1/x All’s quiet on the western front... Gary 🦍 is well rested after the weekend & vanna after a Mon morning zoom call will be back to the beach until 1/29. As predicted several days ago the countertrend strength of growth names have and should continue to provide support after a
2/x strong run for valué names since Sep. This ST trend, as noted, is a fxn of over positioning paired with likely coming surges followed by 1 more round of lockdowns, as the hammer & the dance continúes w/ an increasing narrative surrounding the Irish covid variant in the month
3/x to come. This, plus growing frustration surrounding what’s currently a slow vaccine roll out & growing opposition to the size of Biden’s $1.9 tril stimulus deal should only add to the contra reflation thesis. Ultimately, this should end up being simply a refresh of what we
4/x continúe to believe will be a secular LT trend to higher rates & strong DCF companies. But this ST rebalancing of positioning & dampening of the inflation response will likely give way to a perception of a Goldilocks economy, as more checks roll in & we march slowly towards >
5/x vaccination levels w/less ST fear of a strong LT rates response. This should lead to a healthy continued VRP to digest in the front of the curve. Despite this, & the continued sideways digestion this week, & likely following grind higher 1/29-2/17, longer dated fixed strike
6/x IVol should continue to bounce off of a 20 VIX floor, as there are simply no longer enough Vol sellers in the back, after most were washed out in March. & there has now been the addition of massive new buyers in the form of retail call buyers & the growing popularity of IVol
7/x exposure as a replacement to bonds in a potentially inflationary trend, NTM the fear of equities at record valuations. In the ST, this makes for a great risk reward for calendar call spreads in the indices & dispersion trades once again. This is especially true given the
8/x onslaught of earnings season this week,as well as greater clarity on new policy directives imbedded in the revealing of Biden’s new stimulus package. I’d expect more continued idiosyncratic moves based on this news with very muted index movement. There’s still a brief window
9/x of muted vanna through 1/29, but having BTD on Fri to flatten exposure on the dip to 3822.75, we’ll continue to cautiously add exposure at our levels as we digest the overextended rally from early last week in what is a seasonally weak time w/overextended positioning.
10/10 Ride any longs with a stop at the rising 1 stdev down of the 20 day on close & funding skew & convexity with local IVol, aware that when this market does finally come untethered in the months to come, that it’ll be due for a sharp correction. Good luck! 🍀
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1/x Sometimes you are just too close to something to see it properly... So, today you get my wide angle lens. This market has had every reason to give us a correction and technical break the last 1.5 weeks. It’s come on the back of a monster run since September. It’s had its
2/x biggest wall of worry narratives chopped down 1 by 1. Sentiment & bullish positioning is at all time highs. Hedging activity is low. Breadth has deteriorated. Vanna’s been on an extended vacay. HF stress has recently increased. There’s significant economic, monetary policy, &
3/x global trade uncertainty.... Yet 1 thing & 1 thing alone has kept this market tethered, resulting in a week long digestion, that should continue. GARY 🦍 (dealer long gamma positioning). W/ the Fed meeting tomorrow, which is historically bullish. And EOM/BOM flows, which also
1/x I’m going to do something a little different today... everything from yesterday’s note still completely applies. There is only one important new factor to contemplate. Citadel & Point72’s bailout of Melvin Capital...This was undoubtedly done in part due to the preferential
2/x terms that our 2 beloved 🦈’s received. But I think it would be a mistake to think that Ken & Stevie pulled the trigger as quickly as they did solely based on terms. After all, the term benefits are probably relatively small relative to 2 more important considerations that
3/x they clearly pondered. 1)what the immediate effects on their current books would be if they didn’t do the transaction vs if they did do it & 2)how they could use their ‘activism’ to proactively profit off of the deal. Given that the deal came together quickly, this tells me
1/x Going to keep it super short and sweet tonight...The window is still open. As laid out yesterday, today was an inside day where we were able to benefit from converting our short hard deltas to short calls and long downside calendars (soft deltas) and collect some theta. We
2/x also got a significant unwind of the reflation narrative, that we we called and were able to monetize. But it is important the market never made it to the 2std dev up of the 20 day, & stalled at our 3853 level all day. This lack of thrust paired w/ a potential overnight break
3/x of our ***3833.5 level, is a reason for potential concern on a Friday w/Vanna still at the beach. Pair that with the anecdotal evidence of risk off we’re seeing in BTC, & signs point to continued defensiveness until EOD. As stated yesterday, as long as Gary is able to hold
1/x So, if you’ve been scratching your head about the recent countertrend DXY strength & wondering if it has legs,& it seems like the cyclical rotation hasn’t been trending as strong recently, & your Spidey-sense is telling you there’s a disturbance in the force, you’re not alone
2/x If you’re wondering what might cause this market to melt up & get us to a more Goldilocks scenario in the midterm w/out overheating, look no further than Ben & Randy’s spot on analysis here...It seems the reflation rotation, & all its trappings epsilontheory.com/uk-variant-sar…
3/x might be in for a hitting of the pause button. Unlike them I could see this ultimately being a bullish wall of worry to climb, likely after a brief initial pullback, as it could slowdown the climb in LT rates & help to alleviate ST inflation fears, ultimately pushing off the
1/x The time is now...As I’ve said before, if there is 1 thing I stress it is that I don’t know everything. I understand several important inputs better than most. I understand well 50% of the daily flow equation, & can place reliable bands around another ~25%. This imperfect
2/x info still allows me to predict movement w/a high degree of accuracy. That said, when markets react counter to my data, that means factors outside if my viewfinder are having a very strong effect. So much so that the other 50-75% of flows that are known are being overwhelmed.
3/x When this is the case, the correct reaction to this deviation isn’t to stubbornly fight this new info, but to watch & track the divergence respectfully for confirmation of thrust. Broadly antithetical price strength @ that strength in these circumstances is meaningful & tells
1/ Ch-ch-ch-ch-changes (Turn and face the strange)... as futures, sit pinned @ an odd elevated morning perch awaiting Janet Yellen’s confirmation hearing & her call for the new admin to ‘act big’...this narrative has markets on high. But the truth is that it’s actually just Gary
2/x behind the curtain, pulling the usual levers. Until Vixperation on Wed, it‘ll be nearly impossible to break the IVol oversupply. This pinning of IVol was so strong on Fri that despite a peak to trough drop of nearly -2% in SPX, fixed strike straddle were down across the board
3/x & particularly decimated in the very front of the curve. IVol particularly in the 30 day range is showing dramatic signs of oversupply relative to the rest of the IVol surface, giving a nod to the Vix strip driving the compression. Even during windows of vanna weakness as we