Introduction
Market is shooting my targets I marked on last week.
The US economy continues to show extreme strength, growth and consumption are stable, but stagflation risks and the cost of living are becoming increasingly threatening, while the Fed is reacting too slowly.
Companies are increasingly passing on elevated costs (for example, tariffs) to consumers. Core inflation was above 0.3% month-over-month for the fourth consecutive time, which is very high on an annualized basis. It is not just energy (oil, gasoline) getting more expensive, but also services and durable consumer goods. Manufacturing data also show that purchasing and selling prices are rising drastically, compounded by a jump in the prices of chemicals and agricultural commodities. The fact that the Fed is keeping interest rates steady (which are moreover too low, as I have shown before) means they are effectively carrying out continuous QE, seeing as real interest rates are falling.
This will later lead to a rate spike, which will be a massive shock. The bond market is mispricing the situation entirely. They are only pricing in the momentary war and inflation fears, but not economic growth and future supply shocks. This once again increases the right-tail risk in yields.
I remain long yields, long VIX long-term, long energy and long healthcare, and speculatively selling front-end vol in stocks, doing only speculative momentum trading there, but not too much. An overshoot to 7450 is possible if Dow/SPX correlation holds on.
Realized volatility has reached the average. It has about 1% left to drop, the VIX is aggressively suppressed, and the structure is unstable. In my opinion, this week is not suitable for upside-FOMO, but not necessarily for shorting either. The speculative weekly edge with the highest probability lies in the downside gap fill BTD strategy. Shorting should only be done very carefully.
Last week the market hedged the downside, but spectacularly did not believe in the gap fill. Behind the paywall, I will examine what the market is betting on this week.
This is what the trend lines look like:
Any correction above the 6822.75 SPX level is healthy and necessary to build structure. The question is whether the market is pricing liquidity down there…
Let’s scrutinize the weekly positioning…
