My Market Thoughts in a glance:
Live Trading Room Recap: SPX, TSM, AAPL, TLT, FXY, XLE, TM, ORLY, FAST, SMCI, 10Y, DXY
Bitcoin Breaks Key Support: GBTC Short
Fed Cuts: Getting Closer & Further Away
Option Flows: Window of Weakness
Quant Positioning: Higher VIX, Higher SPX
Policies Drive Price: New Hampshire Primary Tuesday
Other Macro Event Risks Coming Up
Live Trading Room Recap
Last Wednesday morning (January 17th) in my live trading room, I told CLUB/EDGE clients that if SPX can hold $4730 and VIX get back below 14.49, market is bullish and we can get back above 4755; with $4800 trigger to work higher into $4820/50.
We closed Friday at nearly $4840. Today we tagged $4868.
Craig and I talked about this LAST week for EDGE clients before Friday happened.
Even my premarket client note posted Thursday (Jan 18th) was helpful to understand why market was gapping up and how to play:
Reason for the season: TSM reported earnings. They are helping semis/tech get bid in Nasdaq.
Also, AAPL got an upgrade by Bank Of America conveniently at the 200D, so it is now gapping all the way up to $187 double daily resistance...
weekly gap at 191.09
daily gap at 191.73
hourly gap at 192
So once it can get/stay > 187, it is going there.
What is helping AAPL and NVDA this morning in particular:
TSM is up 7.7% after beating earnings and raising cash dividend.
~EPS: $1.44 vs $1.37 est
~SALES: $19.62B vs $19.45B est
~Board approved Q3 FY23 Cash Dividend of $3.50/Share vs $3.00 for Q2 FY23 and $2.75 for Q3 FY22
Honestly, it looks like a BIG pull forward as exports from Taiwan took a big jump before the election last Saturday.
TSM Actual Q4 sales 0% flat YoY, but up from -10% YoY in Q3.
But Big dividend boost & Guiding +20% growth is igniting semis once again!!
With that, here were my key highlights of my trading themes for CLUB/EDGE clients:
Swings on my macro themes all worked into Friday: TLT, FXY, XLE. Plus my SPX bounce idea.
Trend-long portfolio is also outperforming; like TM, ORLY, FAST breaking out above recent all-time highs.
Chases have also been exciting. Case in point SMHI Friday morning was a teaching moment on my beloved "5 Bar Move on 15min post Bollinger Bar Squeeze" ! That was good for 30,000% and why I was confident where to cover in order to keep the full 30,000%!
Despite the strong price action in Nasdaq & SPY, the underling breadth has only marginally improved so there are fewer stocks participating in this incredible rally creating a divergence which means: either the rally broadens out or the 1999-esque move in Big Tech/Semis creates a FOMO market where NQ futures continue to be max long as 10Y futures continue to be max short.
BOJ monetary policy meeting Tuesday represents risk to the market's advance as the strong move in USDJPY creates risk above 150 - which would bid up both DXY & 10Y.
To date, my prior targets from Jan 3rd of 10Y hitting 4.2% with USD 104.30 before FOMC was only half right. DXY hasn’t gotten past 103.58 yet. Granted, there is still time, but likely BOJ has pushed out their decision on negative rates from the January to April BOJ meeting - not only to see how the spring wage negotiations go but to see what US Fed and Treasury do next week.
Bitcoin Breaks Key Support
This was my warning to CLUB/EDGE clients on a GBTC short recommended Mon Jan 15th:
Bitcoin - is following its proxies lower MSTR, RIOT, MARA, COIN, HOOD, HUT, BITO, GBTC
That bitcoin was/is/will continue to be a tell on Fed/Treasury liquidity - that it goes up when conditions are loose and goes down when it's not.
But in the case of the recently-approved and launched Bitcoin ETFs, I see price lower before we have a reason for it to rise.
Technically, it's breaking 42K support on way to 38K then 34K most likely - should my indicator (bottom panel) confirm and get/stay below the "0" line.
Today, Bitcoin is printing $40K and still trades like poop (technical term).
Fed Cuts: Getting Closer & Further Away
Fed rate cut bets had fallen to 50% (for a single 25bp cut) from ~67% after stronger-than-expected US retail sales last week, along with firm labor data.
US Retail Sales Rise By Most in Three Months to Cap Holidays
Value of purchases rose 0.6% in December in broad advance - unadjusted for inflation
Clothing, general merchandise and e-commerce led gains
Now, those rate cut bets are at 46% chance from a peak of 79% as Fed goes into black-out prior to the Jan 31st meeting.
Datatrek weighs in:
Futures still put 96 percent odds on the FOMC cutting rates more aggressively this year than their official guidance.
According to this market, the most likely outcomes are either 5 or 6 cuts of 25 basis points apiece (33 – 34 percent odds apiece).Fed speakers had some impact on this market’s views over the last week. The probability of 7 cuts (one at every meeting except for January) declined by 27 percentage points. Those odds went straight to the probability of 5 cuts, which rose by 25 points.
The two-year Treasury note’s yield moved sharply higher following the FOMC Dec 13th but has come back in since, prompting some to expect Fed to not cut before May.
We will see soon, as the 2Y futures note breaking 102'18 would put it in play to come back down to 101'31 ZT before the real cut narrative catches a durable bid.
Craig Shapiro, our MacroAdvisor EDGE Manager, assesses this week's treasury auctions - with big UST sales: $500bn in bills, nearly $200bn in notes:
Janet bringing out the selling bazookas next week. Looks like she will be selling close to $500bn in bills (at new higher levels that what she had been doing) along with $190bn of duration (2s/2y FRN/5s/7s). Looks like she will be adding $50-75bn or so to the TGA by month end settlement (draining liquidity) as she gears up to start making tax refund payments next month.
Given the move in yields we have seen over the last several days on better economic data and more hawkish Fed speak vs. where market expectations were pricing, hopefully she will be making some calls to her friends overseas to help her get these sales done. Otherwise, expect her primary dealer friends to have to keep taking down more than their average allotment, further putting a drain on reserves as we head into the end of the month QRA announcement and Fed meeting.
Fed drives front-end of yield curve and I see 2Y coming down as stated above.
Treasury drives long-end but I don't expect she issues more longer-duration coupons (which is bearish equities) until AFTER Fed has cut.
Option Flows: Window of Weakness
Cem Karsan on potential for window of weakness post Jan OpEx:
“The structural supply and demand imbalance should end on Friday...
“Can that counter the lack of positive flows, the vol buying, and some of the macro liquidity issues?Cem acknowledges macro risks to Treasury issuances, reverse repo, and geopolitical unrest in the Red Sea can disrupt the bullish flows, but said the flows data suggests there are increasing prospects of a “February 14 Valentine’s Day Massacre.”
So the Window of Weakness can span a two-month time period. During which, VIX hedges continue to get bid:
Simplify on VIX hedging:
Moving to equity hedging considerations, a flat VIX has kept SPX out-of-the-money (OTM) put premia at their lowest levels since 2017, creating one of the cheapest 1-month 5% OTM downside protection costs of the last 15 years.
...
covering 100% notional with a 10% OTM put would cost today half as much as at the start of the COVID 2020 drawdown, and almost three times cheaper than in January 2022.
Then consider the chances for outsized selling if VIX triggers, and you will see why it makes for a good hedge:
Keep in mind that systematic leverage is very high; SPX-2% is worth about $100bn of forced selling (according to UBS).
Quant Positioning: Higher VIX, Higher SPX
Folks are pretty focused on the large 17 VIX call buying last week (largest notional value ever according to CBOE) which spiked VVIX.
@MenthorQPro reminds:
"If we go over the 17 strike, VIX may squeeze higher because dealers will have to "hedge-respond"; meaning they would have to chase higher and buy more calls, due to good old gamma hedging. This is something to note and keep in mind when seeing large trades like this."
And talk about an outlier that can revert with velocity:
VIX Calls Dealer Positioning - as of Jan 17th: 0 %tile (via Nomura)
Then GS jumps in reminding:
L/Os & HFs *both* net sellers.
@Trade_The_Swing sums up the risk well:
Long spx dealers gamma fading fast. Range expansion not unlikely
Flow looking into long #vvix vol of vol expressions Feb to April expires and long spx left tail vol
Dealers position might become more unstable into month end
In general, but also now specifically, this is the warning issued by @VolSignals:
"So when you read about how SPX options dealers are "getting shorter gamma to the downside", you should care.
And when you read about how CTAs have large "sell skew", full positioning, and thresholds just below current market levels, you should care."
Policies Drive Price: New Hampshire Primary Tuesday
Remember: Policies drive inflation, so given Trump is leading, this is worth a reread into NH Republican Primary Tuesday.
My goal with my post on Inflation Policies and Trump as POTUS 2024, is now being highlighted by others as a risk to equities:
"The market will eventually be forced to react to rising odds of a sharp US national policy reversal. Investors should overweight government bonds and defensive equity sectors." BCA Research
Other Macro Event Risks Coming Up
The Big Macro events happen next week: Jan 31st, when Fed will be updating the market on its monetary policy same day as Treasury releases how it intends to finance fiscal policy demands.
I contend, Treasury matters more and whether Yellen will issue shorter-duration bills which is liquidity providing, or more longer-duration coupons, which are liquidity sucking.
Otherwise, market moving news this week:
The ECB’s first monetary policy meeting of 2024 is held this Wednesday, along with a BOJ rate decision Tuesday.
Tech earnings are kicking off this week in earnest: IBM, INTC, NFLX, ASML, TSLA...
US economic data includes Q4 GDP released on Thursday - expected to expand by 2.0% (vs. 4.9% in Q3).
Fed's favorite inflation gauge, the core PCE price index, will be released on Friday.
And, it bears reminding, the US Republican presidential primary in New Hampshire will be held tomorrow!
See you in the trading room for all of it!!