Equity and other markets review 12.09-16.09
Nothing like price to change sentiment
General market overview: The scary price action on the Friday prior to Labor Day failed to continue the downside momentum at the start of last week. It was on Tuesday that traders unsuccessfully attempted to break through 3900 for the last time (based on close of day) and bulls seized the moment to get a breather from the oversold conditions. Back up bidding came as J. Powell had a friendly chat at the Cato Institute conference that did not surprise the market one bit and the serious put hedging that had been placed started quickly to burn through its theta, vanna and charm greeks. SPX managed to finish the week up c. 3.6% and, not less importantly, it is technically now trading above both the sma50 and sma100 on the daily timeframe. I see an increasing number of people sniffing ‘soft landing’, which was previously regarded as unimaginable. In that sense, sentiment has at least partially improved, following one of my most favorite quotes:
Closest resistance from here is the area b/w 4150 and 4200. Part of me is wondering whether some of the price action has been front-running this week’s CPI number. While I am definitely no expert and believe few-to-no one could actually prognosticate the number, there is the overall feel in the air that peak inflation has passed and current inflation momentum is favorable. Expectations are for CPI (MoM) to be slightly negative and if energy and food are excluded, a 0.3% positive MoM.
The point I want to make is that what happened last month when we got July numbers could well be repeated. We got a big gap up above previous consolidation for the latest part of the bear rally up to the sma200d. This time it could lead us to the next logical resistance from here, which is the area b/w 4150 and 4200, whereas the support below is at the recent lows at 3900. If we break from there, I see no other option but to test the 3700-3800 levels.
I am more inclined for an upside scenario at this point, given the slight change in sentiment, overall positioning and expected calmness in both the rates and forex markets. The former are all at key or near key resistance levels, albeit none has broken its upside trend. Despite this, reaching new highs should require serious effort or a catalyst (bad CPI could well be one) and I am seeing this as a brief period of time where chances to get negatively surprised from a big jump in rates is relatively smaller (do not get me on the QT talk, doubling balance sheet decrease speed later this week).
I tell myself a similar story with the USD. ECB hiked 75 bps as expected but showed commitment towards further hikes, which allowed the EUR to get some ground against the dollar. Despite the EURUSD now being near textbook resistance (sma50d) that has been kept for most of the year, calmness in markets should keep the EURUSD away from making new lows in the short term.
Lastly, we are still in bullish seasonal territory, with both SPY and HYG reaching its September seasonal highs at the end of the week.
I understand the slightly overbought conditions from last week, the possibility that the whole bounce was short covering and hedge related, and how a bad CPI could quickly change the shaky sentiment and thus price action. Therefore, I am not advocating new longs at these prices, but I am simply staying long through the call spreads that I got last week (more on this below).
Sector overview: I have to admit there has been nothing that has really made an impression on me. Last week has been a bounce across all sectors. Energy related equities were relatively worse but still finished green amid a volatile price action in oil, whereas higher beta sectors such as XME and XRT were among the best performing. Semis were a tad later to join the party and some of the big names in the sector such as AMD and NVDA are still near lows on their charts. Only the very brave that believe direction is to the upside should be looking for bottom picking in those. I would rather wait and see whether I could play them on the short side if indices turn sour again.
Potential trades: If not already long, I would suggest one to stay on the sidelines. We are sitting on a slightly extended short-term move in indices with important data ahead. It is much better to anticipate the next move with a lighter book than having to exit positions due to bad entries and potentially switch sides.
While going through twitter last week I stumbled across a good idea coming from @iv_technicals. The trade is long call butterfly for Dec using the following strikes:
The idea is also discussed in the @themacrotourist latest substack. I give credit where it is due, and although having a rather slim chance of getting the max payout (200 points) one could easily get 5-6 points in case we continue ripping higher after CPI and FOMC meeting.
What I would add to the trade is another long fly, this time on the downside. The SPX chart above does look like a ‘triangle’ formation and if price continues oscillating around the 4000-4100 levels for another week or two, a volatility expansion might be due - either up or down. I do not want to be dismissive of all the risks that could bring us lower and one could easily tell them by heart, so having both tails covered makes sense to me. The long put December fly 3650 - 3450 - 3250 currently goes for a similar price of c. 11$ at the mid.
Even at c. 22$ total cost, covering both tails can still make your decent money as the max profit of each of those is 200$. One can pick a side, or choose both of them.
Current positions: On Thursday I got long CLF, DKS, ABNB through call spreads expiring early October, and also still short QQQ through the tiny size in my put fly that trades within the strikes.
I got DKS long call spread Oct 07 115-119 for 1.57 risking 1$ of this premium. It is a retail sporting goods company that has continued to post good numbers amid what was deemed horrendous consumer confidence. I do like that feature and how much stronger it has behaved compared to the overall sector. This company also has a solid buyback program, which is never a bad thing and I did expect the broad XRT ETF to pick up with indices to give it further tailwind on the upside. I also liked the price (premium) paid as I believe I got it fairly cheap considering how close it was to the lower strike.
I got also long call Oct 7 125 - 130 call spreads for $1.50 in ABNB as I loved the potential breakout of recent consolidation through the sma100 on the daily. Strong travel sentiment coming from airline companies, failure to make a sensible pullback since recent highs and also other travel companies (RCL, CCL, BKNG) picking up weighed on me to put some size to work. Risk management is similar, as I do not plan to risk more than 1$ of the premium, trying to juice the best risk-to-reward I can get.
My last equity long is CLF, a steel producer, which I have been following for some time. XME has been on my radar lately and given its high beta and the feel that the market was about to bounce, I entered in a 18-20$ Oct 07 call spread for 62c, planning to risk max 40c of those. Chart was screaming with a nice pause on the sma50 on the daily timeframe. The company has some of the best management in the industry and decent insider buying but I admit the commodity itself was not a main driver for the trade.
I plan to get rid of my QQQ Sep 30 310-295-280 put fly that is still within the strikes on the first sensible pullback. Even though I still see it as a good position, I do want to keep the profit that I made in it, especially now that it is with such size that makes it a marginal trade compared to the rest of the portfolio.
Conclusion: Even though we are a bit overextended in the short-term, I believe there is more upside to 4150-4200 unless CPI and/or other catalyst prove me otherwise. I expect and hope that rates and USD are not going to drive risk-off behavior either in the short term. I do not plan to initiate more longs here though but would rather keep what I got.