Yes, we're back with our competition today.
So let's go through a quick thread of what's been going on in the markets during the past few weeks,
and whether the 10% 🐻 rally is over or not...
+ some cool new stats from the #BASON
🧵👇
So let's go through a quick thread of what's been going on in the markets during the past few weeks,
and whether the 10% 🐻 rally is over or not...
+ some cool new stats from the #BASON
🧵👇
https://twitter.com/OraclumIS/status/1556980169713352705
1/
Despite having yet another high inflation print on July 13th (9.1% CPI),
and the Fed hiking another 75bps two weeks later bringing the FOMC rate to 2.5%,
the markets rallied to over 10% the past 4 weeks.
Why?
Despite having yet another high inflation print on July 13th (9.1% CPI),
and the Fed hiking another 75bps two weeks later bringing the FOMC rate to 2.5%,
the markets rallied to over 10% the past 4 weeks.
Why?
2/
Well, investors were hooked on a so-called Fed pivot (and a potential ‘soft landing’)
Powell said that by raising rates to 2.5% they’ve reached a neutral level of interest rates.
This was seen as a clear sign of relief.
Well, investors were hooked on a so-called Fed pivot (and a potential ‘soft landing’)
Powell said that by raising rates to 2.5% they’ve reached a neutral level of interest rates.
This was seen as a clear sign of relief.
3/
In theory, neutral is the equilibrium rate for which the economy achieves full employment
In practice, from this point on, further hikes are considered restrictive monetary policy
Powell also said the Fed will be data-oriented in making their calls on future hikes
In theory, neutral is the equilibrium rate for which the economy achieves full employment
In practice, from this point on, further hikes are considered restrictive monetary policy
Powell also said the Fed will be data-oriented in making their calls on future hikes
4/
One such important data point was the employment number last week,
where the US labor market continued its strong job performance.
This was good news for the economy, but bad news for the Fed - the wage-price spiral is still going up.
And no, rates are not at neutral.
One such important data point was the employment number last week,
where the US labor market continued its strong job performance.
This was good news for the economy, but bad news for the Fed - the wage-price spiral is still going up.
And no, rates are not at neutral.
5/
Also, the bond market reaction was significant.
The 2-year yield spiked after the jobs report, and we now have an even deeper 10Y2Y inversion (over 40bps by now, biggest since 2000).
Also, the bond market reaction was significant.
The 2-year yield spiked after the jobs report, and we now have an even deeper 10Y2Y inversion (over 40bps by now, biggest since 2000).
6/
Remind yourself why this is the most important recession indicator:
Remind yourself why this is the most important recession indicator:
https://twitter.com/wolf_vukovic/status/1509908462397915141
7/
Another important data point will be the new inflation print coming out tomorrow
To see what to expect, keep in mind how this number is being calculated: it’s the sum of 12 monthly price changes.
The table below shows the monthly CPI data
Another important data point will be the new inflation print coming out tomorrow
To see what to expect, keep in mind how this number is being calculated: it’s the sum of 12 monthly price changes.
The table below shows the monthly CPI data
8/
The read for July 2022 will remove the 0.9% point from July 2021 and replace it with whatever we got last month
Subsequent inflation prints will remove 0.5%, 0.3%, and 0.4%, replacing them with new 2022 data.
Do you expect inflation to start going up or down?
The read for July 2022 will remove the 0.9% point from July 2021 and replace it with whatever we got last month
Subsequent inflation prints will remove 0.5%, 0.3%, and 0.4%, replacing them with new 2022 data.
Do you expect inflation to start going up or down?
9/
Furthermore, the technical trend is still downward,
and many analysts are suggesting we are reaching an overbought situation (like we had in March this year).
For example:
Furthermore, the technical trend is still downward,
and many analysts are suggesting we are reaching an overbought situation (like we had in March this year).
For example:
https://twitter.com/MrBlonde_macro/status/1554930654890151945
10/
On this I recommend the following read by @MrBlonde_macro
On this I recommend the following read by @MrBlonde_macro
https://twitter.com/MrBlonde_macro/status/1555234764495458305
11/
Obviously, this doesn’t need to mean anything,
but do keep in mind that big players in the markets love to watch out for technical inflection points (both overbought and oversold like we had in June).
Just a thought.
Obviously, this doesn’t need to mean anything,
but do keep in mind that big players in the markets love to watch out for technical inflection points (both overbought and oversold like we had in June).
Just a thought.
12/
But it’s not just the technicals.
Overall, not much has changed structurally since I wrote this:
But it’s not just the technicals.
Overall, not much has changed structurally since I wrote this:
https://twitter.com/wolf_vukovic/status/1538899547019087872
13/
I closed most shorts back then (June 18th),
kept half of my SPY short position with a large SPY call hedge (so as to be net neutral),
but will reopen a few new short positions now. With stop-losses and hedges ofc.
I closed most shorts back then (June 18th),
kept half of my SPY short position with a large SPY call hedge (so as to be net neutral),
but will reopen a few new short positions now. With stop-losses and hedges ofc.
14/
Now, how can the #BASON be helpful here?
As always it can tell us what’s gonna happen by the end of each week, and help us seize a potential trend reversal.
We had time to run through the data and found some very interesting things.
Now, how can the #BASON be helpful here?
As always it can tell us what’s gonna happen by the end of each week, and help us seize a potential trend reversal.
We had time to run through the data and found some very interesting things.
15/
For example, we found that a simple long-short strategy works really well for all indicators we have predicted.
But it works best for the VIX.
For example, we found that a simple long-short strategy works really well for all indicators we have predicted.
But it works best for the VIX.
16/
We never really took the VIX predictions too seriously since its errors were quite substantial each week (due to its very high volatility).
You can see this in its distribution graph and its qq-plot.
We never really took the VIX predictions too seriously since its errors were quite substantial each week (due to its very high volatility).
You can see this in its distribution graph and its qq-plot.
17/
But if we just focus on direction instead of precision,
where we go long VIX if its Friday BASON prediction is higher than its Wednesday open, and short vice-versa,
we get a stunning 149% return over 27 trading weeks!
But if we just focus on direction instead of precision,
where we go long VIX if its Friday BASON prediction is higher than its Wednesday open, and short vice-versa,
we get a stunning 149% return over 27 trading weeks!
How's that for a signal :)
Thanks for reading!
As always, our full text is in our newsletter, and the competition survey link is inside.
Feel free to share & subscribe :)
oraclum.substack.com/p/the-end-of-t…
Thanks for reading!
As always, our full text is in our newsletter, and the competition survey link is inside.
Feel free to share & subscribe :)
oraclum.substack.com/p/the-end-of-t…
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