Breaking Out And Overbought
TRADING ROOM NOTES SUMMARY FOR WEEK ENDING DECEMBER 15TH:
That was a big week!
Overall, stocks registered their 7th straight week of gains, which was the best winning streak for the S&P 500 since 2017 and the best streak for the Dow since 2019.
Nasdaq is near 52-week highs but it was the Russell that shined (+5%), AGAIN.
>>My call for Growth-to-Value rotation is in full view! (See before + after charts as posted daily for clients.)
USD closed near 4-month lows, down 2% for the week, helping stocks stay bid.
Yen finished higher, up 2% for the week, finishing 5 weeks of gains.
>>My call that "USD Has Likely Peaked" early Nov is working really well as is my rec'd "macro basket trade" of long yen, bonds, stocks + gold.
Helped by the dovish Fed pivot, we had another big week of declining Treasury yields:
2-yr yield fell -27 bps this week to 4.455% and YTD now only up 5bps, but down -76-bps from 52-week high on 10/18/23.
10-yr yield fell -31.7-bps this week to 3.927% (YTD +10bps) but down -106-bps from 52-week high 4.987% on 10/19.
30-yr yield falls nearly -30-bps this week to 4.026% (lowest since July) and is down -107-bps from 52-week high of 5.101% on 10/19.
>>My call mid-Nov that the 10Y would reverse back below 4.9% yearly pivot on way to 4.6% and once below 4.6% would fall to 4% has been hot-fire-flames. In fact, the 10Y overshot to 3.9% with CRITICAL support at 3.8% and BOJ meeting Dec 18th.
Let's just say, I have a very specific intermarket/macro/technical tell I am tracking closely for clients to help time the next big inflection point.
Fed Pivots Twice in Under Two Months
If ya didn't believe me before that Fed would pause, then I'm sure you believe me now.
As clients know, I have firmly believed the Fed was done hiking as of March 12th - the Sunday that Treasury/Fed/White House came out to "back-stop" the bank crisis and stem the bank runs.
Since then, they have stepped down, skipped, stepped down, skipped, and then made the loud intonation at the Nov FOMC meeting they were done hiking. Markets have rallied strongly off that Nov 1st signaling along with the Yellen Yahtze of more (QRA) T-bill issuance (liquidity providing) than bonds (liquidity draining).
Fast forward to Wednesday's Dec 13th FOMC meeting and they have affectively had their 2ND PIVOT in under two months by releasing their Dot Plot plan that adds/pulls forward three cuts for 2024, compared to the 1 or 2 they had been projecting.
Even if you don't believe they will follow through on the cuts (as I do), you can agree: The FOMC confirmed the rate hike cycle is finished.
James Lavish did a nice write-up on Fed Pivots stacked on top of a good thread on Dot Plots. I highly recommend this read.
In a nutshell, the dots are now projecting 75 bps in cuts in 2024 with a 4.6% median, down from the 5.1% projected in September.
I told clients Wednesday morning in my trading room that "the challenge was for Powell to sound positively hawkish" if he was to push back against the market/FFR pricing in 4-5 rate cuts in 2024. Further I said, "anything below 4.9% would be considered 'dovish' and below 4.7% would be considered 'uber dovish'".
Market rallied hard on the announcement of 4.6% as the median dot plot (Fed members' forecasts for FedFunds rate).
Yields and dollar take another leg down as a result.
Me To Clients That Morning on Pre-FOMC:
"SPX stays above 4630, we head to 4653, 4660 and in time 4720."
Holy smokes. “In time” usually means a few days to weeks in my world. We went there in 24 hrs!
Next up: BOJ 12.18. Place your bets!
Longs in 10Y bonds, Yen + Gold/PMs will get tested is my bet.
Why, Santa Clause, Why?
This is a longer post (that I will detail later under #macro-to-micro-support), than here as summary market thoughts, but I will at least provide the main buckets of beliefs:
Powell's press conference identifies the public-facing reasons they are reconsidering. John Authors parses this out for us (see bulleted screenshot below).
Market bulls believe it's as simple as inflation is falling and real rates are restrictive/high so normalizing rates through cuts still keeps real rates positive. Maybe they really do just want to get-ahead of a monetary policy that gets even more restrictive as inflation falls. (Waller's pitch).
Market bears pounced on the Fed pivot as a recession alarm that the Fed sees coming. That economic growth is slowing in the US and has already turned recession in part of the EU and potentially China. Many believe cuts are coming to avoid a hard landing.
Closely watching USD swaps market can also point to weakness in the global markets prompting a Fed pivot. See my post on how BOJ + ECB were 'saved' as BTFP program was extended to a Japanese bank just before the FOMC meeting.
Oh, and there is the election risk for Biden of Trump gaining in the polls.
One way-under-the-radar reason For Fed to pivot is what Geoffrey has written about in his channel: #graphcall-macro-education.
He suggests the 'Balance Sheet Recession at Banks' as potential alarm for Fed and need to support their falling bank deposits, rolling over NIMs, and how the cost of funding for Banks could continue to rise even if the FFR decreases.
ALL of the above are considerations. My market-timing call back in mid-Nov based on technical analysis that signaled yields and dollar had peaked just needed a narrative. ;-))
Market is Overbought and Gamma is Now Negative
The $SPX is currently at its most overbought level in 30+ years.
https://x.com/SamanthaLaDuc/status/1736225728646029355?s=20
After FOMC, SPX did something else surprising than just rally to my $4720 price target.
GEX structure / Gamma went negative with a record gamma amount of 718M expiring Friday with triple witching Dec OpEx.
And that presents a big risk for bulls.
Anything that unpins volatility, even slightly, could trigger big selling.
If IV unpins even slightly, say about 2.5% higher than current values, this opens up a hole in the MM position below us where no hedge is required. This weakness could pressure sold puts to squeeze out and propel us downward. @Dr_Gingerballs
Watch Your Rotation Plays
Last week was a small cap outperformer with REITs leading, followed by Materials and Industrials with Financials.
MAG7 underperformed greatly but oversold/unprofitable tech did well! That's the nature of the rotation we played.
"Laggards – Unite and Ignite!" - This was my December 3rd client post that proved to be more than profitable.
(See chart of Open Swing Positions as of Friday for clients)
And why I really liked these oversold VALUE, metals & mining, falling rate (and some oversold tech) plays as swing longs.
Here is a SWING POSITION REVIEW I did for clients before FOMC Dec 13th.
And another snapshot from my live trading room for clients Dec 14th on supporting a small part of my small cap outperformance call in $XME $XLB with $IWM $IWN.
The small-cap Russell 2,000 made a new 52-week high today after hitting a 52-week low just 48 days ago. That's the shortest turnaround time in the index's history to go from 52-week low to 52-week high dating back to the 1970s! Bespoke
I am very grateful I helped clients position for this move!
Just remember: OUTLIERS REVERT WITH VELOCITY!
My intermarket breadth indicators are too hot.
Some prices have gone parabolic.
And parabolas are trapped longs that trigger volatility and liquidation events. It's been fun - all green swing long portfolio same way I had all green swing short portfolio end of Oct before Fed Pause & Yellen Yahtze.
Careful is all I'm saying.
Did you enjoy #samanthas-market-thoughts posted above? Then you would love full access to her and her live trading room, detailed macro and intermarket analysis, not to mention full portfolio of trades across Chase, Swing and Trend timeframes!
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