Monday, August 29, 2022

Morning Note: Shorts Finally (maybe) Getting it Right

We've spent a lot of time herein over recent weeks on positioning dynamics under the market's surface that help explain how a rally in stocks can gain some serious steam directly in the face of some serious fundamental headwinds.

In particular, we talked about options dealers’ positioning as well as what has been a high degree of short interest in S&P 500 futures contracts (bets that the market's going to fall).

Yesterday's Wall Street Journal featured an article touching on the latter.

Snippets:   emphasis mine...

"Net short positions against S&P 500 futures have grown in the past couple months, reaching levels not seen in two years. That means traders are increasing their bets that the index will fall, or at least hedging against that risk."

"Short positioning in the market can help participants gauge sentiment and can influence the magnitude of stock moves, investors and strategists say. If stocks rally, short sellers may be squeezed to cover positions, which could accelerate the market’s upward move."

That last sentence is what we've been talking about. 

However, like I said in a last Friday video, the shorts could indeed ultimately have it right, and, thus, get handsomely rewarded for their bearish bets. Like last Friday! As opposed to forever having to cover in a rising market...

Another supportive factor for stocks has been the unrelenting bullishness among retail traders who, scarily, have learned little more than you-buy-those-dips every time they occur... The article touched on that as well:

"Although short positioning in S&P 500 futures indicates a bearish outlook from institutional investors, individual investors appear to have a rosier take."
“Retail investors are actually pretty optimistic,” said Mr. Hackett. “It’s more likely that in the near term, a period where retail investors get more pessimistic causes the market to drop.”"
And I emphasize, by quoting hedge fund manager Mike Taylor:
"In the past 2 yrs more retail trading accts have opened than the past 20 years combined, a side effect of #MMT - mass speculation.  Millions of new inexperienced options traders unaware of risk."

Yeah, if/when the retail investor capitulates is when I suspect our ultimate downside target comes into view.  

On the economy:

As I've been stating herein of late, our present assessment has it that indeed the U.S. is either already in, or is about to roll into, recession. However, our present (always subject to change) view is that it'll, all things considered, be relatively mild.

This from recent BCA Research note is interesting, and supportive of our mild-recession thesis:

"Although US GDP growth was revised up to -0.6% from its preliminary estimate of -0.9%, it continues to point to a contraction in economic activity in Q2. It marks the second consecutive quarter of negative GDP growth – meeting the textbook definition of a recession. However, the NBER Business Cycle Dating Committee will examine a broader set of data when determining whether the US economy experienced recession in H1. On this front, alternative measures of output indicate that the picture may not be as bleak as this widely followed gauge suggests. Gross Domestic Income (GDI) has risen 1.8% and 1.4% in Q1 and Q2, respectively.

While both GDP and GDI assess economic activity and are conceptually equivalent, differences in the source data can cause deviations. GDP measures expenditures on good and services provided to final users (households, government, etc.) while GDI measures aggregate income (wages, business profits, rental and interest income). Over the pandemic, the discrepancy between the two has grown with GDI outperforming GDP.

The debate of which is the most appropriate is a longstanding one, and some economists agree that Gross Domestic Output (the average of GDP and GDI) is a more accurate measure. US GDO remained positive in H1, increasing by 0.1% and 0.4% in Q1 and Q2, respectively. Some economists also argue that GDI is a better real-time indicator of the economy. During the 2008 downturn, for example, revisions to both measures brought GDP closer to GDI."

Asian equities struggled overnight, with 13 of the 16 markets we track closing lower.

Europe's in the red so far this morning as well, with 14 of the 19 bourses we follow trading lower as I type.

US stocks are weaker to start the session as well: Dow down 261 points (0.81%), SP500 down 0.72%, SP500 Equal Weight down 0.99%, Nasdaq 100 down 0.58%, Nasdaq Comp down 0.70%, Russell 2000 down 0.84%

The VIX sits at 26.92 up 5.32%.

Oil futures are up 1.29%, gold's up 0.04%, silver's down 1.01%, copper futures are down 2.07% and the ag complex (DBA) is down 0.67%.

The 10-year treasury is down (yield up) and the dollar is down 0.10%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 6 -- led by uranium miners, Dutch Bros, energy stocks, gold and Brazil equities -- are in the green so far this morning. The losers are being led lower by base metals futures, materials stocks, defense stocks, base metals miners and MP Materials.
“It’s a huge mistake to theorize before one has data. Inevitably one begins to twist facts to suit theories instead of theories to suit facts.” Sherlock Holmes...

Have a great day!


  1. Good Morning Marty, thanks for the market updates! I like the Brazil equities and will likely to add more down the road.
    I have a question about the economy of India in terms of macro-investment. What do you think of the ETF INDA? India has a fast growing economy, They want to become a develop country in the next 25 years.

    1. Hi Sam, we've been in and out of INDA over the past few years. I do like it's longer-term prospects, Apple presently moving some production there fits part of that thesis.

      Near-term, keep in mind that India is a net importer of commodities (read energy), which of course is a headwind from an economic perspective...

      In terms of valuation, Indian stocks are expensive, trading at 21 times earnings... Although the latest economic data has been good relative to the rest of the world -- whether that translates to higher corporate earnings, amid higher input costs, is a big question going forward.

      They are, on a relative basis, positioned better than a lot of countries from a policy rate perspective. At 4.90%, ultimately, there's room to cut when inflation comes more off the boil.

      All things considered (election notwithstanding), yes, Brazil looks hugely attractive for the patient investor right here: 5 times earnings, policy rate at 13.25%, commodity exporter, etc...