Week of September 22
Up forever?
Recap of last week
Great week for us last week. We went contrarian and faded the crowd last week. I was leaning bullish for a while into FOMC, because the data we had received since June/July FOMC was unequivocally a weaker labour market but contained inflation. The prefect recipe for a dovish message. What pushed me over the edge (and into calls) was I noticed some very popular Furus were predicting a Dec 2024 FOMC (-3% down day in the SPX) repeat.
As is typical with FOMC, we saw the patented vol crush as the index closed near unchanged just to have the real move the next day. We were able to avoid that with an option fly structure where we shorted 2x far OTM calls.
We scaled out of these contracts at various points (locking in gains), the overall blended gain +71%.
We did not have any losing trades last week.
We entered one swing trade over the weekend on Friday which we are currently holding.
Next move for markets
Down. Although I remain steadfastly bullish over the medium term, in the short term I think a small consolidation and pullback is likely. We are short ES from an average price of 6717, and we have our stop at 6732. This market is a freight train and has been running over shorts as we know, but we also enter the worst week of the entire year statistically. I think if any minor correction is to occur this week the bears should defend 6730s, if not, we take our papercut loss and move on. Simple as that.
I actually really much prefer going long, but as a trader who staunchly believes in making data-driven insights is the only path to long term success as a trader, I cannot ignore this. 2H September, and the post-Opex week of September is the worst week of the year.
As usual, behind the seasonality curtain so to speak, there are underlying liquidity dynamics that drive outperformance (or underperformance). McElligott breaks down the various factors affecting equity outflows in the above picture.
The biggest factor in my opinion being the Corporate buyback blackout that started last week, which will accelerate into October as companies prepare to report 2Q earnings.
The most recent estimates for corporate buyback authorizations in the year of 2025 is around $1.2 trillion according to GS. With several months of the year being blacked out as companies prepare to report earnings, the rough estimate for daily demand during the open window is about $5 billion. So that will be $5 billion of daily VWAP demand that will be missing during this open window.
Here we have a higher level view, the annual share buybacks in aggregate dating back about 20 years. This is the foundation and bedrock of the historical stock market rally since 2009.
On systematic positioning, not much has changed in the past few weeks. Very simply, max long. This is not bearish in and of itself, as it requires a trigger or catalyst to activate potential selling. What is more relevant in the immediate sense is that they will not be doing any significant buying. Just absent.
Lets check in with the Magnificent 7 here. RSI is not much to go by in and of itself, but it tells you where you are in the rally roughly speaking. We are at 75 RSI, highest since around December 17, 2024, before the SPX had a -3% down day the next day. Can it go higher from here? Absolutely yes. Do you want to go long here? No. Its not about, will it go higher from here, its about, what am I risking for what potential rewards? We’re in a stock market bubble, so things can go higher for no reason, but as a seasoned trader who has taken thousands of trades, and let thousands of trades pass me by, I am not jumping out of my seat to go long with Mag 7 at 75 RSI, entering the most bearish week of the year, with no corporate buyers or systematic buyers to back me up. You can win a round of Texas Hold Em with a 2 and a 7 offsuit (statistically the worst hand in poker), but it just means you got lucky. You can get lucky once or twice, but you don’t make careers out of getting lucky. If you go long here outside of a simply day trade, you are just hoping to get lucky. Thats not for me.
However, beyond the next week or so, I remain very bullish. I think most likely scenario into month end is some sort of wobble and retracement that will ultimately get bought. The theme of 2025, continues to be stocks up and investors chasing because they are under-positioned. This phenomenon will not be corrected until investors get stopped in as a whole, or stocks trade down significantly. It is most likely the former will happen, as almost always, the market is right and the crowd is wrong. GS equity sentiment remains negative for now over half a year and counting. Contrast this with what we saw in 2024.
Funding spreads are one of my favourite market indicators when developing my medium term outlooks. This is the most true bull/bear indicator it is, it measures the cost of leverage. How much premium investors pay to access leverage in the form of ES futures. You can see this was the early tell back in December 2024, when spreads collapsed (after FOMC). The market hung in there for a couple of months after that before the great Liberation Day crash. I believe this is working in the other direction this time, as we can see funding spreads gapped up post Jackson Hole and may lead the SPX significantly higher.
Lastly, another of my favorite positioning indicators, put-call skew. This like funding spreads, measure the actual cost of accessing leverage. It is not sentiment based (in another words, it cannot “lie”, like AAII for example). We are clearly in a bullish regime, and investors are bullishly positioned, but they are not over their skiis. People are nowhere near as bullish as they were last year after the election for example. I think that’s where we are headed ultimately, but we may be 7000 SPX by then. This I think ultimately illustrates, there is more room to run for this rally.
To sum up, short term the market is extremely overbought, and as we exit the September quarterly options expiration and enter the most bearish weak of the year statistically, I favour looking for a pullback to enter rather than jumping in long. Corporates are mostly in to their blackout period pre-earnings season, and systematics remained sidelined as a majority. However, on a more medium term outlook (say until EOY) I believe that any and all dips will be shallow and they will be bought. And we will be buying them.
Trade Ideas
Swinging shorts into this week, but very small risk and defined stop. Entry 6717, stop 6732.
Will look to buy dips probably once market settles and dealer gamma profile settles now that expiration has passed.