The Setup Nobody Wants to Own
Between the Lines - Vol. 4
Two weeks ago I called this a buyers’ strike, and I still think that was the right description at the time. The market had stopped behaving like a place where people were looking for opportunity and started behaving like a place where nobody wanted to be first. Hedges got put on, macro took over, every bounce felt rented, and every headline felt like a reason to take off risk rather than put it on.
While the debate has been about whether the market has bounced too much, I have been leaning the right way. Last week’s SPX 6600/6650 call spread, put on the week before, risking 20bps of NAV, closed at max gain. I traded the 6800 calls on 9 April risking 5bps, paid 13 and sold at 39. Friday’s 6850 calls for 5bps died worthless. The direction has been right while this market has been working very hard to confuse people. That doesn't mean it's fixed. Nor does it mean people are back to believing the way they did before the Iran headlines hijacked the tape. What it means is that something important has shifted: the market is trading better than people feel.
We are well off the lows. The weekend talks didn't deliver some grand resolution, and futures are a touch softer again as I write this. This market has just lived through a geopolitical scare, a relatively violent squeeze, and a proper confidence wobble, and it was never going to glide back to all-time highs in a straight line.
What interests me here is not that the market bounced. It’s how it bounced, and more importantly, what still does not seem to be fully believed underneath the surface.
That is where this starts to get dangerous. Anyway. Let's get into it. This is the post where I put my cards on the table. You might think I've lost the plot. Or you might think I'm early. Either way, I think the pain trade is about to become very obvious to a lot of people who are currently sitting on the wrong side of it.
