Midnight Musing On Markets
As my trading room will be closed Monday – which is regrettable, unavoidable and hugely inconvenient – I wanted to send clients my thoughts on what I think lies ahead this week.
After a momentous Sunday intervention by the Fed (where Fed cuts main rate to near zero and boosts asset purchases by $700-billion), which proceeded a coordinated global dollar swap agreement (to relieve the USD liquidity shortage), banks getting strong-armed, and followed by more unbelievable promises by Trump and Mnuchin (which bulls really could have done without), futures went limit down.
Was it something they said? Yes, but more that Fed is out of bullets in the traditional sense. They have cut to zero and have nowhere else to go but negative. This is a big negative for growth and by extension equities. As a result, market is falling in protest to lack of fiscal stimulus to help combat the very deep recession that some would argue (like me) is already here.
Here is my thinking on where markets go next and what this means for volatility and stability. Spoiler: more of the former and less of the latter.
You know my position on this already – confidence is shot and buyers stepped away from the ask. Here’s a short summary of why:
- Sold-to-you market from Oct-Feb on Repo liquidity injections and stock buybacks and retail traders all in. Yuge divergences under the surface as repeatedly tracked in my Intermarket analysis for clients; macro case tracking bond yields which kept falling while equities rose (and started Oct 3, 2018 actually!).
- February 18th warning that market looked ready to break turned risk-off fast February 24th. It’s been down-hill since.
- And since then we have had MASSIVE DISTRIBUTION under the surface – 3 weeks now – as called out in my live trading room… every single day. No bid/liquidity. My repeating mantra: Not safe. No asset is safe. Not even Gold.
- Historic moves. Bond moves last week alone were 10-standard deviation wide. And then the US Dollar danced like Jagger.
- Volatility is bid and does not look tired. It has done nothing wrong as a trending stock. I still see higher.
- Fed gave it’s all today in its Sunday emergency meeting. That makes FOMC Wednesday cancelled and Fed largely irrelevant now as markets (and Fed) await Fiscal policy.
- Waiting on Trump/Congress to help support the damaging affects from COVID-19 on Americans and our economy is akin to relying on hope as a trading strategy.
- Goldman came out and slashed GDP growth in Q2 to -5% after slashing SPY quarterly YOY EPS corporate growth -15%. You know what will happen to the unemployment rate. And then you can imagine what the Fed will have to come back and do…
- (Warning, Political) Trump and his cronies are dangerous in their policies and lies, and growing impotence to change the direction of the markets after 2018 tax cuts and trade tariffs greased the wheels for a USD liquidity shortage and political inaction from COVID-19 tipped us over and hard. I’m betting on a Yuge 2020 election surprise.
- Fiscal is now up to bat. Place your bets. And remember there are Trillions of market cap at stake. We’ve already lost ~$40T in 3 weeks with no bi-partison plan to stem the panic (and ensuing bank runs). Color me skeptical. Neither Fed nor Congress can cure a virus. Markets like the disease just have to burn itself out.
- Emergency Monetary Moves may stabilize markets for a NY minute, thanks to proposed US dollar liquidity swaps, $700B QE and bank mea culpa today with promise of no more stock buybacks as the Top 8 finally got strong-armed into promising not to steal any more candy. But let’s face it, we had coordinated central bank easing and QE GLOBALLY last year. It didn’t help.We erased all the Repo, all the Q4 QE + Fed cuts since then. How will this monetary base expansion fuel consumer spending and loan demand in the midst of a global pandemic?
- Historic moves beget historic moves. This past week, the US nearly averted another Great Financial Crisis. And we are still at risk of falling off the financial cliff as credit markets can freeze again and as cash bank runs can spread again at both institutional and retail level. This isn’t over.
- Money can’t buy love; there are no atheists in foxholes and even capitalists become socialists in a crisis. Only when we feel safe as a people will we be safe in the markets.
Sell Off Is Not Done
I firmly believe equities will fall further – into my $SPX $1700~ level, but first I fully contend we can and should bounce end of week. Here’s why in words. You have some ‘Bounce Worthy” charts from Thursday and my Friday morning interview that proved prescient for Friday’s end of day rally:
We have a structural force within markets that can work to buoy the markets – at least this week. The best time to reshort is after the “CTA bounce” – that’s when the Vol strategy players close their YUGE amount of ITM puts that expire Friday – as this causes them to ‘buy futures’ which creates the sense of a rally, but it’s JUST short covering. No FOMC meeting Wednesday so no need for Quants/CTAs to wait for Fed Volatility to peak. It should peak Mon/Tues after this 100 bp rate cut by the Fed today. But holding these puts into Friday seems too dangerous to me as time works against decaying theta in their options and they have a MASSIVE amount into Triple Witching Friday. So what day will they cover?
What we believe is key about 3/20 is that we see almost 4 million in put open interest expiring on that day. Much of this interest is in the money, and is causing this negative gamma situation we are in. Using our theory options market makers are short most of these puts and are therefor short gamma. This requires them to sell futures as the market goes lower, and buy futures as the market rises. This expands price volatility. @spotgamma
By Wednesday I’m thinking. I think we stabilize by Wednesday based on this (but it’s subject to change!).
Here’s another reason: Fed buys $60-70B of Tbills for every .25 pt drop in yields. So they have $33B rolling (3D lag) from last week’s emergency rate cut which hits Mon which will translate into liquidity which will help cushion the shock of 100 pt cut Sunday and retail freak out Monday on top of the additional $700B of QE they just committed. Although way less than the $10T needed to really get the animal spirits entering the markets again, it is definitely more than the ~$240B expected for 100bp. So equities should be more than rocky Mon into Tues but THEN I think the CTAs/Quants cover the LARGE profits they have in puts that expire Friday which fuels futures as they cover/roll. I will be watching this closely to say the least: Cover or Roll. So by Wednesday we could stabilize. Or we fall off the cliff at my $2375 Do-Not-Pass-Go Level.
But after this bounce….I am still a Big Bear (since 2/18 but esp since 3/8) as NO WAY the bond buying is done and no way the stock selling is done – and oil selling to a degree. Oil trades with yields and they are going down, volatility UP, which is why I believe Trump announced Friday US would buy oil to replace the Strategic Petroleum Reserves! Trump knew they needed to stabilize the oil market in light of the impending rate cuts. Only reason. All in all: THIS is all very deflationary. And this is why Big Picture there is no way we don’t go to negative rates this year/next. And this is why Big Picture there is no way equities see ATH this year. Much more likely we visit ~$1700 $SPX which is my price target from 2 wks ago after targeting/reaching ~$2400 and bouncing. That bounce needs to be timed well to take advantage of the next 25-30% drop in equities.
And COVID-19 death toll in US will likely determine when.
Please, Please take this threat to your health and wealth seriously –
“By March 23 many of our largest cities & hospitals are on course to be overrun with cases.” @ASlavitt
“when credit systems die. The volatility is staggering.” @CaitlinLong_
I will be largely off-line Monday but will report in later in the afternoon. Be safe and remember my warnings from last week: Monday, Wednesday, and Friday.
Capital Preservation meets Life Preservation and with that KNOW WHAT YOU OWN!
My bet: they close the stock market and soon – maybe until COVID-19 is “under control”, and that could be … awhile.
Remember CASH (and preferably a multi-currency account) is a really good place to be in times of extreme panic.
As I wrote and said Monday, this market action is in my opinion a Financial Crisis not Correction. IT IS NOT SAFE!
My client video from Tuesday showed some of my intermarket analysis and macro thinking to support this strong viewpoint. Wednesday expressed my fears moving forward I will be tracking closely.
The Fed action today did nothing to convince me or markets that QE would save the day!
But maybe CTAs/Quants will provide the relief bounce next week we need to help scared and scarred longs a chance to get out before the next half of this market drop commences.
