Cem Karsan on September Seasonality & Election Volatility

Summary

In this discussion, volatility advisor Chen Kon shares insights on market seasonality, emphasizing the importance of options expiration cycles over calendar months. He suggests that the market is poised for a strong end-of-year rally, driven by factors like buybacks and leverage. Kon warns of potential challenges in January if the market surges too high, recommending long-dated call options for leveraged gains. He also highlights the impact of policy decisions like immigration on inflation and the economy.

Takeaways

• 📅 Seasonality in markets is more related to options expiration cycles than calendar months.
• 🔄 Post-expiration, volatility tends to decrease, which can signal a positive market trend.
• 🚀 Historically, markets have reacted positively after significant Fed rate cuts, similar to the post-December 2019 scenario.
• 📈 The market's strong performance year-to-date, coupled with buybacks and leverage, can lead to significant upward movements with relatively small capital injections.
• 💹 The incremental capital required to move the market has significantly decreased, indicating a highly leveraged environment.
• 📊 Low trading volumes during the last two months of the year can lead to significant market movements.
• 🗓️ December and January typically see the largest options expirations, which can create volatility and market skew.
• 📉 The time compression before year-end, coupled with large skew and volatility, can drive significant market flows.
• 🏦 The Fed's policy actions, such as rate cuts, can have a substantial impact on the economy and market direction.
• 📈 An end-of-year rally could be setting the stage for a potential market peak in January, suggesting caution for investors.

Q & A

What is the primary driver of market seasonality according to Chen Kon?

Chen Kon emphasizes that market seasonality is primarily driven by options expiration cycles, not by calendar months.

What does Chen Kon mean by 'Von and charm flows' and how do they affect the market?

'Von and charm flows' refer to the flows related to volatility and options positioning. Once these flows kick in without significant downside volatility, it signals a bullish market trend, as seen in the last two weeks.

How does Chen Kon compare the current market situation to the Federal Reserve's actions in December?

Chen compares the current market to when the Federal Reserve unexpectedly cut rates in December, causing the market to surge for three months. He suggests that similar dynamics could be at play now.

What impact do large buybacks and re-leveraging have on the market?

Chen points out that a significant amount of buybacks, about $50 trillion in the year, coupled with re-leveraging, pushes the market higher. He highlights the outsized influence of even small amounts of money in today's markets.

Why does Chen believe it is risky to short the market in the final two months of the year?

Chen argues that between November and January, there are high levels of volatility due to major expirations and buybacks, making it dangerous to short the market during this period.

What is Chen's perspective on the upcoming election's impact on market volatility?

Chen sees the election as a significant event for market volatility, with the potential for dramatically different outcomes. He recommends sophisticated investors to consider trades around this volatility.

How does Chen view the Federal Reserve's influence on the market and economy currently?

Chen explains that the Fed's current policies, such as holding down interest rates, support the economy. Lower rates stimulate real estate demand, contributing to positive economic surprises.

What does Chen predict for inflation in the coming months?

Chen believes inflation will come in higher than expected due to structural factors. He advises keeping an eye on inflation indicators such as TIPS and breakevens.

How does immigration policy relate to labor inflation, according to Chen?

Chen explains that open immigration policies help suppress labor inflation. If immigration policies become more restrictive, labor inflation could rise sharply, especially if the economy accelerates.

What warning does Chen give about the market in early 2024?

Chen cautions that while the market could rally through January, reaching levels like 6,000 or higher, a major problem may arise by mid-January due to volatility and speculative action. He advises being cautious after the initial rally.