Macro and Flows Update: May 2024 - e29
Summary
TLDRIn this episode of the Macro and Flows Update, the host discusses the positive market trend from May 1st to 15th, driven by a supportive Federal Reserve and CPI. The market is well-supplied, with low volatility and liquidity provided by measures like Freddy Mac and Fannie Mae rule changes. The 'summer of George' is anticipated, characterized by a consistent upward market trend with limited upside due to well-pinned index levels. The speaker predicts dispersion and massive rotations in the market, suggesting a focus on hedge fund positioning and social media narratives. The big picture remains higher for longer with structural inflation, and the speaker anticipates a Q4 rally into and out of the election, with potential targets of 5575 to 6000. The advice is to play long, buy dips, and sell rips in this low volatility market.
Takeaways
- 📈 Positive Market Trend: The speaker anticipates a positive and supportive trend in the market from May 1st to May 15th, which has been realized.
- 💹 Fed and CPI Impact: The Federal Reserve's actions and Consumer Price Index (CPI) were key factors for market direction, with neutral to positive outcomes leading to significant market strength.
- 🌊 Summer of George: The term 'Summer of George' refers to a period when market volatility is well-supplied, leading to a consistent, low march higher with limited upside.
- 🔑 Low Volatility: Implied volatility is very low, making it easier to hedge and indicative of a market that is likely to see dispersion and rotations.
- 🔄 Market Dispersion: Expect dispersion in the market due to the pinning of the index, which historically has led to low correlations and single-name stocks moving independently.
- 🎯 Hedge Fund Positioning: The positioning of hedge funds will be a key indicator for potential market rotations, with long and short positions dictating potential supply and demand.
- 📊 Meme Stock Influence: Social media and platforms like Wall Street Bets could influence market movements, particularly for stocks that are poorly positioned.
- 📅 Upcoming Events: Key dates such as the Fed meeting on June 12th and the end of the quarter are expected to influence market volatility and direction.
- 🚀 Structural Inflation: Despite a temporary lower inflation number, the speaker believes that structural inflation will continue to be 'sticky' and rise as the market and economy perform well.
- 📉 Potential Pullback: There may be a market pullback in August before a rally into and out of the election in the fourth quarter.
- 💰 Investment Strategy: The speaker suggests focusing on dispersion and rotation rather than beta, and advises buying dips and selling rips in a low volatility market.
Q & A
What was the predicted market trend from May 1st to May 15th based on the last macro and flows update?
-The predicted market trend was positive and supportive, with expectations of a significant strength rally back if the Federal Reserve's actions and CPI were neutral to positive.
What does the term 'summer of George' refer to in the context of the market?
-The 'summer of George' refers to a period when the market is so well supplied with volatility (V) that dealers are forced to buy when the market goes down and sell when it goes up, leading to a limited upside despite a positive trend.
Why does a well-supplied index V lead to low stock correlations?
-A well-supplied index V pins the market, causing stocks to move in the opposite direction when the index is stable. This movement due to idiosyncratic risk can lead to a breakdown of correlation as the market forces other stocks to compensate for the stability of the index.
What is the significance of implied volatility being well supplied in terms of market behavior?
-When implied volatility is well supplied, it creates dispersion in the market, leading to massive rotations and potential arbitrage constraints where the indexes have to add up to the single names, causing a double effect on stock movements.
How does the positioning of hedge funds and other entities influence market rotations and potential investment strategies?
-Market rotations and investment strategies can be influenced by the positioning of hedge funds and other entities. If these entities are massively short, it presents buying pressure into those products, and vice versa, suggesting that playing the opposite of their positions could be beneficial.
What role do social media and platforms like Wall Street Bets play in influencing market movements according to the script?
-Social media and platforms like Wall Street Bets can push narratives and influence market movements, particularly for names that are poorly positioned for other entities. This can lead to short-term, meme-driven runs that can affect stock prices.
What is the expected impact of the Fed meeting on June 12th on the market trend?
-The Fed meeting on June 12th is expected to lead to a slow grind to sideways action in the market, potentially adding to the volatility compression and influencing the market's direction post-meeting.
What is the outlook for inflation and its effect on the bond market according to the script?
-The outlook suggests that inflation will continue to bounce and be sideways to up from expectations. This could lead to the bond market, which has had a bit of a pullback, to slowly grind higher.
What are the potential market movements expected in the fourth quarter leading up to the election?
-The script suggests a potential Q4 rally into the election and out of the election, with numbers to look for around 5575 to 5600, and then possibly seeing all the way up to 6000 after a potential pullback in August.
What is the recommended strategy for investors in the context of the expected low volatility (V) market during the summer?
-The recommended strategy includes focusing on dispersion and rotation more than beta, buying dips, and selling rips. It also suggests playing from the long side but trading in a very low V market, and considering owning significantly longer data calls, possibly even in 2025.
Outlines
📈 Market Trend and Economic Factors Overview
The speaker provides an update on the market trends as of May 16th, noting a positive and supportive trend from May 1st to May 15th. The Federal Reserve's actions and CPI were key concerns, but as long as these factors remained neutral to positive, the market was expected to rally significantly. The speaker refers to a 'summer of George', a period of well-supplied volatility (V), leading to a consistent upward market trend with limited upside due to dealers' buying and selling patterns. The discussion also touches on the potential for dispersion in the market due to the pinning of the index V, which historically has led to low correlations and single-name correlation being lower than ever before. The speaker suggests that the path of least resistance is higher, based on V charm flows, stock buybacks, and market machinery that naturally pushes the market higher.
🔄 Anticipated Market Rotations and Hedge Fund Strategies
This paragraph delves into potential market rotations and the impact of hedge fund positioning on supply and demand. The speaker advises playing the opposite of hedge fund positions, suggesting that this summer could be challenging for hedge funds and other entities with long-short positions due to market dynamics. The speaker anticipates that social media and platforms like Wall Street Bets could influence market movements, particularly for stocks that are poorly positioned for other entities. The discussion also covers the potential for meme stock runs, though not as extreme as in previous years. The speaker predicts a slow grind in the market post-Memorial Day, with a focus on the Fed meeting in June and the impact of the JP Morgan collar on volatility. The big picture is one of higher, longer-term structural inflation, with the speaker suggesting that inflation will continue to bounce back and forth, potentially leading to a Q4 rally into and out of the election.
🚀 Investment Strategies Amidst Low Volatility
The final paragraph offers investment advice for navigating a market with very low volatility. The speaker recommends focusing on dispersion and rotation rather than beta, suggesting buying dips and selling rips as a strategy. The advice is to trade in this low volatility market, with an emphasis on not just buying dips but also looking for opportunities to sell. The speaker also advises on the timing of long data calls, suggesting that they should be pushed out further into the year due to the expected compression of volatility over the summer. The speaker concludes by reminding viewers that the content does not constitute financial advice and that each investor should consult with their advisors before making investment decisions.
Mindmap
Keywords
💡Macro and flows update
💡Supportive Trend
💡Fed
💡CPI
💡Volatility
💡Liquidity
💡Implied Volatility
💡Correlation
💡Hedge funds
💡Meme stocks
💡Options
💡Inflation
💡Beta
💡Vault
Highlights
Positive and supportive market trend expected from May 1st to May 15th.
Fed and CPI are key factors for market strength and rally.
Market supplied with V (volatility), indicating a positive month with low volatility skew.
Accommodative Fed and administration measures provide liquidity and stimulate markets.
Low implied volatility indicates an easy hedging environment.
Expectations of a 'summer of George' with well-supplied markets and limited upside.
2017 experienced record low correlations and implied volatility due to index pinning.
Index pinning leads to dispersion and breakdown of correlation.
Hedge fund positioning and liquidity will drive market rotations.
Social media and entities like Wall Street Bets may push market narratives.
June's slow market with decay of June options expected to be supportive.
Fed meeting on June 12th may lead to a slow grind to sideways action.
JP Morgan collar and July 4th holiday expected to suppress volatility.
Longer-term structural inflation expected despite recent lower numbers.
Markets may see a Q4 rally into and out of the election.
Target indices of 5575 to 5600 by the end of summer.
Focus on dispersion and rotation rather than beta for trading strategies.
Long data calls should be pushed out further, considering the compressed volatility in the summer.
Monetize current positions and play from the short volatility side.
Buy dips and sell rips in a low volatility market.
The video does not constitute investment advice and viewers should consult their advisors.
Transcripts
hello and welcome to another episode of
the macro and flows update it is May
16th um and here we are uh last macro
and flows update we were pretty clear uh
starting May 1st all the way up to May
15th uh yesterday you could expect a
positive uh supportive Trend in the
market we have gotten exactly that the
big questions were around the fed and
CPI and I said if those things are
neutral to
positive um you know expect uh some
significant strength rally back and
based on how relative to how supportive
those flows are right the question was
you know if they're strong enough uh we
will uh you know work forward from there
and be be much more um I would say
bullish on on outcomes uh sure enough
that's what we've gotten uh V is very
very very well supplied in the market um
that is uh going into the summer with
Memorial day and then end of month
beginning of month uh positive flows
into a positive what we've had as a
positive month um with again Vol
supplied skew very low so easy to
hedge uh a relatively accommodative fed
an Administration that is uh working
behind the scenes to provide liquidity
and and kind of goose the markets um in
the form of uh you know Freddy Mack and
Fanny May rule changes um other measures
that are that are kind of again
seemingly small not down the-middle
liquidity um but very potentially
stimulative um all these things are very
supportive um and never mind you know at
Baseline if markets stay consistently
well supplied the path of Le lease
resistance is is higher uh just based on
V charm flows uh BuyBacks of stock all
the market Machinery that we know that
naturally pushes things higher um we'
referred to this in the past as the
summer of George this is you know been
been good three years since the last
summer of George th why do we call it
that that's the Summer where that's the
time when B is so well supplied that
dealers when the market goes down H go
down have to buy when the market goes up
have to sell there's limited actual
upside despite a positive trend think
2017 that was a classic year of this
type of action B was so well pinned at
the index level that the market
literally had nothing bigger than a 3%
pullback the whole year
um and it was just a very low all
consistent March higher um that's the
type of action I would expect not that
low of all not uh you know not that
extreme but that General view this ball
is implied volatility is very well
supplied both through Structured
Products and now zero DTE and all the
things that are that are supplying that
Vault
shortterm um you know in the index
that's also an important takeaway why is
that important because that actually
that creates dispersion in 2017 as an
example we saw at for the time record
low um correlations in stocks in 120
years of History it was the lowest
implied Vol by 30% but it was also by 20
to 25% the lowest correlations and again
in 125 years of index history the single
name correlation was was lower than it
had ever been why is that why would that
happen why are those things two things
related again we've talked about this
but to those who haven't heard it before
that is because the index V is pinned
when the market goes down the dealers
have to buy versus the Vall the market
goes up they need to sell versus the VA
that pins the index but stocks like
Nvidia and other stocks still have to
are going to move big those aren't the V
centers based on idiosyncratic risk when
they
do the index itself if it's pinned will
force other things to move in the other
opposite direction and so it it you get
a double effect so a move up and
something will push a move down and that
drives a breakdown of correlation this
is an Arbitrage constraint the indexes
ultimately have to add up to the uh the
the single names have to of the index
have to add up to the index so if
something goes one way things have to go
the other way so we believe this will
drive a dispersion which is what is what
that's called um and and you'll see
massive rotations this summer in in a
liquid Market um what will rotate which
ways I think the best clue is is looking
at hedge funded exposure at positioning
uh and liquid Market wherever the
positioning is represents potential
Supply or demand if POS if entities
hedge funds or other entities are
massively short uh that present presents
reflexively uh buying pressure into
those products and vice versa so um I
think you're going to see a a trash Dash
things that you know look at those hedge
fund hotels uh wherever they are long or
short I would uh be uh generally playing
the opposite I think this will be a
difficult summer for hedge funds and
other entities that are long short um as
as they are essentially supply and
demand in the market um not just true
for hedge funds but other entities as
well um so uh again you really want to
be playing long and short opposite those
books um as well as other books I think
uh we're going to see uh you know we had
some Clues through the meme kind of uh
push in a couple entities randomly uh a
week ago or so I think those those are
clue that narratives are going to come
and go and push things in uh silly
directions particularly if there's
supply and demand on the other side of
it so I would be looking for impetus
through um social media and other
entities Wall Street bets to push names
particularly names that are poorly
positioned for other entities um I think
they will go after names like that once
again I don't think it will be a 2021
2022 Redux necessarily in terms of meme
runs but um but there will be some it
will run a bit um U after this kind of
period of of Memorial Day and uh you
know end of the month uh flows that are
supportive uh you know behind it since
early June which is very slow um and
then after June opcs and by the way that
early June will be slow but it will have
those decay of the June opcs a corly
opcs which should be broadly supportive
in that those first couple weeks of June
then we have the FED meeting on June
12th and I think that slow grind will
kind of uh to to slow grind to sideways
action uh after Nvidia on May 22nd
through that period And The V
compression will I think eventually on
the FED now push to it you know add for
likely another potential push um but
then that again will will with the JPM
JP Morgan Collar coming at the end of
the quarter lead to again V suppression
in uh throughout the the July 4th
holiday and and July and so we could
really have a long summer here of of V
compression um uh I I think you know
that is the the major theme and
dispersion would be the cor lary to that
um from a macro basis that doesn't
change the big picture the big picture
is higher for longer sticky uh
structural inflation even though we got
a bit lower number I think the more
markets gr higher and the economy does
well and the summer is um uh you know a
a supportive uh summer with fiscal
stimulus I think inflation will continue
to to bounce uh and and be if anything
sideways to up um uh from from
expectations um I think that will
eventually lead to the tenure which has
had a little bit of a pullback continue
to work its way and grind slowly higher
um I think the fourth quarter once we
get there uh you know into labor day um
you can start to uh you'll probably see
an August uh pullback of some kind um
you know and then we could very well see
a Q4 rally into the election and out of
the election um I think uh you know
numbers to look for I think
5575 to 5600 that area is is uh would
not surprise me if we were teasing that
that general area if not hitting it and
then backing off a bit in the end of
summer um and then uh you know into the
fourth quarter from some type of
pullback uh then seeing all the way up
to 6,000 um you know this this Market
has has legs I think this uh after the
summer of George uh long data calls will
be continue to work uh so but I just
think those long data calls need to be
pushed out a bit further meaning uh
September through dece December January
February um uh if you're if you own them
and then you really want to be funding
those because all will be very
compressed in this earlier summer period
uh where where V is cheap but will
continue to to force um low V outcomes
um so that should be the primary uh you
know Focus uh monetize what you can now
play more from the short V side shorter
dated and be not don't be afraid to to
own some longer you know significantly
longer data calls again maybe even in
2025 um as as a whole even though there
are higher Vols um and the curve is
upward sloping we do believe those
things will maintain their value um uh
you know as we go forward relative to
these other things again on their own
outright uh those long data calls are
not a buy because all will be you know
we to lose essentially three months this
summer and that's a lot of Decay even
for something that is 9 months to a year
out um so again focus on uh dispersion
and rotation more than beta uh play uh
long uh and uh bu buy dips um but also
unlike just buying dip dips and looking
for convexity we would be much more in
the camp of uh buying dips and and and
selling rips um and uh continue to play
from the long side but but but trading
this very low V Market um um during that
time so in the meantime uh no better
time to be water uh to not sit and stare
at your screens um over the summer but
but be um again uh focus on these core
Trends and don't get chopped up um
wishing you all the best be water take
care
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