Positioning Unwinds and the Next Leg of the Melt-Up
Crude flushing, vol crushing, real rates 55bps from negative, and why path dependency matters more than price levels heading into the weekend
Today’s tape is exactly the compounding impulse I have been laying out for paid subscribers all week (see livestream from April 9th: LINK). Crude is getting flushed, vol is crushing, ES is ripping into the weekend, the Russell is leading, and the dollar is continuing to bleed against the full basket. The credit cycle melt-up is now in the phase where every bearish positioning has to get unwound in sequence. Myself and Jaymes Rosenthal broke down the full positioning map today, where real rates are relative to negative, and the two specific bear scenarios that would actually take this apart. Next week, I will go deeper into the specific pair trades and derivative expressions that have the best risk-reward as this leg extends.
LIVESTREAM RECORDING FROM TODAY:
Today’s Livestream: Main Talking Points
1. Stocks are melting up, bonds are lagging, and the dollar is bleeding against the full basket. That is the exact combination I said you wanted to be positioned for. ES and Russell are both bid with Russell outperforming, bonds are sitting in their range with the curve steepening marginally as long bonds lag, and the dollar is getting sold against AUDUSD, AUDJPY, and the peso. I was explicit with paid subscribers that the trade expression was long stocks and short the dollar, not playing the bond side (LINK). That is exactly what has worked. When the forward curve repriced from 25bps of hikes at the capitulation back to 12bps of cuts for this year, that was the shift that unlocked this leg.
2. Crude positioning got flushed today and vol cracked. The call skew that blew out twice is now getting unwound in full. Going into the Iran/Strait of Hormuz news, crude call skew blew out aggressively. When crude had its first flush, traders doubled down and spiked call skew a second time. I flagged on stream that week that everyone just got levered long calls again at a lower high in vol, and that the position was going to flush. That is exactly what is happening today. Crude is off hard, OVX is cracking, and the geopolitical risk premium that was priced into equities is coming out.
3. Short-end real rates are 55 basis points from going negative. That is the specific signal everyone should be tracking. The Fed has let one-year and two-year real rates collapse this entire move because they are pausing into supply-side inflation. If short-end real rates actually cross into negative territory, you get a 2021-style melt-up that most people cannot even conceive of right now. If the Fed moderates and holds the line, the melt-up is still real but more measured. The exact magnitude depends on how far the Fed lets real rates fall. That is the signal to watch, not a price level.
4. Ten-year real rates are steepening versus two-year real rates, and that is a growth signal, not a warning. Two-year real rates have collapsed. Ten-year real rates have held or risen marginally. The real rate curve steepening tells you that growth is not collapsing through this inflationary impulse. If growth were actually deteriorating, long-end real rates would be falling faster than the short end. That divergence is why equities have the runway for at least another month of melt-up, and why the Russell is outperforming as cyclical conditions hold up.
5. Inflation swaps are pricing this shock as short-term and supply-driven, not as a structural repricing. One-year and two-year inflation swaps have risen. Ten-year and thirty-year inflation swaps have actually come down. That decomposition tells you the market is correctly pricing this as an oil-driven supply shock rather than a demand-driven inflation regime change. The Fed does not control the supply side, so they are letting it pass through rather than hiking. That is the optimal setup for liquidity to keep moving out the risk curve.
6. Tech is 35 percent of the S&P 500 and software is roughly half of tech. The software inflection is the mechanical driver of the next leg. Over the last month, tech has contributed almost five percent of the index return on a weighted basis. If software continues to bid from here, you could have another month where the S&P adds another ten percent and tech contributes six or seven points of that alone. That is not a stretch scenario. Software was the most under-owned subsector in the market for six months. Yesterday’s IGV rally into the Opus 4.7 release confirmed the positioning inflection. The mechanical path from here is passive flows rebalancing back toward neutral weights, which closes the air pocket under software fast.
7. The Russell is outperforming because it is the index that actually receives the capex spend. The Mag 7 companies are spending nearly a trillion dollars in capex. They are not building data centers themselves. They are paying companies in the Russell to build them. So the Russell is the balance sheet that absorbs the capex transfer, which is why it held the triple low during the geopolitical shock and why it is now leading on the upside. Once liquidity comes back in and geopolitical risk drops, the Russell has the cleanest setup because the capex transmission is still in its early innings.
8. Gold and silver are inflecting. The metals beta is about to have a significant melt-up. I called the low in gold and silver earlier this week almost exactly. The thesis is that metals are fading the geopolitical risk premium and switching their primary sensitivity back to the credit cycle. People ask how metals can rally when crude is falling and geopolitical risk is dropping. The answer is you have to net out the drivers. Credit cycle liquidity is a structurally larger driver for metals than the geopolitical risk premium. As cross-asset vol compresses and real rates fall, metals bid. That is the setup heading into Warsh coming into the Fed and the DXY making new lows later this year.
Credit Cycle Playbooks
The Melt-Up Trigger: The Playbook For The Credit Cycle Melt Up
Cross-Border Flows, the Dollar Devaluation, and the Global Trade Rebalancing
All educational primers on credit risk, duration risk, the yield curve regime model, and the equity risk curve are free here:
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Next Week: Capital Flows | Pair Trades and Derivative Expressions for the Next Leg
Next week, I will map the specific pair trade constructions and derivative expressions that have the best risk-reward as this leg of the melt-up extends. How to size long dollar-short positions against the specific G10 crosses that are benefiting most from real rate differentials. Where to express the software inflection through names that are still lagging IGV. And the specific out-of-the-money call structures on the high short interest quintile names that offer the asymmetry I want into what could be the largest IPO window in financial history.
MONDAY’S LIVESTREAM: LINK
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