These are my prior market thoughts, shared with LaDucTrading.com clients. Join us real-time for all macro-to-micro analysis & trades.
Here are my latest market thoughts as I survey markets from my iPhone on the dock while family is active in water sports all around me asking when I will join them.
Waiting On A Bounce
Big US Banks blaming NFP and increasing recession odds - ignoring Japanese stocks that are having their biggest one day drop in history - is not helping you navigate I fear. So maybe this is helpful.
The Nikkei crash is bigger than 1987. On a Yen Carry Trade leveraged unwind. It’s a big deal, so treat it like one.
And yet, KEY Swing price targets given to clients weeks ago when I predicted the correction have hit:
When I warned clients FRIDAY of a liquidation event, it looked EXACTLY like today.
Near limit down and options market blows out so not easy/safe to enter/exit.
Then I saw a string of tweets about TRADES CANCELLED & REVERSED from IBKR SCHW, and HOOD.
I warned;
You are witnessing derivative panic and unwind that is protecting THEIR MONEY not yours! #NotDone
So as I expected then and now, the 10Y yield holds the key, and should retrace some, but we still must be vigilant of potential systemic risk at worst and a leveraged unwind that has just started at best.
Seriously, this correction is NOT about negative CPI or Sahm Rule triggering.
It is about LEVERAGE UNWINDING and REVERSING CONFIRMED TRADES is a tell of derivative houses at risk.
Always good to remember option structure matters AND some of the most viscous rallies occur in protracted bear markets.
On the first reminder…SpotGamma at noon:
“So far, the options flows are dominated by put covering (blue). This is essentially short covering, which makes the rally unstable. Bulls want to see longer dated call buyers come in - they're so far absent.”
And trade_the_swing sums up my views well:
“Today is not just about var shock in SPX. It's about cross asset volatility.
While volamgeddon 2018 was vix only, today instead it affects equity, bond and FX, all assets traded by big dealers.
How big they are hit will determine the Fed response”
And as I posted Friday for clients:
“But truth be told, spot VIX can stay elevated until we get a macro trigger to buy markets.
THIS is the market telling him/Fed that they are wrong and behind the curve.
My bet: FORCED SELLING = FORCED CUTTING.”
Is The Global Margin Call Done?
Clients know my view:
We are going lower - even after the bounce, even after CB intervention.
Both Markets and Oil.
And not because recession is imminent but because of LEVERAGE still to unwind:
Fast forward to today, and we are but only down 500 pts! Here were the immediate reasons for markets to fall - long before the Israel-Iran escalation:
Me, repeatedly:
If/When yen moves higher, MAG7 equities should move strongly lower - assuming Fed/Yellen don't intervene.
If yen moves higher AFTER a BOJ hike, that is a tell that **they** are loosing the tether that kept the US-JP carry trade spread from financing equities.
Read: Rise Of Carry.
Last week’s market thoughts:
THIS is a perfect storm - that may display as 'the pause that refreshes' - of FORCED SELLING that is not done big picture, because...
SAHM RULE TRIGGERED
VIX BACKWARDATION TRIGGERED
NEGATIVE DEALER GAMMA BEGETS NEGATIVE GAMMA
VOLMAGHEDDON 2.0 RISK
CTA'S FORCED SELLING & STOCK BUYBACK BLACKOUT PERIOD
CONCENTRATION RISK STILL DERISKING!
YEN CARRY TRADE UNWINDING
BASIS TRADE UNWINDING
ENTIRITY OF YIELD CURVE COLLAPSED
GOLD 'AS COLLATERAL' AT RISK OF SELLING-OFF
And no, Bitcoin will most definitely not fix this!!
So even if this week we coast, what is left to really cause accelerated selling of equities - should 10Y yield bounce as yen falls…
An emergency rate cut.
Confusing, yes, but we need a huge cut into year-end - like 75 bp now, so imagine if they disappoint or delay?! Or refuse to because they are afraid of looking panicked?!
2. No way the Basis Trade Unwind is done.
What is made even trickier is the intersection of yen carry trade unwind WITH basis trade unwind of long Nasdaq 100/short treasury futures. It took years to form and will take months to unwind. We also do not know how the selling of US Treasuries by Japan can trigger higher US yields just as books try to square up for lower yields.
It’s really not the stuff of which durable trends are made!!
3. A US Dollar Bid. Can you imagine what would happen to equities should DXY start to aggressively rise now? Like it did for a year at the 2000 top?!
A rising USD will not only serve as headwind to already battered equities but also trigger a precious metal and oil sell-off, which will further hurt the basis trade in general given its value as collateral for funds and banks.
Hasn’t happened, yet, but CREDIT SPREADS are starting to rise.
