Discover more from Capital Flows
It's so quiet........ 😳
Be ready for the short when it comes!
Financial markets have been very quiet over the last two days in expectation of CPI. Let’s go over a couple of things and touch on some life/market principles.
First, the macro report I wrote is right here. This breaks down all the catalysts in the next month.
When we think about financial markets, we always want to think about positioning and trades as they move from catalyst to catalyst. I don’t think about trades as a specific duration like 2 weeks or 10 months. I usually think about it as holding x asset until y happens or we reach FOMC/earnings/x economic release etc.
After you know these catalysts, then you want to see how forward instruments are pricing various catalysts through time. For example, there are multiple FOMC meetings this year. We have a forward curve pricing each of these meetings. The rate hikes/cuts for each meeting dynamically change as we move closer to each meeting and the economic data develops. So always know future catalysts and watch how the market changes its pricing as we approach said catalysts.
For fixed income, I always think about how the market is pricing FOMC and CPI as we go from month to month.
Everyone should go and Subscribe to! Jose over there is one of the most generous men on Twitter. A true gentleman! I always read their macro pieces and they never fail to help me.
Their most recent piece:
Markets have been quiet for the past couple of days. During these periods of time, you are basically sitting on your hands or trading with very small size.
Markets move from low volatility to high volatility. You always want to adjust your positioning and style to how the volatility regime is changing. This isn’t just for markets though. The same thing is true in life.
If you have a high degree of volatility in your income, you act very differently in your consumption. If you know how the volatility in other people’s spending or income is changing then you can know when windows of opportunity are likely to occur. The degree of volatility you have in any system sends a signal about what is happening and the degree of significance you should ascribe to various events.
If you want a great book on this dynamic with volatility, The Origin Of Wealth is exceptional at explaining it in very simple terms: I made a note of it in this tweet:
What am I waiting for?
Personally, I am waiting for an opportunity to short equities and get long the 10-year. As Jose said in his piece, I am a seller of equities at 4200. I have models that identify optimal places to buy and sell but if we are just speaking in big-picture terms, I do have the 4200 level in my head.
Obviously, we have the CPI print and FOMC minutes tomorrow. What I am thinking about is how the reaction of price action to tomorrow’s events will move into the industrial production print Friday. We had a negative manufacturing ISM print last week which biases me to a deceleration in industrial production.
As I laid out in the macro report, equities are priced for perfection right now. Earnings estimates are at a high, valuations are overextended on a short-term basis, and momentum is topping after an incredible rally in tech.
So yes, I am bearish on risk assets. If I am wrong, then I will get stopped out of trades.
This is roughly how I view the risk-reward in the S&P right now:
I laid out all the signals I am looking at to execute a short trade in the macro report. I would also be watching Japanese and European equity markets given the levels they are currently at.
Just remember, there is a reason you are getting paid so much to keep your money in short-term bills. It’s risky out there!
Thanks for reading!