Discussion
This market is incredibly vulnerable to both rising rates and recession as a result of excess valuation and full positioning. Doesn’t matter which one materializes in the coming months, significant downside into September/October is odds on. And frankly, given the bizarre nature of what is going on right now, it would not at all surprise me if both hit the market at once (i.e. a breakout in rates right into the teeth of a recession). But we need to get through OPEX and TGA QE. OPEX flows will be supportive this week (they kept the market supported yesterday despite ugly internals), and TGA QE is likely to continue through EOM. My thesis has been that the market could rally into Powell in anticipation of dovish cooing about a soft landing, but as I wrote about this weekend I do not believe he is going to be dovish. So, once we get through OPEX the only support is TGA QE.
This breakout in rates is the real deal, and I think its impact overwhelms the TGA QE support to equities. Stocks just aren’t oversold enough to overcome the rates breakout and the end of OPEX flows. As such, I think this week is the time to layer on shorts with a hedge or some room to add a bit more if the market views Powell as a “clearing” event. But not right here.
This morning the market is retesting the lows of yesterday morning, and again VVIX is not up as much as VIX, which tends to be a very short-term bullish signal for the market. And HY CDX, while up decently, has not broken out above the highs from yesterday morning’s mini-puke.
This market is a MESS. % of stocks above their 50dma continues to slice lower as if through butter. VVIX is sticky. But I think you buy this morning’s dip ahead of OPEX flow-related rallying into Thursday/Friday. Then short and hold in size.
Exhibits
VVIX up less than VIX on this move lower this morning with HY CDX only at the highs of yesterday morning’s dip says the market has one last OPEX flow-related rally left in the tank.
But rates breakout is the real deal with UST 30s and TIPS 10s at new highs…
…Beneath the surface 50dma breadth continues to melt…
…And sentiment is not nearly oversold enough to overcome the breakout in rates and the end of supportive OPEX flows.