“You prepare a table before me in the presence of my enemies; You anoint my head with oil; My cup runs over.” Psalm 23:5

Not that anybody is counting, but we have just witnessed the 4th major negative supply shock in the last 6 years. This one is arguably the most shell-shocking of them all, and undoubtedly the biggest energy shock ever — and that is not to be taken hyperbolically. Is there something to say about the frequency at which these supply shocks occur? Is the closure of the Strait of Hormuz as monumental as some say, given that the markets have essentially deemed it a non-factor? Yes, and yes.

Multipolarity begets volatility. Or to be more specific, the transition away from the unipolar, US dominated world is fostering a much more chaotic global environment than people are used to. COVID biblically ruptured supply chains and accelerated fractures in global relations. Russia invading Ukraine continued to fracture energy markets and geopolitical relations. The torch was then passed on to “Liberation Day” — which is still restructuring global trade, capital flows, and actively accelerating deglobalization. This takes us to present day in which the Strait of Hormuz has now been effectively closed for almost 2 months. Effecting both global energy and food security, this has the potential to be the most destructive, but some say that markets don’t seem to agree.

So, what gives? First & foremost, the (oil) market is not incorrectly interpreting the closure of the Strait. The persistent tug of war between the financial and physical market plays a pivotal role in determining oil prices. Hedge funds with VaR constraints aren’t eager to be long a market that moves on almost every possible headline (and there is an endless supply of them) despite the structural physical imbalances due to the closure of the Strait. Furthermore, an event such as this one takes time to show up in global markets. This of course includes financial.

Oil paper markets are — albeit slowly to some — starting to show the severity of this situation. It bears repeating that we are already in uncharted territory. The IEA convened an emergency meeting which resulted in the announcement of the largest ever joint SPR release last month. Oil prices did not budge whatsoever — huge news failure. Why? Because the math didn’t check out.

Our SPR — largest in the West — presently sits at about 58% of capacity. However, we cannot use all of it. The SPR has a practical operational floor near 160mb that must remain in place to preserve cavern stability and maintain operational flexibility. There are also execution lags. Then there is the pace at which the reserves will be released — in short, far too low.

Ultimately, the cumulative oil deficit from this event is already over 100+ million barrels. Daily global oil consumption is about 100 million b/d. Thus, the US is now left with a lower margin of emergency safety since this closure has extended into late April, and even if this conflict ended today, it would take months to return to any normal flows/production.

So, while I know that it may not seem like it amidst the 75 ceasefires, Strait “openings,” and “victories” over Iran, but the tipping point for this conflict has passed. Dated Brent made a new ATH earlier this month, and oil paper markets should soon follow as the standard seasonal peak in demand coincides with this historic supply disruption. Global onshore oil inventories will fall precipitously, and this should serve as a trigger — alongside the continued closure of the Strait — for the resumption of more positive financial flows into oil, bridging the purported gap between the financial and physical market.

The Equity Conundrum & Its Contribution to Summer Madness

For several months equities did not move an inch as distribution was evidently occurring. After this process culminated with the advent of Schrödinger’s Strait, the market drifted down slowly for about a month until late March only to furiously rally back above ATHs in less than a month. This, of course, has been a head scratcher for many.

Yes, the largest energy shock in history by a mile, simultaneously affecting global food security in a major way, is exceedingly positive for US equities. Yes, but not really. The fact of the matter is that the market was simply overhedged into this crisis — hence the incredibly slow drawdown in Q1 —, so much so that any hint of a positive development out of the Middle East would send stocks flying, validity of the news be damned.

Today, equity traders have transitioned from being overhedged to scrambling for upside exposure which has been concentrated in AI/growth/Mag7. While oil traders have transitioned from the “everyone is bearish (remember all the projected surpluses?), but everyone is long” stage to the “everyone is bullish, but nobody is long” stage due to vol constraints and the need for physical shortages to manifest via inventory draws before putting on size. “Nobody” is obviously an exaggeration.

“Investors realised profits from bullish long positions and started to accumulate bearish short ones last week, anticipating a further fall in Brent prices as the United States and Iran conducted face-to-face talks to find a way to end their war.
Hedge funds and other money managers sold the equivalent of 51 million barrels of Brent futures and options over the seven days ending on April 14, the fastest sales for three months since the middle of December ...” —@ JkempEnergy

Seasonality plays another significant role in the coming Summer Madness. From my last post:

2026 will be another year where volatility — in every corner — is high. For financial markets in particular, it is also a midterm year, and these years tend to be the weakest & most volatile in the presidential cycle.

Now is a good time to start owning downside exposure, especially since PMs — which have been very sensitive to risk on/off sentiment — have decided not to participate in this rally.

And again, puts are hated.

All things considered, as long as the Strait remains closed, you can expect more inflation and cross-asset vol down the road. Don’t get lulled into a false sense of security. Summer Madness approaches.

A bientôt

Consequently, the rules, conditions, and governing dynamics of markets changed. In other words, the regime has shifted and capital flows, investor behavior, cost of capital, demographics, social dynamics, narratives, inflation, tax rates, valuations, etc., are vulnerable to major changes.

Regime changes or transition periods are notoriously difficult to navigate. One needs to be swift to react to the first signs of them. You cannot afford to get stuck in the previous regime mindset. Adaptation is essential. Anyone who’s been long duration since late 2021 can speak to this. So can those who believed that Trump 2.0 would be similar to Trump 1.0.

Arguably the most significant transition of this year was the transition from a low vol to a high vol regime. The first signs of this regime change were the aftermath of the Aug ‘24 vol shock and the exceedingly likely chances that Trump would win the election.

"Feeling very refreshed coming into this new year. As I was reading through an EOY note from BofA, I found a few gems that were reminiscent of a small thread I wrote in September.

Regarding the fireworks, there may have been some foreshadowing last night lol. To paraphrase one of the gems: Vol shocks like Feb ‘18 & Mar ‘20 reset markets with years between events, but Aug ‘24 left VIX positions intact, signaling another could some sooner than usual.

Cool, cool. Another one: “Fragility + faster reactions + valuations mean no 2017 vol repeat.” Even better. Sounds like fireworks incoming to me.

This is only one of the major differences between a mid & late cycle Trump presidency.” —

And Trump 2.0 was a certainty.

Funnily enough, these two transitional markers complement each other. Trump & friends — being agents of change —, eager to rebalance the global trade system amidst a late cycle environment, and fragile VIX options positioning combined to create a perfect storm which sent vol soaring specifically in the first half of the year. Since July/Aug'24, vol’s floor has slowly crept up.

If that is not convincing enough that we’ve left the old, low vol regime, 2025 has had more big < -1% down days than big > +1% up days. The last two times this happened were 2008 and 2022. Not only was equity vol high during these times, but social and political volatility was as well.

Similarly, it was not just equity vol, nor FX vol, nor any other asset’s vol which increased materially since Trump’s reelection. Political and social volatility has also skyrocketed as a result of this regime shift. This is important to note, because historically this type of vol does not go gentle into that good night.

It also just so happens to have been foreshadowed in financial markets as well.

I liked this chart so much that I had to use it again. EMs — which are prone to high & frequent political and social instability, government/institutional distrust, and inflation — have been less volatile than DMs where it matters most. The asset widely known as the safest in the world has experienced uncharacteristic volatility over the past few years. Some may look at this chart and think that we will swiftly return to a relatively lower vol period and stay there, but that era has passed.

VOLATILITY IS HERE TO STAY

2026 will be another year where volatility — in every corner — is high. For financial markets in particular, it is also a midterm year, and these years tend to be the weakest & most volatile in the presidential cycle. Given current conditions, this is exceedingly important to note. US equities — having staged a powerful and largely mechanical rally after a sharp drawdown earlier in the year — appear to be in distribution.

Since “The Fool Moon is Waning” in late September, indices have gone nowhere fast.

The FMS cash level hit a record low.

Demand for levered equity exposure hit a wall once again.

And with Trump (or Nixon 2.0) in position to nominate a new Fed chair next year, it’s pivotal to note that Nixon once deemed an outgoing Fed chair — William McChesney Martin — as “too late” and replaced him with his trusted economic advisor, Arthur Burns.

Sound familiar? Whether the new Fed chair is Hassett, Waller, or whoever, you can be sure that they will do whatever it takes to meet Trump’s needs — lower rates at all costs.

Thus, the “endgame” quickly approaches: dollar down, stocks down, yields up, commodities up, with a monetary regime change to boot.

Currently bonds are barely down YTD while the dollar has maintained a precipitous drawdown. Stocks, on the other hand, have had quite a positive year. But let us not forget, right before the 20% drawdown in Q1 there was a record percentage of US consumers that expected higher stock prices over the next 12 months:

And, as usual, they were not very optimistic about stocks after they dropped:

One can easily tell how they currently feel, as there is not a soul on Wall Street that sees a down year for the S&P in 2026:

We shall see about that.

OIL & ENERGY

I have not forgotten about my beloved (and largely forgotten by most) space. Initially, I thought that this would be a great year for this space — FWIW, energy was the best performing sector of Q1 —, but it was not. Energy is up about 6% YTD while oil is down about 16% despite “drill, baby, drill” not coming to fruition. So, what gives?

There is a paper I read a few months back, titled Energy Quantamentals: A Tale of Two Algorithms and OPEC+ by Dr. Ilia Bouchouev. It is an excellent read that displays the two algos in control: 1) one designed to buy oil as an inflation/geopolitical hedge and 2) another designed to sell oil futures as a form of portfolio insurance against risks of a global recession and argues that the current market climate is essentially the tug-of-war between the two.

I am not an expert. I don’t really want to be one either. However, I am (and have been) a believer that algos have trumped fundamentals in the oil market for quite some time, and now I have evidence other than my eyes to bolster this claim.

Some of the most notable portions of the paper:

“To see this relationship more clearly, Figure 2 presents the same data in the form of a scatterplot for weekly changes in prices and MM positions. It highlights the remarkably strong co-movement between the two. The slope of this graph provides us with a useful rule of thumb that 100,000 contracts (100 million barrels) of buying or selling futures by MM trades, causes oil price to change, on average, by approximately $4 5/bbl. We will use this rule of thumb later to assess the impact of future potential buying and selling on prices.”

“Figure 4 addresses these challenges at once and confirms our previous observation that the conventional fundamental modelling framework no longer holds and as of recent, it can no longer explain oil price movements…..One can see, however, that all of these correlations started to break down in the middle of the last year. More recently, they completely fell apart, fluctuating around zero. This confirms that even the most reliable fundamental relationship between inventories and time spreads is now failing to explain the behavior of oil prices.”

“As already mentioned, the structural demand from buyers for oil as an inflation hedge is rather cyclical. As shown in Figure 5, it is currently close to multi year lows. As such, it is difficult to see that this demand can fall much further from already depressed levels, especially in the current environment of heightened geopolitical risks.

Furthermore, comparing the latest positions held by ‘slow’ money to their long-term average, one could argue that the pent-up demand for inflation hedging could be at least 100 million barrels. This, if executed over the remainder of this year, could easily amount to more than a half-million of financial barrels per day, largely negating an oversupply in a physical market of a similar magnitude. This structural demand for oil futures could spike rather quickly at any sign of further military escalation in the Middle East.

In contrast, as shown in Figure 5, the demand for recession hedging via oil momentum strategies is already highly elevated. In other words, the CTAs’ positions are not too far from their maximum historical shorts. Such demand also tend to be rather cyclical and their futures holdings tend to mean-revert over time. Obviously, mean-reversion is a relatively slow moving process which does not have to start immediately, and in the short-term the financial demand for inflation hedging could decrease further and financial demand for recession hedging could increase.”

A personal favorite:

Lastly, but certainly not least:

Back in September, positioning in Brent crude went net short for the first time ever. In mid-August, positioning in WTI was net short for the first time ever. It has been quite a lucrative strategy to fade extreme positioning in this space, mainly because of the dynamic displayed above.

Nonetheless, my biggest takeaway from this was that the floor for oil prices is not far.

Ultimately, inventories remain low relative to long-term levels, non-OPEC supply growth is set to fade, demand is still solid, oil is historically cheap relative to precious metals, US shale oil production has turned negative YoY for the first time in history, and the geopolitical climate is not cooling anytime soon. Energy — currently under 3% of the S&P — made up approximately 30% of the S&P in 1980 due to similar conditions that presently exist. It will not remain unloved forever.

So long 2025, it was a pleasure.

Tetelestai.

It is finished.

The reason why we went from “attempting” fiscal austerity in Q1 to “we will make it all up, times 10, with GROWTH, more than ever before” is because the market is the most significant domestic policy constraint.

Seeing complaints about losses in 401(k)s, the 10y moving +70bps in two days (a truly historic move), and the dollar not behaving itself — aka the triple yasu — will make the best of them do an abrupt about-face.

The financial and trade imbalances that exist within this system cannot be reversed, and dealing with them requires pain/wealth destruction while avoiding worst-case outcomes. It’s a great time to have courage.

The Fool Moon is Waning

Back in late June — only a few days after my most recent post — Nomura’s McElligott dropped another gem which proved to be quite a lucrative signal.

That’s a 100% hit rate 2 months out alongside some stellar excess return hit rates as well, and the results did not disappoint. Indices have rallied aggressively ever since, with every dip gobbled up almost immediately. However, on the flip side of this reset lower in 3-month realized vol due to the unrelenting buying from the systematic crowd was the potential for a violent reversal once systematic demand fades.

The reason I deemed this rally a fool moon is because it was almost entirely driven by systematic flows — the fundamentals are irrelevant —, and this type of rally gives false confidence and lulls many into a sense of false security in which they believe that hedging is pointless — hence SPX skew being crushed since late June as we rallied away from OTM put strikes.

However, as of September 25th, 2025, systematic buying demand appears to have reached its limits, and the fundamentals will also be irrelevant as this cohort sells. Per T1Alpha:

“Vol-control funds are pressing against their five-year highs. A sharp move higher can be just as destabilizing for these funds as a selloff, forcing exposure cuts at precisely the wrong time. A 2% swing in either direction could trigger as much $40–60 billion in net selling requirements, completely detached from fundamentals or sentiment.” On the flip side there is little scope for more length with even a 0% average move leading to just ~$5bn in additional buying.”

For the sake of confluence, here’s Nomura’s view as well:

“Euphoria over artificial intelligence is inducing a “virtuous feedback loop” that’s turning growing ranks of skeptics into equity buyers at higher levels and increasing overall risk taking, McElligott wrote in a note to clients.

This behavior alongside many players at or near maximum exposure has built up downside risk in stocks, justifying the need for protection. “Even though it hurts, you cannot take your hedges off now, no matter how much they’re dragging performance,” the strategist said, setting out a list of reasons for investors to be vigilant….

Leveraged funds are currently producing the largest cumulative one-month notional buy flow, which is also heavily concentrated in the themes of AI, mega tech companies and semiconductors, McElligott said. This leads to a feedback loop that is part of the market’s grind higher.

If those flows were to reverse, they are also heavily skewed toward selling by nearly double the amount that they would buy if the market keeps rising, he said.” — BBG

With 1) VIXpiration and OpEx in the rear-view mirror and 2) a substantial amount of positive SPX gamma that rolled off as of last week, we are finally — after months of a seemingly never-ending dispersion party exacerbated by systematics — at a point where hedging is likely to be beneficial. As of September 19th, I hedged via medium/long-dated exposure for the first time in several months. Some eye-catching data from VolumeLeaders arrived shortly after this.

Think the gist is clear — there have been many abnormally large prints over the last few days.

Cross-Asset Picture/Cross-Asset Vol

Arguably the safest assets in financial markets are now more volatile than their EM counterparts. This speaks volumes to me since the US shares another well-known EM characteristic: high susceptibility to political instability. It’s no wonder why many EM markets have performed so well this year, especially through Q1.

Earlier this year, I covered the dynamic where unhedged foreign FX investors were seeing compounded losses as the dollar fell materially alongside equities. Looks like they no longer want dollar exposure. It’ll be interesting to see how this evolves.

With gold/silver roaring higher and retail seeing stocks as escape valves, de-anchored inflation expectations are to blame.

We are in year 3 of inflation being the top concern for Americans, yet there is no appetite from the monetary or fiscal side to do what it takes to address it. So, naturally, people are long dollar debasement, long risk assets, & long mental instability as casino culture & financial nihilism proliferate.

Too many myopically focus on CPI prints as opposed to what embedded inflation does to a nation’s psychology. People rightly loathe inflation since it disproportionately affects society, leading to a divide between winners and losers. The winners have the means to protect themselves from the loss of purchasing power while the losers don’t. This imbalance in security is what makes structural inflation politically and socially combustible — it significantly erodes faith in the system. This dynamic persists, becoming increasingly less tolerable, until it reaches a breaking point.

Ultimately, inflation targeting is ineffective because it’s systematic debasement disguised as price stability. As Volcker noted: “And aiming for 2 percent inflation every year means that after a decade prices are more than 25 percent higher and the price level doubles every generation. That is not price stability, yet they call it price stability.” The zeitgeist of inflationary periods teaches a valuable lesson: prevention is better than cure.

The end game — otherwise known as stagflation — until these dynamics change is still: yields up, dollar down, and equities down.

Until next time,

Pierre

Back in November the market showed signs of exhaustion. It proceeded to undergo a multi-month distribution process which culminated February 19th. The salient detail during this time was that the market did this in spite of countless mentions of tariff implementation. The sell-off from February 19th to April 2nd was largely driven by market imbalances — not macro catalysts. In December, banks and institutions faced balance sheet constraints (limits to the supply of leverage as everyone crowded into the rally) which gave way to leverage constraints shortly thereafter (limits to the demand for leverage via exorbitant funding costs). Implied & realized correlation were near ATLs, and call skew was through the roof. Notably, there was simultaneously substantial demand for protection from institutions — a recipe for a violent sell-off.

Of course, there were macro drivers as well. Fiscal divergence (being arguably the most important) alongside a structurally overvalued dollar were by no means supportive for markets. Fast forward to Liberation Day, which the majority were evidently incredibly unprepared for given the accompanying VaR shock. That’s another leverage constraint, realized vol was no longer a risk manager’s friend. The end result was a tumultuous period that induced historic moves in the dollar, rates, and equities. Markedly, neither rates (which were going the wrong way in this admin’s eyes) nor the dollar exhibited safe haven-like performances at a time when they were widely expected to. This seems to have forced Trump to initiate a 90-day pause on tariffs. Consequently, Schrodinger’s tariff deals laid the foundation for a breathtaking, volatile rally.

Many deals were guaranteed since then, but unsurprisingly very few have materialized. Tariffs on China are still relatively high. We’ve backtracked on fiscal policy (shocker) — a headwind for US assets, particularly for bonds & the dollar (equities are notoriously late to the party):

“Furthermore, due to the embedded asymmetry in monetary & fiscal policy, the current regime shift will likely bring about an environment where we see dollar down, stocks down, yields up action amidst stagflation, assets that have been systematically starved of capital outperform as the hyper-financialization lever gets turned off, and the shift from fiat to digital currency is ushered in — for what it’s worth, I don’t think Bitcoin solves this ;)”

Most importantly, amid the abundance of headlines, the goal of reducing our trade deficit remains. There will be brief periods where the dollar is bid, but the path of least resistance is downward. It has not yet reclaimed Liberation Day highs despite the violent equity rally. If there was truly meaningful demand for US assets it would have eclipsed them already. Similarly, there will be brief periods where long end bonds are bid, so trading it is more prudent than owning it. Ergo, the path of least resistance for long end bonds is lower.

The RoW is still massively outperforming US equities YTD. Our balance of payments (BoP) vulnerabilities are apparent to all — running persistent and sizeable twin deficits led to a structural vulnerability which is now shifting capital flows. A structural dependency on foreign capital to fund said twin deficits, a deteriorating income balance with rising payments to foreign holders of US assets, and an overreliance on portfolio flows (not foreign direct investment) makes us more sensitive to shifts in global risk sentiment. Lastly, on the macro front there is the increasing probability of further escalation in the Middle East. A stretch of oil/energy outperformance would be unkind to equities, bonds, or the dollar, but it may just be what gives the dollar and bonds a meaningful (and transient) bid.

On the positioning front, due to the aforementioned market imbalances and the leverage constraints which they produced, “real” money hasn’t been as sanguine as others have about US equities. Amidst the earlier distribution process, it was clear that the lack of risk appetite warranted caution at the very least:

“More perspective on this:

There was a divergence b/w the two coming out of 2021 as well. However, the present divergence is much more pronounced. Caution is warranted.”

One would think that after such a material decline that this cohort would be eager to gain exposure, but 1) nothing’s really improved macrowise and 2) they’ve been further disincentivized to do so by volatility.

This sign was largely ignored then and is largely ignored now despite conditions being demonstrably worse, and cross asset volatility is moving higher as this bifurcated market attempts to sort itself out. SPX has gone nowhere for a little over a month now and as of May 19th, SPX skew was reflecting both long-term concern and tactical upside chasing — but all in all, the options market agrees that there have been no substantial improvements.

The list of risks to the disruption of these inherently supportive mechanical moves in indices at the tail end of this rally is lengthy, but without the necessary positioning, downside outcomes are likely capped. Fittingly, we’re currently seeing significant institutional demand for protection which is a key prerequisite for any “crashy” scenario.

Steep skew reflects this strong demand for downside protection. This can lead to a scenario where a subsequent sell-off is exacerbated by dealers since they are increasingly short gamma & short vega if/when spot decreases. As shown in the above charts, this dynamic was present in February as well. VVIX creeping higher with equities at ATHs and a relatively bid front month VX warrant some caution.

Conversely, an insatiable demand for upside exposure from retail persists despite the relative reluctance of institutions to join the party. Sound familiar?

While there is much more empirical evidence of retail’s fervor, the gist is clear. Lastly, in my view, there are some intriguing signs that longer-dated tenors of realized vol are sending — particularly 6-month. As previously mentioned, 6-month realized vol bottomed last July and served as somewhat of a warning shot via a disruption in the VIX options complex and overstretched long NDX/short RTY positioning. Historically, it increases as equity downside materializes and decreases commensurately after markets find their footing.

The important question for me is now: Is longer-dated realized vol (3m/6m) set to substantially decline? To which my answer in almost every scenario I can think of is a resounding no. Implied vol looks extremely mispriced.

Switching gears, positioning in the dollar looks conducive for a huge short covering rally.

The catalyst needed to trigger said rally may very well be escalation in the Middle East. I don’t say this vindictively, but signs that escalation was on the agenda despite Trump’s election were both glaring and plentiful. The pervasive expectation that he would completely eliminate the possibility of any geopolitical flare-up was evidently uncorroborated. While there is a non-zero chance that the situation de-escalates significantly, it’s not an outcome I’m assigning much probability to at this point — though it’s probably important to note Trump’s strong aversion toward higher oil prices, so further escalation is not ideal for him.

Speaking of which, oil shorts have naturally felt some pain as oil is +20% from its June bottom. It’s difficult to say in absence of updated data how much of that has come off but it’s safe to assume that it’s not a copious amount. Call skew is through the roof lately as an extension of the geopolitical-driven caution, but the consensus fundamental story for oil is still negative. War aside: US crude oil production has clearly plateaued (this situation is exacerbated by unjustifiably low ($60/bbl) oil prices as producers are disincentived to “drill, baby, drill”), rigs are falling, and inventories (globally at multi-year lows) are decreasing alongside them — now roughly 10% below the 5yr seasonal average. Then there is the reality of 1) how cheap oil still is relative to gold, 2) OPEC regaining market share as the US is the largest contributor to non-OPEC supply growth in recent years, and 3) a monumental realignment in pricing power, supply, and demand that’s soon approaching.

Nonetheless, as cliche as it may sound, the fundamentals don’t matter until they do. The oil market has become almost entirely driven by algorithms which have proven rather obstinate in the face of improving fundamentals. Thus, I reiterate —it’s noteworthy that energy was the best performing sector before Liberation Day. Is the ignition of the Middle Eastern tinderbox the event which removes the algorithms from their throne? Maybe, it seems more likely the longer the conflict continues. Regardless of its outcome, lower oil prices aren’t supportive of higher US crude oil production, and energy is a good diversifier considering the current macro backdrop.

As for rates, there is really not much to say. Between the public ridiculing of Powell by Trump & friends for not yet cutting rates, the absence of any significant, long-lasting bid in USTs since Liberation Day, the looming threat of a continued, increasingly widespread foreign exodus from USTs, and the inflation story not being close to finished, there is no scenario in which the long end is safe to own.

2H trading and investment opportunities abound, and the perceived bull is much stronger than the actual bull. We’ve crossed the point of no return — it’s all about capital flows from here on out. Significant regime shifts such as the present one often become self-reinforcing as capital takes time to change hands. Since this process has already begun, there is consequently — contrary to popular belief — an alternative. In fact, there seem to be plenty of them:

Much to look forward to.

“Ready or not, here I come.” This is what change says to everyone. It doesn’t ask whether or not you’re able to adapt to it. It doesn’t care if you don’t like how it looks, sounds, or feels, but it handsomely rewards all who embrace it and everything that comes alongside it. It’s no secret that most are resistant to change, especially when money is involved. However, there are times when resistance to change can be exceedingly detrimental to one’s future. Recent events lead me to believe that we are in said times.

Our financial system relies on perpetuity. Leverage, suppressed volatility, capital concentration, and cheap financing help sustain this state. Thus, carry trades — anything structurally short volatility — permeate every asset class. This leaves the system precariously vulnerable to change.

History shows that any major disruption of the status quo aligns with a forceful, violent unwind of carry trades thereby marking the entrance into a new regime and a turning point for commodities and real assets. The end of the classical gold standard in 1933, the end of Bretton Woods in 1971, and the 1997 Asian financial crisis all served as catalysts for an unwinding.

Recent comments from this incumbent administration such as Bessent’s “we are going to have to have some kind of a grand global economic reordering” and Trumps’ “this is a period of transition because what we’re doing is very big” displayed their adamancy towards disrupting the status quo and made it clear that it was on borrowed time. Whether or not one believes that their policies will produce their intended results is ultimately negligible. What matters is that on April 2nd, 2025, otherwise known as “Liberation Day”, the world changed significantly.

Coming into the year, I felt strongly that this would be a transitional period, and that many would learn the differences between Trump 1.0 and Trump 2.0. In Q1, I saw several signs that monumental change was afoot. Multi-month distribution, non-consensus dollar weakness, record foreign capital outflows spurred by fiscal divergence, index correlation at virtual all-time lows, lofty valuations, cyclicals signaling a peak and subsequent downturn in growth, & a notable shift in leverage taking all pointed to a perfect storm for change.

Shortly after April 2nd, it was apparent to me that we had just witnessed a regime change as monumental as the end of Bretton Woods in 1971. The similarities are uncanny. Flaring geopolitical tensions, concerns about the US trade deficit brought to the forefront, political pressure on the Fed for accommodative monetary policy to offset the shock, & price controls gave way to a period of global economic instability and uncertainty.

The Smithsonian Agreement — introduced 4 months later to restore stability to the monetary system — was too little, too late. The regime shift was already well underway, and it led to the development of modern finance & the full shift to fiat currency. To weather the storm, investors shifted asset allocations to commodities and real assets.

More recently, in 2022, carry trades unraveled due to inflation and the drastic shift in monetary policy. Energy was one of few sectors to notch gains. It materially outperformed the market and proved that diversification in today’s world is owning assets that do well when things change. Note that this occurred without a fundamental shift in the global monetary order. We now have that. I know it may not have felt like it, but energy was the best performing sector in Q1, and this was not by chance. When the dust settles and people begin to acknowledge the regime shift taking place, energy will be a great place to be.

Furthermore, due to the embedded asymmetry in monetary & fiscal policy, the current regime shift will likely bring about an environment where we see dollar down, stocks down, yields up action amidst stagflation, assets that have been systematically starved of capital outperform as the hyper-financialization lever gets turned off, and the shift from fiat to digital currency is ushered in — for what it’s worth, I don’t think Bitcoin solves this ;)

Convinced that nothing has changed, investors have been fixated on the road to new all-time highs, but the chances of reaching them this year have notably decreased. What started as a market degrossing episode where multi-strat hedge funds and pod shops struggled morphed into a VaR shock. Having transpired after funding spreads dropped precipitously in mid-December, signifying a decrease in risk appetite from institutions, it becomes much more difficult to reach new highs as the rally engine was leverage — and it’s been cut.

This focus on equity returns in spite of drastic regime change is a testament to what hyper-financialization — which ironically perpetuates wealth inequality — has done to the minds of many investors. It’s left them feeling entitled to 20% yearly returns as if they are a God given right. It’s caused some to default to virtue signaling when markets are no longer on easy mode. Suddenly they care about everybody else’s portfolios. Suddenly they become the most outspoken about political and geopolitical affairs, desperate to blame someone for their losses. Whereas beforehand they were simply concerned with the stocks du jour. Your worst enemies in times like these are emotion and linear thinking. Never be a slave to either.

To those who are consumed by media-driven efforts to sow seeds of division, entrapped by partisanship, or motivated by emotionally charged hatred, the market’s YTD performance cannot be attributed to tariffs. Gold has not been surging against the dollar in spite of Western apathy for it because of tariffs. As Seneca once said, “All this tribalizing from day to day won’t bring you any relief, for you’re traveling in the company of your own emotions, followed by your troubles all the way.”

It’s all about change. Say goodbye to the status quo.

The US has long since run a large trade deficit to supply the world with dollars in order to maintain world reserve currency status. Foreigners (CBs, SWFs, etc) hold an ample amount of USD-denominated assets (stocks, bonds, credit), which reinforces demand for the dollar. Not only does the dollar consistently strengthen versus foreigners local currencies (a profit for them), but our stocks also perform well (more profit for them).

Now, envisage a world in which the US decides to stop running trade deficits, implement fiscal austerity, and prioritize short-term pain for long-term gain while other nations go into fiscal expansion. This is already happening and it creates a picture where a US-specific negative shock incentivizes foreign investors to diversify away from USD-denominated assets.

In a previous note, I suggested that because of crowded positioning and no real catalyst to bolster the dollar much further, it likely had a date with gravity.

King $

Coming into the election, it was clear that the $ was on a path to rise substantially. I flagged the short-skewed positioning here back in mid-October when DXY was 102. Positioning slowly but surely went from net-short to a crowded long when DXY was in the 106s. At 108, with positioning still crowded and no real catalyst (that I can see) to bolster the $ much further, it likely has a date with gravity.

The dollar has since retreated materially, but in eye-popping, nontraditional fashion, so have stocks. It is this action which has garnered the attention of many, and rightfully so.

Per Deutsche Bank: “European investors are currently losing as much money on their S&P 500 holdings as they did during the ~30% inflation-driven sell-off in 2022 (Figure 1).”

Per Deutsche Bank, again: “It is the idiosyncratic downward repricing of US fiscal, growth, and Fed expectations (Figure 2) that is causing the dollar to weaken alongside US equities.”

To elaborate, bear in mind:

• The difference in fiscal policies (and AI competition) — Europe and China are in fiscal expansion while the US attempts fiscal austerity. I know it’s only Q1, but compare market performances, the message is clear.

• Peak in semis (SOX,SMH) last year alluding to a peak and cyclical downturn in US growth.

• Central bank policy differences are self explanatory.

• Unhedged FX investors banking on the dollar to offset losses as the dollar typically strengthens in risk-off scenarios have seen losses compound substantially.

These factors incentivize foreigners to sell USD-denominated assets and either rotate capital elsewhere or repatriate, which can serve to exacerbate dollar down, stocks down action. To go a bit more in-depth, since early March there has been dollar down, stocks down, yields up action — a sign of more aggressive foreign capital rotation. This is arguably the most important dynamic to watch this year. Monumental change is afoot.

Visuals always help.

A Perfect Storm

Per Simon White of BBG: “Rapid outflows are always a risk factor for a market, but in the US it’s happening when valuations are still near all-time highs, and volatility and index correlation threaten to exacerbate the downturn. The VIX has been rising but has remained surprisingly contained given the fall in prices. Disquietingly, index correlation has also been rising off virtual all-time lows.”

Sums things up perfectly. Correlation has stayed on my mind for a while now.

Which reminds me, some dispersion bros have felt some pain lately:

Change

I still don’t believe that multi-month distribution has transpired only to quickly surge back through ATHs. There will be counter-trend rallies, but until further notice, they should be tactfully sold — Pavlov’s crew will need to adjust. Lastly, change is good — even if painful. Don’t resist it, embrace it.

Speaking of which, ahead of Feb VIXperation, I found myself referring to the July/Aug episode almost non-stop. Implied correlation was flirting with 0 again as positioning became increasingly stretched into a period of seasonal weakness. Most notably, distribution had been transpiring for months. This is the biggest difference between the two periods. Now it’s time to put the pieces of the puzzle together.

Fragility

It’s all one trade. Allow me to expound upon this. I will use a bit of help from my pinned post to do so:

The correlation between semiconductor cycles and growth is most salient here. Typically, semiconductor stocks lead both the upturns and downturns in profitability by 3-6 months — stocks are discounting mechanisms after all. Bypassing the case for a peak in sales (which can be seen via TSMC, MU, AMD, etc), semiconductor stocks peaking last July is, in my view, also indicative of a peak & cyclical downturn in growth. On top of this, all of the major CB’s are doing QT — Fed, ECB, BOE, BOC, & most recently, the BOJ.

The BOJ has an inflation problem that makes it exceedingly disadvantageous for its monetary policy to remain overly accommodative. While the Fed, which is dealing with a mild version of stagflation, has paused with a bias toward easing (a catalyst is needed and Fed policy is asymmetric). This dynamic is just one of several that contribute to a stronger yen and eventually a further unwinding of the yen carry trade.

The yen carry trade, which is essentially short vol, has a funding currency with low/negative yields (the yen) and a target investment with reliably high returns (AI/semis). As of late, JGBs have been falling in response to the regime shift in monetary policy, the yen’s been strong, and the AI trade has evidently lost steam.

It’s all one trade and what’s intriguing to me is that you can see this in the markets. Where exactly? To that I say, here:

Here:

Here:

Here:

And here:

Ah, I almost forgot. And here:

Global QT with Japan as the focal point is highly likely to continue inducing volatility.

More Fragility via Positioning

To piggyback off of the positioning section in my last post, some valuable info from volumeleaders:

These, along with the aforementioned signs of distribution, have my eyes wide open. This process seems to have reached a culmination and I find it very hard to believe that this has occurred only for equities to quickly surge back to ATHs.

Can’t forget about how futures haven’t made new highs since December despite cash making new highs in February.

This recent sell-off seemed more gamma/positioning driven than macro. 50% of the long gamma position in SPX rolled off after Feb OpEx, leaving the market to move freely shortly after. Couple that with an almost certain significant upside trajectory for vol, and you have fireworks. Per Nomura, a day ahead of Feb VIXperation:

Retail, of course, happily BTD into this setup while institutions sold. Per GS’s Scott Rubner:

• The largest retail buy imbalance in the history of GS dataset (starting in 2019) took place on Jan 17 at $5.03 Billion. This dataset includes covid times.

• Monday, Feb 3, was the second largest retail imbalance at $4.89 Billion.

• Tuesday, Feb 4, was the fifth largest retail imbalance at +$4.23 Billion.

• Four of the top five retail imbalances took place in the last two weeks, signaling record dip-buying.

As of Feb 28th, per GS:

• Retail purchased equities for 28 straight days from January 10th to Feburary 20th.

• This included 4 of the top 5 largest retail imbalance days in the history of our data set.

• I would describe the trading style as a fundamental “buyers strike” and overwhelmingly a systematic and quantitative trading environment. This was the fastest -5% decline from an all-time high for the NDX Index since September 2020.

• AAII Bearish sentiment recorded the 4th "most bearish" reading in 30 years. Other 3 instances: September 2022, March 2009, October 2008.

That last point is my favorite. The week before that, I saw that AAII survey floating around as proof that equities were going to go through the roof. No better time to remember that positioning is everything.

Fragility, The Macro Way

Having made several mentions of the glaring similarities between now & the 70s — deglobalization, ever-increasing geopolitical conflicts, trade protectionism, and (most importantly) an asymmetric Fed in an environment highly susceptible to negative supply shocks —, it feels like there’s not much to add here. Nonetheless, top of mind:

• Fiscal profligacy decreasing — courtesy of the DOGE.

• Tariffs.

• Relative CB policy.

• Elevated policy uncertainty.

I’ll conclude this section with a note from before DT’s inauguration:

Really, It’s All One Trade? So…What’s The Trade?

Time for a positioning update. It will be my last one.

As for what can come next:

• JGBs will continue getting sold, and the yen will continue to strengthen as the BOJ is extremely behind the curve like the Fed was in late '21. Needless to say, the Nikkei will not benefit from this development.

• DeepSell (lol) turned Mag7 into “Lagnificent 7” and China is not implementing contractionary policy like the other major CBs. Smells like peak US exceptionalism should this persist.

• Don’t fall asleep on energy & oil. Bottom of multi-year range, global inventories historically low, US crude production’s likely peaked & due to roll over. Paper markets still trump fundamentals for now, algos don’t check for validity or feasibility of headlines. Barring any exogenous events, crude remains rangebound for the foreseeable future.

• US long-end is more responsive to growth for now. This is subject to change — fade extremes.

• USD will continue to weaken — reminder that this isn’t always positive for equities.

Until next time,

Pierre

“And not only that, but we also glory in tribulations, knowing that tribulation produces perseverance; and perseverance, character; and character, hope.” — Romans 5:3

NVDA puts increased 1/7, trimmed some 1/27. CL long was initially trimmed 1/13 & completely closed 1/16. Energy longs were trimmed materially the same day. SPX/NDX puts were closed 1/14. AAPL puts closed 1/21. NDX puts added again 1/23 alongside yen longs the same day.

Vol Is Back

Volatility showed signs of its coming resurgence after the July-Aug episode and it’s now back with a vengeance! One of my favorite measures of vol was discontinued as of 1/27 — talk about timing.

Each time RVOL6M crossed above 14 (going back to 2007), trading exited “easy” mode, ultimately venturing into “veteran” difficulty. Whether a persistent or transient veteran mode ensues is dependent upon several factors, most of which I’ve written about extensively. I’ll briefly touch on arguably the most important — positioning.

Positioning

Indices have lost the fuel required to do what the consensus expected. Consequently, SPX and NDX have experienced nothing but volatile chop since the Trump-bump.

In other words, this has been a lengthy distribution process. This is not your typical distribution either. On 1/27, when NVDA dropped precipitously due to the swift arrival of DeepSeek, it was very clear to me that that was institutional selling. My suspicions were confirmed shortly after that day:

Some more color from Vanda (source ZeroHedge) : According to Vanda, discretionary institutional investors were the most likely culprits of Monday’s tech rout. Here's why:

• First, systematic investors (CTAs) sold only a fraction of what they sold during the August or post-Dec FOMC sell-offs.

• Secondly, as noted above, retail investors bought the tech dip in huge size. Here Vanda leverages institutional flow proxies from its VandaXasset platform to confirm the above – i.e., institutional OTM put option premium traded in tech stocks.

• Third, Russell 3K correlations with Goldman Sach’s Hedge Fund VIP and Most Short indices suggest that semiconductor and telecom equipment stocks remained among the more widely held sub-sectors inside hedge funds’ long books. Given these institutions' tight risk limits, the chart below further corroborates the view that selling pressure among semis/tech stemmed entirely from the institutional crowd... with retails buying the dip in record amounts.

This all checks out, especially when accounting for the continuous reluctance from institutions to add leverage since Dec 18th.

More perspective on this:

There was a divergence b/w the two coming out of 2021 as well. However the present divergence is much more pronounced. Caution is warranted.

TD Sequential/Combo Fun

Concluding this with some TD fun. These are best used in combination with positioning, sentiment & current macro backdrop.

“You crown the year with Your goodness. And Your paths drip with abundance.” — Psalms 65:11

Feeling very refreshed coming into this new year. As I was reading through an EOY note from BofA, I found a few gems that were reminiscent of a small thread I wrote in September.

Regarding the fireworks, there may have been some foreshadowing last night lol. To paraphrase one of the gems: Vol shocks like Feb ‘18 & Mar ‘20 reset markets with years between events, but Aug ‘24 left VIX positions intact, signaling another could some sooner than usual.

Cool, cool. Another one: “Fragility + faster reactions + valuations mean no 2017 vol repeat.” Even better. Sounds like fireworks incoming to me.

This is only one of the major differences between a mid & late cycle Trump presidency. About the floor for the long-end, I believe the 10y bottomed 9/17. Guess the floor wasn’t far after all — also the first time ever that 100bps of cuts induced a 100bps rise in the 10y yield.

Oil bottomed 9/10. As stated in my most recent post, “drill, baby, drill” is not friends with reality.

Admittedly, I’ve already talked about what I expect for this year extensively, so I don’t think there’s that much more to cover. Nonetheless, there are a few things that got me pensive recently:

• Cognitive dissonance in DT voters.

• DJT fake-out.

• The $’s strength.

• Historically abysmal market breadth.

  ---

CD For DT

There is presently a pervasive belief amongst overzealous DT supporters that DT will not only make America great again, but he will also do so in the blink of an eye & without any pain. This doesn’t check out since the average supporter also believed that the current state of the economy was exceedingly poor. If Trump is truly being handed a bag of sh%! covered in gold, wouldn’t it naturally take time and some pain to remedy the US?

This thought process seems logical to me, but the % of Americans who are expecting stocks to rise over the coming year is at an ATH — seems like they say otherwise. To drive home my point, in late October, 51.4% of US consumers expected higher stock prices over the next 12 months. After Trump’s victory, this shot up to over 56%. I understand the sentiment, but I don’t share it.1

DJT — DOW THEORY

Transports were my go-to reference last year when trying to assess the authenticity of the strength in this market.2 We got a massive fake-out around election time that I found very amusing.

A picture that certainly isn’t justifying the historical sanguinity for equities.

King $

Coming into the election, it was clear that the $ was on a path to rise substantially. I flagged the short-skewed positioning here back in mid-October when DXY was 102. Positioning slowly but surely went from net-short to a crowded long when DXY was in the 106s. At 108, with positioning still crowded and no real catalyst (that I can see) to bolster the $ much further, it likely has a date with gravity.

The 3 components of the wrecking ball didn’t make a strong showing altogether as the bear steepener and rising $ stole the show, but oil wasn’t necessarily weak either. I believe this was a major contributor to the historically abysmal breadth — and consequently indices performances in December — that has garnered the attention of many.

Bad Breadth

Bad breadth has been good…for Mag7. It’s horrible for everything else. This time, it wasn’t even good for Mag7 as everything was sold last month. SPX almost broke a record for consecutive days with negative breadth and the monthly market breadth hit an ATL for December. This suggests that there will soon be a mid-Julyesque rotation/degrossing that allows for breadth to improve at the expense of high beta tech — some good & bad news.3

.

A closer look into my thought process since November via two threads:

Narrator: The bear steepening continued. In fact, it finally uninverted the 3m10y. Regarding the monetary incompetence, it is no secret that the Fed — once again — has no credibility and any arguments for this are uncorroborated. Trying to be hawkish and dovish simultaneously screams incompetence. Unfortunately, this behavior is unsurprising.4

To elaborate on the lyrics, just take a look at what indices have done since November 8th. Quite the contrary to what I was told was absolutely going to happen. I was even able to reload the clip in December:

Still never ended up being 100pts offsides at any time with the SPX puts. NDX ran wild to be quite honest. Then came FOMC, where the VIX almost doubled in a day — a testament to the amount of leverage/historic cost of leverage within the market. Some of the hedges were trimmed after a day like that, and I don’t see a reason to let them all go yet. December 6th just so happened to be the top in SPX & the bottom in VIX/VXN. It’s nice to get lucky.

Going forward, I’m going to find more ways to bet on that unhealthy broadening (RTY/XLE up, NDX down, which can turn into RTY & NDX down, with NDX down more) — saw some of this action to close December, but not enough. XOM longs were slowly added — 12/13, 12/18, 12/23. NVDA short (idea stems from most recent post which I’ll be trading around for the foreseeable future) added 12/6 & 12/10 — trimmed a bit since.5 AAPL short added 12/16 & 12/23. CL long added 12/20 & 12/23. All several months out.

Lastly, I have my eyes on a few spreads:

Cheers and best wishes, 2025 will be one for the books!

1. Drill, baby, drill.

2. Mass deportations and immigration overhaul.

3. Terminating the “green new scam” and consequently cutting energy prices in half within 12 months from his inauguration.

The first has rung through my mind incessantly since its advent. Further evidence of widespread acceptance that this is an incontrovertible outcome can be seen via positioning in energy & oil. Positioning and sentiment in this space were very low beforehand, which has countless times provided lucrative opportunities for both longs & shorts. As for investors, they have questioned why they didn’t just long tech with max leverage for the past 10yrs — completely understandable. However, everything has its time, and the time for energy & oil is soon approaching once again.

In reality, “drill, baby, drill” isn’t likely to be implemented anytime soon as companies remained focused on financial stability and shareholder returns instead of aggressive drilling expansion. Capital discipline and efficiency gains is the name of the game as shale industry execs realize the differences between now and Trump’s first term. Fears of disunity among OPEC+ should be laid to rest for good after the latest meeting as well. They seamlessly pulled off a multilayered deal that enables them to stay in the driver’s seat.

Nonetheless, investors’ perspectives are diametrically opposite. Positioning is near historical lows, sentiment is in hades, and the seemingly perpetual disconnect with fundamentals continues. But all hope is not lost. The gold-oil ratio is currently exceeding 30:1 (39.6), indicating that oil is cheap relative to gold. Historically, crude has returned 32% on average over the next 12 months, while gold has returned 4% on average. This ratio has spent 80% of the time between 10:1 and 30:1.

Since 1984, there have been 27 instances of a monthly close where the gold-oil ratio was at or above 30:1. There were 2 (Mar, Jul) in 1986, 1 (Oct) in 1988, 4 (Jan, Feb, Mar, Jul) in 2016, 12 in 2020, 1 (Jan) in 2021, and 7 (May, Jul, Aug Sep, Oct, Nov, Dec) in 2024. 74% of these monthly closes since 1984 have occurred over the last 4 years. From a yearly close perspective, since 1984 there have been only 2 instances where the gold-oil ratio was at 30:1 — 2020 & (as of right now) 2024.

In what may seem counterintuitive, this is a picture-perfect setup for oil. Oil looks to be building out a multi-month bottom before reality sets in, and almost everybody hates it. Per the Nov BofA FMS: “FMS investors are the most (net) overweight pharma, banks, and industrials, and the most (net) underweight energy, materials, and staples.

What’s intriguing is the change in their expectations post-election.

Two things stand out in this.

1. The complete disappearance of a higher oil price on bad geopolitics, especially given current conditions (ME still a tinderbox, geopol. climate arguably most turbulent ever, and Trump is not God).

2. A disorderly rise in bond yields based on debt fears has increased as the most bearish possible development in 2025 — this seems uncorroborated since debt has been a problem for years and monetary incompetence is largely responsible for yields’ path.

FMS respondents don’t seem to care that central banks are cutting rates at the fastest pace since May 2020 with China coming back online in spite of all the enmity, and both are distinctively supportive of inflation, higher long-term yields & oil prices as it stands. All things considered; oil & energy are set to have performances that defy consensus expectations.

What Does This Suggest for Equities?

AI fever has taken the world by storm since May 2023. Consequently, semiconductors have performed exceptionally well over the same period. Needless to say, they are highly cyclical. Semiconductor cycles are triggered by a combination of demand surges, overinvestment, and macroeconomic shifts. Notably, there is a significant correlation between GDP and a semiconductor cycle. As I noted back in Q3 of ‘23, growth likely peaked, and I believe this will hold up. Growth is likely to be relatively stagnant for the foreseeable future, but nothing reminiscent of a deflationary bust.

Equally important are geopolitics and trade relations. Trade restrictions, export controls, and geopolitical tensions can disrupt supply chains. A few months ago, China constrained access of gallium to Europe, and gallium prices soared, nearly doubling. More recently, China restricted the export of gallium & germanium to the US under dual use policy. Both of these are critical to the manufacturing of semiconductors, and China is responsible for 98% of global gallium production. This move comes as a direct response to the US export controls on semiconductor tech in China and has the potential to leave ripple effects across several key industries.

What’s arguably most salient, is leverage. The demand for leverage on long positions has risen with stock returns leaving the cost of leverage historically elevated. The cost of leverage is presently at levels last seen shortly before the GFC. One sign of this is seen in options activity, which reached nearly 70 million contracts on average in November (second highest on record), since they supply a leveraged way to bet on stocks with relatively little money. Another can be seen in increased leveraged ETF usage, which has recently hit record highs as well.

Per Nomura: “Retail is absolutely jamming into this slow melt-up in US equities as per the current record AUM in leveraged ETFs, which as I always say, can tend to act as a source of late-day “Synthetic NEGATIVE/SHORT gamma” which is somewhat counterbalancing against the previously mentioned “Long gamma” from the options sellers… which will be problematic on a reversal LOWER day, of course then amplifying the selloff into their EOD rebalance…but for now, it’s feeding upside momentum, as “(Synthetic) Short gamma” cuts two way.”

Some of the most popular leveraged ETFs are TQQQ, SOXL, QLD, FNGU, & NVDL — this brings me back to semis. Per Sentimentrader: “The Relative Trend Score for SMH has cycled from 10 (all of the trend metrics for the SMH/S&P 500 ratio are positive) to 0 (none of them are). After similar cycles, SMH suffered a negative return all but one time over the next six months. The S&P 500 tended to struggle as well.”

So, the market leaders for the past year & some change are set to roll over and virtually nobody cares. These are not charts that entice me to increase LT holdings. And neither are these.

It looks like new leaders will eventually emerge and this transition period is not likely to be conspicuous or tractable.

Conclusion

The market remains exceedingly sanguine with a record high % of US consumers expecting equities to be higher in the coming year and rates much lower, reflecting “Trump optimism.” The cost of leverage is at historic heights while the cost of portfolio protection is at generational lows. Per ZH: “The Goldman trader explains that the 1 month 100% strike put costs 95 basis points. This means that you break even if the S&P trades lower by 50 handles (from here) any time over the next month!”

This is not a call to sell everything, of course, but as leadership gradually — and then suddenly — shifts beneath the surface, it will likely pay to have protection.

What’s the Trade?

I have been in & out of trades lately, namely,

• Long XLE via March call spreads 88s > 97s

• Long CL via March call spreads 67s > 71s

• Short TLT via Jan put spreads 98s > 89s & 93s

• Short SPX & NDX via March SPX put spreads/ Feb QQQ puts 140 pts from SPX & 730 from NDX, trimmed to 30% by 11/20. Now back to a full position as of 12/6 — Jun exp.

I will let the dust settle from the recent OPEC+ meeting before going long oil via CL and XLE again. Long China looks tempting but if I do try that again (initially Jan 23rd) it will not be in size (as it stands right now). Crypto looks enticing as there is certainly a place for digital currency in our system, but only as a trade, not an investment (yet). Commodities, the long-end, and cross-asset vol are going higher long-term. Aggressively adding to LT equity holdings is not currently in my plans. Overall, I think one can stay long US equities without worry in the short-term — unless you’re overleveraged, and many people are —, but not purchasing protection at these levels is incredibly injudicious.

Many will learn the differences between a mid & late cycle Trump presidency — reality often differs from expectations.

“Is there anything of which it may be said, “See, this is new”?

It has already been in ancient times before us.

There is no remembrance of former things,

Nor will there be any remembrance of things that are to come

By those who will come after. (Ecclesiastes 1:10-11).

• The long-end has, contrary to popular belief, already affected equities.

• A red wave isn’t enough to stop the business cycle from transpiring.

• Positioning is everything, and even more so at inflection points.

  ---

With the election now in the rear-view mirror, I can confidently say that the result didn’t surprise me. From July, just before Biden’s withdrawal from the race:

What did surprise me is how smoothly the election went. Who knows, maybe I’m speaking too soon. Either way, the market had been pricing in a decisive win for Trump for quite some time, and assets have made some very interesting moves post-election.

The long-end sold-off viciously, small caps absolutely soared, large caps rallied, and financials and energy surged higher coming directly off of a red wave. There’s been so much chatter about how equities are almost incessantly ignoring rising rates, but I beg to differ. Equities have trudged forward, essentially going nowhere for a month and some change. It took the best post-election day performance to get indices (NDX/SPX)…slightly above July highs. So, the 10y rising may have not produced any material downside yet, but it clearly has kept a lid on momentum.

Arguably the best comments pertaining to rates came from the one and only, Jerome Powell at FOMC:

There’s no ambiguity here. The Fed is decidedly saying “there is no inflation tail whatsoever.” Or maybe they did indirectly acknowledge the possibility of it when JPow mentioned that both core inflation & geopolitical risks are elevated. I’ll come back to that later.

Late Cycle

Amidst all of the euphoria, I remember that 1) Trump winning is objectively positive for this nation (& world), and 2) he is not God. Therefore, he is incapable of doing some of the things that his overzealous supporters expect him to do — namely, immediately bringing peace to the globe in a period marked by heightened geopolitical tensions. He is also unfortunately inheriting an economy in the late stage of an unprecedented business cycle. The next few years will unequivocally be difficult.

Nonetheless, none of this should read as “the world is literally ending, it’s over.” Not a soul on this planet is qualified to tell you when that would happen, and I’ve made myself as clear as I possibly can be several times over on this matter — the rough times do not truly begin until we’ve seen a substantial resteepening in the yield curve. That being said, YC check:

This has been a mean bear steepening.

Positioning at Inflection Points

I’ve made several changes to my positioning since mid-October. Namely (none of these positions have/had a delta of less than 30 upon entry):

• Closed all of the Nov VIX call spreads by 11/4. The underlying was above the short call so there was really no need to hold this longer since I’d entered this on 9/26 with VIX in the 15s.

• Been in and out of CL longs since original entry on 9/12. Most recent long entry on 10/28 with CL in the 67s via March CL call spreads. The huge surge in IV during the rally from the 9/10 lows to early Oct was a sneak peek into what’s coming sooner than later. Initially cut the XLE/energy long (@ 92) for a loss and re-entered on 10/28 in the 88 —also via March call spreads. Fundamentals have remained solid here, but it’s important to be cognizant of entering negative seasonality as well.

• Entered Feb QQQ put spreads on 10/23 and closed 50% of them by the eod. Trimmed 75% of this by the close on 11/1 and left the rest on into election day and took a loss on the last bit of them after that historic post-election trading day. Got modestly short via March SPX put spreads on 11/8 since upside vol is still vol, I can’t remember a post-election VIX crush of this proportion, and SKEW’s still falling (more on this later). This is, of course, still a rental and I expect to take some pain.

• Grabbed some Jan TLT put spreads on 10/1 & 10/16 and closed 50% of them by 11/1 (NFP). 75% of these were sold by the close on 11/6, and I’m leaving the rest on for the foreseeable future. Will likely add to this if long-end rates continue rising.

• Added modest upside exposure to China again, slightly ahead of schedule on 11/5 via March FXI call spreads. Recent stimulus announcements have disappointed the public so I wouldn’t be surprised to see China sell-off in the near-term.

• Looking for an entry in PMs.

The main theme here — which is the return of the wrecking ball — remains the same in spite of recent post-election developments.

Since the last wrecking ball update, positioning in two of its components has changed substantially. For starters, the USD has seen a notable increase in longs.

And lastly, but certainly not least, net positioning on Brent & WTI futures & options per staunovo:

Positioning in rates & the USD has changed significantly since mid-October while crude’s has barely changed. In spite of that, volatility in this space has been high. There is a lot to say about this volatility.

Notably, headline risk here is huge — always has been. This is unsurprising, but the rate at which this has occurred since September was amusing. From KSA apparently abandoning its $100 crude target that they never actually had, to the Saudi oil minister purportedly saying prices may fall to $50/bbl if others cheat (which OPEC swiftly refuted and deemed wholly inaccurate and misleading), to Israel apparently leaking plans to the US about its strike on Iran’s military infrastructure, headline risk has been no stranger to crude.

The best (worst) part about all of this is that price immediately retreats fast & hard upon these headlines, allowing you (if you’re tethered to reality) to enter at more favorable prices. However, it also adds superfluous volatility which serves to push others away from the sector and shape uncorroborated consensus opinions. For example, I’ve watched consensus pertaining to the Middle East evolve from “Iran won’t do anything to garner a response from Israel” to “Israel won’t respond before elections” to “See, no nuclear or oil facilities were targeted, just the air defenses which guard them. It’s over.” Think it’s very clear that this is far from over.

Non-wrecking ball positioning is indicative of equities nearing an inflection point.

On the flip side, buybacks are set to start rolling in through year-end, seasonality is positive, & the chase is on should volatility cooperate and fall.

As far as favorable seasonality goes, I’m not really confident that it will be so for November. After all, this was not the case this year for April, or July. And September and October didn’t follow seasonality either. It may seem crazy to be short equities in any form right now, but aside from counter-seasonal performance & positioning, SKEW & PCE falling (ofc it can go lower) makes it feel prudent to hedge.

It’s been a while since I’ve felt inclined to mention the infamous wrecking ball. At the beginning of April, it made its first appearance of the year — long-end rates, oil, and the USD surged simultaneously, ultimately putting downside pressure on equities.

On Friday, I came to the realization that the majority is assigning a 0% probability of the wrecking ball’s resurgence — and by default inflation’s as well. The adage “don’t fight the Fed” comes to mind. Since the Fed has declared victory on its war with inflation, most market participants have too. Unfortunately, this has all the makings of a pyrrhic victory.

The long-end has essentially front run a substantial portion of the Fed’s cutting cycle into a jumbo 50bp “1st rate cut” with FCI exceedingly loose and price stability nowhere close to being reached. Most importantly, tensions in the Middle East have risen materially and there is a high likelihood of a loss of supply now. This was not the case in April (I’ll expound upon this shortly).

IMV, this is the worst-case scenario for an asymmetric Fed. Recalling the mentions from Powell about implicit tightening via a rising long-end, one can easily see how this can be a problem. It’s quite simple:

As previously stated, back in April, the wrecking ball came out swinging hard. This was accompanied by uncomfortably hot CPI prints and heightened geopolitical tensions in the Middle East. However, by the time they reached a crescendo, positioning in oil, stocks, bonds, and FX had been rinsed.

The current picture is the diametrical opposite of the former, and almost nobody seems to be taking it seriously. Positioning in oil, stocks, bonds, and FX show that the “inflation is dead” bros are out in droves. Per Simon White of BBG:

Commitment of Trader positioning shows the net long of speculators in US stocks is rising. And the US Bonds Position Proxy, where I have amalgamated hedge funds’ beta to Treasuries, COT data and the JPMorgan Treasury Client Survey, also shows a long in bonds that’s burgeoning outside of CTAs.

Furthermore, COT data shows significant longs in fed funds and SOFR futures. There is a net short bond position between leveraged funds and asset managers, but some of this could be related to the basis trade, i.e. it is not clear how much of this is outright short risk.

A revival in inflation very likely means higher rates, lower bonds, and quite possibly lower stocks, as valuations are throttled by higher discount rates.

With SOFR options implying a near-zero probability of an inflation tail, and positioning as it is, it’s clear the market is not prepared for such an outcome.

The USD has had the tailwinds of stronger than expected econ data and a safe haven bid from heightened tensions in the Middle East. Nonetheless, positioning is still relatively pessimistic on the dollar.

Looks like there’s room for significant upside here. I can say the same thing for oil since positioning — despite HFs recently dumping bets against Brent at the fastest pace in 8 years — is still conducive for meaningful upside.

An Asymmetric Fed Provides Asymmetric Payouts

Positioning in each component of the wrecking ball suggests that there is zero concern for upside inflation risks while a global cutting cycle (most cuts since Mar’ 20) is underway, and the Middle East is a tinderbox that’s about to ignite very soon — this was the first time since 1973 that Israel was involved in an active war on Yom Kippur.

There are several ways to take advantage of this setup:

1. Long oil, energy, and vol. This is my current positioning. (CL 67s, XLE 92s, spot VIX 15s). Notably, USO roll ends on Monday and this “unusually high” VIX is indicative of stress inside the vol realm.

2. The long-end is a rental. Trade it tactically while being mindful of surprising econ data. This becomes a major short when the Middle Eastern tinderbox ignites — 10y could be at 5% by year-end in a flash.

3. Short equities. This is also a rental but subject to change. I planned to be short via QQQ put spreads last week, but after watching my open positions do so well, I decided to be more patient. Realized vol is low as indices have been stuck in mud over the past month. Things have seemed nasty underneath the hood and VIXpiration this week could mark a turning point.

4. Long China. No need to rush to add/gain exposure here. Post-election is an ideal time to do either of those. China will continue to gradually reveal and implement stimulative measures, but they won’t be able to meet majority of US investors’ expectations given that they have permanent QE brain.

   ---

A Picture is Worth a Thousand Words

Admittedly, it’d be a disservice to make a part 2 to the wrecking ball without giving a visual update of its components.

Wouldn’t hurt to include some other notable charts either.

And scene.

Concluding with some pertinent verses:

Lots to cover and this will consist of references to several previous posts.

I’ll begin by addressing (US) equities:

1. Closed the Jan ‘25 QQQ put spreads I entered at 478 and 483 on 9/18 and 9/19 early last week. The downside move didn’t come as soon as I was expecting it to as the market was stuck in a range — courtesy of the magnetism of the infamous JHEQX 5750 call short.

2. I still believe a substantial downside move is due into late Oct for previously stated reasons like increased market fragility since mid-July, disappearing buyback bids, and a higher floor for spot VIX.

3. Speaking of which, I grabbed some Nov VIX call spreads on Thursday because it looked like vol had reached its (higher) floor.

   

4. Friday was very interesting. Vol was unusually bid and I think that the rate cut cementing data and subsequent unhealthy broadening — RTY up, NDX down — explains that. It reminded me a lot of 7/11. Both days saw rate cut cementing data, RTY up/NDX down, notable yen strengthening, and most importantly, unwinding of severely crowded positioning — this time it was Chinese equities.

5. Looking to add downside exposure via QQQ put spreads sometime next week.

6. A year-end rally is obviously still in the cards. This is subject to change depending on how October pans out.

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The Red Dragon

China has finally done it. They’ve finally stimulated in a meaningful way. This is something that I’ve talked about extensively since late 2022:

Back in January, it felt like the market was forcing their policymakers’ hands:

*Checks notes* Jan 22nd is still the bottom for HSI & FXI. This is a really interesting development because:

• This was the first time ever that economic issues have been discussed at a Politburo meeting in September — shows the policymakers sense of urgency.

• Fiscal stimulus has finally arrived — money is literally going into the hands of Chinese consumers in a big way.

• Positioning is heavily skewed short China — UW China equities is the largest consensus trade in all global equities (per GS).

I’m expecting more stimulus from China in the near future. This policy move is what’s needed to further trigger capital to go from relatively overvalued markets into China’s. Post-election will provide more opportunities to gain exposure here.

Just like that, we’re off to the races! Surely this will end well…

Nonetheless, this is exceedingly significant for commodities — particularly oil. Last year I mentioned that China was not only a key factor in my positioning (long oil on 7/7/23) because it couldn’t collapse — like many pundits were loudly proclaiming it already had — if oil was to rally, but also a major driver of the last commodity supercycle:

Which reminds me, here’s current commodity positioning again:

Oil recently set records for pessimism as well,

Still feel the same way about this pessimistic positioning:

The recent rally of about 5 or 6$/bbl saw a miniscule amount of short covering. Net-length increased by only 4,539 (per staunovo), while headline risk has recently aided in the process of subduing crude prices. Ceasefire deals are purportedly always close to being solidified, but this time Saudi has apparently abandoned its $100 crude target that they never actually had. This is not surprising:

The picture for oil — and commodities generally — is now painted vividly: a global rate cut cycle is underway, inventories have drawn consistently, cushing is still pushing tank bottoms, and geopolitical risk premium is nonexistent. As for the lack of geopolitical premium, I reiterate:

The most salient point here is that China — the world’s #1 oil importer — has finally started to stimulate in a meaningful way (“abandoned “prudent” monetary policy stance expression and mentioned to implement “forceful RRR and rate cuts.”) — per GS.

That being said, I’ll manage my current oil exposure via Jan ‘25 CL call spreads accordingly as risk/reward is even better, and shopping for cheap energy companies for the long-term seems like a good idea now.

Broadly speaking, commodities as a whole look more attractive, but positioning in a crowd favorite — gold — is relatively stretched. This is important to note especially if we’re subject to further deleveraging sparked by the yen carry trade and everything gets sold except vol.

The Anguish of Central Banking

The moment unprecedented fiscal profligacy and monetary policy neglect merged; America found itself vis-à-vis with a painful reality; a concept reminiscent of the 70s. Lately, I can’t help but be reminded that we seem to be repeating the same mistakes the Fed made back then.

Real inflation is higher than reported by the BLS, yet the Fed has been adamantly declaring that the unemployment rate is its focal point now. Once again, inflation has taken a backseat before it has been appropriately dealt with. This asymmetric Fed policy is not new1:

Amidst an extremely volatile environment where we’re highly susceptible to negative supply shocks, it’s not the best time for the Fed to behave like this. Vulnerability to both exogenous and endogenous supply shocks is at an ATH.

In the case where we start to experience more negative supply shocks — and we definitely will — the Fed/pundits will claim that they are the main reason for inflation’s resurgence. It will somehow have very little do with their asymmetric stance which creates room for more policy blunders.

That’s all for now.

Until next time,

Pierre

• With a beautiful mix of indignation, befuddlement, and (unwarranted) pessimism, positioning and sentiment are perfectly aligned.

  

• CTAs have served to exacerbate this. The mass deleveraging episode sparked by the violent unwinding of the yen carry trade brought CTAs net length to a notably low point.

  

• Prompt spreads held up quite well amidst the recent sell-off. They’re looking relatively healthy in spite of current pessimism.

  

• Inventories have drawn consistently — almost every week since the beginning of July —, cushing is pushing tank bottoms, and we’re about to get a rate cut (which should be generally supportive of commodities). The disconnect between the paper & physical market is presently gargantuan, but it can’t last forever.

Oil is primed for a short squeeze, but a catalyst is needed to induce a long-lasting rally. I still believe that October is a sweet spot for this catalyst (increasing geopol. tensions) to transpire, so I went long oil through CL call spreads (several months out) earlier today.

An important caveat here to note is that there is, of course, a possibility that the yen wreaks havoc on markets again, causing a massive deleveraging (exacerbating the main issue) where correlations go to 1 — everything gets sold except vol. So, I’m prepared to take some pain here.

This leads me to the picture for equities:

• Since my last post on 8/25, cash proved to be a solid position. The unhealthy RTY > NDX action led to some downside for the indices into 9/6. I didn’t end up catching the entire downside move, but I got a straddle on 9/4 to cover NFP and monetized 80% of it by the close on 9/6. By 9/9 in the morning, 100% had been monetized.

• Tomorrow, the buyback bid starts to wane substantially ahead of a market that has front-run rate cuts all year.

• The yen carry trade isn’t as important as most believe it is right now. It doesn’t matter what level USDJPY is at. The magnitude of the move is what’s important. RTY outperforming NDX is the main issue still — saw some of this today but NVDA’s bid dampened the issue (& vol ofc). For small caps to perform well alongside large caps going forward, you’ll need large caps to have a blow off top. Which leads to my next point…

• A blow off top is very unlikely right now as positioning is stretched & market fragility has greatly increased since mid-July.

Still expecting to see an explosive downside move from mid/late-Sept into late Oct. It will be very important to see how explosive this move is, as that can determine if we get a year end rally or not, and how strong/weak it’ll be. Not currently positioned for it yet, but I will be 9/18 by EOD. FWIW, vol looks like its approaching its (higher) floor right now.

I saw more of the unhealthy broadening which reared its ugly head in mid/late July. In fact, NDX momentarily went red while small caps materially outperformed. No bueno. Bulls don’t want to see this again while dispersion is this high.

It was for this very reason that I poked fun at the cohort responsible for creating the “small cap summer into blow off top” narrative. This is also what gave me the conviction to aggressively hedge with QQQ puts/put spreads & VIX call spreads mid-July.

After the close, the gears started to turn more. This long-awaited rate cut has been confirmed to take place next month, but what does that really mean for assets? For starters, small caps should begin to outperform large caps.

Though, considering positioning, they may start their outperformance ahead of schedule. We have never received the first rate cut while 1M implied correlation was this low.

Of course, there is almost a month until the first rate cut, in which this picture could change drastically. I presently believe that if we can get through NVDA earnings, NFP, & CPI unscathed (no recession scares), we’ll see a return to regularly scheduled programming — Mag7/semis outperforming small caps. This scenario would lead to a rise in dispersion into the first rate cut and has been the memo since March ‘23 as BofA highlights:

Naturally, the first rate cut is not so kind to large caps. Given current conditions — stocks up 32% past 9 months vs. average of 2% in run-up to 12 occasions since 1970 of the 1st rate cut (source = Hartnett/BofA) — I still think that the reaction from equities will be less-than-stellar. With VIXpiration & the rate decision both transpiring on the same day (September 18th), you have a potentially explosive setup for a downside move into October.

Nonetheless, election vol/overhang, ever-increasing geopol. tensions, & stretched positioning make it quite unlikely that spot VIX retreats to levels seen before this unhealthy broadening action presented itself.

Looking at the 3 most recent “1st rate cut” scenarios from a perspective of Dow Theory:

Not once did transports make new highs after the first rate cut. Overlaying NDX (other indices are fine too) yields a clear-cut picture:

This picture is not exactly confidence-inspiring for bulls in the longer-term.

The Turbulence of the Post-Pandemic World

Keeping this as short and simple as possible, we’re at a key inflection point in both markets & the economy. A quick blast from the past:

Here’s what the yield curve looks like after sustaining the longest inversion in history:

I figured it’d be good to revisit this since the Fed has now made it clear that unemployment is their focal point. A hard landing is supposedly not in the Fed’s plans, but this view is as consensus as it can possibly get.

Hartnett clarifies: “soft” (or “no”) landing consensus (86% according to FMS).”

Can’t say that I’ve shared a “soft landing” or “no landing” view even once throughout this cycle. I certainly won’t be jumping on any of those trains now as the Fed unabashedly takes a victory lap on inflation. I still vehemently disagree with this “mission accomplished” approach to inflation considering that:

1. We’re about to cut rates while commodities are historically under-owned in an exceedingly volatile geopolitical climate and prices are still relatively elevated.

2. We’re in the nascent stage of stagflation.

3. Populism is still large and in charge.

4. Fiscal profligacy is here to stay.

5. The Fed is still stuck between a rock and a hard place.

Speaking of the geopolitical climate…

The rise in global shipping rates is also correlated with the escalation of geopolitical tensions, and I do not expect them to magically abate anytime soon. I expect them to heat up, especially as the election approaches and into 2025/through the rest of this decade.

With the “1st rate cut” solidified, it seems prudent — from a risk/reward standpoint — to seek out long commodity opportunities over equities. Again:

This brings me back to last Dec’s FOMC, when the infamous “Powell pivot” occurred:

To top it off, at the last FOMC, Powell gave commodities — and equities — the greenlight to run. In what was a disastrous display of indecisiveness — and dare I say, a lack of credibility — the Fed released the animal spirits. And you know what they say, “Don’t fight the Fed.” Powell previously stated that the material rise of yields was welcomed, as it behaved like rate hikes/implicit tightening — making their job easier. But yields had dropped considerably since he said that. In fact…

It wouldn’t be farfetched to consider this development as rate cuts given what Powell said about implicit tightening. Despite this, Powell came out singing a surprisingly dovish tune.

—

From the same post above:

No new lows for gold since. The gargantuan demand from CBs + the fact that gold is a hedge against monetary and fiscal incompetence has helped out a lot.

And no new lows for oil either. The disconnect between the paper and physical markets here will be resolved in due time. Patience is key.

It gets better:

No new lows for the entire commodity basket since the “Powell pivot.”

That day also happened to put in a multi-month low for vol and induced some spot up, vol up behavior:

Most importantly, we received 3 consecutive uncomfortably hot CPI prints after this. Which reminds me, the floor for rates (long end) does not look too far from here considering present and future circumstances:

Will be fun to see everything play out now that we’re finally cutting rates.

Until next time,

Pierre

It was ultimately a matter of massive de-grossing coupled with record high dispersion. This unwinding of several majorly crowded trades (short vol, carry trade, long Mag7/short IWM/RTY) into a seasonally weak period while positioning was stretched produced this vol market shock. Talk about a perfect storm.

This evidently caught many people off guard, but what if I told you that this was relatively easy to see ahead of time?

You can find a plethora of these signs under the “Summer Madness” tab of this publication. If there were only two signs that I could point to, they would definitely be implied correlation and positioning. This is what those looked like ahead of this historic vol market shock:

Positioning was stretched ahead of CPI and markets love to shift to wherever the pain trade is.

And implied correlation is at levels where VIX reached single digits in 2017. New record lows in COR1M showing that everyone is prepared for the continuation of summer madness…

The most astonishing thing to me about this event is unequivocally how quickly vol has retreated.

After having their YTD gains swiftly erased, short vol has evidently doubled down.

1M implied correlation (COR1M) is historically low again as well.

It is truly astonishing.

Seasonality says that only the first half of August is poor but given that this rally looks a bit long in the tooth with VIXpiration coming on August 21st, the market looks to be giving those who have missed the opportunity to take advantage of unjustifiably low cross-asset vol a second chance. Note that I don’t believe VIX will go to 65 again this time around and that the window to catch this is relatively small.

Since there is also an upcoming FOMC meeting next month where the Fed is expected to cut rates, it is exceedingly important to pay close attention to how equities react to this.

IMV, we have essentially front ran the rate cuts the entire year. Majority of market participants have been salivating at the mere mention of rate cuts since Mar ‘22, and we’re finally about to get one. This leads me to believe that equities & bonds (long end) reactions will be less than stellar — contrary to popular belief. All things considered; I expect cross-asset vol to remain elevated for the rest of the year and into 2026.

Transitioning Out of Summer Madness

There is an incredibly lucrative setup in another market right now. Commodities are being bet against at an extreme rate. A rate at which I believe is unjustified.

My favorite commodity is hated too — just how I like it.

These images instantly remind me of the concept in equity markets where no market crashes/vol events happen when everybody is prepared for them. They occur whenever the majority is on one side of the boat. In a similar manner, I believe this lopsided positioning in commodities is signaling some major escalation of geopolitical tensions fairly soon. October is a sweet spot for me there.

I checked the other times where correlations went to 1 & vol rose materially (above 45) in equity sell-offs and noticed that held up relatively well in this circumstance. seems to be trading like it was shortly before Russia’s invasion of Ukraine.

The broader market was selling off aggressively early ‘22 while LMT quietly outperformed. Needless to say, the present resemblance is uncanny.

My short-term views are as stated above and as for the long-term, they remain the same:

To put it simply:

• Equities: The longest divergence ever between transports and the indices will lead to substantial downside over the next year.

• Bonds: Thinking bear steepener un-inverts the curve. Inflation will be a problem for a few more years and consequently the long end will continue struggling.

• Commodities: They will continue to shine. One of the best performing assets in the 1H of this year was silver. Expecting gold and oil specifically to perform well over the next few years. —

In conclusion, “Nothing ever happens” bros will have a very rough time over the next few years because playtime is over, and it’s time to get your house in order.

Until next time,

Pierre

Not too long ago I briefly went over how 1) the inability of small caps to rally in spite of falling rates was a red flag for the broader market, and 2) the broadening leading to a “blow off top” would prove to be elusive. Well, Thursday saw the biggest daily outperformance of RTY relative to NDX on record. This level of de-grossing is unlikely to end immediately given that funds were complacently shorting small caps for quite some time. Then came Friday, and what was seemingly a complete undoing of Thursday’s sell-off ended in an unimpressive close for bulls.

My mind goes back to April now, when the talk of the town was that earnings season would be outstanding and lead to a material continuation of the rally. However, it’s liquidity and positioning that matter — not earnings. For this reason, April’s sell-off caught many off guard. Coming back to the present, July looks and feels similar to me. With earnings on the horizon & positioning stretched, hedging is sensible. Oct/Nov/Dec — take your pick.

This period is what was referred to in this tweet from June 25th with the lyrics hinting to July 17th, which since 1928 has been a turning point seeing equities begin to fade materially into August.

NDX has also put in 1- & 3-month peaks in July more than any other month by a substantial margin.

July 17th just so happens to be VIXpiration and index vol is set to put in seasonal lows.

Skew should simultaneously start to drop as we enter this period. It serves as confluence for a correction.

And implied correlation is at levels where VIX reached single digits in 2017. New record lows in COR1M showing that everyone is prepared for the continuation of summer madness…

Before I get into the next portion of this, I want to make myself clear: I’m physically incapable of having any less of a desire to align with any political party or label. I’m not a Republican or a Democrat. I’m not a Conservative or a Liberal. I’m not left-wing, right-wing, or center. None of these things actually matter. I simply align myself with God. Now, time to dig in.

I began writing this post early Saturday morning, and by the end of the night a historic event had transpired. It promptly reminded me of what I said in my last post:

After the failed assassination attempt on Trump — which was nothing short of a miracle —, Biden’s departure before the end of this month is even more likely than before. A red wave is to be expected as well. Over the last four years, countless attempts to sabotage him have backfired and inadvertently served to further bolster his popularity and support. Needless to say, supporting Trump (especially after last night) is a no-brainer.

So, where does that leave markets? In the same position long-term with potential to shake up the short-term cross-asset path. The long-term outlook was covered in my last post. To put it simply:

• Equities: The longest divergence ever between transports and the indices will lead to substantial downside over the next year.

• Bonds: Thinking bear steepener un-inverts the curve. Inflation will be a problem for a few more years and consequently the long end will continue struggling.

• Commodities: They will continue to shine. One of the best performing assets in the 1H of this year was silver. Expecting gold and oil specifically to perform well over the next few years.

In the short-term, I’ll be watching closely to see what trends develop.

Most importantly, the fate of the nation should be at the forefront of Americans’ minds. To close, I’ll reiterate a combination of two of my favorite mantras: don’t blink, don’t panic because playtime is over. It’s time to get your house in order.

• The CL/$CL1! call spreads were up 126% as of 7/1. Cut this position in half Monday night.

• put spreads were up materially as well with most of the gains coming directly after the presidential debate.

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Back in 2021, I told a friend of mine that I believed Biden wouldn’t finish his term as a consequence of his incompetence given that he had done nothing particularly meaningful during his lengthy political career. At the time, it was transpicuous to not only me, but also anybody who had an ounce of discernment that Biden was cognitively lethargic — and that’s putting things lightly. So, naturally, bringing in this “impressive” specimen into such a turbulent, once-in-a-century environment was destined to be painfully unsuccessful. After the recent debate, many Dems have seemingly woken up overnight to the reality of Biden’s cognitive state. Of course, this is intentional, and they were aware of this well before he took office.

In my view, recent developments have all but solidified his departure from office before November. In fact, I’d genuinely be shocked if he was still there by the end of this month. With that being said, it’s time to consider the possible effects that this transition could have on markets.

Cross-Asset Opportunities

Immediately my mind goes to the SPR — formerly known as the Strategic Petroleum Reserve, now known as the Strategic Political Reserve. An overlooked outcome in this scenario is one where, in the face of humiliating defeat, the current admin sees no incentive to tap the SPR anymore. Looking at oil now from both a fundamental and positioning perspective, there may be more upside than previously expected.

There needs to be more inventory draws to substantiate any further rallying, but net length is still skewed heavy short. Every image below is from @staunovo on Twitter. Last updated June 25th.

The last image makes it clear that despite the recent short covering and substantial rally in crude, net length is still fairly short — notably far from where oil has previously made interim peaks.

Prompt spreads look healthy.

And as far as I’m concerned, taking a shot at oil upside over gold is much more prudent than broadly recognized.

Over in FX land, the yen is still getting hammered.

The beatings will continue until…who knows at this point? There will be lucrative opportunities to both long & short the yen in the foreseeable future. I think it’s safe to say that the longs will be short-lived in comparison — unfortunate for Japan. Something else to note is the correlation between this and rates.

These two have moved in tandem for a while now. Seems like the long end is mispriced. Speaking of which,

rate vol looks to have bottomed late May. I think around 140 on is the area where you start to hear more widespread fears about systemic failure, so no panicking is warranted right now — or ever, but if you’re going to panic, be first.

Lastly, but certainly not least, it’s time to take a look at equity vol — with a twist.

Implied correlation made new lows again.

Naturally, the VIX has been relatively muted.

It is no longer solely that is allowing this market to trudge forward — emphasis on trudge. The rest of Mag7 has joined the party, even . This is paramount to note because it’s what is driving such high dispersion in the market. If you look in other areas…

you’ll see that index vol is undoubtedly muted. One more for good measure.

A slight disconnect here, nothing major. Where I believe lies a considerable disconnect is in bitcoin. I’ve been asking myself constantly why bitcoin still hasn’t made a new high since March 14th while high beta tech — which has been highly correlated to bitcoin for a while — has made new highs since then. Since I see bitcoin as a measure/leading indicator of liquidity, my best guess is that due to the abysmal breadth in equities — apologies in advance, but this time the breadth really is abysmal lol — this disconnect is transpiring.

By itself, bitcoin looks likely to breakdown further in the near future. However, when you overlay NDX or on this, you get a much different picture.

Back in November 2021, the consensus was that bitcoin was going straight to 100k. This clearly didn’t happen, and if you look closely, you’ll see that bitcoin topped earlier than NDX did — and much earlier than SPX. This time around, both SPX and NDX have well eclipsed their ATHs while bitcoin’s performance has been lackluster, failing to make new ATHs. Nonetheless, 100k is the consensus again, and I’ll happily take the other side of this. Why? Because it’s time for summer madness. Aside from what I’ve written about in the last 3 editions of this, this is what that summer madness looks like for equities. Along with this…

Dow Theory, which I’ve mentioned plenty of times since late May, is still signaling major weakness for the indices in the future. Notably, the Dow hasn’t made new highs after the weakness in April like the other indices.

By now most know that breadth is poor, so that alone is not enough to derive any actionable value. Knowing what consensus is, and how to 1) take advantage of going against it and 2) figure out if consensus is consensus for good reason is of the utmost importance. Judging by the widespread lack of desire to hedge/go to cash given current circumstances, the current consensus (up only forever) is unequivocally uncorroborated.

With many comparisons of this present market to the dot-com bubble due to concentration levels, you’ll more than likely make more money on the short side of NDX than any other index.

NDX didn’t make new highs for over a decade after the bubble popped. Don’t think it can’t happen again.

Playtime is Over/Joever

This has been a recurring theme of this series. Because playtime is both over and now joever, it’s time to get your house in order. I will borrow another mantra I used back in December 2022 to close: don’t blink, don’t panic.

Have a great 4th of July!

Until next time,

Pierre.

“A good name is to be chosen rather than great riches, loving favor rather than silver and gold. The rich and the poor have this in common, the Lord is the maker of them all. A prudent man foresees evil and hides himself, but the simple pass on and are punished. By humility and the fear of the Lord are riches and honor and life.” — Proverbs 22:1-4

First and foremost, positioning is the same. Solid month and a great way to close out Q2.

Twas an eventful week to say the least. Arguably the two most salient recent developments are 1) the consistent obliteration of the yen, and 2) the potential outcomes should the Dems truly be finished with Biden.

The former goes back to my assertion that cross-asset vol should not be expected to be muted/lower for the rest of the year.

That’s 38-year lows for the yen and there’s plenty of room for it to decline further given present circumstances. One might think that after such a disaster of a “debate” last night the $ would decline materially. However, this wasn’t the case.

IMV, this is because rates have been expected to come down by the majority since the beginning of the year, but they haven’t budged at all since the Fed has been given no leeway to cut rates — thanks to their foolish December pivot.

“To top it off, at the last FOMC, Powell gave commodities — and equities — the greenlight to run. In what was a disastrous display of indecisiveness — and dare I say, a lack of credibility — the Fed released the animal spirits. And you know what they say, “Don’t fight the Fed.” Powell previously stated that the material rise of yields was welcomed, as it behaved like rate hikes/implicit tightening — making their job easier. But yields had dropped considerably since he said that. In fact…

It wouldn’t be farfetched to consider this development as rate cuts given what Powell said about implicit tightening. Despite this, Powell came out singing a surprisingly dovish tune.

Mission accomplished? Not even close. These recent remarks from the Fed give credence to my earlier assertion that the Fed has absolutely no credibility.” —

Equities have essentially shrugged off the need for alignment between rate cut expectations and reality, and bonds (long end) have continued their subpar performance.

What traders/investors should now consider is the not only the perspective of foreigners who dabble in bonds, but also the risk/reward of owning them after last night’s fiasco. Who in their right mind would own the long end given current & future fiscal profligacy, inflation persistence, & crystal-clear absence of sound leadership.

The record inflow into bonds on Monday just before this event makes me wonder what those people were thinking.

Whatever it was, we most certainly weren’t on the same page.

Similarly to the way that investors/traders perpetually long for rate cuts, there is a large cohort that perpetually desires to go long the long end and ride to Valhalla. They have failed countless times over the past few years and believe that this is their chance — again.

Note that rates dropped as of late and small caps saw virtually no relief despite this. To me, this is a major red flag and signals that the 10y has a date with 5% this year. Let the bear steepening begin.

On top of this, equities don’t look any better than they did last time around, especially when you take last night into consideration.

Another Hindenburg omen

Correlation is not only at record lows, but this is the first time it has been this low with the yield curve inverted. Another “first ever”

NDX/semis (semiconductors) seasonality points to tops (at least interim) in mid/late July, but that may be pushed forward given current circumstances.

And index vol is going to wake up in a major way whenever it does.

Playtime is most certainly over no matter what angle you look at markets from. Better get your house in order.

Until next time,

Pierre.

“For God has not given us a spirit of fear, but of power and of love and of a sound mind.” — 2 Timothy 1:7

Positioning is still the same as stated here — once again, cash is not trash.

CNBC seems to vehemently disagree, nonetheless.

Tomorrow is officially the first day of summer. In spirit of the incoming “Summer Madness,” I believe it’s appropriate to reiterate my view coming into this year:

Echoing the latter portion of this, history has been made recently.

Another one:

And lastly, but certainly not least:

“Where were the signs?”

This is all fine and dandy, right? After all, it’s an election year and Jerome and Yellen have everything under control. I still share the view that this belief of and in the “almighty JPow & Yellen” duo is dangerous. Why? Because if that was true, the bond market wouldn’t have performed so poorly since 2020. Equities are always late to the party.

I’m sure that if you ask anybody who is still long and strong this market with no stops set, they’d tell you that none of the above is relevant in any way whatsoever. “Markets can’t go down ever” — as if April never happened — and “it’s an election year, they won’t let anything happen” are some of the most common statements this crew loves to make. Such confidence is often misplaced. Hedging is awfully cheap presently and as a general rule, you should always hedge when you can, not when you have to.

Market breadth is currently horrendous, and many are betting that small caps catch up, breadth expands, and the blow off top rally commences. I was reassured that this would occur by this same crew every single month of this year so far, but to no avail.

I know I probably sound like a broken record by now, but I need to allude to the Dow Theory again — with a twist. You can get the full Dow Theory picture here.

In blue & red are the weekly 50 & 200MAs respectively. Notice anything about this chart? If not, let me add some color.

Remember how awful market breadth is as of late, and the collection of the aforementioned “first evers” above. Time to add some more color.

You can use your imagination for 1972/1973.

The message I’m trying to convey is that it’s transpicuous — in many areas — that we’re in uncharted territory. However, the underlying cause of these divergences, record dispersion/correlation, & historically bad breadth is human nature — which never changes. Most investors/traders don’t want to miss out on any upside, and thus they remain perilously incognizant of the warning signs the market is showing. Good ole FOMO.

One of my favorite signs, in conjunction with those previously mentioned, is this:

That’s 6 hindenburg omens in less than a month with an RSI approaching *checks notes* 82. They are significant only when appearing in clusters.

Some other pertinent, noteworthy charts with HOs:

Cross-Asset Vol

As for cross-asset vol, my stance hasn’t changed. To believe that it will be muted/lower for the rest of the year will prove to be a fatal mistake.

Things have been heating up in Europe with their political fiasco transpiring. Consequently, there was a flight-to-safety bid.

Oil vol is historically low with positioning at historic lows as well. Not necessarily the best combination for those who are betting on substantial downside here.

And rate vol is well off the highs made in March ‘23 and looks to be pricing in perfection.

I’ll stop there.

Note that this is not a call to sell everything and go into a bunker. It’s simply a call to remember that 1) solvency is entirely a matter of temperament, and 2) buying the quiet and selling the riot is the name of the game.

Until next time,

Pierre.