Morning Note: A Tough Go for the Savviest of Traders

In yesterday's note I featured the previous evening's entry to our internal market log. In it I made the following assertions:

"… tomorrow, July’s new home sales number will be released. And if it jibes with other housing data of late, it could spark a bit of a relief rally in stocks. Meaning, recent housing data has been nothing to write home about, and, yep, the market would indeed welcome some bad economic news right about now.

Also on deck tomorrow is the US Manufacturing PMI and the Richmond Fed Manufacturing Index. Comparing those to related data releases of late, they could tilt either way, potentially nudging the market in either direction."

The first circle on the following graph of yesterday's SP500 action marks the moment the PMI and Richmond Fed data were released (both by the way coming in notably below expectations). The second marks the start of a brief spike higher occurring 4 minutes after the release of very weak new home sales data:

Clearly, the immediate positive reaction to unambiguously negative data supports the notion that the market wants nothing to do with good news right here... I.e., bad news is good news! Why? Because "the market" (traders in the aggregate) believes bad news will, at least to some degree, stay the hand of a Fed that has vowed to play hardball with inflation, and, by default, force some potentially serious pain onto the equity market...   

The fact that yesterday's attempt at a rally quickly fizzled speaks to the uncertainty surrounding J. Powell's Jackson Hole speech this Friday. 

With regard to the under-the-surface positioning among options dealers, we've seen a reversal in terms of the skew around implied volatility. Heading into last week's expiration it implied that dealers would be buying the dips and selling the rallies in order to remain sufficiently hedged. This week the skew is essentially turned on its head; present positioning implies that dealers will need to sell futures as the market declines and implied volatility rises, obviously exacerbating any downside move. That played out vividly in Monday's not-small selloff. 

On the other hand, as I pointed out in Sunday's post, there remains a serious net short position among SP500 futures speculators that would likely rush to cover (buy), should, for example, J. Powell once again feed the bulls what they're praying for come Friday morning. 

Bottom line, even the savviest of short-term traders are having a tough go of it right here.

As for us long-term investors, it's all about staying diversified, staying hedged, and patiently allowing things to play out...

Asian equities leaned red overnight, with 9 of the 16 markets we track closing lower.

Europe's actually leaning green so far this morning, with 10 of the 19 bourses we follow trading up as I type.

US stocks are mixed to start the session: Dow down 51 points (0.16%), SP500 down 0.11%, SP500 Equal Weight up 0.01%, Nasdaq 100 down 0.02%, Nasdaq Comp up 0.05%, Russell 2000 up 0.09%

The VIX sits at 23.63 down 1.99%.

Oil futures are up 0.51%, gold's down 0.27%, silver's down 0.78%, copper futures are down 1.34% and the ag complex (DBA) is up 0.73%.

The 10-year treasury is down (yield up) and the dollar is up 0.35%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 15 -- led by energy uranium miners, Dutch Bros, MP Materials, defense stocks and ag futures -- are in the green so far this morning. The losers are being led silver, AT&T, Nokia, treasury bonds and emerging market equities.

"You have to look at real fundamentals, not at what policy makers want to happen. The willing disbelief of people can carry on for a long time, but eventually it is overwhelmed by the market."

--Colm O'Shea

Have a great day!
Marty