A Violent Market Pretending to Be Calm
Between the Lines - Vol. 14
Good morning,
After a week of very limited phone reception and 2 Mbps internet in a remote beach house in Wales, I am back! I average around 10 hours a day of screen time on my phone, so the break was quite nice and probably good for the soul.
Two weeks ago, with SPX sitting at 7,350, I put a 7,700 July target before the paywall and said an August print above it was not off the table. SPX closed Friday at 7,575, so we are now 125 handles away from the original target and close enough that pretending 7,700 is still the interesting part of the call feels a little pointless.
It would obviously be easy to spend 500 words celebrating recent calls and another 2,000 explaining why the final 125 handles should trade. But I don’t think you need me for that. The more interesting question is surely what happens after 7,700, because while the index has quietly marched towards it, the market underneath has been screaming.
Many momentum factors have fallen more than 20 percentage points. The mainstream momentum ETF fell 11% peak to trough, and SOX went from trading around 80% above its 200-day moving average to a much more normal distance - 36% at the bottom of the recent dip and around 46% now. Mag7 suffered a roughly 15% correction (the below post was where I said to buy the Mag7 dip and explained my reasoning).
Anyway, continuing with my list of bizarre things that have happened despite SPX trading where it is… the shiny space, drones, quantum, non-profitable tech all got smashed. Software is split into two completely different markets all while SPX sits within touching distance of another all-time high.
While most wait for some kind of correction in index, I think the most important question here is whether the violence underneath the market has already removed enough excess to extend the rally or whether it is eventually going to escape into the index itself.
VIX with a 16 handle suggests a fairly orderly index. Single stock vol, positioning and now parts of the credit market say something very different. So today’s post is about which signal I trust, what happens after 7,700 and why I think the next meaningful move will be considerably larger (and probably less straightforward) than index is currently pricing.
My focus this summer now moves onto that 8,000 touch.
Before you all assume that is me expecting another 425 handles in a straight line, I don’t. In fact, I’d be surprised if we make it through the rest of summer without a proper 5-10% air pocket somewhere along the way. I have considerably more conviction that we see both 8,000 and a violent drawdown than I do in which one comes first. I am bullish on the destination but increasingly suspicious of the path.
