***Editor's Note: There was a typo below. $QQQ is bearish trend not bullish trend.***
“I no longer listen to what people say, I just watch what they do. Behavior never lies.” – Winston Churchill
This morning I have no commentary other than the quote of the day. No stories, just numbers.
Here is what I will talk about below: Flow, Using flow to your advantage with a DIVERSIFIED short book, Tightening Cycle.
So let’s do it: there are a lot of stories in this world. Let’s set ourselves free of them.
Back to the Global Macro Grind…
One of the best ways we can see positioning is through our CFTC positioning table. It's a look into what people are actually doing. Not into the stories people will tell you. Let’s first focus on the beloved $QQQ.
The chart below shows the 3yr Z Score of CFTC positioning within the Nasdaq. Simply, anything above 0.0 are people building a long position. Anything below 0.0 is the opposite. In the current bear market rally, positioning came from a -1.31 Z Score (1/24/23) to a 0.77 Z Score (5/9/2023), $QQQ is up +11.5% in that time. It happened, it’s done, $QQQ is bullish trend. But now, positioning is declining… So, while you hear all this stuff about A.I. this, A.I. that. People are taking off their long position. People are telling you one thing and doing the opposite, exit liquidity.
Anyone else notice $XLK down with very high volume yesterday (volume up +10% vs the 1 month average)?
You can also see how peaks in these Z Scores have typically been followed by peaks in $QQQ.
While that is going on, you have SPX. Positioning on a 3yr Z Score is at -2.83. What does that mean? Look at the chart below. Basically, while people are pumping A.I. and Tech, the machine is exiting everything else.
I’m sure you are curious, so I’ll put the chart below to show the historical context of a -2.83 Z Score on a 3yr rolling basis. It is the second lowest number to the pandemic. Even more interesting is that on 8/16/22 we were at a historic short position, people got long the market (current bear market bounce) until 3/14/22. But have since put on an even larger short position.
All of this doesn’t mean that you should be following the machine’s positioning. It means play your own game.
$QQQ is currently bearish trend and we currently do not have a position in SPX or $QQQ. We do, however, have a diversified short book in what we believe are higher probability plays. As well as less newsy plays, once something hits the news, it’s too late.
What am I talking about? How about energy? Here, net short positioning has historically caused crashes in Oil. However, Oil $USO is not at the top end of the range yet. But that isn’t where our research should end. Copper $CPER, has a much better upside to downside ratio, although still has 1.6% upside potential as of yesterday. So, in our diversified short book we would prefer $CPER to $USO.
Although again our research shouldn’t end there, you may be able to get even better opportunities in other oil reliant industries/commodities: Hydrogen $HYDR, Lithium $LIT, Uranium $URA, Corn $CORN, Wheat $WEAT, Steel $SLX, Industrials $XLI, Timber $WOOD, Nuclear $NLR, Gasoline $UGA, Saudi Arabia $KSA, UAE $UAE, Qatar $QAT, Kuwait $KWT, Energy Exploration $XOP, Small Cap Energy $PSCE.
Here are some more ideas as you look at your portfolio. These are the significant IVOL discount and premium callouts from our extended IVOL table (1yr Z Score in parenthesis).
- IVOL Premium Callouts: $EWD (3.46), $EWG (3.03), $IBUY (2.42), $FXE (1.86), $CWB (1.74), $EWY (1.56), $PBD (1.55), $IHI (1.47), $CYB (1.39), $EWP (1.04)
- IVOL Discount Callouts: $SLX (-2.8), $GREK (-1.71), $BNDX (-1.62), $USO (-1.55), $TLT (-1.55) $SOXX (-1.42), $BNO (-1.39), $ESPO (-1.35), $IGIB (-1.29), $KIE (-1.27), $ITA (-1.27), $IGLB (-1.13), $HYD (-1.11), $EWS (-1.1)
China export numbers this morning? They came in at -7.5% YoY (May). That's the 2nd sequential deceleration with expectations for -0.8% YoY. With exports to the US down -18.2% YoY.
I will wrap up with interest rate expectations. It is currently implied (77% probability) that there will be another 25 bps rate hike in July. With that information, the Regional Bank $KRE was one of the best performing ETFs yesterday (+4.96%). We haven’t even gotten to our prolonged period of stagnant rates. I look forward to listening to what my colleague Josh Steiner has to say on the call about this.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.78-4.02% (neutral)
UST 10yr Yield 3.56-3.85% (neutral)
UST 2yr Yield 4.20-4.62% (bullish)
High Yield (HYG) 72.90-74.97 (bearish)
SPX 4095-4315 (bearish)
NASDAQ 12,456-13,499 (bearish)
RUT 1 (bearish)
Tech (XLK) 155-172 (bullish)
Shanghai Comp 3148-3254 (bearish)
Nikkei 30,300-33,618 (bullish)
DAX 15,622-16,232 (bullish)
VIX 13.90-21.21 (bullish)
USD 103.01-104.87 (bullish)
USD/YEN 137.74-141.02 (bullish)
Oil (WTI) 67.64-74.60 (bearish)
Oil (Brent) 72.08-79.03 (bearish)
Gold 1 (bullish)
Copper 3.52-3.85 (bearish)
Bitcoin 26,001-27,999 (bearish)
Ryan Ricci
Macro
