Q2 competition restarts today
Don't forget to make your predictions + quick analysis of post-CPI reactions
Quick summary:
Heads up: the Q2 survey is up & running - click here.
Our winners have been announced last week; keep up the good job!
We also gave you an in-depth look at our Q1 performance
This week the CPI report comes out on Wednesday. What can be expected? Read more below.
We’re back with our Q2 competition today after a brief pause last week. Once again we’d like to congratulate our winners for a job well done and we hope to have you all back this week for Q2.
Keep in mind that in addition to quarterly performance we also reward annual performance at the end of the calendar year. So make sure to stay consistent and reap the rewards.
The survey is here:
Last week we also shared with you our performance for Q1 2023. It was a tough quarter but nothing we can’t handle.
We’re looking forward to how this continues in Q2, and we’re happy to welcome you all back.
CPI report on Wednesday
One major thing to keep in mind this week is the CPI report that comes out on Wednesday (tomorrow), 08:30 AM ET. Obviously it’s difficult to know how the markets might react, so we thought it would be a good idea to have a look at how they’ve reacted over the past few CPI reports.
Below are the weekly SPX market charts (15-min intervals) for the past 6 CPI reports, from March 2023 back to October 2022. The yellow circle is the market reaction on the day of the report (data is announced before market open every time), after which we can see how the rest of the week played out. Notice that each time we have a gap move (up or down) after the report. That’s the market pricing things in. And yet, very often the immediate repricing goes too far, so the gap move is quickly to close.
Based on the initial gap move you can clearly see when the report overshot or undershot expectations. What’s most interesting for us is the reaction afterwards. We are deliberately only focusing on the past 6 months as this was the period of the long sideways market we talked about last time.
Have a look at the reactions following the previous two reports, in March and February. Good news in March, inflation came in lower than expected (actually I think it was exactly as expected, so no upwards surprise at least), so the markets gaped up and kept going up, interrupted by a strong intraday reversal, only to finish strong again in the final hour. Then a sharp decline on Wednesday open, followed by a rebound on Thursday and again a decline on Friday. Talk about kangaroo markets, ey?
But you gotta remember the context. This came a week after SVB went under, and uncertainty was still huge as to what the Fed might do. Notice the Monday gap down open and then huge move up to finish the day positive. Weekly implication? Overall, it was a positive week. CPI came above expectations, so markets moved up eventually.
February was even more difficult to decipher. Gap down at the open, followed by a rapid move up, then a reversal, and then creeping up for the rest of the day. Each subsequent day opened up lower, and then crawled higher (except Thursday when the close was negative as well). Weekly implication? CPI came in worse than expected and the week was, eventually, negative.
In January it came in better than expected (December represented a first decrease on a monthly basis in over a year), and even though the initial reaction was volatile, the week ended up on a high, merely continuing January’s mini rally across the board.
But look at what happened with post-CPI reactions in the final three months of last year.
December: CPI better than expected, gap up open, but down intraday, and down rest of the week. NOTE: Wed was FOMC day so the reactions on Thursday and Friday are more a consequence of that rather than the CPI report.
November: CPI better than expected, gap up open, and continued up rest of the week.
October: CPI worse than expected, huge gap down (in fact, this October low marked the lowest point of the 2022 bear market), but then a strong reversal throughout the day, finishing off with a 5% swing. We wrote about that back in October as one of the biggest surprises to our BASON positioning. We were holding short positions, went up +10% in those first 30 minutes, but then finished the week negative. Some explanations for the reversal, after a worse than expected CPI report, was that shorts were starting to close at this oversold point and this produced a temporary squeeze that sent markets up so rapidly. It’s the sort of thing that’s characteristic of bear markets - you have to close the shorts eventually and this was as good as time as any to do so.
Conclusions? We might say that a better than expected report could send markets up for the rest of the week, particularly in light with the short term bullish trends that we tend to observe right now. A gap up and then down is highly unlikely in these conditions.
On the other hand, a worse than expected report might be another catalyst that will reprice market expectations of the Fed’s reaction function. Right now the bond markets are pricing in a cut in interest rates before the end of the year. Bond yields are particularly sensitive to inflation so inflation being on a downward trajectory keeps pushing yields lower (just like it kept pushing yields up since mid-2021). The banking failures in March marked a catalyst for even more aggressive repricing of yields, so the question now is what signal are bond markets giving us?
But more on this later this week…
(NOTE: we’ll aim to provide more up to date market analyses in the upcoming months. We kinda lost track of all that in the midst of all the admin work that was required for the fund. But now we’re ready to go back to what we love: analyzing macro and market conditions constantly and consistently).
Welcome back, and feel free to jump right in:
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DISCLAIMER: Neither the survey nor any of the contents of this website can act as investment advice of any kind. The results of the survey need not correspond to actual market preferences or trends, so they should be interpreted with caution. Oraclum Capital, LLC (Henceforth ORCA) is a management company responsible for running the ORCA BASON Fund, LP, and for organizing a survey competition each week, where it invites the subscribers to its newsletter (this website) to participate in an ongoing prediction competition. The information presented on this website and through the survey competition should under no circumstances be used to solicit any investment advice, nor is it allowed to be of commercial use to any of its readers. The survey and this website contain no information that a user may use as financial or investment advice. All rights reserved. Oraclum Capital LLC.
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