Charts of the Week

Happy Friday! What a week we had with OpEx, a litany of Fed speakers, and some key macro data. Today’s OpEx was a bit lighter than normal, with “just” $1.7T of notional expiring, with about $735M of SPX in the morning.

Because more options trading is happening with shorter expirations, it’s also logical to think that there is less longer duration positioning. At least for now.

Speaking of options, NDX (the NASDAQ 100 index) saw significant call volume on Thursday, the highest since 2014. This amount of lopsided volume sometimes coincides with euphoria-level sentiment.

On many Fridays when weekly options for single stocks expire, we’ve seen mega cap tech call volumes surge, in larger and larger size coming into today. Though we did not see the same level of eager call buying today during monthly options expiration.

Speaking of tech, we’ve seen a surge of inflows, making the sector quite the crowded trade. But there are other reasons for it, such as the upward rotation in size.

Some managers are essentially looking at market capitalization as a heuristic for quality: larger is better. This has caused breadth to narrow, and often that portends to some level of increased risk when looking back at historic analogs.

The other side of the crowded tech trade is shorting US banks, which has also become quite lopsided. 80.2% of KRE’s float is short right now, for example.

We also saw a rather significant rotation into tech and Eurozone stocks over the last month, continuing a theme for 2023. On the other side, commodities, utilities, emerging markets, and US stocks saw some reduced positioning.

We can see a bit of the distribution out of US equities by institutions below, which has been going on for over a year. Individuals have also been lightening up their positioning a bit.

Meanwhile, index and to a lesser extent hedge funds, have been accumulating equity exposure.

The ratio between the Russell 2000 and NASDAQ 100 is back to an extreme we haven’t seen since the COVID crash. But this time it’s about the regionals tanking while tech rockets higher. Will this provoke a mean reversion trading opportunity with the extended short positioning and longs in tech? Quite possible.

The gap between QQQ and TLT is at the largest levels we’ve seen in about a year. Often this reverts, with TLT leading QQQ lower or them meeting in the middle. Will this time be different? I think it may depend on when the debt ceiling resolution happens and the size of debt issuance per month. The sooner the better for the bulls. Otherwise we could see the liquidity vacuum effect amplified even more. Either way, the amount of Treasury issuance of up to $1.2 trillion by the end of September largely in bills is likely to drain liquidity from risk assets and bonds.

That removal of money supply can also be seen in M2, which is reverting to a longer term trend in terms of its rate of growth. While it is concerning that money supply is falling year-over-year, the amount of money that was created in such a short time was excessive.

For a 13th month leading economic indicators (LEI), as measured by the Conference Board, fell again. Since 1960 anytime we’ve seen LEIs fall for 6 or more months we have a recession follow. We still feel the chances of a recession this year are elevated.

The debt ceiling looks more like a set of stairs and then an elevator, doesn’t it? The measure introduces more problems than any sort of practical governance of the total debt burden. Nevertheless, it is something the Congress and White House wrestles with regularly, and that can sometimes have impacts on the economy and market.

Bankruptcies are on the rise so far in 2023, after a rather slow start to the year in 2022. The size of the bankruptcies have also, at times, been rather large.

Retail sales came in lower than expectations of 0.8% at 0.4%, but discretionary spending did get a boost after a lackluster March.

We saw signs of this ahead of time from Bank of America’s credit and debit card spending data. The biggest weakness appears to be in clothing, home improvement, luxury fashion, and furniture.

We also saw especially weak business conditions from the Empire State Manufacturing Index, which came in at -31.8 vs an expectation of -3.7.

New orders fell significantly, along with shipments, and backlogs.

As we move into what may be a recessionary period, the question is what does the first rate cut look like for markets? It’s a mixed bag, with reactions varying. In essence, there’s no guarantee that it is the bottom or that there is more downside to come either.