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Replies to post #25040 on Cycle Trading
07/28/22 10:42 AM
Yesterday, ahead of today's FOMC meeting we were musing what would happen if the Fed followed in the ECB's footsteps and killed forward guidance.
Well, we got the answer today when Powell effectively confirmed he is just as clueless as Lagarde when it comes to forecasting the future, and his admission that the Fed will be pretty much exclusively data-dependent...
... coupled with the Fed Chair's confirmation that it will "likely be appropriate to slow increases at some point" is all the market needed to unleash a huge buying spree, sending the Nasdaq more than 4% higher, and triggering the biggest buy program since March 2021!
And as the powerful buying wave pushes spoos back above 4,000, we are suddenly starting to see fund managers freak out that Fear Of Materially Underperforming is about to become Fear of Missing Out all over again. And there is good reason for that: as noted earlier today, both gross and net exposure is the lowest since the covid crash as Long Onlies and hedge funds had been taking every opportunity to sell bear market rallies until now...
... when Powell's Dovish presser has just forced them all to chase "this most hated rally" higher.
Nomura's Charlie McElligott explains why in terms of positioning, which was bad heading into the FOMC, and is now downright catastrophic:
Equities keep “running to stand still” and frustrating everybody—where the hotly anticipated “negative earnings revisions as the next shoe to drop for risk assets” story has not quite worked-out as planned—especially after Tech megas MSFT, GOOGL and even chip-maker TXN posted double-digit quarterly revenue growth and posted still-optimistic guidance last night (as opposed to expectations for “kitchen sinking” it), while critically too we saw Visa top earnings and note “no evidence of a pullback” in US consumer spending, in a move that is roiling the best laid plans of the “top down” macro bears, who were poised for ugly prints and fwd expectations due to the implications of a strong USD and a rapidly weakening economy: It was *kinda* prophesied here last Tuesday (I’d give it a “soft 6.5” out of 10): “My thought then turn to Microsoft reporting next week—where multiple conversations yday off the back of the resiliency in the Equities tape, and this larger theme I’ve been discussing about “the whole world” waiting for the negative earnings revision “next shoe to drop” for the broad cross-asset trade as “risk-off” catalyst to drive that next leg down But what if MSFT reports “not the end of the world” numbers at all, when everybody thought broad US earnings were going to “poo the bed” this quarter? Say MSFT reports earnings next week which, “yes,” are weaker and sees the stock trade lower after hours….but is then realized by the next morning by PMs that any “miss” was supposed to the be the “buy the dip” opportunity for the name and broad market? In the words of one of my favorite and most astute clients, “…yeah, people are going to have a problem I think if MSFT is fine next week”” Earnings have, so far, evidenced a surprising “better margins” story for many corporations, as pricing (and pricing power) is going up, while too we now see input costs finally beginning to show some signs of fading, which is more than offsetting that macro “slowing volumes” dynamic This was supposed to be the “buy the dip” moment for Stocks—but there is no “dip” evident, and companies by-and-large are not “kitchen sinking it” yet— and now you risk a “buyers are higher” dynamic for Equities going forward, because in the absence of a new high print in future versions of monthly CPI data, it doesn’t look like there is any path to new lows at this moment Back to the Future: As Equities investors both domestically and globally see this mega-cap Tech and desireable USD asset outperformance set to now further accelerate on Earnings stability (and C-Suite execution from liquid and familiar “brand names”)— particularly as Bonds are “working” with yields lower on the market’s total focus shift away from “inflation upside” to “growth downside,” and thus, stabilizing / reversing some of that multiple compression story which has been the driver behind the re-rating lower over the past year—it further strengthens the bull-case for a shift back into “Secular Growth” that will lift broad US Equities Index, because they remain such a heavy weighting With the broad “lift” being provided to US Equities via said formerly consensually owned and ‘loved’ during the “everything Duration” era…then totally ‘hated’ and sold on the Rates move…and now about to be ‘loved’ again mega-cap “Secular Growth” Index heavyweights (FAAMG+), we will see even greater upward momentum on Spot Price, and downward trajectory of Vol—which in turn keeps the aggressive short-covering / re-allocating “Long” theme I’ve been highlight the past week and half from Systematic players strongly “in motion” Accordingly, as the 3m rVol lookback continues to average down fast as “vol outlier” days drop from late Apr / early May (SPX 3m rVol was 100%ile 3-4 days ago, now at 91.9%ile), despite S&P finishing -1.2% on the day yday, we actually saw Vol Control re-allocate +$1.4B of buying in US Equities futures on the session In a somewhat similar vein, the US Equities Index / ETF Vol space was solid today with SPX / SPY consolidated seeing “positive $Delta” flows despite the Spot selloff, buying Calls and selling Puts); while too, we see Dealers remain bang-on that SPX / SPY “Gamma Neutral” line which lends the market some relative stability—where a move above 3960 will induce additional market insulation, while a move below risks “accelerant / momentum flows” from Dealer hedging—while too, notably highlighting that 3960 also shows as the “Delta vs Spot” flip level too
And while Charlie was looking forward to today's Fed announcement being more hawkish than expected, a place where we explicitly disagreed with him as we pointed out previously, the facts that Powell himself has poured (very overpriced) gasoline on the fire has only supercharged this dynamic, and it is quite likely that we will now see unprecedented chasing by funds and even L/Os into a ramping market, at least until such time as Powell realizes what he has done and trapdoors stocks again, sending the S&P to new 2022 lows next time, at which point the real "ugly bear" recession can begin, and setting the Fed on course to not just rate cuts but negative rates and trillions more in QE.
More in the full McElligott note available to pro subscribers in the usual place.
