“It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.”
–Charles Darwin

When a new predator species is introduced into the animal kingdom there is an original discovery phase. During this phase the predator will be eating like a king due to its prey being unaware of its existence. Although as time goes on the prey will learn and become more aware of the predator’s habits. Once this happens the predator will begin to have less and less food as the only prey that survives are the ones who have adapted to the change in their environment.

The biggest change that came into our finance world in the last month was the 0DTE game. When not a lot of traders knew about it, the players in the game were eating like kings. There would be one option with far and away the most volume and that would determine the price for the day. Although as time went on the game started to change to where there would be two options with the highest volume, a Call and a Put. These two options would define the intraday range.

Although, as more and more people figured out the game being played, the 0DTE game has started to generate less and less profit for those involved. Exactly like our new predator species being introduced into the animal kingdom.

Evolution - 02.16.2023 Tesla cartoon

Back to the Global Macro Grind…

The top traded 0DTE yesterday was the SPY C412, which did NOT pay out (457,984 contracts traded). As well the 5th largest contract did not pay out either, the SPY C411 (275,297 contracts traded). The contracts that paid were the 2 & 3rd most traded, the SPY P411 and SPY P410 (351,092 and 330,746 contracts traded).

Coming into today the contract that has been on the board is the 2/17 TSLA C220. In the last 2hrs of trading yesterday TSLA fell -5.4% rejecting this line. With bitcoin this morning also being down -3.2%. So, we will see if they are able to print the 220 line today. To do so they must push TSLA up +8.9% from here. Also, if you were wondering what type of stocks TSLA is trading like, it is all things tech and crypto that are unprofitable (not a great camp to be in for a $639B company trading at a 55x P/E).

The next large trend in the international market is China’s reopening. When China reopened, the country’s most reliant on China as a trade partner also saw a significant price increase based on the belief that the China opening will increase international demand.

What we have been using to track this are the January export numbers for individual countries to China. In the chart of the day, you can see the only countries with an acceleration in exports are Singapore $EWS and Indonesia $IDX. While South Korea $EWY (-31% YoY), Japan $EWJ (-17% YoY), Taiwan $EWT (-34% YoY), and Vietnam $VNM (-21% YoY) all saw significant decelerations in trade exports. This is only one data point but will continue to be important going into February as expectations for GDP in these countries continues to accelerate (as are quarterly earnings expectations).

Let’s get into todays set up via the risk range upside : downside risk. Bitcoin 1% : 16%, TSLA 7.9% : 22%, AMZN 9% : 5.5%, SPX 2% : 3%, VIX 1.7% : 18.9%, Shanghai 2% : 0.8%, Oil 5.6% : 4.6%, Gold 4% : 0.5%, and Dollar 0.1% : 2.5%.

Both TSLA and Bitcoin are providing the most downside potential. Although the top end of the range (yesterday’s) for TSLA is 218, the option line is 220. The S&P is giving an even fight today with the VIX probing the top end of the range. The Dollar is also at the top end of the range which equates to China being at the low end of its range. Gold has gone to the low end of its range as Fed rate hike expectations continue to increase. Then finally Oil is in the middle of its range (-2.9% this morning).

High Frequency Data:

  • The 2yr yield is up +17 bps on the week. My colleagues have been breaking down the US data in previous Early Looks but to recap, the Fed has a long way to go in this tightening cycle.
  • Rate hike expectations: 25 bps in March, 25 bps in May, and an 89% probability of 25 bps by July.
  • The current 2-10 spread is -79 bps and the 1yr forward 2-10 spread decelerated to -46 bps. This signals that the current 2-10 spread will remain inverted for some time
  • US Fed Primary Credit has remained around $4-5T
  • The Fed continues to have decelerating MBS and Treasury Securities held YoY
  • Germany $EWG PPI (Jan) decelerated to +17.8% YoY, consensus was at +16.4% YoY
  • UK $EWU Retail Sales (Jan) accelerate to -5.1% YoY
  • Indonesia held its interest rates flat at 5.75%. Annual inflation is at 5.95% with a target of 2-4%. Indonesia being one of the countries with increased demand from China would signal that CPI is likely to accelerate from here.
  • China $FXI House prices (Jan) have remained flat at -1.5% YoY for 6m
  • IVOL Discount Callouts: Chile $ECH, Turkey $TUR, Energy Exploration $PXE, Sugar $CANE, 1-3yr Govt $SHY, BBG Int Treasury $BWX, BBG Muni $TFI
  • IVOL Premium Callouts: France $EWQ, Netherlands $EWN, Germany $EWG, Sweden $EWD, Hong Kong $EWH, New Zealand $ENZL, Metals & Mining $XME, Silver Miner $SIL, Cybersecurity $CIBR, Biotech $XBI, Smallcap Healthcare $PSCH, Wheat $WEAT

Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets

UST 30yr Yield 3.65-3.96% (bullish)
UST 10yr Yield 3.55-3.90% (bullish)
UST 2yr Yield 4.34-4.72% (bullish)
High Yield (HYG) 73.91-76.52 (bearish)            
SPX 3 (bearish)
NASDAQ 11,293-12,148 (bearish)
RUT 1 (bearish)
Tech (XLK) 134-144 (bearish)
Defense (ITA) 113-118 (bullish)
Gold Miners (GDX) 28.25-31.04 (bullish)                                               
Shanghai Comp 3 (bullish)
Nikkei 27,228-27,767 (neutral)
VIX 18.06-21.82 (bullish)
USD 102.32-104.81 (bullish)
Oil (WTI) 73.48-80.38 (bearish)
Nat Gas 2.29-2.70 (bearish)
Gold 1 (bullish)
Copper 3.98-4.19 (bullish)
Silver 21.25-22.81 (bullish)
Bitcoin 20,890-24,810 (bearish)

Ryan Ricci

Evolution - FRIDAYCOD