Musical Chairs

CLUB/EDGE client post Friday, September 6th, 2024. Focus on Selling into NFP Day, Update on #Swing long recommendations (because market structure weakens), and Deflation of CONCENTRATION RISK.

» CLUB/EDGE client post SEPTEMBER 6TH, 9:05 AM ET.

Not A Surprise - Any Of It

NFP Payrolls 4.2% (as predicted).
FOMC expectations increasing to 50bp cut.

10Y yield back to my 3.678% QTRLY support level last tagged Aug 5th.

$TLT tags $101.57 PT.

Yen rallies. $USDJPY tags 142 PT.

$SPY 545 + $QQQ 455 held.
Must hold.

For a solid read on state of labor market, here is one by the author of the Sahm Rule:

“Regardless of the reason for a rising unemployment rate, the Fed would have support to cut. That said, a rising unemployment rate without increased participation or some other special factor would be cooling demand, raising the risk of substantial weakening and pointing to larger rate cuts." @Claudia_Sahm

Musical Chairs

I review hundreds of stocks weekly to spy durable trends long and short for clients.
My focus is looking for strongest sector rotations led by the best companies - like my Spring #Swing long recommendations:

• UNH pick with XLV

• KO pick with XLP

• ISRG pick with IHI

• AMT pick for XLRE

• TPH pick for XHB

• AEM for GDX

• and so on.

All of these (and more) are still working, and yet the reasons these are working so well is because the market's structure has weakened.

By that I mean that the prior euphoria in all-things AI and Mega Cap Tech and Semis - aka CONCENTRATION RISK - has absolutely lost momentum, money flow, sponsorship and gamma option crowding.

• No more are calls being aggressively accumulated.

• No more are puts being aggressively sold.

• No more are calls sold above getting called as price moves into those higher strikes forcing the dealers to cover by buying more stock.

Nomura strategist Charlie McElligott weighted in on a similar view:

the recent volatility shocks have likely limited the ability of discretionary traders to take on new long positions or bet against the volatility rally.
McElligott says that this is especially true in the leveraged and hedge fund space, where tighter risk limits and risk budgets are a constrain now unless of course they had PNL to play from getting the trade over the past month correct...

Buyers Stepping Away

In times like this I tend to zoom out to the Reward Vs Risk of the markets as we move into end-of year with consensus firmly in bull mode.

1. Likely grind higher into September 20th OpEx - unless Oil and Yields fall further in which case expect a for-sure 50bp cut on Fed Day September 18th.

2. Likely grind higher into election/year-end - given seasonality and statistical bias in election years. Heck, even the stat offered up on twitter for a weak September bringing a strong close is making the rounds.

   

3. Likely grind higher in tech after the recent weakness - given how extended the 'safety plays' have become.

I see all of that, but I also see the market structure HAS weakened, as has the AI euphoria, as has the Fed/BOJ policy interventions.

Where will the renewed forward growth excitement come from that has led this GROWTH rally higher?

My point: with a reduced risk profile by investors and big money alike, we have a backdrop where lack of buying can give sway to air pockets of risk.

I see it: buyers are stepping away - small to start - before the market sees it.

And we don't have compelling reasons for them to come back.

Macro Tells:

• Yields are not bid - despite fiscal dominance.

• Dollar is not bid - despite economy constantly expecting a “soft landing”.

• Oil is not bid - despite rising geopolitical risk premium.

Sector Tells:

• Defensive sectors of XLV, XLP, XLU have outperformed XLC, XLK, ZLY since my recommendation in early May.

• RSP:SPY rotation translates to fewer and fewer MAG7 and SEMI stocks.

• NDX93 stocks are not outperforming. SPX Earnings 493 is -7% YTD.

More than that.
As long as VIX has outsized moves - like August 5th on yen carry trade unwind - and Oil continues to fall with yields threatening a basis trade unwind, the inflationary assets of stocks are no longer safe for yield harvesting.

And I'm not sure the #higher-for-longer crowd has accepted that, yet.

When they do, the inflation premium that has bid up the growth stocks forcing CONCENTRATION RISK to further deflate.

I think of it as LIQUIDITY DEFLATION.

With that, we will have fewer and fewer longs I trust.