Macro and Flows Update: March 2024 - e27

Summary

The video discusses the current market dynamics, emphasizing the impact of quarterly options expirations (Opex) on stock performance. It highlights the skew and open interest in structured products, leading to force buybacks at the index level. The speaker notes a shift in positioning in the tech sector, with call buying instead of put buying, creating gamma at the right tail. The video also touches on the macro trend of stagflation, the role of the Federal Reserve, and the implications of election years on market performance. It advises viewers to expect a bullish market environment and to capitalize on potential short-term dips for long-term gains.

Takeaways

• 📉 The speaker emphasizes the importance of the F 14th decline and its impact on Opex, suggesting a period of closely monitored market behavior.
• 📈 There is a notable skew in the market with significant open interest, particularly in structured products, which is driving a force buyback at the index level.
• 🔄 The tech sector shows opposite positioning with more call buying compared to put buying, leading to a gamma concentration at the right tail of the products.
• 🔩 The decay in certain names as big Opex cycles approach is resulting in underperformance, contrary to previous expectations of a tail counter move.
• 🌪️ After Feb 14th, the market is expected to experience controlled dips, which are considered viable entry points for investors.
• 📊 The upcoming CPI report is anticipated to be weak, potentially leading to sideways to down market action, which is seen as a digestion period for overbought conditions.
• 🔄 The speaker predicts a two-week window of potential market weakness and momentum, following the last Wednesday of Opex.
• 📈 Structurally, the market actions are seen as very bullish, with positive flows being a significant factor in this outlook.
• 🌐 The macro trend is identified as stagflation, with the speaker advising on trade strategies such as buying calls, precious metal calls, and Bitcoin calls in response to this environment.
• 🏛️ Political considerations are highlighted as a key influence on the Fed's actions, with a focus on supporting growth over inflation control.
• 🗳️ Election years, especially populist ones, are typically positive for the market, with the speaker encouraging aggressive long positions in such periods.

Q & A

What is the main focus of the macro and flows update video discussed in the transcript?

The main focus of the video is to discuss the quarterly Opex and its impact on market behavior, particularly the performance of certain stocks and indexes during the Opex cycle and the subsequent weeks.

What does the term 'Opex' refer to in this context?

In this context, 'Opex' refers to 'options expiration,' which is a financial term describing the date on which an options contract becomes invalid if it is not exercised or assigned.

How does the speaker describe the market's behavior during the Opex cycle?

The speaker describes the market's behavior during the Opex cycle as experiencing a solid push, with certain stocks and indexes showing a gradual underperformance following the expiration, leading to a potential buying opportunity.

What is the significance of the F 14th decline mentioned in the transcript?

The F 14th decline signifies a critical point in the market that the speaker and their team were closely monitoring. They were anticipating a decline as the last opportunity to hold positions tightly and be ready to bounce back.

What does the speaker mean by 'buyback force buyback from dealers at the index level'?

The speaker is referring to a situation where dealers are forced to buy back shares due to the market dynamics at the index level, often as a result of changes in skew and open interest related to structured products and options tied to them.

What is the 'mag 7 and tech complex' mentioned in the transcript?

The 'mag 7 and tech complex' likely refers to a group of seven major technology stocks or a similar complex of tech-related assets that exhibit specific trading behaviors, such as a high volume of call buying versus put buying.

What does the speaker suggest about the market's medium to long-term outlook?

The speaker suggests a bullish medium to long-term outlook for the market, with a focus on structured trades like long calls and risk reversals, and emphasizes the importance of being positioned for a market rally, especially in the context of a populist election year.

What is the 'stagflation' mentioned in the transcript, and how does it affect the market?

Stagflation refers to a situation where the economy experiences stagnant growth along with high inflation. The speaker mentions that during such an environment, the trade is to buy calls on precious metals, Bitcoin, and longer-dated calls on certain asset classes, while avoiding commodity investments and selling oil puts.

What is the significance of the election year in the context of the market's performance?

The speaker highlights that election years, particularly populist election years, tend to be positive for the market. They note that in such years, there is significant fiscal spending and monetary support, which are beneficial for risk assets.

What advice does the speaker give for investors in the short term?

The speaker advises investors to be agile and flexible, looking for opportunities to play from both sides of the market in the short term. They also suggest that after the potential digestion in time and price, investors should be prepared to take a more aggressive long position.

What is the 'unpinning of VA' mentioned in the transcript?

The 'unpinning of VA' refers to a shift in market dynamics affecting longer-dated Volatility (VA) instruments. The speaker notes that after a period of increase, dealers start to short these longer-dated VA instruments, creating a supportive environment for such assets.

What is the speaker's stance on the Federal Reserve's actions in response to inflation and growth?

The speaker believes that the Federal Reserve is prioritizing growth over inflation in the current environment. They note that despite hot inflation numbers, the Fed has continued to signal its intention to cut rates, indicating a commitment to supporting growth.

Outlines

00:00

📈 Market Analysis and Expectations

The paragraph discusses the market's performance in relation to quarterly Opex and the impact of F 14th decline on market trends. It highlights the importance of skew and open interest in structured products, and how they drive buyback forces at the index level. The contrast between mag 7 and tech complex positioning is noted, with call buying versus put buying speculative flows. The paragraph also addresses the decay in certain names during big Opex cycles and the underperformance of these names. It emphasizes the controlled dips post-Feb 14th and the bullish momentum expected until the Wednesday of Opex. The influence of weak CPI and market sideways to down action is mentioned, along with the concept of time as a crucial dimension in market analysis. The paragraph concludes by suggesting a potential two-week window for market digestion and momentum.

05:01

📊 Mean Reversion and Market Dynamics

This paragraph delves into the concept of mean reversion and its role in the market, especially when positive flows are absent. It discusses the market's upward trend despite negative flows and compares the current situation to previous successful trades. The paragraph also explores the idea of an 'unpinning of VA' after a two and a half months uptrend, which suggests dealers starting to short and creating support in longer dated Vault. It outlines the strategy for short term and medium to long term investments, advocating for long calls, risk reversal, and short stock positions. The macro trend of stagflation is also discussed, with advice on trading in such an environment, including buying calls on precious metals and Bitcoin, and selling commodity puts. The paragraph concludes with a discussion on election year dynamics and how they impact market performance.

10:02

🏛️ Political Influence on Market Trends

The paragraph examines the political factors influencing the Federal Reserve's decisions, particularly in the context of a Trump administration. It suggests that the Fed's institutional integrity may be challenged, leading to a focus on growth over inflation management. The paragraph also discusses the broader political and stability risks that could affect the Fed's actions. It then connects these political considerations to market trades during a stagflationary environment, emphasizing the importance of buying calls and precious metal calls while avoiding commodity investments. The impact of global conflicts on commodity prices and the potential benefits of deglobalization for certain assets like Bitcoin are also explored. The paragraph concludes with a broader perspective on the impact of election years on market performance, distinguishing between populist and non-populist election periods.

15:02

🚀 Optimistic Market Outlook for Populist Election Year

The final paragraph offers an optimistic outlook on the market for the current populist election year, predicting positive performance supported by fiscal spending and monetary support. It advises on aggressive positioning for long investments during potential buyback opportunities and market digestion periods. The paragraph reinforces the idea of a risk-on environment and suggests that momentum is likely to accelerate as the election year progresses. It concludes with a reminder to be adaptable and seek opportunities while considering the long-term investment strategy. The paragraph also includes a disclaimer about the video content not constituting investment advice and the responsibility of the viewer to determine the suitability of any investment strategy based on personal circumstances.

Keywords

💡Opex

Opex, short for operating expenses, refers to the costs a company incurs for its日常 operations. In the context of this video, it seems to refer to a specific time period in the financial markets, likely related to options expiration dates, which can have significant impacts on market behavior and investor strategies.

💡Skew

In finance, skew refers to the asymmetry in the distribution of asset returns. It measures the degree of imbalance between the tail and the body of the return distribution. In the video, skew is discussed as a factor that influences option pricing and the behavior of market participants, particularly in relation to open interest and structured products.

💡Buyback

A buyback, or share repurchase, is when a company buys back its own shares from the open market. This can be done for various reasons, such as to improve financial ratios, boost per-share earnings, or return capital to shareholders. In the video, the term is used to describe a market force where dealers are compelled to buy back shares, likely in relation to options and derivatives.

💡Gamma

Gamma in finance refers to the rate of change of an option's delta with respect to changes in the price of the underlying asset. It is a second-order Greek in options trading and reflects the curvature of the value of an option in relation to the underlying asset's price. In the transcript, gamma is discussed in the context of option trading and market dynamics, particularly how it affects the behavior of certain market participants.

💡Mean Reversion

Mean reversion is a financial theory that suggests that asset prices and historical returns will move back towards their average or 'mean' over time. It is often used as a strategy in trading, where investors buy assets that have performed poorly in the short term, expecting them to rebound. In the video, mean reversion is discussed as a factor contributing to market pullbacks and corrections.

💡Stagflation

Stagflation is an economic situation in which there is slow economic growth or stagnation, along with high inflation and unemployment. It is considered a difficult situation for economic policy because traditional remedies for inflation, such as raising interest rates, can exacerbate the stagnation. In the video, stagflation is mentioned as the current economic environment, influencing market behavior and investment strategies.

💡Volatility

Volatility in finance refers to the degree of variation of a trading price series over time as measured by the standard deviation of returns. High volatility indicates that a security's price can change dramatically in a very short time in either direction. In the context of the video, volatility is discussed as an increasing factor in the market, particularly in relation to short squeezes and market momentum.

💡Election Year

An election year is a period during which one or more political elections take place. In the context of the video, the election year is discussed as having a significant impact on market performance, with historical data suggesting that certain election years, particularly those during populist periods, tend to perform well.

💡Risk Assets

Risk assets are financial instruments or investments that carry a higher degree of risk compared to other types of investments, but also offer the potential for higher returns. They are typically more sensitive to market fluctuations and economic conditions. In the video, risk assets are discussed in the context of the overall bullish sentiment for the market, with the speaker suggesting that the current environment is supportive of such assets.

💡Macro Trend

A macro trend refers to a broad, long-term pattern or development in the economy, society, or the environment that has significant implications for businesses and investments. In the video, the macro trend of stagflation is discussed as a key influencer of market behavior and investment strategies.

Highlights

Discussion of the F 14th decline and its implications on market behavior.

Explanation of how Bon and charm flows are related to skew and open interest, affecting buyback forces.

Contrasting positioning in the mag 7 and tech complex, with a focus on call buying versus put buying.

Analysis of the Decay in performance of certain names as big Opex cycles are entered.

Assessment of the market's controlled dips and the expectation of bullish momentum post-Opex.

Weak CPI data's impact on market movement and the concept of time and price digestion.

Forecast of a potential two-week window for market weakness and momentum.

Structural bullish sentiment for markets despite short-term market corrections.

Identification of a bullish period similar to late October following market pullbacks.

Medium to long-term bullish outlook for markets, with a focus on strong action setup.

Discussion on the importance of the five-week cycle and its potential for market activity.

Explanation of the impact of mean reversion and macro news on market pullbacks.

Unpinning of Va and its implications for market positioning and momentum.

Strategic positioning for medium to long-term investments with a focus on long call and risk reversal.

Macro trend analysis pointing to stagflation and its impact on market behavior.

Trade strategies during stagflationary environments, emphasizing calls on precious metals and Bitcoin.

Political considerations and their influence on the Federal Reserve's policy decisions.

Historical analysis of election years, particularly populist elections, and their impact on market performance.

Outlook for the current election year, with expectations of positive market performance and support for risk assets.

Transcripts

hello and welcome back to another macro

and flows update

video here we are in March big quarterly

Opex when we've talked about we've been

pretty adamant about if we didn't get

that F 14th kind of

decline um that was the last shot and to

hold things very you know quickly and

closely ready to to bounce um on the

positive Vana and charm flows that come

from these quarterly

Opex exactly what we've seen right a

nice solid continued push as we enter

this Opex kind of two we and two and a

half week window in

particular

um again to refresh most of our

followers at this point understand but

Bon and charm flows are a function of

skew and there's big open interest and

big skew and big quy aexes with all the

Structured Products and everything tied

to them and that ultimately drives a

buyback a force buyback from dealers at

the index level but another thing we've

highlighted uh really for the last

several months is that there's an exact

opposite positioning in the mag 7 and

the tech kind of complex right so you

have a lot of call buying in that

complex as opposed to put buying

speculative flows um which has driven a

lot of gamma right at the fatter right

tail in those products as opposed to Fat

left tail in the indexes but now that

there is a Decay happening a Slowdown in

those some of those names as you enter

these big Opex Cycles you get an

underperformance of those names and so

we've seen a real Decay and not a tail

kind of counter move but a real slow

gradual underperformance of some of

those names that's what we've been

talking about for a little bit

now um we said after Feb 14th you can

get pullbacks but they're viable dips

it's not a fat tail it's not a b event

these are going to be more controlled

dips that we get here and we were also

adamant that really until uh Wednesday

so so yesterday

of Opex uh to really expect bullish

momentum and what have we started to see

well CPI was uh weak and it pushed up

and then we're kind of getting the

sideways to down action uh we would

expect that sideways to down action a

digestion in time and price we like to

call it again imagine you have a graph

time matters there's another dimension

here that really matters and you can

work out of an overbought situation

simply by going sideways so that that

digestion in time and price right a

buyable dip in time and price is

coming um we've said that and it started

really a couple days ago um but the

question is how much is it is it going

to get enough momentum to kind of

squeeze in this window as we talk about

these kind of these windows um to get

something a little bit bigger we'll see

a smaller Opex with less mod and charm

BuyBacks is coming more importantly than

that it's a five week cycle well five-e

cycle now that doesn't sound like okay

relative to four one week more it's

actually much much more important than

that because the windows and weakness

which are generally about a week in a

four-week cycle maybe a week and a half

go to almost twice that two and a half

weeks so significantly more room for

unpi and some interesting things to

happen here so I would really expect

another two weeks from last Wednesday to

really be the the window here of

potential digestion weakness and

momentum in these windows begets

momentum right there is tail ultimately

if things start to go but but we believe

structurally this is a very bullish set

of action that we're seeing for markets

the flows speak for themselves we're

going to get to that in a second but but

we are in a in a bullish um uh period

much like we talked about last uh late

October after that pullback uh November

December Jan you know uh November

December into mid January was very

bullish very positive time the year now

the backup years all the way till

September really six months or so um are

are very well set up for for strong

action in the context of that a very

short window here of digestion a buyable

dip is what we are looking for in price

and

time a couple of things that that are

push you know we we understand the beach

ball underwater that we've uh we've

talked about during these aexes right

but that leads to unnatural kind of push

in the context of otherwise what's been

poor macro news and this pullback is

really a function of mean reversion or

or

digestion um so that's mean reversion on

top of that you know I think it's

important to note that um you know

without those positive flows that mean

reversion can happen it's not that we

have a bunch of negative flows um unlike

what we've been seeing now for over two

months two and a half months this market

up V up which we called for you know W

is very much bottom as long D calls as

we talked about an incredible trade um

on the longer term shorter term periods

where it doesn't work it's not going to

work every day but over the long line

has work very very well we do believe

medium-term that will continue to be the

trade not just for a month or two but

for the next six months nine months for

for quite some time maybe even a year

that is the best trade as you enter the

last chapters of a of a rally as you

start to head into what's the final

trade which is the blowoff top which we

talked about that is the trade you know

I started the markets in 1998 that was

the trade in 19 1998 in 1999 into 2000

it was a good twoyear trade really um

until the blowoff top finally happened

and things ended volatility increases

into the end of markets and upside

volatility in particular increases

because these shorts and markets get

squeezed Hall writing which has been

overr becomes needs to be bought back

into rallies and Things become more

convex and unpinned that is the reality

that we are facing we've been talking

about this for months we have been

spoton with that

the other thing that I want to be uh you

know clear about now that we've got this

for some time two and a half months

we're starting to see for the first time

you haven't heard me say this in two

years an unpinning of va what does that

mean longer date inol meaning two three

four five six months out because it's

been going up for two and months now

dealers are starting to get short that

and what that's dealing doing is

creating a a nice amount of support in

that longer dated Vault now shorter

dated Vault because other structure

elements because of again the March Opex

being high and the Opex is behind it

being low has still had Supply and that

is still relatively well contained but

the tail the back end of the curve the

stuff that's less liquid has less Supply

and that's an important new Dynamic that

can begin to get this ball up market up

and V performance feeding upon itself a

bit of momentum because of the

positioning there um so we like calider

expansion into what we think will be a

digestion into the downside in the short

term short dated Market down V down so

puts in the short term will perform

quite poorly short put short stock

should be quite good there but in the

more medium to long term We Believe

it'll be a more neutral uh move involved

um with with Market you know hard Delta

is probably being just as good if not

better than than puts versus calls there

but not nearly as profitable as short

dated put short long dated call long

short stock so that's really the

position you want to have long call and

risk reversal or CER and then short

stock in the short turn the next couple

weeks two to four weeks depending on

action um but then again long deltas and

long beta calls because the next move

after this digestion will be market up

volup against um in the medium

term again long dated calls uh are the

story the macro trend is still

stagflation again three months ago

everybody was looking at each other they

were looking at me saying stagflation

what stagflation we're seeing a soft

Landing we said that word stagflation

Breathe It in the Air that's all we've

seen since then six numbers five of

which in the last six numbers have been

hot numbers relative to

inflation why is that why is that why do

the mark continue to Rally in the face

of that because the fed and the treasury

and government rid large has been very

clear that in environment where they are

the FED is in a box they have to deal

with both inflation and weak growth

which is what we're starting to see they

are going to choose to to support growth

they are not going to worry about

inflation in this environment they are

not vulker they are going to be Burns

and they've been very clear since

December in their surprise announcement

that that would be the case and they

have continued despite the hot numbers

to stand by that cutting lean not just a

pause but that their next move will will

be a cut the fact that we still have two

cuts in there despite five out of six

numbers being significantly harder than

expected is notable they are telling you

that they are bringing liquidity and

they're going to provide liquidity no

matter what this year why why are they

doing that politics that's a dirty word

but it's true I don't mean it like

they're about they're partisan I mean

that that Powell and other ENT People

BET based on their incentives they're

incentives they have a choice to make

deal with inflation or deal with growth

there's no right answer per se they are

choosing growth because their legacy

depends on it uh there is a high

probability that Trump and the FED not

Trump that the the fed and power will be

under pressure under a trump

Administration that the institutions of

the FED which PO is supposed to protect

will be under pressure by

Trump um the institutions of the FED are

not the only ones at risk uh you know

there is political growth and stability

that that at the current uh in the

current structure uh could arguably be

um at threat and so these are things

that that again

non-politically that power um is

choosing uh to support as opposed to um

inflation dealing with inflation what is

the trade during a stagflationary

environment

we know station Environ we've talked

about this environment um the trade is

to to buy calls to buy precious metal

calls to buy Bitcoin calls and longer

dated calls in um in in certain uh asset

classes particularly hard assets that

has been the trade um but not to buy at

all Commodities to be clear you want to

sell oil puts you want to sell commodity

puts because those will be support Ed

because of the conflict globally between

countries and the underpinning of

commodity prices that H are are uh

protected by sources of power um so

growth will be slow that's what happened

in St inflation area but Commodities

will be underpinned despite that low

growth by the suppliers of those

Commodities and precious metals um uh

and other things that that mimic at at

times like Bitcoin or other things um

will be much more volatile due to uh

cross-governmental deglobalization

forces um but uh ultimately will be the

most uh the biggest benefactor of the de

globalization and the risks due to

inflation so uh those are all things to

keep in mind the last most overarching

thing for the next not just medium-term

but more longer term the next nine

months or a

year is election year news people talk

about the election year you hear all

kinds of opin and some people say oh the

election year if you look at all the

data it's not that strong depending on

how you cut the data um the last since

1928 performance has been about 11% a

year above Trend you know pretty high

win rate 83% 19 of 23 years have been

positive of election

years but a lot of people look at that

data and say well you know it's certain

years it's certain you know it's not as

positive as people say if you cut the

data slightly different it doesn't look

as great I think the biggest takeaway

is that all election years are not

created equal if you look at populace

periods which I have talked very clearly

about how we are in now right what we

are in now which are really five

election periods uh in the 60s and 70s

64 68 7276 in

1980 as well as the 2020 election which

we recently had if you look at all of

those six

election there is an incredibly positive

now 100% of those years are positive

double digit returns for all of them and

an average return of

21% now think about that six of those 23

elections which are populist elections

are all positive all positive double

digits and 21% returns that's pretty

remarkable but what does that mean for

the other years that means for all the

other years combined the return is 5%

So Below par in other election years

other than that and as I've talked about

1968 to 82 the market went nowhere in

nominal terms so take out the five the

four start elections during that

period which combined by the way along

22% average returns 100% positive and if

you take those during that period you

take the those years out every other

year with a few with one exception is

negative and the average returns are

negative 10% per year for all the other

10 years of that 14-year period so

populous periods are weak not just in

real terms but even nominally incredibly

weak in real terms outside of election

years that makes sense what happens

during election years what happened in

2020 massive fiscal spending massive

monetary support massive liquidity

injections um which are very positive

for risk assets and ultimately those

other years you have the give back and

that's what we would continue to expect

so we are bullish of this year this is a

populist year of Elections we believe it

will be positive we are up now the

Market's up about 6 and a half 7% We

Believe into a even small 2 3% pullback

you want to be aggressively looking to

get long into a year like this the

market is telling you the FED is telling

you where liquidity stand in this year

and regardless of the risks you are

going to have positive support for risk

assets that said we have a small window

here for potential buyback uh for for

this potential digestion in time and

price and this is an opportunity for you

to get back in um and and play from the

long side as we have the last three four

weeks

um particularly as we get into the

election really the next after the next

couple months that momentum should only

accelerate into We Believe That

September uh to November

period so as always be water be flexible

be looking for opportunities here to

play from both sides of the short term

But ultimately uh this is a risk on

environment um for the year and after

this kind of digestion uh you know be

water but but take your shot wishing you

the best until next week next month uh

be water take care

this does not constitute an offer to

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