Market Journal: NFP Game Plan

More correction is required, but the battle between Financial Crisis 3.0 and positive structural flows looms.

Discussion

There’s a lot going on at the moment, and my short term analysis of the market is evolving pretty quickly. So, I feel the need to reiterate…

The point of this market journal is three-fold: 1) manage tactical short-term positioning, 2) monitor the conditions driving medium-term positioning, and 3) absorb thoughts and observations emanating from my inherent fascination and obsession with markets. The “not investment advice” disclaimer is applicable across WOTE, but most importantly to the Market Journal section. Everyone’s positioning, strategy, and personality are all different, so I’m never going to write about how I’m positioned or trading around anything I’m writing about. This is exactly what I have stated it is: a live journal of digital diarrhea with varying degrees of usefulness to an outside observer. It’s just helpful to me to be able to process what I’m seeing via writing.

On to the market…

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I can’t shake the nagging feeling that no matter how bullish underlying market structure is looking out to July 19 opex to SPX 4600/4700, the sentiment and positioning overhang needs to be worked off before that rally commences. This breakout in rates across tenors and structures is the perfect catalyst for a correction, and after perhaps some positive action in response to NFP tomorrow morning, I would not at all be surprised to see SPX turn lower into EOD.

Two members of my flows & liquidity “team” (“@jaredhstocks” and “@newriverinvest”) weighed in on tomorrow’s NFP via Twitter. Jared’s commentary on flows into VOL puts confirmed what I saw through the day, that being VIX and VVIX sliding lower in pretty decisively not-bearish price action; while New River’s data show systematics on the edge of flipping into de-risk mode, with NFP clearly key.

Bottom line: my expectation for tomorrow is an initial positive SPX reaction to NFP on a better-than-whisper print (whisper circa 270k), then a resumption of the sell-off with SPX and rates turning red and triggering New River’s systematic de-risking signals. But as always, real-time market conditions will impact my interpretation of events and likely market direction. Just laying out the thought process ex ante.

Looming over this very short term analysis is the battle between a brewing Financial Crisis 3.0 and structurally positive VOL flows into July 19 opex. I’m going to be very strict in identifying the bottom of this correction given the problem the financial system appears to have with TIPS 10s around 180 bps, as a 2-3% correction could very quickly morph into a larger 8-10% move lower.

Exhibits