The Week Ahead
Volume 106 - Buy the dip?
What a week!
I think what we experienced last week was what I told my subscribers—a reality check/a positioning clear-up. Was it all that much of a surprise to see NDX down 3% when everyone was in the same boat… Vol was low, SPX downside was cheap, everyone in the same boat long and seasonality to turn sour soon. Why did we sell off? I think a large part of it comes down to Trump's election odds, which have been moving to a lower probability outcome - still priced to win but a lower probability than before.
I also think China’s poor GDP prints had some knock-on effects. For the time being, I will continue to hold my small MCHI short. There is this large debate of whether, under the surface of the recent pullback, there’s a rotation going on versus de-grossing. I am more on the de-grossing side of the argument. When USD/JPY started to unwind, you got some unwind in other carry trades/overcrowded trades (vol selling). The popular momentum trade got hit as did mega cap tech. There are some rotations going on as mega-cap tech positioning clears up; from what I can see here, a lot of money is flowing into financials, healthcare and industrials (though some will say that industrials were heavily net sold). I have argued the case to subscribers on my private Twitter that this pullback and positioning clear-up coming early in earnings season could be a bullish thing.
Election risks are now live and will be a stronger force as the election gets closer.
So should you be surprised by the recent risk-off? Probably not.
Dealer gamma positioning is not quite short yet but close to yearly lows. The buffer has gone, so markets should move more freely, which they have since it unwound.
Last week VIX -0.13v, VVIX -3.32v. Weekly straddles that were costing 90bps now cost nearly 200bps as we enter a very busy week ahead. There will be plenty of earnings (40% OF SPX market cap) and macro events (JOLTs, European CPI, BoJ, ECI, FOMC, BoE, NFP).
FX
It hasn’t been a simple market recently, but I do expect the popular trades to work again. I think USD/JPY trends higher into the election and think USD/CNH (despite its corr to $/JPY) could be a great hedge as it would provide you long USD exposure (which I have argued to be a great all-round hedge in previous posts) and you get short CNH for any potential China weakness… and USD/CNH is positive carry.
BoJ to come… even if the BoJ hikes this week, which is possible, any further yen upside is likely to be short-lived. As I have said before, the only hawkish thing that can happen for the BoJ here is if the Fed cuts. Until then, the correct trend should re-assert itself, and carry should work again.
For me, and for now, the dollar has a high bar to outperform. While a September rate cut looks likely, it would not be large enough to send the dollar lower.
As for the Euro, I am still confused as to why it isn’t lower…. It must be the hawkish cut, lol. Monitor rates despite the focus (for now) remaining on growth. I think EUR provides attractive risk/reward on the downside, and I am looking for downside trades.
GBP… still watching, and still looking to get short. Patience…
Single Stocks, Index & Vol
For now, for ES1, 5528-30 remains a strong area of resistance.