Can We Ignore Last Week?
If you believe that we had capitulation and panic, then no. But if you believe, as I do, that the VIX calculation was massively overstated and that market flows showed some fear, then caution, and then greed, you cannot be comfortable with risk here.
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The S&P 500 finished last week virtually unchanged.
The case against “ignoring” last week is:
- Allegedly there was capitulation.
- Thursday was the best day since 2022.
That really is the big argument to move into “risk on” that I keep hearing.
The case for “ignoring” last week is:
- As we wrote last week, the VIX calculation skyrocketed, but VIX futures did not confirm the move. The VIX calculation is complex and can be heavily influenced by deep out of the money options, based on offer prices, not even traded prices. I am convinced we saw a bit of fear, but NO panic. Therefore, getting bullish because we allegedly had panic is unlikely to work.
- Yes, Thursday was a “great” day, but just last Wednesday, we got to over 2% higher on the S&P 500 intraday. I’d take the “great” day as an all-clear signal with a big grain of salt! We have been arguing, for months, that liquidity is low (true depth of liquidity), and that creates abnormally large moves in BOTH directions.
- Whatever “fear” we saw early in the week, was replaced by greed by the end of the week. We also played for the bounce on Monday, and got it, but were back to selling by Thursday afternoon.
- The YEN carry trade is likely over, so it shouldn’t add to selling pressure like it did, but it was only one component. There might be some reloading on the yen carry trade at “attractive” levels (at least to where it was two weeks ago), but that is not for the faint of heart, so I suspect it will be limited in terms of helping the market. If you believe the Yen Carry trade was the main reason we’ve been selling off, you can buy. If, as I do, you believe that it was only a portion of the problems the market is facing – concerns about the economy, a Fed that is likely to be slow to act, AI earnings having a much higher hurdle to create big bounces, leverage in other forms and still too much option selling, then you should be concerned about the market
To sell off further we will need a “catalyst”
- Economic data could provide that catalyst. I don’t think inflation data will be bad, but that could surprise. What concerns me is data pointing to jobs and consumption could continue their decline, arousing “recession” chatter (that is my base case).
- Earnings. Earnings have not been a “snap of the fingers” this time around. Heck, even a 10 for 1 stock split in a market darling didn’t help that stock. Given positioning, where I think despite some rotation, some de-grossing, and even briefly, a bit of caution/fear, the market is still too aggressive in AI type valuations. I expect earnings to be problematic for stocks.
- Geopolitical Risk. From Russia/Ukraine, to Israel/Iran/Iranian Proxies to Venezuela, the risk of something adversely affecting the supply of oil remains high. Whether on purpose, or accidental (which can easily happen with so much military activity occurring), we could see a spike in oil prices from geopolitical events and that is not currently being priced in.
- The bond market, apparently got in technicals that drove yields lower than the market was willing to support when we had auctions last week. Many shorts were now taken out, and the campaigns (and associated spending promises) won’t give anyone a “warm and fuzzy” feeling about the direction of deficits. So I don’t expect much help from yields. The only way I see 10’s getting back to 3.7% is if the economic data is worse than even I’m expecting, which won’t help stocks.
Remain cautious. I’m a contrarian, and in the past have been good at catching some market bottoms (post Silicon Valley bank and just ahead of the Fed’s COVID response). I want to buy when there is panic out there. Not just talk about panic, but trading patterns and flows that scream out panic!
I don’t think we got that, and now that so many are betting we did, I think it leaves us very susceptible to not just getting back to the 200-Day Moving Averages in stocks, but to possibly break them, triggering some real panic!
Disclosure: Peter Tchir owns SQQQ and is short QQQ and will continue to trade around those based on his views.
