Market Journal: SPX Parabola Confirmed

Discussion

The core issue in markets right now is the fact the OIS market is priced for the Fed to cut Fed Funds to around 410 by December 2024. Markets have taken Waller’s “maintenance cuts” framework and run well past what the Fed has guided to…unless of course a recession is coming and therefore logic holds that the Fed would do more than maintenance cuts.

But cross-asset market signaling suggests a recession is unlikely, at least starting in early 2024 when the economy would be most vulnerable coming off the aggressive August-October FCI tightening. Therefore, cuts pricing likely needs to come out of the market, which I discussed yesterday.

In yesterday’s note I said that the fate of the Goldilocks rally depends on the interaction of investor positioning, labor market data, the price of crude oil, and FED rate policy, and that even if rate cuts get pushed out to 2H24 (which is very likely based on current UST market structure) Goldilocks can continue until investor positioning becomes too aggressive as long as the price of oil remains contained in the meantime.

That’s my own WOTE-based analysis. Now two key pieces of confirmative evidence.

#1: Cem Karsan

In a fabulous 1.5 hour Xwitter Space with Andy Constan, Karsan went into detail about the collateralization and options delta buyback flows likely to drive SPX up to the 4818.62 ATH by January/February. As I’ve discussed on these pages ad nauseam, I do not care about other market participants’ opinions unless they provide a very specific lens into an area of the market outside of my purview. Andy Constan is an unbelievable trader who I greatly admire and respect and have learned a ton from, but our views tend to overlap, as we are both very focused on government policy, so his tactical market view at any particular point in time is not of great value-add to my process. Karsan, on the other hand, has decades of experience as a market maker in the options world where he has developed a very specific expertise in the area of flows, an expertise that would take me an entire career to develop. So, when Karsan speaks, I listen. But most importantly, when Karsan’s market view aligns with my WOTE-based process, I don’t just listen, I take detailed notes.

The combination of breadth thrust signals piling up, the “guts of the stock market” saying recession is unlikely, benign CDX price action, Powell d/b/a Burns by allowing FCI to dramatically ease before the inflation genie is put back in the bottle, and Karsan’s flows analysis pointing to a bullish move in equities into January/February, is lead weight-heavy evidence pointing to an upcoming SPX parabola.

#2: Goldman

Second piece of confirmative outside evidence is a Goldman Sachs note on rate cut pricing out yesterday. Full note below, but in short: Now that inflation appears to be well on its way back to target, even if the Fed pushes back on the extent of current cuts pricing just the fact it’s so quickly open to maintenance cuts shows that it is highly likely to respond to a growth scare with more than maintenance cuts alone.

Second conclusion from Goldman’s note is that MAG493 is likely to outperform MAG7 even if the Fed pushes back because now some version of the “Fed Put” is in place if growth becomes an issue. With the “Fed Put” in place, some of the recession pricing currently in MAG493 valuations can be unwound, at least relative to MAG7.