Business as Usual
Futures have ramped higher with oil with yields with bitcoin following the second largest shorting week ever!
Via @themarketear
Of note, of the largest shorting weeks ever, 3 of them occurred in 2008 BUT early in the crash (May, June and June). So not a "bottom" or "capitulation" sign in itself (Goldman)
Quarterly options expiration before a long weekend set up a nice oversold bounce today as a result of clearing $866M of negative dealer gamma positioning and bitcoin recovering massive losses from "tens of billions of forced liquidations".
Reminder: Dealer gamma: A negative value means option dealers are "short gamma", which forces them to hedge cyclically (buy strength, sell weakness), hence they take liquidity out of the market.
However, as Tier1Research warns:
there is no immediate source of buying from systematic rebalancing strategies in the next few days and we remain in negative gamma.
Vol Control strategies are largely sidelined for the remainder of the month as recent high realized vol has reduced the prospect of these flows coming in aggressively.
Tomorrow, Powell begins his two-day semi-annual testimony before Congress. At the end of the week, we'll get Jobless Claims data, PMIs for May which should begin to indicate some of the recent slowdown, and sentiment data from the Univ of Michigan. All can be market-moving.
IF markets hold together, THROUGH FRIDAY, we can make a run into my max 3994 PT, but only if we hold together. The risk:reward of calling this a swing long bottom is in question and is not confirmed. Consolidation (read: chop before the drop) is my baseline bet.
As for the energy rout last week, Jefferies points out:
On a rolling 12M basis energy has outperformed the SPX nearly 70%, good for a 4SD move looking back, as far as there is sector data.
Bernstein is bullish the oil patch still:
"While returns over the past 5 years were well below the cost of capital and arguably the lowest since the 1980s and 1930s, we expect return on capital to reach 20% this year, the highest level since 2008. But returns of 20% are still below the 30% reached at the peak of the last cycle in 2005-07, which implies that by historic standards, we are not yet at peak cycle margins. While a recession is a risk next year, markets are already partially reflecting this, with oil stocks pricing in close to US$70/bbl than US$120/bbl. This is not to say that they will not fall from current levels if we do have a recession. They will, but so will all stocks. If we do see a material pull back from current levels as a result of a recession, we believe that given the structural forces at play, oil stocks can still generate good returns and would view such a pull back as an excellent entry point"
Bottom Callers
This was the headline that is not moving markets today but will:
ECB's Lagarde: We intend to raise rates by 25 basis points at our July meetingECB PRESIDENT CHRISTINE LAGARDE IS WARNING THE RISK OF AN ABRUPT CORRECTION ON EUROPE'S FINANCIAL AND HOUSING MARKETS IS HIGH
Until then, many are pronouncing that we are set up for a rally to highs - some say all time highs - be which I say that "oversold" can last longer than many can stay solvent.
Case in point the oil recession of 2014-2106 wherein the Energy sector was crushed, resulting in over $66B in bankruptcies alone not including market losses.
I see the current scenario for the Tech Wreck lasting several years, but the market IS tech, so we go lower. The cost of capital is rising… so liquidity will continue to come out of the market by default and design!
Baseline Bet:
Most quants expect stabilization/rally post 6-17 OpEx into EOQ. Despite this morning's bounce, I still think we dump.
I am still expecting a tag/overshoot to my $3400 SPX so those large holding of puts cover to monetize large gains and THAT forces a reflexive bounce that sucks in the bulls. Again.
That's a much better time to go swing long in my opinion.
It is also the time I see oil spiking with SPY.
The play for downside crash puts to ~$3400 then upside calls when those downside crash puts cover then puts again around $3800. For now, that's my baseline bet!
