Asleep at the wheel?
Equity and other markets review: 28.11-02.12.2022
General market overview: Last week was a huge nothing burger, as expected. Rarely does one sell in one of the most seasonal weeks in the year, especially if he/she is on holiday. The market was up a bit more than 1% with the price action just grinding up. Besides the little action around AAPL on Friday, there was nothing too exiting on the equities front. I am no expert on China, but all the headlines were much more negative in tone versus what the China Large cap ETF (FXI) priced. Despite the increasing tensions within the country I refrain myself from reading too much into what I barely know of.
What is interesting to me, however, is the huge discrepancy everyone is talking about between rates (both short and long end) and equities. With short term rates at 4.5% and potentially soon a bit more than 5%, as priced by the Eurodollar June contract, equities have been having a walk in the park lately, without a meaningful retracement. Now, 15% from the CPI Oct 13 lows is not excessive by any means, but the lack of choppiness tells me someone might be a bit too confident of the direction.
With rates at 5% equities are much less attractive in relative terms, especially when everyone is screaming that a recession is coming next year. Yet people seem to love them. All this comes as the long end has rallied significantly (i.e. 20Y&30Y rates have decreased), which one might argue is a safe haven bet rather than a simple retracement.
Add to this the recent price action in oil and crude and the case for a walk in the mud, not walk in the park becomes solid. Complacency is what bit investors in August and I assume it is what is going to bite them again.
I am not saying that long end rates and DXY going down does not have a bullish component to it, I just think that the decrease of the discount rate of future cash flows through the retracement in long rates should be offset with increased risk premium due to a potential recession and this has not been the case. And while weak DXY is good for overall financial conditions, the move to the downside has already happened. It feels extended and very close to good technical support near the sma200d.
To be honest, I am not looking for a new low or trying to make an outrageous claim. I do believe, however, that some equities selling is due. I am aware that I could be wrong looking to the downside. At the end of the day, recession is apparently a consensus view, long positioning is low, we are in a very seasonal period and extreme window dressing is upon us. But all the best short term risk-reward opportunities are to the downside, which has an equally attractive case. So I choose to be in this camp, at least temporarily. Timing shorts has always been tough, so I have decided to let technicals guide me. We are done with Thanksgiving and dangerously close to the sma200 on the daily, many assets feel extended and DXY is close to support. This is enough for me and I am now well net short.
Sector overview and potential trades: Monster winner last week were the defensive sectors. Once again healthcare, utilities and consumer staples saw meaningful inflows.
All of them seem pretty extended to me. Thus, I have entered short the utilities, particularly because of the cluster of technical indicators where additional selling was rightfully expected. But to say that only these sectors are at key levels would be quite mistelling.
Almost every sector is currently either at a good price or technical level, which leaves people like me with a short bias feeling like a kid in a candy store. Other real economy sectors like XME, XLB, XLF are at good resistances, whereas XRT, JETS, XLY are at key moving averages on the daily timeframe.
Or if you like weak names ARKK has continued to be one of the worst tickers and the price action in TSLA and AMZN has recently been appalling.
I am currently watching for the GBPUSD to get to the sma200d for a quick short as I see this as a super extended move with DXY near key support.
I will once again mention that after the close of each day I post a brief summary of what has made an impression on me in terms of price action during the day. I believe there is ton of valuable information there especially if one is trading for short term moves.
Current positions: I am short DAX, short XLU, short GS (half position), short IBM (half position) and long CL_F (half position)
A recurring theme amongst the short positions this time is overextension to key areas. This comes as a bonus to my belief that we are due for a downtick in indices and also bearish bias due to worsening fundamentals. This is more than enough for me to build a short book as of now.
DAX - I got back into the trade after I got out due to the holiday period. The market seemed reluctant to go down so I took off the trade, expecting a better entry. Luckily it happened so and I entered short again on Friday. I am short futures and half of my position is covered by shorting 2 Dec 14150 puts.
XLU, GS, IBM - All those names appear to be quite stretched and at key levels for me to just sit on the sidelines.
I have a long 380-370 put spread expiring on 9 Dec. $390 appears to be well defended just when XLF is also at a good resistance. Note there is a dividend due on Nov 30, meaning the spot price is not actually that much further from the strike.
I have played IBM similarly, with a long put spread 149 - 144 with the same expiration.
My short in XLU is executed through a covered put. I built my position at and slightly above the sma200 on the daily and shorted 70$ and 69.5$ strike puts against it, to get me ahead if the weekend was to be calm.
CL - I got long 10 mins after the Saudi saying there will be no production cuts. I was lucky to immediately spot the event, but it took me some time to find a way to play it. Got a Feb 80-90 call spread for a momentum trade, but the price action failed to confirm my idea, so I took off half at breakeven. The rest will be cut on a breach of the recent lows, which, unfortunately, looks very likely.
Conclusion: Despite everyone sure the recession is around the corner, equities seem oblivious. I love listening to price action, but believe path ahead should not be as easy as it has been the last few weeks. Now that the holidays are over and we are near important technical levels, I expect the markets to downtick and have traded in accordance with my views. There are tons of overextended tickers at key levels for those that have a short bias.