Bullish
Last night’s CPI number and the following price action in equities was one of the most dramatic reversals I’ve seen in a while. The CPI number, which came in 0.2% hotter, was unequivocally negative for the market, and the S&P 500 dropped by 100 points into the open.
That’s when things got interesting. Momentum started to turn back up. The S&P 500 rebounded from a low of 3502 (where there is a lot of option open interest in the market, likely attracting some buying from gamma hedgers) to 3560, where some traders likely saw value in selling the rally. However the market didn’t roll back over - instead it suddenly surged in illiquid fashion back up to 3600, then through resistance at 3650 as shorts covered and stops got triggered. I feel bad for shorts who sold after the number, as the reasoning to be short was sound, notwithstanding other factors in the market. CPI turned out to be a bear trap, with very little liquidity to cover between 3570 to 3620.
When a market can longer go up on bullish news, that is usually a sign of a top. When a market can longer go down on bearish news, that is a sign of a bottom. I cautioned readers about being short or bearish in my last post, and discussed how the conditions for a short squeeze and a rally are in place in my Real Vision interview on Monday. We just needed a trigger. Last night’s price action was not necessarily a fundamental trigger, but it is confirmation that my thesis about excessive bearish sentiment and positioning is correct. As a trader who trades on probabilistic outcomes and imperfect information, that is enough for me to turn bullish on the market.
I believe the fundamental triggers will fall in place over coming weeks. Here are a few possible bullish triggers:
The market is looking for a resolution to the fiasco with UK pension funds and the gilt market. The situation is unsustainable, and the path of least resistance is for the Liz Truss and Kwasi Kwarteng to walk back their aggressive tax cuts and present a more fiscally responsible budget. This would shave off 20-30 bp on the 10 yr Treasury yield, at the very least.
We also have China’s CCP Congress over the weekend, where there is a possibility they take steps to support the struggling economy, either through fiscal or monetary stimulus or a plan to vaccinate their citizens (which is the first step before they can put a stop to zero covid policy).
Earnings season is approaching and expectations are already pretty pessimistic. @MrBlonde has a great post about how pessimistic expectations going into earnings increase the likelihood of positive equity returns.
Bad US data. Cracks are appearing in the data, from ISM approaching 50 to jobless claims ticking upwards and JOLTs ticking downwards. Bad data = risk on.
One can wait for these triggers to play out before buying into the market. However by the time the macro outlook is all clear, a lot of potential gains will have been missed.
Current positions
Long gbp/usd, betting on a capitulation by Liz Truss’s administration.
Long WTI oil and energy ETFs. It’s not often you have two imbedded puts in the market - Biden’s need to buy oil back for the SPR and OPEC cutting supply as the price approached $80.
Long silver - I like silver as a long risk/short USD proxy in general
Long SPX futures - because everyone is bearish and short.
Disclaimer:
The content of this blog is provided for informational and educational purposes only and should not be construed as professional financial advice, investment recommendations, or a solicitation to buy or sell any securities or instruments.
The author of this blog is not a registered investment advisor, financial planner, or tax professional. The information presented on this blog is based on personal research and experience, and should not be considered as personalized investment advice. Any investment or trading decisions you make based on the content of this blog are at your own risk.
Past performance is not indicative of future results. All investments carry the risk of loss, and there is no guarantee that any trade or strategy discussed in this blog will be profitable or suitable for your specific situation. The author of this blog disclaims any and all liability relating to any actions taken or not taken based on the content of this blog. The author of this blog is not responsible for any losses, damages, or liabilities that may arise from the use or misuse of the information provided.