Suffice to say markets were not amused with the worst read on US factory activity in a decade.
US equities struggled to fight back in afternoon trading on Tuesday following a morning swoon that accompanied the abysmal read on America’s manufacturing sector.
By the closing bell, the S&P had logged its first decline of 1% or more since August 23, the day Donald Trump lost his cool on Twitter following China’s announcement of retaliatory measures in response to the new tariffs tipped by the US president on August 1.
“A look at US Equities index/ETF options positioning shows us that dynamics are tilting, with $Delta- and $Gamma- for both SPX / SPY and QQQ now ‘negative'”, Nomura’s Charlie McElligott warned on Monday. That opens the door to “sloppy” price action and it’s also worth mentioning that as of yesterday morning, the trigger level for CTA deleveraging on Charlie’s QIS model was 2,937.
One person who has seen enough is Kevin Muir, of Macro Tourist fame.
“I have turned full-Kodiak-brown grizzly on this market. I am adding to my shorts here”, he said Tuesday. “I’m like Otis – fat, old and lazy – but I think the salmon will be swimming right to me soon enough”, Kevin quipped. Apparently, this it Otis:
He (Kevin, not Otis) detailed the rationale behind his cautious stance on risk assets a week ago today.
“One of my favourite indicators is Ed Yardeni’s Fundamental Stock Indicator”, he said, on September 24, adding that he’s “learned the hard way not to disregard this signal” over the years.
For good measure, Kevin said he’s now long the short-end unhedged. “By the way, I have bought US two-year notes and did not hedge them with a short position in longer duration crap”, he remarked, before exclaiming “That’s how bearish I am!”
It’s worth noting that the discrepancy between ISM manufacturing and HY spreads is now even more glaring than it was last month.
“In the US, spreads have been widening since early May as the trade war re-escalated but are still much tighter than levels implied by slowing growth”, Deutsche Bank’s Binky Chadha cautioned early in September, after the August ISM print. “Although direct comparisons… are complicated by the large share in credit of the Energy sector then, during the last growth slowdown in 2015-2016, spreads were significantly wider, by almost 100bps in IG and 500bps in HY”, he added.
Finally, we though it was worth including one more tidbit from Kevin, which we’ll present without further comment:
Were you confused by the weird stock bid in the last week of September? I would argue that the asset allocators were once again at it with their “VWAP over the entire month.” Look closely at S&P 500 with each calendar month highlighted. Too often it goes one way all month.
Get the latest from The Macro Tourist in real-time on Twitter (@kevinmuir)