Shooting Blindly in the Dark
Talk about regime change...
This week — especially today — has been great. This post will be a combination/recap of my last two posts.
Key themes:
Equities are late to the party, as is customary.
The long end is quietly approaching levels where it begins to take the legs out of this rally in equities.
Contrary to popular belief, the pain trade is down.
A new trend has been confirmed.
Time to dig in.
Regime Change Incoming
I made mention of taking off most of those QQQ shorts that were initiated at 444.87 in my last post.
So, positioning is stretched (understatement lol) & consequently the pain trade is down, but there’s no way to *know* what CPI will come in at. I’m leaning towards a hotter or a mixed/in-line print. Cold would surprise me tbh.
That being said, positioning for me is light into this. Was short QQQ from 444.87 and took most off around 438. Still short TLT from 94.60. Energy/cl positioning is the same as it was last time. If there’s any rally here into OpEx it is a gift if you’re looking to short imo.
Whether hot, cold, or in-line, I don’t think they’ll make it easy for anybody. Patience is key.
The rationale for this positioning is simple. Bonds have been more responsive to hotter CPI prints, so they stay on in full size. After the CPI print, which came in hot for the 3rd time in a row, QQQ closed at 438 & rallied through today’s close. TLT, however, continues to sell-off. “Equities are always late to the party” type of action — typical.
I didn’t mention the energy/oil portion of my positioning last time because not much has changed, but this time around it’s paramount to note. So, in from CL 69.80, added at CL 75.57, and have taken a bit off since. Oil’s been very good to me since December 13th, and it looks like this will continue for the foreseeable future.
Why is this important to note? Because oil is closely correlated with the 10y/long end/breakevens, and the 10y chart should have all eyes on it right now.
The golden cross that formed in the 10y last July led to an interim top in equities.
And the one in Nov ‘21..well we know how that panned out.
Lastly, on the monthly chart, for the first time in decades there is a golden cross forming for the 10y. Talk about a regime change.
Shooting Blindly in the Dark
On a somewhat similar note, the wrecking ball is still very much alive.
I made this meme on April 1st, when I noticed that all the ingredients were present for the wrecking ball. Since then,
The USD is higher, albeit not by much.
Oil broke a major trendline to the upside and has held its gains so far.
And the bear steepener is still intact. It’s been more prevalent in the 3m10y spread than in the 2s10s spread recently.
Meanwhile, equities are still running in place.
SPX is still below the October trendline.
And once again, NDX has gone absolutely nowhere since March 1st.
I’ve seen the reason for stagnation in the indices be interpreted as inflation not mattering anymore by most. I honestly can’t blame them. Even after the 3rd consecutive hot CPI print after what was a disastrous display of indecisiveness — and a lack of credibility — from the Fed in December, equities shrugged off the losses from yesterday.
However, I cannot agree with that reasoning. To do so is to have your eyes solely fixated on equities, and after mentioning and highlighting not only bond’s, but also the USD & oil’s importance, I believe that if you share that consensus view then you are shooting blindly in the dark.
In conclusion, traders have been trained Pavlov style to buy every dip over the past several months because new ATHs awaited them almost immediately. However, a new trend has been confirmed — reaccelerating/sticky inflation. Disinflation (not inflation lol) is transitory. Equities do not care at all — for now — but there are red lights flashing in other asset classes. The pain trade is still clearly down, given that as a result of this almost all rate cuts have been taken out of the pipeline while there is simultaneously record high momentum crowding.
Things are heating up in markets & macro land.
Until next time,
Pierre.