Week of November 24

Corrections don't last forever.

Recap of last week

Brutal week for markets last week. We avoided almost all of the carnage. Outperforming in markets in the long term is easiest to do by avoiding big down days. We sent multiple warnings about not going long into NVDA earnings.

Before NVDA ER I said odds favor an IV crush or just flat out dump.

Again, after the print I sent out an update that the price reaction was really poor, and signaled more selling to come.

Last but not least, I said watch out for big shorts looking to dump as much size as possible into people FOMOing NVDA earnings tomorrow.

Besides avoiding the bull mass extinction event, we entered 1 ES trade (good for 30 pts). We also added some new swings and rolled some old ones out.

So question is now, how far does the correction have left to go?

Next move for markets

Up. As we head into Monday of Thanksgiving week, I believe that the bottom for SPX is in. That low of 6525 on e minis should hold for atleast a couple weeks if not months. Before Friday, I saw two possible scenarios for a bottom. A gap down and final washout on Friday, or SPX holding 6500 on both Friday or Monday would also do it. Then Williams came out (NY Fed) and very clearly signaled a dovish pivot and reversed an incoming gap down and sent the index very green. He changed everything. With his whisper sending rate cut odds soaring, I believe that he took further downside off the table.

So the fact is, markets had already priced in no cut for December pretty much before Friday. They had rolled out many different Fed speakers shooting it down for weeks on end. For Williams to come out, and deliberately signal something different and send markets going into another direction was no accident. Make no mistake, the Fed wanted to send out a dovish message and to calm the markets, this was no accident. Now our job is simply: Dont fight the Fed. The Fed’s most influential members are of course Powell (#1), Waller and Williams. Waller for all intents and purposes doesn’t move markets anymore. Not because he is not influential, but because he has been very dovish for months now and market knows his position on rate cuts, which he has made very clear over and over again. Powell hasn’t spoken since October FOMC. That leaves Williams, who was a huge unknown. For him to come out Friday and pivot is a big fucking deal. As NY Fed president, I believe that his views are congruent with what Powell is thinking. I see very little chance that he said/signaled what he did on Friday without Powell’s explicit approval.

Rate cuts are an important part of the bull story. They aren’t the only thing that matters. But the key here is that market was already in the 8th inning of a correction, and I think if Williams had not said anything on Friday the bottom would have happened in the next day or two anyways. Bulls had already been crushed for weeks on end, and then they (as in big money and smart traders like us) set up the last bulls for an extinction event post NVDA earnings. They broke the bulls’ back on Thursday and usually once we have that last positioning wipe out the market tends to recover.

So my assumption is the bottom is in at 6525 es. That would imply the CTA med term trigger is not breached and that would save the bulls from the systematic selling avalanche that would have come. Maybe it will come at a later date but for now bulls are saved. That was/is the biggest risk to markets.

Although we have to address that the short term trigger was already breached and many trend signals are now negative after a long period of positive trend. The actual numbers are not that bad though, GS estimates about 13b ES to sell in the next week. Something to keep in mind but I don’t think this is a market moving flow in and of itself.

Interesting study made by MS, showing large intraday reversals tend to be really bullish. I think this shows how a final washout and capitulation of bulls paves the way for further upside.

The crowd is now max fearful, after being max greedy after the NVDA print. That usually doesn’t go well for bears. If we use a simple measure of skew in NDX (prices of puts relative to calls) we can see that we are at the highs of the year, second to only Liberation Day. Liberation Day was a true outlier in terms of volatility, as recall we saw two b2b 5% down days. That type of selling you see once in a decade or multiple decades. If you waited for Liberation Day type of fear to buy the dip, you would miss way too many good dip buys. I don’t think we will reach that level of fear this time, so that’s why I am a buyer. Logic here is very simple, be greedy when others are fearful.

Goldman’s panic index has reached a 9.61/10. Market’s will not get more fearful than this unless its an outright market crash as in COVID or Liberation Day. I don’t think we have the catalyst necessary for this. If we look at the term structure here, we can see how fear exploded across near term expiries and in backwardation. I no longer think these levels of volatility can be justified, after the Fed pivoted. I believe Thursday/Friday we reached max fear, and if that proves to be true, vol will deflate like a popped balloon sending indexes catapulting higher.

GS PB flagged last week we saw extremely elevated ETF volumes. They estimate a typical day ETFs are about 28% of the tape, and late last week they exceeded 40%. We can see a clear correlation here between VIX and ETF % of volumes. This occurs because something macro is dominating all trading flows and all stocks are trading like one single stock. This is a sign of extreme fear. This is also a sign of low liquidity in futures and a exploding demand for hedges which is mainly done through ETFs.

Here again, we see ETF volumes explode during many significant bottoms in the S&P. When fear explodes, we see traders/institutions stop trading individual stocks and just long/short SPY/QQQ/IWM etc and this is usually a signal of an impending bottom.

Lastly, it is month-end and we have pension rebalancing. GS estimates this group has about 13b equities to buy into month end. Not a massive flow, but another tailwind for the bulls and mostly nullifies any CTA selling.

And from Nomura the latest look at the beating heart of SPX - Mag 7. The crowd now fears a crash in Mag 7 as evidenced by rocketing put skew, meanwhile call skew is crashing. Mag 7 call skew in the 32%ile with other bottoming conditions as pointed out above contributes to a strong bull case here.

To sum up, I believe the markets were in the 8th inning of a correction heading into Friday. I assumed Williams comments were made deliberately and with Powell’s approval which signals quite a dovish shift from the Fed. Seeing as the market was already washed out and the bulls were broken from the NVDA earnings reversal, this pivot I think is enough to set the bottom here in the S&P. The crowd is max fearful, volatility is extremely expensive, and we head into 2H Nov and December which has historically been the best time to be long equities out of the whole year.

Trade Ideas

1. I may roll some options to different strikes.

2. Will alert in the chat other trades.