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.