Degrossing

Trump has repeatedly tried to pump the markets, to push down oil prices with "war is almost over" tweets in a number of different variations, and people keep falling for it.  They did that again in afterhours on Friday, hoping that Trump was looking to finish up the war.  It took less than 24 hours for Trump to contradict himself.  After the past few weeks, if you still believe what politicians say, in particular Trump and MAGA, you are hopeless. 

People hate admitting that they are wrong.  Traders don't like taking losses.  So euphemisms are popular.  Instead of saying I took a loss, they say "stopped out".  Instead of saying I am selling, likely for a loss or a much reduced profit, they say I am deleveraging, or degrossing.  What you saw last week was a lot of degrossing.  A more apt term would be liquidation.  We are in the liquidation phase of the selloff.  The final phase.  This is the scariest part of the selloff, as investors who have tried to hang on, to wait out the storm, reach their pain threshold, and eject.  Since many of these funds have strict loss limits and try to control drawdowns, it means forced selling based on risk management, not fundamentals.  

The FOMC meeting last Wednesday was an aha moment for the markets.  The last bit of hope that the Fed would remain dovish and look through higher oil prices was gone.  Precious metals, bonds, and stocks all fell together in a vicious move from Wednesday to Friday.  Just by looking at the synchronous and rapid drop, it felt like a bunch of pod shops and hedgies had hit their loss limits and liquidated all at the same time.  The move in rates has been notable, and this will have lasting reverberations for stocks if it isn't reversed.  The SOFR curve was pricing in 3 rate cuts over the next 12 months before the war.  Now its pricing in a slight chance of a rate hike at the next 2 meetings, and no rate cuts for 2026.

Before this mass degrossing, stocks were probably the best buy the dip candidate among the major assets.  Now, with precious metals and bonds going down significantly last week, it presents other assets to buy on the dip here.  With a labor market that's too weak to get the Fed to hike rates, these levels are looking attractive for at least a short term bounce in bonds and metals.  

All of this is happening as leveraged loan spreads are widening to near Liberation Day levels, with the SPX only 6% below all time highs.  

The cat is out of the bag for private credit and private equity.  The pensions, endowments, and high net worth individuals already have a big allocation, and are looking to reduce it.  At the same time, they are trying to sucker in mom and pops to buy into private equity and credit, trying to give easy access to private equity and credit via 401k's.  One of the reasons that you had so few IPOs over the years was because of all the money going into private equity.  Companies didn't need to go public to access capital.  It looks like that's going to change.  Now they will need to go public to continue accessing capital, which should increase the number of IPOs, which already had a full calendar with giants like Space X, Open AI, and Anthropic scheduled to go public in 2026.  With more IPOs, it will exacerbate the supply/demand mismatch when investors begin to sour on stocks.   

Just as there appears to be a deluge of IPOs waiting in the wings, looking to suck up risk capital, the Nasdaq and Russell index bosses are suddenly loosening requirements for index inclusion, making it easy for recent IPOs to go straight into the index.  Just a coincidence, right?

Because of the war, and "weekend risk", you've seen a pattern since the start of March.  Selling on Thursdays and Fridays, ahead of the weekend, to avoid weekend risk (trying to avoid a Monday gap down).  With fast money traders having de-risked ahead of the weekend, they go back in and try to catch the bottom by buying on Monday and Tuesdays.  Wednesdays are the turning point, and then you get the selloff in earnest on Thursday and Friday.  That's happened 3 weeks in a row.  We all have reptilian brains, we expect that pattern to repeat.  The continuation of the war is a good excuse to keep believing in that pattern.  Trump tried to break that pattern with a last minute tweet just before the Friday close, that the war is almost over, and traders jumped on the bait, squeezing stocks into the final minutes of Friday, and into after hours.  It was faded in weekend markets, just 24 hours later.

It is fascinating that traders keep believing, hoping that these Trump tweets are actually true.  He's had several of these tweets, trying to push oil prices down, and stock prices up, with variations of the war is almost over, mission almost accomplished, etc.  With his diminishing credibility, the half life of these artificial rallies are shorter and shorter.  But it keeps the hope alive.  That the war will be over soon.  That Trump can stop the war at anytime, at his choosing, that he's the one calling the shots.  But maybe its Israel that's calling the shots, and they seem to want a much more protracted war than the US.  Didn't Rubio say that Israel was going to attack Iran, and that's the reason the US joined in?  If it was just Trump who controlled whether to keep the war going or to stop, the TACO thesis is valid.  But if its Israel that's really the one in control, then the TACO thesis should be thrown in the trash bin. 

Trump's words have been counter to his action.  The bombings continue.  The US are now sending Marines and battleships to the Middle East.  There are barely any ships passing through the Strait of Hormuz.  I would fade any optimistic Trump tweets, as they seem to just be war propaganda and attempts at pumping up the markets.  One of these days, he'll actually be tweeting the truth, but betting on that has just meant buying local highs and bleeding down to lower lows.  

Nothing significant in the COT data for indices, small speculators were buyers of the dip, and increased their net long from March 10 to March 17.  Not seeing any panic in the options market, as the put/call ratios remain elevated, but not spiky.  It looks like investors are tired of buying puts into weakness, only to see the market bounce and their premiums melt away.  Puts have not been paying off, even with the downtrend.  Options remain overpriced, and holding options for more than a few hours is fighting an uphill battle.  

Looking at dark pool data, we still haven't seen the low DIX readings that would show that retail investors are throwing in the towel.  They keep buying the dip, and don't even seem to be afraid of the weekend or the war.  They are all in on TACO.   The market continues down the slope of hope. 

Its been a choppy market will lots of short term rallies since the war started.  Yet here we are, with the SPX futures trading under SPX 6500 cash levels, in overnight hours.  I have a small long, but mostly in cash looking for a better level to add.  I've definitely been too nonchalant about the selloff, but thanks to the tax refunds and the buy the dip crowd has kept losses small.  But those tax refunds and inflows aren't going to last forever.  The bulk of the tax refunds have already been issued, and likely deployed.  Correlations are rising among asset classes and within the stock market itself, so things are feeling panicky.  We are very close to a bottom, so I will stay long, but want to see a bit lower to add.  Post opex often have flush out moves, especially when Fridays are weak.  If we get more weakness on Monday/Tuesday, will look to add to longs.