A review of the paywall section
Was it worth it?
We have featured the paid section of the newsletter for 6 months now. We have guided our dear subscribers through several key events that made a big difference in portfolio positioning during that time.
What started as a free pocketbook guide through the August sell-off (see below), continued into a more detailed coverage of the September and October sell-offs.
After a “very hawkish FOMC” in September, we kept a close eye on the bond market throughout October, and consistently updated our short positioning.
Then on November 1st, after the QRA and a much more dovish FOMC, I’m proud to say we captured the full extent of the powerful November reversal, after which the markets haven’t yet shown any signs of stopping.
We have unequivocally stated on Nov 2nd that the Treasury and FOMC provided a strong buy signal for both bonds and stocks, and that they have “saved Christmas”. The sell-off was done. A bull market ensued.
Then came the December FOMC, even more bullish than the last one, signalling a total of 3 rate cuts for 2024. Our verdict was once again spot on, it was a clear bullish sign.
We expected another reversal and a sell-off come February, but that one never happened. We once again followed all the action from the Treasury and the FOMC on Jan 31st. Even though the initial verdict was bearish, and the markets sold off heavily on the day, the price action hence has invalidated that verdict, and we shifted our positioning quickly. The clear implication was if you can’t beat them, join em. Which we did ever since and rode the wave during February and into March.
Let’s unpack these one by one, to review all of our hits and misses over this 6 month period. Like we did back in August:
Let’s jump in.
Shorting during Sep and Oct
September 13th - Our analysis underscores the impact of inflation on market sentiment. Despite a slight CPI uptick, the market remains resilient, driven by strong consumer demand. However, concerns persist regarding asset valuations and inflation expectations. Anticipating short-term pressures, we advocate for strategic hedging and prudent risk management, especially ahead of the upcoming FOMC meeting.
September 21st - We correctly anticipated the market's hawkish turn, driven by an expectation of continued Fed firmness on inflation and the likelihood of further interest rate hikes before the year's end (even though they never happened, but that was later captured as well). Our strategic move to acquire put spreads with Oct expiry paid off as the value of these positions surged, reflecting the market's adjustment to a tougher-than-anticipated monetary stance. This foresight was not only vindicated by the substantial negative reactions in both equity and bond markets, with stock indexes and bond yields taking a hit, but also reinforced our decision to maintain a bearish stance throughout the next few weeks.
September 28th - Once again, we underscored a bearish sentiment towards both bonds and equities, driven by prolonged yield curve inversions signaling an impending recession, significant bond market adjustments due to massive new treasury issuance to cover a $1.5 trillion budget deficit, and the Federal Reserve's determination to maintain high interest rates.
October 5th - Despite avoiding a government shutdown, bond market turbulence triggered yet another sell-off in equities. Anticipating potential recession concerns, a small trade in TLT was initiated. The analysis underscores the interplay between bond and equity markets and hints at strategic positioning for future scenarios. We lost a little on the equities shorts in the following week (but still kept them), and gained on TLT longs.
October 14th - We outlined a five-step macro playbook indicating potential recession concerns amid ongoing market uncertainty. We keep seeing more of the same: bond yields continue to rise, triggering equity declines. Anticipation of potential earnings compression underscores looming recessionary pressures, prompting strategic positioning with tactical longs, hedging, and exposure to long-duration bonds. As we monitor market indicators signaling a deeper downturn, readiness for potential shifts in market dynamics remains crucial in navigating through all this macro volatility.
October 21st - Our analysis precisely anticipated another bearish turn, marked by a significant downturn in bonds and a cautious shift from equities despite attractive Treasury yields. The strategy of maintaining SPX and NDX put spreads and adjusting TLT positions amidst fluctuating markets underscored our foresight. Despite facing unpredictable Big Tech earnings and economic announcements, our portfolio's resilience validated our bearish stance, showcasing our ability to navigate through market turbulence with accuracy.
October 28th - We explore the upcoming Treasury’s quarterly refunding announcement (QRA) and the FOMC meeting, highlighting their potential impacts on bond and equity markets. Despite positive earnings reports, market sentiment remained subdued as macro conditions, including rising Treasury yields and shifting investor flows, weighed heavily on equities. Attention turns to the QRA as investors gauge potential changes in government bond supply, with scenarios ranging from decreased deficits to increased borrowing needs, each with distinct implications for market dynamics. As we brace for potential market shifts post-QRA and FOMC, our positioning is now flat, ready to react based on emerging trends and scenarios outlined.
Going long in Nov and Dec
November 1st - We highlight a shift towards more optimism following the Treasury's unexpected decision to lower long-term bond issuance, reducing the case for bond shorts and leading us to close equity hedges. This move, diverging from prior estimates, suggests decreased pressure on yields and the potential for market rallies. As we await the Fed's decision, we're positioned for a possible short-term rally, demonstrating our flexibility in responding to new developments.
November 2nd - We observed a bullish turn in market sentiment, driven by the joint updates from the Treasury and the Federal Reserve. The Treasury's announcement of lower-than-anticipated long-term bond issuance for the next quarters has significantly eased concerns over yield pressures, prompting us to pivot and enhance our exposure to both T-Bills and SPX.
November 11th - We reflect on the aftermath of a highly anticipated week marked by pivotal moves from both the Fed and the Treasury. While the previous week saw a notable rally, this week brought a return to sideways trading, prompting questions about the sustainability of the upswing. We examine Goldman Sachs' optimistic macro outlook report, contrasting it with the challenges posed by the swift reversal in long-term yields, which could hinder the Fed's efforts to control inflation. Despite the potential for a false dawn, we maintain long positions in anticipation of range-bound trading in the coming months, with equity markets likely to hover between 4,200 and 4,500.
November 18th - Despite lower-than-expected inflation figures, uncertainty persists regarding the trajectory of market movements. Our outlook remains cautious, anticipating potential sideways trading with limited upside. We maintain long positions but stand prepared to adjust our strategy based on evolving market conditions, particularly in light of the Fed's commitment to maintaining higher interest rates.
November 25th - We observe another week characterized by sideways trading and subdued volume, attributed to the Thanksgiving holiday. Despite the holiday slowdown, market momentum persisted, with indices steadily inching upward. Reflecting on our previous calls, we note the success of our strategy, particularly our decision to capitalize on lower bond yields and hold long positions in equities. However, as indices breach key levels, signaling potential headwinds, we adopt a cautious stance, considering the possibility of market corrections.
December 2nd - Despite bearish macro implications, technical factors and structural flows suggest a favorable environment for a December rally.
December 14th - We identified another powerful bullish shift following the Fed's latest FOMC meeting, where a dovish outlook for 2024 projected 3 rate cuts for next year. The market priced in 6 rate cuts and kept rallying.
December 23rd - We revisit both the bullish and bearish views for the market in 2024. Bullish sentiment remains strong, with expectations of a soft landing supported by factors like the completion of the Fed hiking cycle, strong economic growth, and accommodative fiscal policy. However, caution is advised as easing financial conditions could complicate the Fed's efforts to sustainably reach its inflation target. On the other hand, bearish concerns persist regarding slowing growth, stubborn inflation, and the potential for policy mistakes. Wage inflation remains high, posing challenges for reducing inflation to target levels, while earnings projections may fall short, leading to potential stock sell-offs. As we navigate these opposing viewpoints, our current positioning maintains long positions in equities and bonds, with a watchful eye on upcoming macro events like the QRA and FOMC meetings in January.
Playing it careful in Jan
January 13th - Our analysis strikes a cautiously optimistic tone, balancing the bullish momentum of early 2024 against ongoing inflation worries and policy uncertainties. With 'sticky' inflation persisting and discussions around an earlier-than-expected end to quantitative tapering (QT), we're closely watching the Treasury's bond issuance strategy and its implications for market stability. Anticipating potential short-term market corrections around the upcoming options expiration, we're hedging with puts, while remaining alert to key forthcoming events like the QRA and FOMC meeting.
January 20th - We observed a week filled with contradictions, as the SPX and NDX hit all-time highs, fueled by a tech rally, despite rising bond yields signaling caution. This dichotomy reflects a market grappling with robust labor data and persistent inflation, challenging the Fed's pathway to rate cuts. Our interpretation sees this as a bullish technical signal for equities short-term, yet we caution against complacency, noting the potential for economic data to delay anticipated Fed rate cuts. The shift in rate cut probabilities postulates a more complex landscape ahead, necessitating strategic hedging. We responded by buying hedges to safeguard the long positions, recognizing both the immediate opportunities presented by the market's upward momentum and the underlying risks highlighted by the week's economic indicators.
January 27th - We anticipate a tense week ahead, with crucial fiscal and monetary decisions poised to dictate market direction. We're eyeing the Treasury's long-term bond issuance and the Fed's rate stance, alongside major tech earnings, as potential catalysts for volatility. A bearish tilt predominates our outlook, with expectations of increased bond supply potentially dampening equities, while remaining open to adjust our strategy post-policy reveals.
A bullish reversal in February
February 1st & 3rd - The QRA and FOMC painted a clear bearish signal for the markets on the final day of January. The announcement of increased long-term Coupon issuance to $581 billion—coupled with the Federal Reserve's pause in rate hikes and commitment to ongoing quantitative tightening—has cemented the bearish view. But it was wrong. The next two days, price action invalidated the view.
Contrary to expectations, the equity market's resilience, particularly after the earnings rallies from META and AMZN, forced us to reconsider our position. This unexpected turn, influenced by institutional bond buying and subsequent short squeezes, has led us to acknowledge our initial misjudgment. Maintaining long positions while cautiously watching for a correction, we emphasize strategic patience and readiness to adapt, highlighting the challenging balance between bearish predictions and bullish market behavior.
February 13th - We issue a warning regarding the seasonal impact of the February options expiry window. We warn that if there is to be a sustained sell-off, it needs to happen in the next two weeks. Until Fri the 23rd.
February 17th - We observed a volatile week shaped by key events from two weeks prior, in addition to looking at the Feb option expiry window. Despite an initial sell-off triggered by hotter-than-expected CPI reports, equities rebounded swiftly, sustaining near all-time highs. Notably, the divergence between bond and stock performance underscores evolving market dynamics, with Big Tech stocks continuing to dominate despite macroeconomic headwinds.
February 24th - The two week window has passed. Despite initial concerns spurred by inflation worries, the market continued its ascent to record highs, propelled by strong earnings reports, notably NVDA's stellar performance. While fears of a market correction during the post-options expiry window subsided, lingering risks from upcoming events such as the March FOMC meeting and Q2 bond issuance loom. The prevailing bullish sentiment remains robust, driven by the Mag6/AI narrative, yet vigilance against potential macro headwinds, including the impact of the reverse repo facility and large bond issuance, underscores the need for strategic positioning and flexibility in navigating evolving market dynamics.
And there you have it. A lot of good calls, a few bad ones, but the most important outcome was immediately signalling the reversal from Nov 1st: short before, long afterwards. If you did just that one trade, it would have made a world of difference.
Thanks for reading!
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