Charts of the Week

There’s no shortage of moving parts to monitor in this market. Today we’re going to take a journey through the big picture and share some key updates on themes and trends we’re tracking here at MacroVisor.

Angry, Angry Sellers

Hedge funds are selling aggressively, extending short positioning into recent weakness. Most of this short interest is being expressed in single stocks, which could be setting up for some interesting opportunities.

Where Did Everybody Go?

Liquidity is rather low, with S&P 500 futures liquidity retreating to levels seen over the summer and before that during the SVB banking crisis. This is likely to increase intraday price swings and the total ranges we experience. Particularly as the S&P 500 is also in negative gamma territory (with the flip level at 4307 currently).

It’s Getting Crowded

The concentration of hedge funds in mega caps is staggering, as they represent close to 20% of net single stock exposure. This long exposure has been (at least somewhat) offset by concentrated shorts in other single stocks, as mentioned previously.

The Mega Flight to Safety Unravels?

Apple, the world’s largest company, tacked on a trillion to its market capitalization during a time when revenue and earnings were falling (when adjusting for buybacks). A fascinating case study on how the flight to quality, with size as a heuristic for “safety”, has prevailed in 2023. Hardly looking like any bull market in the past where there was a reasonably robust appetite for risk. But now even the leadership is falling.

Mega caps have begun to roll over, sell a drawdown last week that was the worst since October of 2022.

Topsy-Turvy Tech

The broader NASDAQ has also seen increased selling pressure, with the most new lows vs new highs that we’ve seen since September off 2022.

Even after all of this selling, however, the valuation of the NASDAQ 100 remains elevated.

Which may become more problematic given the amount of profit estimate downgrades we’re seeing, further calling into question what the growth picture may look like moving forward.

Bond Buying Bonanza

The flight to the long-end has been nothing if not remarkable. TLT call volume has surged, with much of that same being bought to open new positions. Last week saw the highest such volume on record, showing that the bond bulls are still very adamantly increasing exposure.

Many of those same bond bulls may indeed even be households, who have been rather remarkable buyers of Treasury exposure in 2023 so far. Perhaps on track for the largest year ever.

Households also have a rather sizable exposure to equities, with 39% of the $73 trillion in US market capitalization owned by US households. This has helped to drive the K-shaped economic recovery, which has helped to benefit the top 20% but seen the bottom 50% struggle more with costs rising faster than wages.

Equity Exposure Elevated

Free Cash is King

Free cash flow has been one metric to watch closely, as companies that have high levels of it have been outperforming. This is a theme that is likely set to continue in a high interest rate environment.

Biotech Bottom or Breakdown?

On the other hand, biotech does not like high rates as a long duration risk asset. XBI is at a somewhat perilous juncture here technically. Should support fail to hold we could see the ETF retrace rather meaningfully.

Conditions Could Continue to Tighten

Financial conditions are tightening back to levels we haven’t experienced since late 2022, only this time the Bank of Japan is beginning to tighten their policy stance, and the positive fiscal impulse from late cycle US government spending has dried up. It’s unlikely that financial conditions loosen much from here until we see a more meaningful drop in inflation and growth.

Such tight financial conditions are likely to hit the bottom 50% of the S&P 1500, which is experiencing the highest effective interest rates in three years. Indebted small and mid caps are also significantly under pressure from a rising cost of capital, particularly if they have debt maturing soon or, worse, are using revolving lines of credit that ratchet up in cost as rates rise.

These tightening financial conditions are also impacting CCC-rated corporate bond spreads in the US and Europe, with Europe leading the way insofar as financial stress is concerned.

Hong Kong King of Equity Volatility

Hong Kong, on the other hand, is leading global equity indices in terms of three month at the money equity volatility. Given the pressures in China, this isn’t terribly surprising. It’s also an area to monitor as meaningfully higher volatility may not stay contained overseas.

Economies Tend to Overheat Before Recessions

While there is a lot of excitement about the Q3 GDP print, which was a strong top-level reading by any measure, it is often the case that the economy overheats right before it turns down.

Consumers also are tapped out of their post-COVID excess savings, outside of the top 10%.

Closing Thoughts

2023 has been a year of thin upside participation. Where it’s paid to be bullish in a select few stocks and the large cap US indices, and at the same time bearish a number of weaker, smaller names and indices. That is to say, both bulls and bears have had plenty of opportunities to make money in this market environment, but bulls have had to be far more selective overall.

All of these experiences should serve as an opportunity to learn. After all, we all pay a tuition to the market. It’s our choice as to whether we’re going to benefit from the lessons being taught.