Last time I wrote I put on some QQQ downside and this week I took off half and subsequently bought some QQQ calls as NQ approached 29k. NQ has managed to hold that 29k area well since May, there have been a few moves below it but each time has been met with a sharp rally back above it. I also covered half of the EUR/JPY short at 179 against the 184.1 entry, which moved so quickly that I had not even finished sizing it. MCD was cut for a small loss in the week.
I think Friday made it clear that positioning was too bearish going into CPI. It came in hotter than expected, and equities rallied while vol and skew got crushed. Simply put, too many people were too heavily hedged for a bad outcome, and a disappointing number was not enough to justify another leg down. You could see this positioning tale in Goldman’s prime data which showed investors adding shorts in macro products ahead of the release while buying individual TMT names.
When I talk about positioning, I am interested in what people have already done with their view. Someone who is worried about inflation who has already reduced exposure is in a different position from someone equally worried who remains fully invested, which matters when the number arrives. A bearish surprise does not necessarily trigger another wave of selling if enough people have already acted; many of those will be putting exposure back on when the market fails to fall.
I think a lot of the damage from higher rates is already priced in. One or two hikes by themselves wouldn’t make me bearish, particularly with more than three priced over the next year. Does the Fed actually hike in September? I am not sure, but the more attractive trade is rates being left where they are. I won’t pretend to have a way of knowing what’s going through every Fed member’s head, but I do have a view on how much tightening equities can tolerate. I think it could turn out to be less unpleasant than investors have been prepping for.
I think the big question here is what happens if some of the pressure starts to reverse. Obviously, energy is still the biggest concern in the inflation picture. If the fighting were to ease with Iran, you would see oil come off and inflation expectations move lower with it. From here, it may well be the catalyst that finally cracks the range index has been in for some time. I think that people spend so much time working out what the next disaster might be that their books are badly set if anything gets better.
