Market fear evaporates
Last time...
Time for the "last time VIX was here SPX traded at all time highs" crowd to start chanting. This is not how volatility works, but one thing is sure, "they" are sucking fear out of this market...which opens up great opportunities to use options for directional trades.
Source: Refinitiv
Sugar rush
Equities loving the expectations of cuts...
Source: TS Lombard
2024 estimates holding up very well
EPS revisions are running above historical trend. This is great backing for the bull.
Source: UBS
Double digit drawdown
Sounds like a fantasy, but that is what UBS expects sometimes in 2024, although they see another squeeze higher first. They write:
1. Stocks typically drop about 6-7 months before a recession.
2. The range of declines varies from 0 to 15 months before a recession.
3. P/E ratios are currently 2-3 points below their 2022 highs.
4. Given the strong economic backdrop, we anticipate more short-term upside.
5. However, we also anticipate a double-digit drawdown at some point in 2024.
Volatility in revisions
58% of currencies are breaking sigma thresholds, the highest level post-COVID.
Source: JPM FX
The sentiment / flow chart that makes you go hmmm....
Risky vs. safe assets fund flows. Does not look like a top. What's behind this?
Source: EPFR
No even extreme
Greed is back in fashion, but note we are not at extreme levels yet. More people need to be sucked in it seems...
Source: CNN
Vulnerable to a stock sell off
Downside convexity remains the "new" main risk for the CTA crowd. That goes for global as well as US stocks. Big down scenario has the CTA crowd potentially selling more than $200bn of global stocks.
Source: GS
Index options trading
1. The main focus in index volatility is the prevalence of dealer long gamma, which has kept realized volatility low.
2. Despite multiple upcoming catalysts, such as CPI/FOMC, the end-of-week SPX straddle is inexpensive.
3. Short-dated upside positions in SPX are preferred due to the potential for a continued squeeze higher...note that gamma positioning is far less dramatic than it is on the downside. (GS index trading desk)
Fed - what inflation to target?
A few bullets via TS Lombard's Blitz worth considering:
1. Pre-Covid, the Federal Reserve primarily focused on Core inflation, neglecting the distinction between goods and services.
2. Post-Covid, there is a shift in approach, where the Fed is now concerned about the difference between inflation in goods and services.
3. Core inflation over the past three to six months has been around 3% to 3.5%, suggesting the need to lower the funds rate to 4.5% based on a modified Taylor rule to prevent an economic slowdown.
4. The challenge lies in the divergence between core goods (2.5% annualized drop) and services (6% annualized increase), which makes it difficult for the Fed to decide on interest rate cuts.
Source: TS Lombard
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