September 2022 Update

1 step forward, 2 steps back

It is common knowledge at this point that positioning is very short (like, record short). This year has been a tug and pull between bearish macro flows and positioning underpinning the market and compression of vol. We continue to expect more stair steps down and counter trend rallies. We may grind down to 3800 and slightly lower to shake out the weak hands, but it is our belief that the market will be stuck between ~3750 and 4200 until the new year.

The macro trend is alive and well

Inflation is running hot and real yields are still negative. Currently, the bond market is expecting a pivot at 4.5% in April 2023. We believe, and the fed has called for it too, that real yields need to be positive, which will put the feds fund rate somewhere between 5-6%, and maybe even 7% before pivoting. The fed wants low volatility (stability), low asset prices, and deleveraging. Going into the midterm elections, the fed is likely to become more hawkish. Do not wait for a pivot and new ATHs.

The bull case

Short interest is at record highs and vol is dramatically oversupplied in December. Seasonality is also weak for another month. This set up is like dry tinder waiting for a short squeeze.

Outlook for October

We are in a window of weakness. Lotsa supportive flows are only coming back around October 3rd, so we can expect larger moves moves until then. But if we live until then, continue to sell the rallies. Look for countertrend opportunities. No need to sell it here, and no need to try and hedge for a big tail yet, but that is on the horizon.