Macro and Flows Update: June 2024 - e29

Summary

The video script discusses the current market conditions as of June, emphasizing the volatility supply at the index level, which results in massive dispersion among index constituents. It highlights the poor breadth of the market, with only 19% of US stocks outperforming the broader market, the lowest in 20 years. The 'Summer of George' term describes this period of increased volatility and index stability. The discussion covers the impact of fiscal and monetary policies, potential future market movements, and strategies for positioning in the market, including long calls and short puts. The script also touches on geopolitical risks, such as potential tensions with China over Taiwan, and their implications for the market.

Takeaways

• 📈 June Opex is coming up, leading to increased market volatility.
• 🔄 The 'Summer of George' describes a period of high volatility and poor breadth in the market.
• 📉 Only 19% of US stocks have outperformed the wider market recently, the worst in over 20 years.
• 📊 The market has seen 35 trading sessions without a significant loss in the S&P 500.
• 💹 The index's stability forces movements in its constituents, leading to a volatile market environment.
• 🛠 Fiscal and monetary policies are supportive, contributing to market stability.
• 💵 Rising asset values create more liquidity and collateral, supporting the market.
• 📅 Expect market stability and a grind higher until mid-August, followed by potential increased volatility.
• 📉 A potential pullback and rise in volatility is anticipated from mid-August to the end of the year.
• 🤔 Long-term concerns include geopolitical risks, particularly related to China and Taiwan, which could significantly impact the market.

Q & A

What is the 'Summer of George'?

The 'Summer of George' is a term coined in 2021 to describe a period of volatility supply at the index level, leading to massive dispersion among index constituents and increased volatility.

How does the 'Summer of George' affect market breadth?

The 'Summer of George' drives poor market breadth, with only 19% of US stocks outperforming the wider market, the worst in over 20 years.

What has been the trend in daily losses for the S&P 500?

There has not been a daily loss greater than 0.75% in the S&P 500 for the last 35 trading sessions.

How does volatility at the index level compare to volatility of index constituents?

The volatility of the index constituents is four times higher than that of the index itself.

What is the relationship between market movement and liquidity?

When the market goes up, it creates more dollars and liquidity through an increase in collateral, which can increase leverage.

What is the expected market trend for the next month and a half to two months?

The market is expected to continue grinding higher with VIX compression until around August 14th.

What is the recommended market positioning during this period?

The recommendation is to stay long on long-dated calls, funding them with short-duration puts and calls, without shorting much stock.

What is the expected market trend from August to early next year?

From August to early next year, the market is expected to become more volatile, with a possible pullback and increased volatility.

What geopolitical events could impact the market?

Possible geopolitical events include a potential Trump presidency, normalization of US-China relations, and the risk of China moving on Taiwan.

What is the potential impact of a Chinese move on Taiwan?

A Chinese move on Taiwan could severely impact Nvidia and the S&P 500, given Nvidia's significant market position.

Outlines

00:00

📈 Macro and Flows Update for June

In this segment, we discuss the upcoming June Opex and its significance. The 'Summer of George' is highlighted as a period of high volatility and poor market breadth. Despite only 19% of US stocks outperforming the broader market, this isn't seen as a short-term sell signal. The market has been experiencing a stable index level while constituents fluctuate widely, leading to increased volatility and dispersion. Fiscal and monetary policies are providing market support, and rising markets create more liquidity, further supporting the trend.

05:01

📉 Expected Market Trends and Positioning

The video suggests that the market will perform well until mid-August, after which a pullback and increased volatility are anticipated. The recommended strategy involves holding long-dated calls and funding them with short-duration puts and calls. It's advised to lean long Delta into this market and expect possible sideways movement in the short term. The discussion also touches on softer CPI and employment numbers, indicating underlying economic slowing, which could justify more stimulus.

10:01

🔮 Long-Term Market Outlook and Election Impact

Looking ahead to the end of the year and beyond, the discussion focuses on potential market volatility and the impact of the upcoming US election. A Trump presidency could push break-evens higher and drive commodities like gold. There is speculation on how Trump might normalize relations with China, potentially leading to a positive market move early next year. The risks associated with a China-Taiwan conflict and its impact on major stocks like Nvidia are also considered, urging caution.

15:04

⚖️ Investment Responsibility and Advisory Disclaimer

This final paragraph emphasizes that the content is not an offer or recommendation to buy or sell securities. It advises viewers to consult their business, legal, and tax advisors to determine the appropriateness of any investment or strategy based on their personal financial situation and risk tolerance.

Keywords

💡Summer of George

The 'Summer of George' refers to a period of heightened volatility and supply constraints at the index level, resulting in significant dispersion among the index constituents. This term, coined in 2021, describes a market condition where the overall index appears stable, but individual stocks experience significant movements in different directions.

💡Volatility

Volatility refers to the degree of variation in the price of a financial instrument over time. In the context of the video, it highlights the increased fluctuations in individual stocks while the index remains relatively stable, causing a narrow breadth and contributing to market uncertainty.

💡Breadth

Breadth in the stock market measures the number of individual stocks participating in a market move. The video mentions that only 19% of U.S. stocks have outperformed the wider market recently, indicating the worst breadth in over 20 years. This poor breadth signals limited participation in the market's upward movements.

💡Index

An index is a statistical measure of the performance of a group of stocks. The video discusses how the index itself can influence the performance of its constituents, acting as a major trading vehicle that can affect stock movements more than the stocks influence the index.

💡Dispersion

Dispersion refers to the extent to which individual stocks within an index move independently of each other. The video explains that high dispersion is a key feature of the current market, with some stocks rising while others fall, leading to increased volatility among constituents.

💡Fiscal policy

Fiscal policy involves government spending and tax policies to influence economic conditions. The video notes that supportive fiscal policies are currently providing market stability, contributing to liquidity and overall market support.

💡Liquidity

Liquidity is the ease with which assets can be bought or sold in the market without affecting their price. The video mentions that there is ample liquidity in the market due to stimulative fiscal and monetary policies, which is helping to sustain market performance.

💡Collateral

Collateral is an asset pledged as security for a loan. The video describes how rising asset prices increase the value of collateral, which in turn can support greater leverage and liquidity in the financial system, effectively acting as a form of money creation.

💡VIX

The VIX, or Volatility Index, measures market expectations of near-term volatility. The video predicts continued low VIX levels in the short term, with a potential increase in volatility expected later in the year, particularly around August.

💡Hedges

Hedges are strategies used to offset potential losses in investments. The video suggests that the current market environment, characterized by low volatility, presents an opportunity to establish hedges in anticipation of increased volatility later in the year.

Highlights

Introduction to the macro and flows update for June, with a focus on Opex and the coined term 'summer of George'.

'Summer of George' defined as a period of index-level volatility supply causing massive dispersion among index constituents.

Only 19% of US stocks have outperformed the wider market in the last month, the worst breadth in over 20 years.

Despite poor breadth, there is no short-term sell signal, and the market continues to grind higher.

It's been 35 trading sessions since the S&P 500 had a daily loss greater than 0.75%, indicating a stable market.

The index is a major trading vehicle, with the index having more impact on constituents than vice versa.

The market is supported by fiscal policy and stimulative monetary policy, with no liquidity issues from a macro perspective.

Increasing asset prices create more collateral, which in turn boosts liquidity and leverage in the system.

Predicted continued VIX compression and market grind higher for the next month and a half to two months, until mid-August.

Recommendation to position in long-dated calls, funding these with short-duration puts and calls.

Expected market volatility increase and potential pullback starting in mid-August.

Predicted more volatile market behavior towards the end of the year, with a possible blowoff top in the last four to six months of the year.

Potential high volatility around the US election period, with increased risk and opportunity for hedging.

Discussion on the potential impact of a Trump presidency on break evens, gold, and commodities, and the importance of defense spending.

Warning about the potential risks to NVIDIA and the S&P 500 if China were to invade Taiwan, highlighting geopolitical risks.

Final recommendation to maintain long exposure through August while being mindful of potential market changes later in the year.

Transcripts

hello and welcome back to another macro

and flows update here we are at June

Opex tomorrow

morning um and big corly Opex as we've

talked about for some time now about a

month and a half uh we are amidst the

summer of George what is the summer of

George this coin term that that I coined

back in

2021 um it is a time of volatility

Supply at the index level that forces

massive dispersion

amidst the constituents of the index

increased volatility because of the

index being pinned essentially if some

constituents of the index go up and the

index itself is very stable and just

grinding higher other constituents

actually have to go down and that's

driving very very poor breadth something

that everybody is talking about now and

uh it's also driving a wall of worry

because everybody's worried about the

breath what what do we mean just

19% of US Stocks has made managed to

outperform The Wider Market in the last

month 19% it's the worst breath we've

seen in over 20

years but again that's not a coincidence

that's uh now we can talk about whether

that's unhealthy in the long term which

I believe it is but in the shortterm

that is not a a short-term sell signal

um if anything the worry that is coming

as a function of that um is driving even

more of a grind higher some other

interesting facts it's been 35 trading

session since we've had a daily loss of

greater than 75% in the S&P

500 again that is the summer of George

it is a time of vol Supply at the index

level um we're having four times the

volatility of the constituents of the

index than to the index itself things

are flying around going in different

directions big moves of the constituents

almost no move at the index level the

index is not just

a uh an an index of a a mathematical

calculation of what the single stocks

are doing the index itself is a major

trading vehicle it is bigger than the

constituents trading at this point and

having bigger effects on the

constituents and the constituents are

having on it you can argue so um it is a

push pull but primarily a push from the

index down that is forcing um underlying

movement um within with within the

underlying constituents so that is the

biggest thing happening to markets

otherwise it is a very Placid Market

there is a lot of support um to the

market by fiscal

policy

uh relatively uh stimulative uh monetary

policy treasury itself is also being

stimulative so uh no problem from

liquidity at this point uh from a macro

perspective and importantly it's very

important to note when the market goes

up reflexively that creates more dollars

and creates liquidity it's it's some

people call it the wealth effect um it's

actually quite a bit more than just a

wealth effect it is a increase of

collateral across uh the system and and

the system being most quite leverage

benefits from from greater uh greater

actual collateral to increase leverage

even more so it's essentially a form of

money creation when assets go up when

the stock market goes up so so uh not

surprisingly U we've had a continued

grind higher that's exactly what we've

called for um and a v uh Supply issue um

forcing VA uh and the vix low um we

believe this will continue for another

month and a half to two months um the

date we've put on the board is August

15th um or so the uh the Wednesday of of

of e of expiration in August um that

that'll actually put us uh sorry August

14th that'll put us um in line for the

the beginning of the Fall so that is a

time to start buying

Vol um uh it is also a time to uh to

start uh lightening up on some of the

long uh Delta exposure we've been

looking at throughout this period um uh

it is uh again we believe through the

end of the year this Market will

continue to perform well but we do

believe at that in that window coming in

August we'll likely start to get a real

pullback of some kind and an increase in

volatility um we believe that the last

part of this rally which uh will likely

come uh in the last four to six months

um August to September October November

December January right um we believe

that 4 and a half to 5 month period will

be uh much more volatile and it will be

market up V up again something we

haven't seen in a while but for the

meantime again next one a half to two

months uh we we believe that we'll start

to see we'll continue to see V

compression and a grind higher which is

a very different distribution of the

market and should be played quite

differently um how do we think you

should be positioning in this market

still long long dated calls even though

we're not getting market up volup the

difference is you really want to to be

funding those calls with everything else

meaning sell short duration puts sell

short duration calls uh what is short

duration something that is a month to

two months out right uh that will do

well in a grind higher so more position

to short put uh than long

call um we do not think you should be uh

short much stock if any against those

long calls uh and definitely leaning

long Delta into these uh into this type

of a market

um so uh expect at some point though

like I said those WS to go higher

particularly in the back of the curve

we're starting to see that a little bit

in the short term here as

well um that probably means that in the

next week or two we get uh some sideways

digestion to down Movement we believe

that move down will lead to Market down

VA down in this current environment any

move down in this environment should be

Vol compressing whereas the moves up now

should continue to be calendar expansion

and again that is why we think short

puts long calendar call spreads are the

best part um of the distribution to play

long Delta with um from a macro

perspective nothing really new to report

uh other than that CPI has been a bit

softer employment numbers uh despite

being relatively firm um continue to

come in uh less hot um and so we believe

uh there's a lot of signs that they the

slowing is actually happening under the

hood but that actually is a positive

thing in this period because it will

lead to more excuse for stimulus

um the next big question that we need to

address is not just the next two months

or into the end of the year because

again that feels fairly um we feel

fairly strongly about will continue to

be a positive trend uh slower for now uh

a bit more volatile um and uh

potentially uh more uh blowoff toppy at

at the end of the

year um but uh but the bigger question

is what is it going to look like at the

end of the year going into the in and

out of the election there's a big event

VA there and what is it going to look

like early next year and that that is a

a big harder question the good news is

even if we continue to Rally we believe

that period will be very volatile and so

easier to play

Hedges with a longv exposure in that

environment um especially after what's

been a very low V environment recently

um and represents an opportunity um we

think that the potential of a trump

presidency um could be the new thing

that pushes break evens higher uh that

drives uh things like gold higher after

a bit of digestion and a shaking of over

positioning in it in the short term um

we also believe uh other than break

evens that uh you know Commodities

themselves will start to do better in

that period uh particularly the trade

again there is to sell puts uh whether

it's in energy or copper or other

industrial Commodities um short put in

in those entities and long calls longer

dated in

Gold um we believe in dollar strength uh

that will be a a significant

uh continued Trend in what we're seeing

uh we believe that we should be spending

more and more money on defense and other

government spending vehicles um even

though Biden has been uh very very uh uh

you know fiscal policy heavy we believe

a trump Administration ironically will

be even more so um similar to the logic

that that would take Nixon uh to to go

open up China somebody like Nixon to do

that uh you know somebody that was

Hardline and nobody ever thought would

uh we believe that despite the fear

about tariffs and early on a lot of the

the pressure and tariffs uh eventually

Trump could be actually the one to help

normalize relationships uh the

relationship with China a bit relative

to where we were as we get into later in

the year um We can question whether

that's a good thing or not uh uh you

know and get into all kinds of questions

about big picture whether that's right

or not um but a deal there we believe um

could open uh open the door for um for

another positive move after a decline

that we think will come um early to mid

next year uh and again that Target date

for that would be mid

January um to mid February so we believe

there are those two windows again

similar to what we thought this year uh

with this rally though we believe that

those are the windows for the most risk

especially now that we're seeing this

rally that we've seen um and if we see

the see weakness in those periods it

could be a very ugly decline a big one

bigger than we've seen uh since

2020 um but that could eventually be be

remedied um in the form of of uh Trump

trying to make a deal with China um

anyway those are the things to be

mindful of the other uh thing that we've

yet to talk about is if we cannot you

know Trump does not get elected uh first

of all uh very dangerous for kind of a

confrontation we believe that'll come

next year between uh China and the US

and if Trump can't make a deal with with

uh with China um we believe that China

eventually will also move um on Taiwan

as early as next November so um that and

I'll leave you with this kind of thought

would be potentially the scariest thing

for Equity markets if that seems like it

might be possible why uh much scarier

than it would have been a year or two

ago not just because of the rally in

equities but how the rally has

transpired I uh I urge you to think

about what would happen to

Nvidia

if right if China invades Taiwan the

reason uh the AI hype had not taken hold

and why Nvidia stock was not doing so

well about two years ago right before

this massive

rally um is because of the fears around

China and Taiwan we've all but forgotten

or stopped talking about that um despite

the at the time us saying that that was

likely a two to three to four year event

well guess what it's been two years um

that is something I would urge people to

think about I we believe there's a 5050

coin flip that it happens the next

several years and if it does um again uh

massive risk for NVIDIA in

particular um and urge you to think

about what that would mean for the S&P

500 now that Nvidia is the biggest stock

or at least one of the biggest two

stocks in the whole world again not to

fear Monger we we believe again that

this end of the year will be a very

positive period in particular slow grind

easy um uh rally here through uh through

August through the middle of of August

and then uh after that more volatile

still potentially dangerous but likely

volatile and up moving blowoff top type

squeeze in the market that we believe

will will begin um to uh to fade at the

end of the year and into early January

with some type of blowoff top so anyway

wishing you the best be water uh in this

uh in this period water tends to mean uh

be very uh be be near the beach more

than anything but uh but really um but

but hang in there with with that long

exposure as we've urged the last several

months um uh through August and uh and

enjoy your summertime take care

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