Alpha Report: Factor Moves and Interest Rates

Sector/Factor Skew and Tails

Main Idea:

Significant tails exist in financial markets as we enter FOMC. The unwinding of positioning this week will create significant asymmetrical opportunities for running trades and generating alpha. This overlaps with shifts in underlying momentum and dispersion of US equities. As a result, the rotation and dispersion we see in equities are likely at a short-term inflection point.

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Review:

Before expanding on the ideas for alpha generation this week, please review the following articles:

• Forging Ahead: The Future of Macro Alpha with Capital Flows: There will be a price increase on the Substack on September 20th. If you Subscribe BEFORE then, you will be able to lock in the current price for all the future upside in the Capital Flows Substack.

• Podcast: How Interest Rates Shape The Rise And Fall Of Nations: I recorded the fundamental ideas you need to know about interest rates and the currency. This is critical regardless of the domain you are in or the asset you trade.

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The primary macro event this week is FOMC:

Positioning has compressed to create significant tails on BOTH sides of the distribution for interest rates. The September SOFR contract will HAVE to move since its pricing an equal probability for both a 25bps and 50bps cut:

There is a chain of path dependency that this meeting creates and understanding this path dependency will contextualize the risk-reward for BOTH interest rates and equities this week as we reprice and hedges unwind.