Equity RED Day

Why are equities down and where are they moving into FOMC?

The S&P500 closed in the red -2.32% which marked a considerable expansion in volatility. The VIX closed up +22% and Mag7 names sold off hard.

Why is this taking place? Well let’s first zoom out and remember the big picture: Equities remain in a bullish regime on a cyclical basis. Momentum remains skewed to the upside and growth remains strong.

The Atlanta Fed GDP Nowcast remains positive and we are going to have GDP data tomorrow morning.

People want to find a recession narrative in the tea leaves but the data doesn’t show it: initial claims remain incredibly low relative to their trend

As a result of this macro dynamic, I was long ES for an extended period of time until I closed the trade on July 18th:

Here was the entry and exit:

Why did I close the trade?

• Main idea: While equities remain skewed to the upside on a macro basis, we are seeing an unwind in positioning on a short-term basis. You need to manage macro risks and positioning risks in trades.

I laid out these ideas in the alpha report which also contextualizes this move in equities: Link

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The tangible details:

Let’s make a few observations directly connected to the move today.

First, implied correlation continues to rise. This was a risk I noted in the equity report (link) weeks ago and explained further in the alpha report (link). Fundamentally, when this positioning began to unwind, it had a reasonable degree of downside.

Second, notice the selling was primarily concentrated in the large-cap growth names. This is a reflection of a marginal rotation out of large caps into small caps:

Third, on a sector basis, multiple sectors were actually up on the day. Utilities, health care, energy and consumer staples all closed in the green. This along with Bitcoin maintaining its strength showed that this is a positioning repricing as opposed to a full out liquidation.

Fourth, implied volatility is officially at a significant premium:

Fifth, while there was a short-term divergence this morning, the stock-bond correlation remains positive. Why does this matter? If stocks and bonds are selling off together then that means we are NOT seeing a recessionary impulse driving markets. This is NOT a liquidation similar to 2020.

Main idea: We are seeing a positioning unwind that has multiple factors pushing equities down in the short term.

Could this turn into a bear market? Yeah of course. Anything is possible. Is it likely? NO WAY!

However, we always need to be nimble and have humility. If the data changes we change. There is no virtue in being a perma bear or perma bull. Our goal is to make money and hedge our ignorance.

I laid out the full trading plan mapping all of these tensions and factors in the alpha report here:

As we move into the GDP print tomorrow and PCE print Friday, interpreting how macro flows begin shifting will be critical. When my strategy triggers a long or short in ES, I will share it with paid subscribers. For now, I am neutral and sitting on my hands with patience.

Overwhelming patience followed by overwhelming aggression is the ONLY way to succeed in markets.