Sell in May and go away came earlier this year?
Equity and credit markets weekly review 24.04-28.04.2022
GENERAL OVERVIEW: The realized volatity of last week was a deja-vu of 2017. The high-to-low range was 50 points. Yes, I know the argument that intraday trades could have made a ton of money, as the SPX moves up 1%, down 1%, and this would somehow make everyone trading rich, but in reality most people chase momentum and the choppiness only makes the brokers any money.
It feels like the market is being pushed down outside of session hours only for the guys that have not gotten long enough to buy some more.
Levels are still very unworthy of a long trade. On the other hand, sensible shorts through options have so far proven a huge theta burner. My thinking here is that I would rather wait for the SPX to shake the last shorts around and over 4200 before getting a short trade on.
Both rates and SOFR futures did little too last week. The former has managed to keep the important support levels and despite the huge recession talk going on they have kept stable. What is important here is that there is no reason for rates to fall if the equity market is as resilient as it is currently. There is the increasing feeling that the market needs something MORE or something NEW to bring it going forward - either up or down. And surprisingly, the data that has come out and the long list of FED speakers have failed to do so.
The dollar appears to be going nowhere too, but lack of bidding remain apparent. Cannot say I am not watching this closely for any signs of a bounce occurring as I believe positioning is very one-sided.
On the sector side I want to point out that there has been a vast number of stocks that have made new highs within the homebuilder and consumer staples ETFs (XHB and XLP). Add to this the huge bull run mega caps have had since the beginning of the year and I am a bit surprised that we have not gotten higher than 4200. Even XLE is doing alright, given that the recent price action in oil has eaten much of the OPEC+ gap up, whereas the gap in energy equities is left untouched.
Before we continue, I would like to give my friend of Credit from Macro to Micro a shoutout. He shares a tremendous amount of charts with a tight focus on the credit markets and in particular Europe. For anyone out there interested in the European debt markets he is a great follow on Twitter - @credit_junk and also publishes a weekly newsletter here on Substack. I am eagerly waiting for his publications every Friday.
In the credit markets it was one of the slowest weeks of the year is under our belt, feeling like watching paint dry. It was one of those weeks where collecting carry was the best thing you could do for your account.
MOVE index finished almost unch.
CDX HY didn’t show any signs of volatility too.
The futures are now where we were back in the beginning of Jan’23. As we go forward the new data will show exactly where we are but I have a sense that even if we jump to the 5.75% terminal highs from Feb’23, the market would not be materially impacted.
The SFRZ3Z4 (SOFR 3 Month Dec’23 - Dec’24 futures) aka higher for longer doesn’t seem to be working post the banking crisis. Given at what levels the spread moved back to, sooner rather than later it will offer an excellent risk to reward trade to the upside or the resumption of H4L (higher for longer). Everyone expects the FED to ramp up cuts but in reality the market has yet again turned very one sided and it is forgetting that there is another side of the coin.
CURRENT TRADES:
LNC 0 66 vs LNC -D. The floater that is priced at US3M LIBOR + 235.75 and ranks just an inch better on the capital structure of LNC compared to the classic pfd LNC - D, which has a fixed coupon. The floater, however, has lagged the recovery since the banking crisis. I do admit there is some yield curve risk as the floater is based on the front end whereas the preferred is probably more sensitive to other parts of the curve but I am willing to take that risk.
We have been very active last week and we have put on several relative value trades in the fixed income space. We do believe there are assets which have lagged the recent calmness post the banking crisis hiccup.
For a full list of potential and current trades please consider becoming a paid subscriber.
CONCLUSION:
As the market seems to have reached of exhausting I would prefer to be on the safe side and remain in relative value trades for the time being, even maybe with a slight tilt to the short side. As volatility is contracting throughout 2023, with the clear exception of the banking run in Mar’23, I believe that a slow and steady grind will be the norm in fixed income until a new risk event hits the newswires. There may be time in the near future when we would need to be hedged but it does not feel like this time is now.
As for equities, I will conclude once again saying that being long is a poor trade in terms of risk - to - reward at this point, but getting short feels somewhat early as selling at the highs is so well absorbed. On a broader level, best action remains to wait on the sidelines. Blessed are those that are not forced to chase index-like performances on a month-to-month basis.