It might not seem like it on some days, but markets are normalizing.
Well, I should qualify that. Markets are normalizing outside of oil.
Sure, swings of 2% and 3% are still the norm rather than the exception, but remember, this time last month daily moves of 9% in either direction were not uncommon.
In the bottom pane you can see that slowly (although not yet “surely”), a simple gauge of how many S&P members are above their 200-day moving average is creeping up, as the bounce off the March nadir attempts to sustain itself despite oil’s epochal collapse, poor earnings and dour data.
Looking under the hood (if you will) shows a collapse in vol. of vol., which is back to levels last seen early last month.
“This is telling us that the grab for tails – either ‘crash down’ or ‘crash up’ – has run out of steam as traders tighten the trading range distribution scenarios”, Nomura’s Charlie McElligott wrote Thursday.
He also notes that this in part reflects dealer gamma positioning which, in SPX/SPY consolidated options, is hanging out “right around” the neutral zone, on Nomura’s model.
(Nomura)
That (dynamic) demarcation line is where the short gamma position that has so vexed markets (exacerbating and accelerating directional moves) over the course of the crisis “begins tilting into outright long gamma territory around 2797 or 2810 ex-Friday’s expiry”, McElligott goes on to say, before reminding you that if we can get into the long gamma zone, the market will have its “shock absorber” back, as dealer hedging would entail selling strength and buying weakness.
That would insulate equities from the kind of dramatic swings seen last month.
Remember, the more volatility normalizes, the more systematic flows will be drawn back in. As realized vol. is pulled lower, vol.-control will re-leverage after reaching the “nothing left to sell” point during the rout.
Of course, as noted above, this all comes against an extremely challenging backdrop fundamentally.
So far, only 65% of S&P 500 companies reporting have topped EPS estimates. That’s the least in a decade and doesn’t stack up favorably to the 75% of companies which usually beat during an average quarter, JPMorgan writes, in a new note.
As things stand, the EPS growth run rate is -24% YoY. That’s some 9% below consensus.
To be sure, there are some “shattered dreams” out there.
And yet, if you’ve learned anything post-crisis, it should be that betting against policymakers with printing presses is perilous.
Especially when a pandemic has given them all the cover they need to toss moral hazard considerations out the window.
Thank you for bringing us these commentaries.. Looking at today’s market action, it is clear that the only things that matter are the activity of these speculators.
Those who dogmatically adhere to looking at “fundamentals” risk the same fate as old-time doctors who refused to budge from their belief that leeching was a valid cure for many ailments.
Keep in mind as well that the economic fundamentals are, themselves, subject to an inflection point. For example, with 26M new unemployed, even if you assume a fairly slow recovery, we are nearing a point where BLS will start reporting a 20-month long stream of blockbuster monthly unemployment reports with 1M+ job gains almost every time… simply recovering the job base at whatever pace you’d like to assume. How will that work as a catalyst in a market environment where short vol once again becomes the least path of resistance? Pretty sure we’re talking about peanut butter meeting jelly again…
McConnell has started up the moral hazard talk again, and has stated that there will be no phase 4 blank check to states. Specifically blue states.
No matter who gets in in November (but especially dems), expect the GOP to return to its deficit hawkish self in 2021.
The GOP deficit dinosaurs will have to contend with their new POPULIST base. This part of the GOP base is not concerned with deficits – they want and expect their Medicare and Social Security. There is a split on Medicaid, especially in the opioid belts, because so many rural hospitals depend on it.
However, they DO favor cutting spending that benefits minorities as long as they are not impacted.
Can or will the Tea Party types stand up to them and risk sending this crucial part of their base over to the Dems?
Since 1987, Trump has registered as follows/ Republican, Independent, Democrat, Republican, Independent, Republican.
Trump will figure out what he has to promise in order to increase his chance of getting reelected and try that!
We will not get back into US equities without fundamentals.
If we can not earn 4-5% passively in US equities ( including capital gains) – we will look elsewhere to invest our money.
We are not afraid of hard work and we will figure it out.
Luckily, we can afford to be patient and see where this settles, including our expectations of MUCH higher taxes to supplement the MMT printing ( good bye: estate tax exemptions, lower tax for capital gains, interest carry, 1031 exchanges….).
Fighting the Fed is indeed a fool’s errand but the Fed will be operating in a changed political landscape –not sure you can continue to permit banks to pay dividends with 30+ million are unemployed and food bank lines stretch for miles. Then there is the macro question of how effective ZIRP + QE ad infinitum will actually be in a “real” economy meltdown. How well was the patient when she was induced into a coma? How effective the therapies? What will be the side-effects? Once revived how disabled will she be and for how long –if not permanently (debt and demographics in mature economies were problematic pre-pandemic)? Not sure anyone knows, but I am pretty convinced that the therapies that worked for the past decade or so will not be as efficacious over the next –even if they prove politically acceptable.
Sure seems like the Fed will do whatever is necessary (e.g. steamrolling Congress into allowing SPY purchases) in order to prevent any SPX breakdown below 2,200.
Fed Put 2.0 will be a very powerful put indeed. Indirectly influencing equity prices via the credit markets is one thing. Pulling out blue SPY tickets is quite another…
I sincerely doubt that the Turtle would have very bluntly told states to go F-themselves (i.e. “declare bankruptcy”) if authorizing the Fed to purchase equities directly were even within 5 light years of the politically possible.
Indeed. But if you read comments on some of the less “sophisticated” news sources, it appears that there is a general belief that the Fed is already in there buying SPYs.
Correct me if I am wrong (once again) but isn’t the BOJ the only one doing that …. so far?
RStantz, I think those are two very different animals from the Turtle’s perspective. I believe that the Turtle is observant enough to see that most of the $’s needed by states are needed by BLUE states. So, just like that $10,000 cap on the State and Local Tax deduction, I’m pretty sure Turtle has no qualms whatsoever in bluntly telling Blue States to go F themselves.
On the other hand, the GOP’s nationwide constituency (and mega-donors) would certainly enjoy a permanent, price-indiscriminate bid in SPY.
Couldn’t disagree more. The optics of buying equities in this environment preclude direct assistance (and the Fed is far from exhausting indirect means of support the market), the politics worse. There just are not the votes in the Senate to amend the Federal Reserve Act –not just Democrats like Warren, but for Repuclicans like Toomey, Johnson, Lee, Daines, Paul and probably Cruz (if he gets a whiff of a populist wave to ride) voting for “Socialism” is a non-starter. And then there is the House where the demand to convert Fed buying into a SWF would be the price that would have to be paid for passage, which of course is a bit of problem for the Senate. By the time we get there SPX below 2200 will be the least of your worries.