“Traders bet the bottom is in,” one mainstream financial media outlet declared on Tuesday afternoon, following an absurd squeeze that catapulted the Nasdaq more than 3% higher into an illiquid summer tape.
I doubt the veracity of any explanation which posits a role for rationality or buying that wasn’t mostly forced. The S&P traded above its 50-day moving average (figure below), there was a record short in US equity futures, CTAs have been aggressively covering and, more generally, moves like Tuesday’s can create a sense of “It’s running away from me!” among managers who, according to the July vintage of BofA’s closely-watched survey, are underweight stocks and sitting on the most cash as a percentage of AUM in more than two decades.
Going by Goldman’s most-shorted basked, July is on track to be the worst month for shorts since the Reddit crowd was busy tormenting hedge funds early last year.
98% of S&P constituents rose Tuesday. The last time that happened was in December of 2018, which should tell you something: These are the types of moves that occur when uncertainty is high and liquidity is severely impaired. December of 2018 was the worst December for US equities since the Great Depression and it would’ve been even more painful were it not for rebalancing flows that hit in thin post-Christmas trading.
The point is, there’s nothing to be gleaned from days like Tuesday. Or at least not if what you’re after is fundamental insight. The dollar was noticeably softer, a boon to risk, but note that rates actually built in more Fed hike premium over the session, in sympathy with reports that the ECB is contemplating a larger-than-expected hike on Thursday. In other words, dollar weakness was at least in part attributable to a rebound in the euro predicated on suddenly lively ECB bets, not to any relief on the rates front stateside. The US curve bear flattened, and the 2s10s inversion was back below ~21bps.
All of that said (i.e., having summarily dismissed Tuesday’s equity rally as largely meaningless), I should note that there were some encouraging headlines on the prospects for the resumption of gas flows through the Nord Stream following scheduled maintenance. I assume most readers are well apprised of the situation, but Germany has repeatedly warned that Moscow would find some excuse not to restart shipments once work on the pipeline is completed this week. In that scenario, the Germany economy would be plunged into an overnight crisis. On Tuesday, Gazprom indicated flows would resume on Thursday at reduced capacity. Shipments were running at just 40% following curbs the Kremlin retroactively justified with a force majeure declaration late last week, which could suggest Vladimir Putin intends to curtail flows indefinitely. The curbs forced energy giant Uniper to request a bailout from the German government.
Also notable: The average price of gas(oline) in the US fell for a 35th day. That’s good news for consumer sentiment, which fell to a record low on the University of Michigan’s gauge last month thanks in no small part to pain at the pump.
Meanwhile, Netflix (which should probably rebrand itself “Icarus”) managed a positive surprise after the bell. The company “only” lost a net 970,000 paid subscribers during the second quarter (figure below). That was a “better” result than the comically disappointing guidance the company issued last quarter.
Revenue was short of consensus for Q2, and guidance was light across the board. The company said it’ll likely return to subscriber growth in Q3 with a million paid adds, well short of the 1.8 million analysts expected. At this point, I’m not sure it makes sense to talk about “expectations.”
The company flagged a pretty severe headwind from the stronger dollar and said revenue next quarter will be $7.84 billion. The Street wanted $8.1 billion. Netflix is, of course, in the process of experimenting with an ad-supported service which should launch at the beginning of next year.
“The market seems to be in a ‘everything is better than feared!’-like mood, which will help Netflix, but it’s hard to look at the guide and be very impressed,” Vital Knowledge said.
On the call, the company conceded that it’s “tough losing a million [subscribers] and calling it a success.”
Thin summer trading. Nothing fundamental.
People are puking OTM puts. My proof: VIX down on a 2.75% SPX day. People are throwing their Vol overboard, and Delta, Gamma, and Vanna are all pushing in the same direction.
We drove down to the Outer Banks last night to visit with some friends. The wait for every single decent place to eat down there was almost 2 hours. There were people crammed into every possible place you could imagine there. I don’t think we’ve hit a recession yet, hiking will continue into next year.
Hiking will continue until morale improves
would be so lost without your analysis of the market’s behavior on a daily/hourly basis. thank you.