Easy part of the move already made
Weekly equity and other markets review 31.10-04.11.2022
General market overview: It is happening, at least for now. Do not know whether it was the monthly seasonality, the mid-term elections one, the statistics around the 2D2U day we had on the CPI day, the expectations for a FED pause or whatever you think it was, but stocks have rallied very decently into the coming FOMC. Last week stocks just continued to go up despite horrible earnings coming from the megas (excl. AAPL) which continued to show the crazy demand for equities even with yields being 4%+ and the potential of a recession coming next year (if not already here). I am sticking to my thesis of not trying to milk every trade to the last cent. Therefore, as FOMC comes soon and SPX is now near healthy resistance levels, I am taking exposure down.
What I like about the rally in equities is that it happens to be backed by the other usual suspects - rates and the dollar.
The dollar broke the sma50 on the daily and is current retesting it. Whether the trend is over is far from clear but looking back we can easily do this, as we have discussed firmly the possibility of a short-term top, which now looks as a fact. Same goes for rates, with short-term being much less interesting, as their floor is capped by the FED actions. The long end’s ginnie looks to be back in the bottle (trend), coming down from several scary upside bars it had recently.
We are now facing a situation with FOMC uncertainty, resistance around 3900-3950 area meeting bullish price action and dollar & rates back to support in their channels. I am not afraid to say here, that despite the millions of investors being left out and wanting to get in, the easy money from the bounce has been made and thus profit taking here makes sense.
Potential trades:
CL_F (or energy stocks) - In oil fairness (he-he, see what I did there?!), I can come up with several reasons why I do like oil as a commodity here. Topic got heated up last week with Saudi’s energy minister publicly accusing the US for manipulating oil price.
"People are depleting their emergency stocks, had depleted it, used it as a mechanism to manipulate markets while its profound purpose was to mitigate shortage of supply,"
We have geopolitical tensions around a vital commodity, which on its own is bullish for price. To this we add the details that one of the parties has openly defended supply cuts and the other will no longer be able to ‘manipulate markets’ as the last portion of the SPR has been released. Then we have the well known individual struggles coming from US energy companies to increase production, Russia - Ukraine war and an astonishing number of subsidies for the common folks at the pump almost everywhere. We also have the inflation narrative / super cycle in commodities driving speculation/inflows in such assets. So we have a very clear picture of the underlying drivers for a solid bid in oil, we just need a proper catalyst and some steam to come off the market.
And this is kind of what has been happening. DXY down should help oil demand and the overall risk on in assets comes in handy. The real catalyst though should be the stop of the SPR releases and the mid-term elections, after which the political agenda to keep prices low for end consumer will have evaporated at least in the short term. Last, but not least, I hear some smart folks talking about China finally reopening.
To finish off, I am posting the chart of oil, which is about to back test the sma50 on the daily timeframe. Big picture is that oil has been making a solid pullback since June and has made a higher low recently. I am not calling for a new high despite having laid out reasons for which one might think I am expecting one. I am just bullish here for those reasons and I am watching price closely to get myself into a trade.
XBI - Another potential long is XBI. I admit for not having many convincing arguments why I believe it would go higher, despite the pause in rates, it’s label as a hated sector (due to enormous wealth destruction) and the beautifully looking chart, but sometimes this is enough.
Larger biotech ETF IBB has done slightly better, so this one (XBI) is the laggard. However, the chart is so good looking with that bull flag breaking out of moving averages and a bottom long forgotten that I can print it and hang it on the wall.
EWZ - Last interesting thing I am currently watching is how the Brazil ETF EWZ would respond to Lula winning the elections yesterday. I think the results are final and the outcome appears to have been a very tight one:
Brent Donnelly (@donnelly_brent) has been advocating for a long position before the elections with the hypothesis that whatever the outcome, it would be considered bullish by investors. And truth is that the inflows in EWZ have been reaching record highs in the weeks before the election. But trading it was not really my cup of tea and I have been lucky so far. However, given the outcome of the elections, which is considered to be worse for investors, if the market reacts positively and appears to have priced it out or to have just waited for the event to be over, EWZ becomes an attractive long proposition, especially if one adds to it the inflation/commodity super cycle narrative.
By the way, some might be interested into reading a previous substack post about FOMC events here. I have not updated it, but as fate would have it, the last time it did not work.
Current positions: I am long FCX (2/3 risk), DE (1/2 risk), EWW (1/3 risk)
I got long FCX Nov 33$ calls as I saw how it decoupled from copper, the commodity which it follows quite closely, hoping that the latter would turn and push the equity further to the upside. Luckily, that is what happened. As it was working in the desired direction, I took some profit home and shorted closer and same dated 35$ calls against it, as the move appeared extended. I am now sitting with the reduced position, now being a spread rather than a simple call.
My position in DE and EWW have also been de-risked, as I have shorted closer and same dated $405-415 call spreads for DE and taken 2/3 of my EWW size off with the rest being turned again into a spread through shorting Nov $49.5 calls.
This week I had some nice speculative position, spreaded among WSB’s favorite tickers AMC, FUBO, STNE, IONQ, TLRY, etc. Those have very high short interest and are potential short squeeze targets, which had a nice bid early in the week. I did get rid of those heading into FOMC following the idea of de-risking before the event.
Conclusion: SPX has rallied significantly into the FOMC week being helped by a pullback in rates and the dollar and despite mega-caps reporting earnings that were worse than expected. I believe that given the event this week and the good levels SPX is trading at, profit taking is due and I have respectively done so with our portfolio. Even though many have been left out of the party and bear rallies do tend to overshoot, the easy move from the bottom has already been made.
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