it really IS different this time; positions; technicals
a strong 2yr auction kicks off liquidity events this week
First a word from Global Wall Street (aka our sponsors),
HERE is the full (archived)story for posterity sake.
The Market Has Never Plunged 10% This Fast to Start a Year
…The S&P 500 has dropped 11% -- heading into correction territory -- in the first 16 trading days of 2022 in its worst-ever start to a year, according to Bloomberg data that goes back over nine decades.
The downturn comes as traders brace for the Federal Reserve to tighten monetary policy and a surge in U.S. Treasury yields weighs on the outlook for stocks. A host of technical signals also suggest that more volatility may be coming up ahead.
The problem is … it’s not JUST different this time but it’s really different this time as in, the ‘flation.
But to save MSM a few steps, I mean, you know. Nothing without consequence, right? June hawkish pivot was bullish flattener. Latest iteration having gone a bit too far down the taper / tightening road, hike / QT pricing, etc, and something had to give. Problem is it would seem to those in the know (everyone is more in the know than am I), there’s more to give..
On that, and how much more to give and next up then as we attempt to put bits and pieces of the mosaic together, and aside from / along with common sense (which ain’t so common) of POSITIONS, well, this timely POSITIONS UPDATE from those who tell us what happened overnite,
Waiting For Equity Long Liquidation?
… >>> Areas of focus?
Extended shorts in fast 1mth positioning cut by 50% into richening… less extended from recent extremes => bias for richen but more balanced with FV profits at 119-24
Price action in equities driven by aggressive addition of new shorts with positioning regime now flipping into short/profit => oversold and bias for richening... but legacy setup remains extended long and now moving into loss => next stage capitulation => In SPX legacy losses growing below 4,350 with next critical level at 4,150 where 75% of legacy risk moves offside.
Risk parity having a rough ride => potential for deleveraging BUT we need higher/sustained volatility.
>>> UST - Profit Collapse: $60m shorts (4bps profits) vs $43m longs (15bps loss)
As we had highlighted last week, the market had built into extreme shorts as yields touched 1.90% and over the last few trading, investor have rushed to take profits with short positioning rapidly cut - on Friday we saw aggressive covering of shorts ($13m / zscore +3.0) with fast (1m) positioning cut by 50%. In contrast, in our own flows the market was better to fade the richening / recent flattening in 10s and 30s.
So where does that leave us? We find that CTAs remain max short and need an addition 10bps of richening before short signals start to be trimmed in 30y (and larger moves required in the belly). Meanwhile in longer term positioning, the landscape is now only moderately short with short profits offset by long losses.
Are we in the capitulation zone? Certainly, there is fuel for more short covering but less extended setup / no profits which makes risk/return more balanced. Focus remains on the short side (since there is still where the risk is concentrated) … in FV/TY with short profits further squeezed above 119-24/128-20 but in CTA large moves required with shorts starting to be trimmed at 120-18/129-24.
Ah the good ‘ole days (no, not when long bonds yielded 2.10%) when 127 strike was relevant. Perhaps another day …
For NOW a couple of links for those more TECHNICALLY inclined trading junkies
KIMBLE wrote, Major Stock Market Indices Reach Critical Impasse!
A couple from Potomac guys noting that Support Levels Give Way in the U.S. with a tidbit on RATES (10y futs, RSIs and yields),
While we have had a downside bias to the 10-Year Note (upside bias to yields), if the price is below the 10 and 4-week moving averages, we would not be surprised to see some stabilization as the next support level, near $128, is tested. This test plays out as the 14-week RSI makes another higher low and has held above 30. It would not be a surprise to see a move back to the moving averages.
Note that the yield is holding above resistance at 1.75%. That is a key level to watch as price tests support.
At the same time, they also suggest burden of proof (and saviour’ness) now has shifted a bit … The Burden of Proof Is Now with the Bulls … This ALSO contains a bit about RATES in addition TO the above,
Across the curve, flattening remains the theme as rates at the short end move higher (seeming to agree with the Fed) while rates come down at the long end. This move at the long end of the curve speaks interesting in that it has the potential to spark a debate among investors: is the Fed going to tighten into a slowing economy? We are not interested in the specific narrative per se, but we are mindful of headlines that these prevailing trends could produce.
Finally, from Global Wall Street where it would appear some stops were / are about to be HIT and FI techs are being driven BY stocks … CoTD is 10yy (1.7095/1.685% — below which would COMPLETE near-term TOP — next stop would be scope down TO 55dMA @ 1.57, “…but with this then ideally holding”). This shop formerly known for having the word BOSTON on it’s shingle is now,
NEUTRAL 10yy BUT, … would look to get tactically bearish again at 1.66/1.62%, with key resistance seen at 1.57%.
staying SHORT 30s and … looking for a move to support at 2.17% initially, then 2.32/33%. Resistance stays at 2.03%, below which we would turn tactically neutral.
Haters gonna hate and hope as a strategy combined with some PRICE discipline.
In closing, what does all of this mean? In typical build it and they will come fashion where IT is a concession which started the year in rates, 2yr auction was quite good.
2-year auction stops through 1.2 bp -- strong indirects
* Today's 2-year auction was strong with a stop through of 1.2 bp and non-dealer bidding of 75.4% vs. an average of 73.6%.
* 2-year auction stopped at 0.990% vs. 6 auction average of 0.440%.
* Bid/Cover was 2.81x compared to an average of 2.50x.
* Dealers took 24.6% vs. a 26.4% average.
* Directs claimed 9.4% vs. a 19.7% norm.
* Indirects were awarded 66.0% vs. an average of 54.0%.
* Rates were lower, but not materially so in 2s heading into the auction as risk assets came under further pressure and the S&P 500 entered a correction. Since the result, yields have extended their decline led by the front end.
Volumes UP,