Monday, August 8, 2022

Morning Note: Still All About Positioning...

Per our latest video commentaries, the resiliency in equities of late smacks more of positioning than it does some sustainable sea change that would have us turning net bullish on the market's go-forward prospects from here.

With regard to that big net underlying short setup in S&P 500 futures adding some oomph, here's research firm Variant Perception's take last week:   emphasis mine...

"In our June 28th report, Equity squeeze and yield plateau, we flagged the rare and powerful autocorrelation buy signal, with a short squeeze target of 4150 on the S&P 500.

Today, the S&P 500 is in range, so we would look to re-establish hedges / downside trades. Longer-term implied volatility remains elevated post-Covid..."  
And with regard to the options dealers positioning, here's Spotgamma this morning:
"Participants trade in a manner that is adding to the market’s bullish, positive gamma position.
Absent an exogenous shock or event after which gamma position may shift drastically (e.g., OPEX), participants must add to their exposure at options strikes higher in prices and further in time (i.e., at and above $4,100 SPX)."

Translation: Options dealers have to hedge their risk by buying the securities underlying the contracts they've sold. The next big expiration date (OPEX) being 8/22. 

In terms of the former (the short position), unless last week saw some serious short-covering, there's still some real "potential" -- particularly considering fresh "stimulus" passed over the weekend and, again, the perceived options dealer tailwind for the next couple of weeks -- for the S&P to test that 4,300 "bear market rally" upside we staked out a few weeks ago. 

The fact that we term this a "bear market rally" tells you about what we're thinking has yet to play out before we close the book on this particular chapter in market history.

Now, the above short-term bullish setup notwithstanding, there is a landmine or two lurking in this week's data releases, not the least of which being labor costs and the latest read on consumer (CPI) and producer (PPI) prices.

As I also suggested in the latest video, and per Spotgamma below, a break below a certain level could literally turn these bullish positional phenomena on their head:

"Break below $4,000 invokes negative gamma, higher implied volatility, and potential for accelerated sell-off."

Stay tuned... 

Asian equities leaned green overnight, with 6 of the 16 markets we track closing higher.

Europe's rallying to start the week, with 16 of the 19 bourses we follow trading up, as I type.

US stocks are up to start the session: Dow up 199 points (0.62%), SP500 up 0.60%, SP500 Equal Weight up 0.93%, Nasdaq 100 up 0.63%, Nasdaq Comp up 0.78%, Russell 2000 up 1.39%.

The VIX sits at 21.52, up 1.80%.  Hmm....

Oil futures are down 0.33%, gold's up 0.43%, silver's up 2.48%, copper futures are up 0.81% and the ag complex (DBA) is up 0.30%.

The 10-year treasury is up (yield down) and the dollar is down 0.28%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 30 -- led by Albemarle, uranium miners, silver, Brazil equities and base metals miners -- are in the green so far this morning. The losers are being AMD, semiconductor ETF, Nokia, carbon credits and healthcare stocks.

"The continuing crucial role played by the US Federal Reserve means that its actions now largely dictate whether global investors move risk-on or risk-off. Consequently, US Fed-watching has turned into a much-prized skill, sometimes even serving as a dark art worthy of Hogwarts and Harry Potter.

--Howell, Michael J.. Capital Wars 

Have a great day!


  1. Good Morning Marty,
    Thanks for the market updates. It appears that the market ignores the tension between the US and China. Does the market care? What do you think?

    1. Good morning Sam. Ultimately, long-term, it matters in a macro sense. Just reading on the "chips act" this morning. It targets China directly, but, in essence, it takes us back to earlier days (pre-80s) where US industrial policy is taken out of the hands of the market, and into the hands of the politician. Makes for messy allocation of resources, and, certainly, exacerbates long-term inflationary pressures... For the moment, the market is very short-sighted; the positioning stuff I'm referencing is real, as it unwinds downside risk increases. If/when the downside comes people will think suddenly the market cares about issues like US/China...