Alright you degenerates…
The bad news is that the Fed is still “rigging the game” to the downside. The good news? Powell hinted that the rate hikes for next year are not set in stone and are subject to change based on how the inflation story plays out. There was some relief from this event; most players braced for a highly hawkish tone, which did not come to fruition. Additionally, we confirmed a recession last week, with Q2 GDP shrinking by 0.9%. However, the reaction to the event was not as dire as most players expected. The indices went on to rally Thursday. Why? This is one of those scenarios where bad news is good news for the market. The anticipation of a recession led to that “slow bleed” price action in the indices. Now that the band-aid has been ripped off, market participants are taking a more forward-looking approach. With long-term sentiment and positioning still at bearish extremes, players are not positioned for significant upside; any unexpected news will likely prompt a scramble for exposure.
While everyone was trying to call a bottom in the indices over the last few weeks, solar stocks ripped higher in the background. Most investors threw this sector in the same category as speculative EV stocks. However, $ENPH and $FSLR posted impressive earnings last week, proving that the group can hang with the quality names. This outperformance in individual names is what we mentioned in previous posts. Despite the choppiness in the indices, there will be opportunities in select sectors and stocks that no one is paying attention to. This is only the beginning; expect to see more market areas follow suit.
A fascinating part of this bear market rally is that not everyone is chasing strength! Hedge Funds and CTAs (Commodity Trading Advisors) are net short and have hardly budged in terms of positioning. CTAs are trend followers, so if this rally continues, they’ll give in. Hedge Funds are similar; they face pressure from clients if they don’t add long exposure during meaningful rallies. Both parties will be in serious trouble if the market runs away.
We haven’t yet seen the aggressive post-earnings flow that we were looking for. When the flow comes, it will be VIOLENT. Those back-to-back, long-dated, multi-million dollar orders are what we want to see for that ultimate conviction. We just have to make it through the gauntlet this week. Once that’s in the rearview mirror, we can start dissecting sweeper activity again and look for select opportunities.
The Squeeze-O-Meter closed last week at 63 as short-term sentiment got overheated. At this level, the risk/reward of being bullish is less favorable due to the short-term crowding on the long side.
This is another batch of earnings bets. For these names, the post-earnings flow will provide far more clarity.
Hedge Funds covered some of their shorts but remained net short. They are severely underexposed to equities and will have to chase if the market keeps moving higher.
Almost every sector hit a bearish reading last week because of the violent squeeze. On a risk/reward basis, long swing trades are not as favorable at these levels.
Jesus believes something has to break before the Fed even thinks about pivoting. Watch today's Flow Show if you want to hear what Wall St. Jesus is most concerned with regarding the current backdrop.
Spencer Riegle hosted his first monthly crypto Misfit Happy Hour with guest John Divine from Blockfills, a market maker in the digital asset space.
See you mañana!
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