Macro and Flows Update: June 2024 - e29
Summary
TLDRThe 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
📈 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.
📉 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.
🔮 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.
⚖️ 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.
Mindmap
Keywords
💡Summer of George
💡Volatility
💡Breadth
💡Index
💡Dispersion
💡Fiscal policy
💡Liquidity
💡Collateral
💡VIX
💡Hedges
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
bye this does not constitute an offer to
sell a solicitation of an offer to buy
or a recommendation of any security or
any other product or service by Kai or
any other third party regardless of
whether such security product or service
is referenced in this video furthermore
nothing in this video is intended to
provide tax legal or investment advice
and nothing in this video should be
construed as a recommendation to buy
sell or hold any investment or security
or to engage in any investment strategy
or transaction Kai does not represent
that the Securities products or Services
discussed in this video are suitable for
any particular investor you are solely
responsible for determining whether any
investment investment strategy security
or related transaction is appropriate
for you based on your personal
investment objectives Financial
circumstances and risk tolerance you
should consult your business advisor
attorney or tax and accounting advisor
regarding your specific business legal
or tax situation
5.0 / 5 (0 votes)