Week of April 10
Early signs of recession last week, coming up this week another CPI print...
**First off I wanted to address the Twitter censorship of Substack. I want to stay on topic re: the markets in this blog, but I just wanted to reassure my readers I will remain posting indefinitely on Substack. This seems to be hands down the best way to connect with readers as a writer at the moment which is why myself and many others including you have chosen this platform. Also wanted to remind you guys you can also contact me via email@example.com if you ever need, but hopefully Twitter rectifies this whole situation soon. Just wanted to say nothing has changed!
Recap of last weeks action:
Up. I think we may possibly see a short term pullback sometime this week to 4000 or 4050. Which will most likely hold and we could test 4200 again.
Last weeks analysis was bang on.
We rallied early on in the week from the Friday close of 4130 or so on ES1. We got about a 40 pt move to 4170 before any material selloff. At first you might think oh well that’s not a much of a rally but it is all relative. The total range of the entire week (high - low) was about 70 pts. So a 40 pt move in a week where we are auctioning in a very tight range is nothing to sneeze at. Reminder that we have to take what the market is giving us. A couple weeks back when I pounded the table to buy 3800, the market served us 300 pts on a silver platter and we cashed in. Now this past week passed by and there frankly weren’t many opportunities, maybe that long in the beginning of the week and a dip buy later on. But we have to be satisfied and happy with what Mr. Market offers us and not get greedy. Some weeks you will bank 200 pts, some weeks you will bank 20, some weeks you will get nothing. Take what the market is offering you, be happy with it, and don’t get greedy. We were greedy disgusting pigs at low 3800s, and banked close to 300 pts as we are now trading 4100 only weeks after. We can sit with that happy satisfying memory and be patient monks now.
Lets be happy with catching those smaller moves while patiently waiting for the moment to get greedy again, because it is coming. The market is like an endlessly flowing river of opportunity. There is always another one around the corner. Think of it like football. You are QB. There are times when the safeties are deep covering the long routes, and you can take 5-6 yards on a quick slant with ease. You take those easy yards, you don’t try and force a deep go route 40 yards down the field when you have those easy yards right in front of you. And when the safeties creep up in the box, the linebackers are packing the box and line of scrimmage, you take those deep shots to your wide receivers because that’s what the defence is offering you. A phrase I always like to repeat to myself that applies not only to markets but life in general is “strength in stillness”. You can be strong, be able, be capable doing nothing. Be still. Doing nothing is actually doing something.
Hope you were able to catch some of that long early on in the week but if you didn’t its not a big deal, this was a slow week, and there will be many more like this one especially as we approach summer. Also good to keep in mind many holiday shortened weeks play out like this one. A slow choppy grind up where many less experienced traders blow up trying to trade huge breakouts that just never materialize.
Now the second part of my prediction was to buy a pullback to 4000 or 4050 on SPX. We got as low as 4070 SPX. I didn’t get filled. That level got front ran. But it did confirm that my initial bias is correct. That we were, and are in an intermediate uptrend. Meaning any downwards move, you must assume that it is a backtest, that support will hold, and that move is ultimately the market gathering energy to make new highs in a monthly timeframe.
To wrap up the week we had Non-farm payrolls. Essentially a hot read of the labour market, a larger number means the job market is tight, the economy is strong, and the Fed has more runway to tighten which is bad for equities. And vice versa. We got a slight beat, of 236k to 230k estimate. Which for all intents and purposes is in line with expectations. Rate hike odds did spike post this print as expected.
Now reviewing last weeks trade ideas:
I didn’t personally get filled, but you will see that my bias was correct. I wanted to buy dips to target 4150, we didn’t get to 4050 but did get to 4070. At the very least hope you weren’t shorting for a breakdown when I was calling to buy the dip. Most important here is I had a process to analyze the market, I developed a bias from that data-driven analysis, and used that to inform my trades. I didn’t get filled this time. But over the long run, a career of trading, I will make money more often than not if aim nailing the general directional bias of the market week in, week out. Consistency and persistence is what I am after here.
My bank play is down slightly/flat, I am still holding and have added a new play in this sector.
I am long oil futures from $66 a barrel, OXY, XLE and still holding this massive winner.
All in all, a pretty slow week. Ultimately, all we can do is take what the market gives us and be happy. Some weeks you will make a person’s salary in a day, some weeks you won’t make shit! Just the way it is. Use weeks like this as an opportunity to reset your emotions, clear your head, and just be ready and open because the next opportunity is always just around the corner.
Next move for markets?
Up. We are in the upper bound of my 3800/4200 range trade I outlined a couple weeks ago. I am not seeing the catalyst for a sell just yet. At the same time, I am not so excited to go long either. The next big move (say 400 pts or so) I believe will come on the downside. But I am being extra careful, vigilant on my entry because shorting is much more difficult than going long. It takes a lot more finesse, and is more demanding of your risk management skills. Highly recommend you read my in depth perspective on shorting the $SPX if you haven’t already or just refresh your memory.
So the entry is everything for me when short. Obviously you want to get as close to the top as you can to minimize your risk. That is ideal with an overshoot, where you have everybody in the pool, long as fuck. Everybody, or most people are balls to the wall bullish calling for new highs, positioning is high, systematics maxed out long, sentiment is euphoric, hedges are a type of bush that need to be trimmed. Everybody’s mom is long. That’s when I go short.
Image A: I recommend buying put options right before a 19% drop in the S&P.
Now last two times I went net short for a big move was Feb 17 in a substack post exactly like this one. And the time before that was Aug 17 2022 as you can see in the tweet above. Now I prefer to be long, and the reason for that is because the market has a natural bias upwards. Being a perma bear is fun and all but I prefer making lots of money instead. But I am not opposed to being short, I just am more discerning when looking for short opportunities. For simple reasons, 1. the reward is lower when shorting and 2. the risk is higher when shorting. So ideally I want that overshoot, to maybe 4200/4300 before getting net short, buying puts and hopefully riding a leg down to new lows. Market changes every day as you know, but as things look right now that maybe post CPI, post earnings. Sometime in May we could possible see a situation develop that way. I will circle back to this scenario later on in just a moment, there is some new market data that we came privy to this week that is of note.
First off the ISM reports that came out. Essentially ISM is an economic survey that gathers information and data by acquiring information through senior business leaders/executives. There are two of note, one that focuses on manufacturing, and one that is more services focused. Both missed considerably. You can dive into the nitty gritty yourself if you are so inclined, but I want to focus mainly on markets and tradable intel in this publication so in that sense all you need to know is that these surveys are reliable, composite, accurate indicators of the current health of the economy, and all these reports are showing signs of contraction. The economy is slowing.
We also had JOLTS, similar to NFP it shows us a snapshot of the labor market. In essence the headline number is how many job openings, so less openings means weaker labour market, and more openings mean strong and tight labour market. We got our first print of less than 10m job openings in over a year, since May 2021.
Image B: Note the delta (rate of change) in job openings.
Remember the Fed has not one but two core undertakings. Inflation at 2% and low unemployment. We are seeing the labour market get tested by this historic tightening cycle right now, and all signs are pointing to it slowing down.
Image C: Challenger job cuts beat.
Image CC: Last couple of times job cuts were on this upwards trajectory, 2020, 2008, 2001. Source T1Alpha
Another indicator of the health of the labor market is the US Challenger Job cuts. Basically how many people got laid off. Massive beat this month, printing almost 90k. I am not an economics professor, I am an SPX trader. So im not going to go into the finer details of all these surveys, and I think the majority of my readers don’t really care either. This is what you need to know.
ISM (manufacturing) - miss
ISM (services) - miss
JOLTS - weakening labour market; less job openings
Challenger job cuts - more layoffs
The economy is slowing, the labour market is cracking and we are creeping towards a recession. Another indicator I look at frequently is the XLP/XLY spread. Consumer staples vs consumer discretionary ETF. Pretty self explanatory. When the economy is looking bullish and expanding, you will see inflows into Consumer Discretionary, when the opposite is true the money flow into defensive stocks in the Consumer Staples category.
Image DD: Note the divergence. Inflows into XLP (staples) outflows from XLY (discretionary). Market pricing recession.
Now again, this is cool information to know but ultimately im an SPX trader. I want to make money trading stocks/futures/options. So in the back of my mind I know that I can reasonably expect another prolonged downturn, at some point in the future, but at this point in time I still am net long and don’t yet see a catalyst for that big short I want to put on like in August of 2022. Like I mentioned last week, the market is in “show me” mode. Without a material EPS contraction, Tim Cook and Satya Nadella ringing the warning bells and lowering FY24 guidance, the S&P aint gonna make new lows anytime soon.
Image D: New lows off the table until you see FY23-FY24 estimates getting dragged down. Source Factset
I want to make money. I am not playing pin the recession on the economy donkey. Recession to me, and to the market right now is just a 9 letter word in the dictionary. That is a broad strokes analysis of the macro landscape as it stands, but we can only trade price action. And this is where we are at currently.
Image E: Nothing bearish at all about this price action. Plain and simple.
Image F: CTAs still with a heavy upside skew.
I remain long biased until higher prices (4200/4300), a super hot 2SD+ CPI, or significant weakness in corporate earnings (back of April into May). Again my ideal scenario to short is overshoot into 4200/4300 post, post-CPI, post-earnings. Could be sometime in May. But we will cross that bridge when we get there.
Buy dips towards 4050 on SPX. Void if 2SD+ CPI print.
I remain long KRE around $43. I also like FRC at $14. KRE is safer, FRC is riskier but higher reward. FRC I am sizing like an options play, it could be a multi bagger but could also get cut in half pretty easily. But the risk/reward is very favourable here. I think the GFC/apocalypse scenario is priced into banks, positioning is bombed out and we could experience a counter trend rally. There is a Fed put in financials. I think there is alot of fear (most of it justified) surrounding deposit outflows, CRE mortgage/refinancing stress and just about everyone puked banks and got short. The crowd tends to not get paid though. We will see.
Image H: L/S ratio on banks lowest in 4 years.
Until next week, happy trading!