Macro and Flows Update: May 2024 - e29

Summary

In 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

00:00

📈 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.

05:01

🔄 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.

10:03

🚀 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.

Keywords

💡Macro and flows update

This term refers to a high-level analysis of economic and market trends, which is the central theme of the video. The speaker discusses the overall market direction and the factors influencing it, such as the Federal Reserve's actions and the Consumer Price Index (CPI). It is used to set the context for the video's discussion on market trends and predictions.

💡Supportive Trend

A 'supportive trend' in the context of the video means a positive market direction that is expected to continue. The speaker mentions that from May 1st to May 15th, a positive and supportive trend was anticipated, which aligns with the actual market performance during that period.

💡Fed

Short for the Federal Reserve, the central banking system of the United States. The Fed's policies and decisions significantly impact financial markets. In the video, the speaker discusses the Fed's role in maintaining market stability and its influence on the market's bullish outlook.

💡CPI

Consumer Price Index, a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is a key indicator of inflation. The video mentions CPI as one of the significant factors that could influence market trends.

💡Volatility

Volatility, often symbolized as 'V' in the script, refers to the degree of variation of a trading price series over time. The speaker talks about 'Vol supplied skew' being very low, indicating that hedging is easy and the market is relatively stable, which is a supportive condition for the market trend.

💡Liquidity

Liquidity in financial terms refers to the ability to buy or sell an asset quickly and easily without affecting its price. The video discusses how the administration is working to provide liquidity, which can stimulate the markets and support the ongoing positive trend.

💡Implied Volatility

Implied volatility is a measure of what the market thinks the future volatility of a security's price will be. The speaker mentions that implied volatility is well supplied, which contributes to the market's stability and the potential for dispersion in stock movements.

💡Correlation

In finance, correlation measures the degree to which two securities move in relation to each other. The video discusses how low implied volatility can lead to low correlation among stocks, which was historically low in 2017, indicating a unique market condition.

💡Hedge funds

Hedge funds are types of investment funds that aim to generate absolute returns by taking on higher risk. The speaker suggests that watching hedge fund positioning can indicate potential market movements, as their long or short positions can create buying or selling pressure.

💡Meme stocks

Meme stocks refer to stocks that have gained popularity and attention through social media, often leading to significant price movements. The video hints at the possibility of meme stocks influencing market movements, especially if there is a supply and demand imbalance.

💡Options

Options are financial instruments that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a set price within a specific time frame. The speaker discusses the impact of options on market dynamics, particularly how June options decay could be supportive for the market.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video mentions structural inflation as a long-term concern, suggesting that it will continue to influence market trends and the economy.

💡Beta

Beta in finance measures the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. The speaker advises focusing on dispersion and rotation rather than beta, implying that individual stock movements may be more significant than market movements.

💡Vault

In the context of the video, 'Vault' likely refers to a financial product or strategy involving short-term volatility trading. The speaker mentions 'Vault short-term' as one of the factors contributing to the well-supplied implied volatility.

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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