Macro and Flows Update: August 2024 -e31

Summary

In this macroeconomic video, the host discusses the S&P 500's significant decline and subsequent recovery in August, attributing the swift rebound to ample gamma and early deleveraging. They predict a reduced likelihood of a massive tail risk and suggest an early rally leading to an end-of-year market surge. The analysis also covers the impact of upcoming events, including the Fed's Jackson Hole meeting and the U.S. election, on market volatility and the potential for geopolitical stress points. The video concludes with investment strategies focusing on long-dated calls amid rising volatility and the outlook for interest rates and gold.

Takeaways

• 📉 The S&P 500 experienced a significant decline to 5120 in futures, followed by a swift recovery, which was surprising in its extent and speed.
• 🚀 The rapid deleveraging and well-supplied gamma in August helped to mitigate the decline's impact, making it less severe than if it had occurred in September.
• 🔍 Despite the decline, tail risk has diminished as the market has adjusted, and the likelihood of a massive tail has decreased, making another significant decline unlikely.
• 📈 The decrease in V Leverage and the positive flows expected in the September Opex suggest a potential early rally and an early kickoff to an end-of-year rally.
• 💹 The speaker believes that the market has started to rally and advises to continue buying dips, playing from the long side into the end of the year.
• 📊 There is a mention of a potential hurdle at the 1.5 standard deviation up of the 20-day, which is a crucial level for the market to surpass to project strength.
• 🌐 The Fed discussion and Nvidia's event in late August are highlighted as important catalysts that could add momentum to the market rally.
• 📈 The speaker anticipates higher volatility in the market, which will likely lead to bigger rallies and pullbacks, but not undo the overall rally.
• 🗓️ The election and related political rhetoric are expected to increase volatility towards the end of the year, with events like the September 10th debate being key to watch.
• 🌍 Geopolitical risks, particularly from China, are highlighted as a potential gray swan event that could cause significant market declines if certain triggers occur.
• 📊 The speaker suggests that long-dated calls should be bought as a trade, given the current market conditions and the expected increase in volatility.

Q & A

What significant event occurred in the S&P 500 futures in August?

There was an incredible decline down to 5120 in the S&P 500 futures, followed by a quick recovery that was surprising in its extent and speed.

Why was the recovery from the decline in the S&P 500 futures so quick and significant?

The recovery was quick due to the deleveraging that happened quickly, with gamma being well supplied in August, which helped to stem the decline and make it a stairstep multi-day process.

What is the implication of the early decline in August for the expected severity of the decline?

If the decline had happened in September as initially expected, it would likely have been more violent and had more serious effects. However, because it started in August with well-supplied gamma, the damage was less severe and shorter than expected.

What does the speaker believe about the likelihood of a massive tail risk in the market?

The speaker believes that the likelihood of a massive tail risk is diminished, as the decline has already occurred and the market has shown resilience with less tail risk than previously expected.

What is the speaker's outlook for the market's performance towards the end of the year?

The speaker expects an early rally in the market, potentially leading to an end-of-year rally, with the market reaching 5900 to 6050 by December, despite the possibility of some pullbacks along the way.

What factors are contributing to the speaker's expectation of higher volatility in the market?

Factors contributing to higher volatility include the initial decline releasing pent-up volatility, upcoming events such as the Fed discussion at Jackson Hole and Nvidia's earnings report, and the election's impact on market sentiment.

What is the speaker's view on the role of geopolitical events in market volatility?

The speaker believes there is an increasing risk of geopolitical stress points, such as actions by China, which could cause significant volatility and potentially lead to a tail risk of greater than 20% in the market.

What trading strategy does the speaker recommend for investors given the current market conditions?

The speaker recommends buying long-dated calls as a strategy, as they believe volatility is too cheap given the recent decline and that this will allow for more significant market swings going forward.

What is the speaker's perspective on the role of interest rates in the market's future direction?

The speaker believes that growth will surprise to the upside, with interest rates potentially rising as high as 5% by the end of the year, which would support a rally in the market.

How does the speaker view the potential impact of the upcoming election on the market?

The speaker suggests that the election, with its increased contestation, could lead to significant volatility, especially if geopolitical tensions rise, but also notes that it could be an optimal time for certain geopolitical moves.

Outlines

00:00

📉 Market Volatility and Recovery Insights

In this paragraph, the speaker discusses the significant market events of August, including a sharp decline in S&P 500 futures to 5120, followed by a swift recovery. The unexpected extent of the rebound is highlighted, along with the role of gamma in the market's quick recovery. The speaker notes that the decline happened early in August, which mitigated the severity of the impact and the tail risk. The paragraph also touches on the reduced likelihood of further declines due to the deleveraging that has occurred and the potential for an early rally into the end of the year, influenced by positive market flows and the diminished risk of a significant market tail event.

05:00

📈 Anticipating an End-of-Year Rally Amidst Volatility

The speaker forecasts an end-of-year rally with higher volatility, noting that the initial market decline has released pent-up volatility, setting the stage for larger market swings. Key events such as the Fed Chairman's discussion at Jackson Hole and Nvidia's earnings report are expected to add momentum to the rally. The speaker also mentions the importance of watching political developments, including the upcoming election and its potential impact on market volatility. The paragraph concludes with a warning about the underpricing of geopolitical risks and the potential for a significant market decline if certain events unfold.

10:01

🚀 Strategies for Navigating Market Volatility

In the final paragraph, the speaker provides investment strategies for navigating the anticipated market conditions. They suggest that long-dated call options should be bought as a way to capitalize on the expected increase in volatility. The speaker also discusses the potential for interest rates to rise, which could positively impact economic activity and lead to a rally in gold. The paragraph ends with a reminder to be cautious and strategic in the current market environment, emphasizing the importance of buying dips and being prepared for the potential increase in volatility as the year progresses.

Keywords

💡Macro

Macro refers to the large-scale economic and financial trends that affect the overall economy. In the context of the video, the speaker is discussing macroeconomic factors that influence the stock market, such as interest rates, federal reserve policies, and geopolitical events. The term is used to set the stage for a broader analysis of market movements beyond individual company performance.

💡Expiration

In the financial markets, 'expiration' typically refers to the date when options or futures contracts become void. The speaker mentions 'August expiration,' which is likely the end of the trading period for certain financial instruments. This is important as it can affect market volatility and investor strategies leading up to the expiration date.

💡S&P 500

The S&P 500, or Standard & Poor's 500, is a stock market index that measures the performance of 500 large companies listed on stock exchanges in the United States. It is often used as a benchmark for the overall U.S. stock market. In the script, the decline to 5120 in the S&P 500 futures indicates a significant drop in the value of these large companies, which is a central point in the video's discussion of market trends.

💡V Expansion

V Expansion, or Volatility Expansion, refers to an increase in the market's volatility, which is a measure of how much the price of a security can fluctuate over time. The speaker mentions a 'significant V expansion' following a market decline, indicating that the price swings of securities became more pronounced, which is a key factor in the market analysis presented.

💡Gamma

Gamma in finance is a measure of the rate of change of an option's delta relative to the underlying asset's price. It is an important concept in options trading. The speaker mentions that 'gamma was well supplied in August,' suggesting that there was sufficient liquidity in the options market to facilitate the quick recovery from the market decline.

💡Deleverage

Deleverage refers to the process of reducing leverage, or the amount of borrowed money used to finance investments. In the script, the speaker discusses 'deleveraging' in the context of market participants reducing their exposure following a decline, which can lead to a stabilization or reversal of the market trend.

💡Tail Risk

Tail risk is the risk of an event that has a low probability of occurring but would have a severe impact if it does. In the video, the speaker talks about 'tail risk sitting out there on the tail' and how the quick recovery from the decline has diminished this risk, indicating that the likelihood of an extreme market downturn has decreased.

💡Opex

Opex, short for Options Expiration, is the date when options contracts expire. The speaker refers to 'Sep Opex' and 'COR Opex,' which are specific dates when options expire. These dates are significant as they can lead to increased market volatility and are used to predict market movements and investor behavior.

💡V Leverage

V Leverage refers to the use of options or other derivatives to gain exposure to volatility. The speaker mentions 'V Leverage is decreased,' suggesting that the market's reliance on volatility as a means to amplify returns has lessened, which is a factor in the analysis of the market's current state and future direction.

💡Fed Meeting

A Fed Meeting refers to a gathering of the Federal Reserve, the central banking system of the United States, which sets monetary policy. The speaker anticipates a 'Fed discussion from Powell' at Jackson Hole, which is a significant event for market participants as it can influence interest rates and economic policy, thus affecting market direction.

💡Blowoff Top

A blowoff top is a term used in technical analysis to describe a rapid and sharp increase in price followed by a sudden reversal, often marking the end of a trend. The speaker predicts a 'blowoff top' in early next year, suggesting that the current rally could end abruptly, leading to a significant market downturn.

💡Geopolitics

Geopolitics refers to the influence of politics on international relations and how they affect global events. The speaker warns of increasing geopolitical stress points, such as tensions around Taiwan, which can introduce uncertainty and risk into the market, potentially leading to significant market reactions.

💡Interest Rates

Interest rates are the cost of borrowing money and are set by central banks like the Federal Reserve. The speaker believes that 'growth will actually surprise now to the upside,' suggesting that lower interest rates have stimulated economic activity, which is a key factor in the analysis of market direction and the potential for a market rally.

💡Gold

Gold is a precious metal that is often viewed as a safe-haven asset during times of economic uncertainty. The speaker mentions gold 'starting to break out,' indicating that it is gaining value, which is often a response to market instability or as a hedge against inflation and currency devaluation.

Highlights

The S&P 500 futures experienced a significant decline to 5120, followed by a quick recovery.

The recovery was surprising in its extent and speed, with a massive amount of risk sitting on the tail.

The decline happened early in August, with gamma well supplied, which helped mitigate the damage.

The deleveraging occurred quickly, making further declines less likely.

Tail risk has been diminished due to the early decline and quick recovery.

A decline below previous lows is considered incredibly unlikely due to missed buying opportunities.

V leverage has decreased, making a tail less likely and supporting an early rally.

The market is expected to see an early rally due to positive flows around the September Opex.

The early start of the decline in late summer has changed the market path, suggesting an early rally.

Volatility has been released and is expected to allow for more significant market swings going forward.

The Fed discussion at Jackson Hole and Nvidia's event in late August could add momentum to the rally.

The election and related policy rhetoric could introduce significant volatility towards the end of the year.

Geopolitical stress points, particularly related to China, pose a risk to market stability.

Long-dated calls should be bought as a trade strategy, given the current market conditions.

Interest rates are expected to rise, potentially reaching 5% by the end of the year.

Gold is breaking out and is considered a strong play in the current market environment.

Transcripts

hello and welcome back to another macro

and flows video here we are uh at August

expiration uh what an interesting month

it's been uh we had a

incredible decline uh that we were able

to get out in front of um for a lot of

our our uh

listeners um we saw a uh move all the

way down to 5120 in the

S&P uh 500

futures uh significant V

expansion but just as quick as uh it

happened it was done and I will say that

was uh surprising the extent at which

the recovery was able to to happen and

as quickly as it was able to

happen um there was a massive amount of

uh sep OPC

uh risk sitting out there on the tail

but the deleveraging happened

quickly and uh because gamma was well

supplied in August and the decline

happened early again I think if the

decline had happened in September as we

had

expected that was most likely um the

decline would have been much more

violent and much had much more serious

effects in our opinion um but because it

started in August and it gamma was well

supplied there were other uh parts that

helped stem the decline and make it into

more of a stairstep multi-day process um

the damage was less bad and and it was

shorter than expected so um once that

deleveraging has happened it's important

to note it's hard for these declines to

continue so a lot of that tail risk that

we've talked about that exists out there

has been now uh diminished and as we

know sep

Opex quarterly aexes have a

tremendous um amount of Vana and charm

to them if that tail in those in that

monthly period does not happen um and

you know here we are in a five-week

period but highly likely at this point

that it's that it it will not amount to

a massive tail so a decline below where

we were so another uh 400 50 point

decline back down to the lows is um

incredibly unlikely given how many

people have missed the buying

opportunity um Etc so uh V Leverage is

decreased as well so that is a tally for

the Bulls and and makes that tail less

likely than than might have been

expected and because there is less

potential tail we know that corly Opex

is are right distributed with a fat left

tail and so if we can diminish the odds

of that left fat tail for other reasons

the odds of that Vana

charm uh Decay that those flows that

will push the market higher coming in

quickly and earlier than that might

usually happen uh later in the cycle and

being front run are are very high um so

you know even though it's still early

and there is a window of weakness right

in this period with a sep Opex we

believe because of the amount of

positive flows that are that are likely

there in the sep

Opex um and and the amount of upward

push that that could likely

represent um without a tail um that that

this will be a earlier rally than usual

in a COR Opex and can represent an early

kickoff to an end of year rally much

different than what we might see in

other other Cycles again

uh the early set off to the decline that

we expected in late summer um really has

changed the path um and we did expect a

some type of wobble which we got um in

in August but we believe for the most

part uh that that wobble is um is over

um that we will likely get some more

pullbacks along the way but uh that that

the rally here um you know has largely

begun and that people should look to

continue to buy the dips from here on

out and play from the Longs side into

the end of the

year um again doesn't mean we're not

going to get uh declines there is still

one last major hurdle um you know we

have not gotten over the one and a half

standard deviation up of the 20-day it's

a very important level structually for

markets to get above to project strength

and to get more positive flows um but we

do believe uh despite maybe a small

pullback here or there that eventually

here before too long uh the rally will

um can pick up steam we still believe

that 6,000 or so 5900 to 6050 or so will

be seen by the end of the year likely in

December now that's just Market

Direction let's talk about

volatility the thing about these uh

volatility moves the initial moves here

when they happen some some time like

this they release the pitting of VA and

uh they stop the the

reflexive um uh fall compression that

happens in markets we believe that this

quick rally back and the massive V

compression that we've seen

since has um has in the short term

trimmed the amount of volatility but we

do believe longer term Vol we have seen

significant expansion of will continue

so we believe the rally here into the

end of the year will be seen with higher

volatility broadly which means we'll get

some some pullbacks we'll get some

bigger rallies um we have a Fed meeting

not a fed meeting sorry a Fed uh

discussion from uh Powell um at uh on

the 22nd here in Jackson Hole uh which

is very very important and can push an

initial like higher and then of

obviously Nvidia on the 28th of August

um which could also uh add to an even

you know greater amount of steam to this

rally um we think both of those things

uh paired with now a positive monthly uh

number which will add end of month

positive

momentum um and then all of the vona

charm flows that will go into the sep

Opex will be very supportive of this

Market um in the short term so um now

behind that we see in October and

November

uh some of all that we believe will

continue to create um bigger swings um

along the way the election itself will

become more dominant in the rhetoric uh

policy tied to these

candidates including the September 10th

uh debate will be important so please

watch those dates carefully We Believe

big uh rallies will come out of vonach

charm moves from event more increasingly

um and obviously with the election now

being more contested than it was with

Biden dropping out and KLA Harris coming

in um we think there there can be

significant um uh volatility into the

end of the year despite higher prices so

very different characteristic than we've

seen the past three months before the

recent decline this initial move has

released volatility and will allow for

more of it going forward um and again we

do believe that higher volatility will

eventually undo the rally and lead to

what looks like a blowoff top sometime

early next year that's our current

thesis mid January mid-February um in

those windows of weakness or early on in

January one of those windows um could

very likely be a problem spot the one

thing to be thoughtful of is geopolitics

that's the one thing that I have not yet

discussed right we talk about broad

Trends and politics uh cash FL money

flow Federal Reserve

policy um we believe that that there's a

significant increasing risk of a

geopolitical stress point um nvidia's

decline was partially last month um a

result of Donald Trump's comments about

Taiwan there is little to no certainty

of Trump's election even though we

believe that is more

likely um we believe China in particular

um will continue to become more activist

and and more aggressive as we get

towards an election particularly one

that they believe if they believe that

Trump uh will will win um that could ha

some activism there could happen as

early as the end of this year we're not

calling for the end of the year but that

is uh very possible and we must be

thoughtful about that again an election

would be an optim an optimal time for

some type of moves while there's

uncertainty here domestically um by uh

you know poor actors people who are

looking to uh to to get some some

strength in a geopolitical chess match

um so I think that's very important to

take take note of again these are taale

events they're black swans um but I

would consider that more of a gray Swan

it's something that people are not

pricing it enough and that to be clear

is an existential risk to Nvidia that

would represent a 50% decline in Nvidia

in the matter of days never mind to

Apple um you know 30 40 50% % those are

things that could cause a tail risk of

greater than 20% to markets in a matter

of days if not a

week um so please please please you know

at this point in the cycle uh the trade

is not to be short tals again uh

volatility itself we believe is too

cheap uh given the slide we've had and

the Vault compression so longer dated v

um should be bought you know longer

dated calls in particular is the way to

play this this trade again which is what

we were doing earlier in the year and

worked so well we believe here now um in

you know after a slow summer when calls

uh needed to be

monetized um and uh financed through

short dated strangles We Believe now

long data calls should be the trade

again and should work very well on their

own um along the way so U never more

important than than now to be water uh

you know start playing from the upside

buying the dips but again understand

that volatility is likely going to

continue to go higher into the end of

the year and again eventually um could

undo the rally once we hit 5900 to 6050

at the end of the year um lastly

interest rates We Believe growth will

actually surprise now to the upside the

reflexive state of markets when interest

rates get the market pulls interest

rates forward uh pulls them uh Cuts

forward you begin to see greater

economic activity quite quickly so the

slowdown that we were see seeing has

actually been ironically resolved by the

drop in the 10year and so we believe

that will now turn again and work its

way higher um and could with a rally to

6,000 see as high as

5% um by the end of the year um which

would represent a significant rally gold

which is starting to break out which

we've talked about for some time will

continue to be a very strong play in

that environment as well so continue to

be water uh signing off till next month

this jump Caron kyal