Before we begin, please see my most recent report for context on the ideas I’m speaking about. I’d also recommend reading through the Substack chat where I post updates.
So I posted in the chat that I was closing out most of my ES short position because of the extended nature of the Z-score we are in. This trade was massively onside. It is a great example of how I combine my macro view with some more systematic style approaches.
I sometimes note factors such as this: for every drawdown we’ve had in the S&P, we usually begin the momentum leg in the first 10 days, and by the end of the bearish Z-score range we have often come to the end of that particular leg. Now does this mean I’m bullish? No. I’m just saying that some signals from my models are showing signs of some overextension/fatigure to the downside.
If you are able to combine systematic models with your macro views, it’ll help you time things MUCH better. There have also been times where I will use these models around a catalyst to try to find some type of edge in entry.
If we begin pulling back in ES with no change in the macro backdrop, alongside some bearish signals, I will NOT hesitate to enter another short position.
For now, I’m neutral ES for now. On the bonds side, ZT has sold of significantly since the Jackson Hole event (which I laid out a short for in the Substack chat). Ultimately the market is now aggressively pricing the Fed’s reaction to inflation which is NEEDED. Even to this point, equities have barely sold off which just shows that the Fed is yet to be ahead of the curve. I expect more downside in bonds but not as aggressive as we have been seeing. This is what the forward curve is currently pricing:
Oil is up nearly 20% in September alone… we are only 10 days in. This is going to significantly effect both Japan and Germany who are net importers of oil, and there is MUCH more downside in their equity markets than their is in the US, particularly given 1) the BoJ is way behind the curve, and there’s a bunch of intervention going on in the Yen, 2) Germany’s growth is not in a strong enough place to withstand multiple hikes from the ECB in my view (which is needed if they are to tame inflation). But also, if the Fed usually set the stance for global policy, the we can agree that most central banks will declare the fight on inflation REGARDLESS of the effect on growth, given that Warsh made this clear in his speech.
On the oil side, which is now the largest contributor to inflationary tail-risks (of course), vol is still VERY contained. Oil is back at the March highs but the implied vol of oil hasn’t even reached half of that. There is still much more room for this vol to blow out, but the market is becoming accustomed to these developments in Iran so there is less uncertainty (uncertainty is a huge reason implied vol blows out). I don’t have targets in mind for oil, and price can retrace so aggressively and get thrown around by headlines that I’m actually not bothered about taking risk in it, I’d rather use my capital in equities for now.
Oil is such a large factor to watch because equities now have a negative correlation with it.
If oil was rallying from demand then we’d have a significantly different correlation but we’re seeing a supply shock which is forcing negative returns in equities everytime that oil rips higher. Ultimately there will come a time where oil drops huge amounts, something like -10% in a day and this will cause direct upside in equities. I am not trading this exact catalyst as there’s almost no informational edge to find it (unless you KNOW when an agreement will be finally reached). Following oil and it’s correlations to equities, bonds and the dollar is very important.
Longer term I’ve made it clear I’m bearish on the dollar but for now, I won’t get long on EUR/USD until 1) my views on equities flip to bullish, 2) EUR/USD reaches at least 1.15500 level (this can change if there is some underlying factors which shift my models, but in the current position this is it).
On the day we have the dollar up, equities down and bonds down which shows a DIRECT inflationary tail-risk being priced in ALL of these markets.
When I have trade ideas ready, I will send them to the chat as you guys know. Check out my recent tweet surrounding returns recently also:
Thanks
Alfie
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