When everything is a trigger.
A new stock market rally attempt got underway this past week, with big early gains for the Dow Jones and other major indexes. But as hopes for a Fed pivot faded again, Treasury yields rebounded and stocks tumbled from resistance.
The 10-year Treasury yield rallied 8 basis points to 3.88%, rising for a 10th straight week. That’s after tumbling to 3.56% intraday Tuesday, testing its 21-day line. The 10-year Treasury yield is getting close to 12-year highs near 4% set in late September.
If traders thought this week was volatile – next week will be even more so with CPI on Wednesday.
Also, third-quarter earnings start at the end of next week.
Energy has seen a comeback even though the dollar remains strong. Energy is still way under-owned by institutions and if you want huge free cash flow, good earnings, and dividends this is where you want to be.
Also, if the tech selloff continues, the $ may land in the energy space. If the energy strength continues they will also probably chase the sector into yearend. May need a little consolidation here though.
There are always negatives and positives. Pick your poison below……
Negative
1. The systematics (CTAs, vol control, and risk-parity) have been huge sellers over the past few weeks
2. The quarter-end saw pension fund de-risk
3. Retail has finally started to capitulate
4. US corporates are in black-out
5. Mutual funds have been raising cash levels
6. Massive short gamma position has magnified the moves
7. QT is ramping up; the last 3 weeks saw the largest reduction in over 2 years
However, now it looks like we are moving from the “worst of worlds” to a potentially very supportive one.
Positive
The coming month has huge potential. According to Goldman’s Scott Rubner, the projected CTA flow is:
Flat tape: +$38B to buy
Up modest: +$141B to buy
Up big: +$217B to buy
Down modest: -$19B to sell
Down big -$42B to sell…
So if the tape stays flat to up there is huge buying by CTAs.
Assuming an UP market for global risk assets over the next month, there is, according to Goldman, $511 billion (yes, more than half a trillion) to buy in stocks, bonds, and commodities. That can be compared to the $70bn of QT over the past 3 weeks.
Corporate Buybacks
We are not many trading days away until the corporates are back buying equities (blackout ends) again in the buyback program. And the numbers are huge. They will have >$5B of VWAP demand, per day, every day for November and December. That is >$200bn of demand.
But not out of the woods.
The Fed is now ultimately trapped. They either lower rates to combat a massive blowup (which is coming anyway) or they leave/increase rates to burn it all down. Kick the can or risk financial Armageddon.
Enjoy the rest of your weekend. See you in the morning.