Damned If We Do and Damned If We Don't
Semi Surge Seems Stressed
Semi Reflexivity In Full View
The Stealth Buyer Still In The Room
Semi Surge Seems Stressed
My Fragile Upside warning Monday morning was not to chase this right-tail but expect digestion at least/exhaustion at best. Then Tuesday, semis gapped down - which led to the softness in markets on low drama.
Goldman: "High Beta Momentum (GSPRHIMO) [was down] 7.5% [Tuesday] on the back of reports that OpenAI is not hitting sales targets (WSJ). This is one of the worst days for the pair in the past five years (99th percentile) and the move has completely reversed what was previously the pair’s strongest ten-day gain on record."
Semiconductors were pummeled in general Tuesday:
In addition to the OpenAI news, sanctions on the sector also hit stocks:
The U.S. ordered numerous chip equipment companies to halt tool shipments to two facilities of Huahong, China’s second-largest chipmaker, according to sources.
No big drama, yet, but divergences abound from macro risks (manifest in higher oil, dollar and yields) ahead of earnings expectations for MAG5 companies reporting this week …. setting up this volatile sideways before we can really get traction - either direction!
For now, it looks like VIX is undergoing compression Tuesday/Wednesday that can bring expansion Thursday/Friday. (More on this below).
In the meantime, SPX positioning is still trend bullish but hedged. They aren’t chasing upside but collaring (selling puts/selling calls) in a channel between 7000-7200 while buying late May/June puts as insurance.
Clearly, market is waiting for the big MAG5 earnings in particular, but also to pass through unscathed from Powell’s last FOMC press conference Wed & ISM Thurs.
Dealer option positioning presents a cunundrum - damned if markets rally and damned if they don’t!
Dealers enter aggressive short gamma should the index move 2-4% higher. via GS
Regarding CTAs, they also face an ultimatum:
If markets rally 1-2x standard deviations (3.6–7.2% spot move) in the next month, with vols compressing — GS estimates ~$40B of additional buying
If markets fall 1-2.5 sigma — GS estimates ~$125-240B of renewed sales
More support for my “Fragile Upside” thesis indeed.
