Counting Cards & Weapons of Mass Destruction

CLUB/EDGE client post Thursday April 18th & Stalking a Market Top

» CLUB/EDGE client post Thursday April 18th 3:18 PM

Nice feedback:

"Your clients should be ecstatic!!!! When you say "Conviction" you mean conviction.  The $NVDA "Stairway to Heaven" was the only thing really pulling the whole market skywards since November-- thereby delaying the inevitable - especially when Powell "Changed his tune" This is all simple in retrospect-- but you see it clearly ahead on the road. An unusual talent."
Long-time Twitter Follower

To which I responded:

"If counting cards is an unusual talent, that's what I do.

I ask myself if current condition is bullish or bearish.

1. Macro: Fed cuts priced out = bearish
2. Quant: CTAs selling, won't stop = bearish
3. Technical: Broke 3/8/21/55D = bearish
4. Breadth: Very broken on both NYSE & NDQ
5. Net Volume: Selling under the surface in both NYSE & NDQ 
6. USDJPY = bearish
7. 10Y Yield spiking = bearish
8. USD spiking = bearish
9. Gold spiking = bearish
10. Options = bearish

I track how growth plays are petering out and volatility is getting bid.

I assess every major sector for strength & weakness. And size up the strongest stocks in each & how they are doing.

I zoom out to M/W charts for over-arching trends & risks.

I review my intermarket charts daily for cross-asset inflection points.

I don't assume. I test, test, test.

Basically, I just read the story that is being written for me to tell.

Geoffrey is much less complicated in his assessment:

Q: What's your view of markets here?A: "Dimon selling 180 million USD and shooting for 8% rates is telling you what you need to know."

Craig has a Treasury model that is working well for his positions:

Janet is still hard at work this week with her IMF buddies to get them to buy her heavy auction supply next week to end the month. It is the last round of duration supply ahead of the next QRA announcements on 4/29 and 5/1.

She is selling $69bn of 2year notes, $70bn of 5 year notes, $44bn of 7 year notes and $30bn of 2-year FRN. What's $213bn of notes among friends!

Collectively, all the auctions that settle on April 30th will bring in about $73bn of new money (partially offset by some bill auctions settling same day).

There is really no stopping this duration supply freight train that the Treasury has to sell over the coming quarters with fiscal deficits running at 6%+ of GDP.

Early indications of tax receipts coming in moderately better than expected could help her lower bills issuance further in coming months however, in order to keep moving the ratio of Treasury bills as % of total debt outstanding back down to 15-20% range, she is "supposed" to keep selling more notes and bonds.

Current estimate from TBAC for the May-July period is close to $1.1trn in gross duration supply which will be once again over $500bn net supply additions.

These are not small numbers and are hard to front run but we should continue to see upward pressure on yields as the forward supply comes to market.

Obviously this can all change on May 1st when Janet gives us the updated duration schedule and she could decide to be very political and lower duration supply additions or announce a further reduction in the TGA which would mean less overall bill issuance for the next 3 month period.

However, with term premiums still low and an inverted yield curve, and having told markets to expect the high level of duration supply to remain elevated in coming quarters, she should continue to issue these higher amounts that will be more difficult for the market to absorb unless at higher yields, particularly as foreign buyers are stepping back.

Will have to dial back exposures to trades ahead of her decision and react accordingly based on what she decides.

We Are In Fiscal Dominance

In a nutshell, with a rising fiscal deficit - 6% of GDP - our currency debases and rates go higher.

Some big brains believe stocks will crash up with rates. I do not.

I think we have already had the crash up.  SMH, SPX, QQQ ... Housing, Commodities.
And bonds have already crashed down, down, down.

Next comes Fed/Treasury intervention tricks - that likely fail.

Then Equities fail/fall harder.

Craig, Geoffrey and I all agree: Rates are going higher! Likely until equities crash and a recession is pulled forward.

And all three of us also agree: Equities face a big headwind as the world is swapping US bonds, US dollar and US equities for gold, food, etc.

I remain convicted: THINGS OVER PAPER

Weapons of Mass Destruction

And I'm not talking about War in the Middle East - although that is most certainly a big threat.

I'm talking about the options market.

The options market has been the drug of choice for bullish intoxication.

Brent at SpotGamma shares my concern:

"There is a tremendous amount of leverage in equities, which has been reflexively built up.
This shows as incredibly low volatility/tight trading ranges driven by 0DTE, call overwriting, vol/put selling, and even leveraged products like NVDA 1.5x/2x/3x ETF's.
The breaking of these feedback-flows could invoke violent unwinds as short vol positions have to be covered, and long vol positions have to be initiated."

So with Fed trapped and Treasury handicapped, I don’t think market makers will be able to reverse this next move lower when the 10Y gets/stays above my 4.688 level.

I fear they will be forced to exaggerate the turn lower and really trap bulls.

That's why I wrote last week that we haven't even seen panic yet.