Mr. Powell, your move!
Weekly credit and equity review 30th Jan - 3rd Feb
We have decided to combine the Equity and Credit market reviews in one piece.
We have done so in order to decrease the amount of e-mails you receive from us as we understand how spammy the world of Substack has gotten. Plus, we hope those of you who have been strictly focused on reading one of the reviews to accidentally find value in the other as well.
We are constantly trying to improve the way we write and lay out our thoughts in markets. Hope you like it and don’t hesitate to tell us what you think.
WEEKLY EQUITY REVIEW
General overview: Last week did not see a red bar in SPX. I can well stop my comment on the market here, but will put more colour here as I thing it is necessary. One can blame it on the good jobs and/or GDP numbers. We all know the reasons are always found after the move has happened. SPX came a bit short of the next big resistance 4100 but is now firmly above everyone’s favourite trend line, which a thing worth noting.
Rates were was equally boring being left unchanged for the whole period, despite some of them sitting on great levels.
The dollar seems to be not going anywhere despite also sitting on a terrific spot chartwise and being, in my humble opinion, very one-sided in terms of positioning. I have been reading so many comments of the dollar being a sell that I am left wondering when, not if, is the shake out pullback coming.
So far so good, big picture nothing had change compared to the prior week with the market basically waiting for a new piece of information powerful enough to throw it in one direction or the other with little volatility and plenty of choppiness in between.
But then came Friday when the good old squeezey crowd reminded us of late 2020 and 2021.
Sector overview and potential trades
While not exactly a sector, I tend to look at the ARKK/super unprofitable and speculative/short squeeze spectrum as a barometer of sentiment and positioning.
There was a manslaughter in EV stocks, particularly in LCID. It is funny that it even came with a rumor to fuel up what was already in the making since the start of the year - a grand squeeze. Stock went up 100% for the day at some point and left many traders heart and PnL broken.
The behavior was evident in TSLA as well and quickly became contagious as traders piled into other stocks with high short floats as they smelled blood in the water.
RIVN tried its best and so did WKHS, GME and others.
I am sharing this as I believe more often than not, in times of market uncertainty, those moves happen at the end of a leg higher and this is why I think it matters.
After all, Powell has been pounding on the table about tightening financial conditions, and not only are they where they were in H12022, but wild speculation / squeezes is again on the table. I doubt he likes this and he might well slip a word or two about it in his speech on Wednesday.
Another thing that caught my eye was the continued selling of defensive stocks. The only sectors that registered a down week were XLV and XLU with XLP finishing flat (mostly because it already had had an awful performance already). Everything else welcomed the inflows and there is not much to comment on besides mentioning some sectors which are now sitting on key technical levels, such as VNQ (sma200d), XLK (sma50w), XLY (both sma200d and sma200w).
In terms of potential trades, I still like what I discussed last week for gold and the dollar.
There is not much to add as the market has basically left unchanged. I can only add that I believe the near term speculation has peaked and those that squeezed last week and even more so those in the same category that did not, are now due for a pullback. There are plenty of them and some we already spoke about.
Current positions: I am currently flat, with 0 directional exposure
As I have not much to discuss here about my current positioning, perhaps I can tell you how much I sucked on Friday, scratching what would have turned out to be a 10x trade.
I think close to no one missed the craziness in retail’s favorite TSLA stock, but in case you did, here is your due reminder.
It went a whopping 23% up in two days, but soon after the open on Friday things started getting a bit out of hand. It was Friday, the ‘best’ day for 0DTE options and the move had already started looking like a nice parabola on the daily chart.
Add to it the short narrative everyone has been chewing and their respective positioning, it became quite apparent that this had a very decent chance for mooning. Soon after the open saw how well the selling at resistance near 165 was absorbed and got into a bull call spread 0DTE 170-172.5 for 25c with stop under VWAP.
The risk reward was phenomenal given than the likelihood of the move happening was much better than priced. Above 165$ -167.5$ there was a pocked with next big resistance at 180$ so basically if it broke above that level things were about to get really nasty for the shorts.
Long story short, I got disheartened and exited at the second prolonged failed attempt to break resistance. As it usually happens, the stock upticked right after I sold and the rest is history. Happy to know that one of the guys on the floor made a 9x on it. He even misunderstood the trade and got simple calls but he stayed in the trade, which is what mattered that day.
Conclusion: We are now entering a week with earnings from the largest cap stocks while also having a FOMC meeting surrounded by heavy data. Higher volatility is almost certain. I believe the recent short squeeze that happened marks a short term pause for speculation as those are usually seen at the end of leg moves. Good luck and happy trading.
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WEEKLY CREDIT REVIEW
It goes without saying that this week’s FOMC and ECB meetings will be the pinnacle all the bears are waiting for. It is reasonable to believe a hawkish stance leaning towards higher for longer. Something he did in the Dec’22 meeting but the market didn’t believe him. What about this time? Rates are 60bps to 80bps down from highs, credit spreads are tighter, cash prices of corporate bonds, AT1s, perpetuals, preferred stocks, Closed-end funds, basically anything that yields more than 4-5%, is up significantly. Maybe this time there is a reason for the market to ‘believe him’. I wouldn’t say that it comes to trusting what he has to say. I think it is more of the positioning of market participants. If everyone is already long and bought whatever they liked, who is left to buy at current prices? I would bet a bit of profit taking will take place eventually but don’t get me wrong. This has nothing to do with predicting a crash. Far from it. I am simply entertaining the thought of a technical pullback caused by profit taking of short-term credit players. Yeah, guys like us exist. To keep the upward momentum going we would need another catalyst, a dovish statement from Powell. Something simple like reinforcing a wait and see approach, a ‘pause’. Will this happen? My opinion is that odds are very slim, I would bet on him reinforcing his higher for longer stance.
As a counter argument, I might argue that everyone expects Powell to be hawkish and reinforce the higher for longer stance. Therefore if everyone is leaning bearish just because they expect Powell to be mindful of current market developments, then a simple reinstatement of his view would not do it to bring the market down, in fact it would likely have the opposite effect. Further squeezing the shorts. The only way for the market to sell off significantly would be if Powell surprises with an updated policy, hinting at higher terminal. I don’t think the odds favor very hawkish Powell but the more I think about it, the less I believe there is chance for a sharp down move. There will likely be a down move from a technical perspective but not of the magnitude of what we were used to seeing in 2022.
Let us see what the short-term trader in me sees in the charts.
MOVE INDEX
There is only one thing this index says and that is NO FEAR. Bond volatility is going down, credit spreads are tightening, cash prices are rising. Bulls are dancing. Just a bit more and we will be at the Jan’22 level, before the whole hiking process began. Quite the change in narrative in such a short-period of time. Makes me wonder if the market went ahead of itself on that one. Likely, in the short-term but the bigger picture seems to support lower volatility for now.
Terminal and Fed Funds Futures:
Nothing meaningful happened since lance week and I don’t expect anything meaningful to happen at least until FOMC’s press conference is over. At the moment I will personally focus on the terminal rate changes and in what direction they go, alongside with the higher for longer expectations. My opinion is that if any of these change, the market dynamics will change. If they go up, then bond and equity markets will sell off, if they stay the same or drop (a drop is highly unlikely in my opinion) we will see a continuation of the short-squeeze.
3. ETFs
Preferred Stock ETFs are currently very extended and PFF, PGX and FPE are sitting at Fibonacci levels. I like that they all touch the levels simultaneously, after a monstrous recovery from the lows.
US CURVE
5 and 10 year yields are testing the previous support level which now acts as resistance. This week we find out if 5 and 10 year will trade below their respective levels. Guess which way the wind will blow is futile endeavor. I prefer to be positioned to the path of least resistance with a trade having a favor risk to reward profile.
CURRENT VIEW:
I have moved to pair trading by focusing on long, investment grade (BBB- or higher) undervalued instruments with high coupons in order to take advantage of the higher carry and shorting overextended ETFs such as PGX. I am confident that carry trading will be the name of the game in the next few months but even if it doesn’t play out and we see volatility similar to ‘22, then I can always increase the hedges to 150% or even 200% of my long exposure.
CURRENT POSITIONS:
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