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Capital Flows
Trades: Update moving into PCE

Trades: Update moving into PCE

The next move for macro and positioning

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Capital Flows
Jul 26, 2024
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Capital Flows
Capital Flows
Trades: Update moving into PCE
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I want to start with a very simple idea: I have never seen so many moves in capital flows that are so easy to misinterpret.

For example, the yield curve is on the verge of uninverting here and SPX is down marginally from the highs. Is this “the end”?

Bears are coming out of the woodwork and say that this is the final event they have been predicting for decades (what an accomplishment):

Image

However, this is NOT the case. The preponderance of evidence indicates that we are seeing a positioning unwind and not the beginning of a recessionary impulse in markets. I laid this out extensively in this report:

Alpha Report: ES Trade, Interest Rates, and Positioning Unwind

Capital Flows
·
July 22, 2024
Alpha Report: ES Trade, Interest Rates, and Positioning Unwind

Hello everyone, In today’s world, everyone has access to the same data and information. In the past, there were more limitations around getting information or paying for data. Ever since this has changed, the highest premium in markets is given to those who can INTERPRET the data correctly.

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We have seen a positioning unwind and then we saw significant buying today during the US cash equity session:

Implied correlation is now overextended and likely at an unsustainable level:

Implied correlation is significantly elevated above realized correlation:

If you want to dig into this more, check out this paper: https://cdn.cboe.com/resources/indices/documents/Implied_Correlation-WhitePaper.pdfhttps://cdn.cboe.com/resources/indices/documents/Implied_Correlation-WhitePaper.pdf

On top of this, we are seeing the Russell rally and outperform other indices.

Here is the deal, the steepening of the curve due to a recession would imply that the Russell would be UNDERPERFORMING ES. Instead, the Russell is OUTPERFORMING. The implication of this relative performance is that the steepening of the yield curve is repricing duration risk, NOT credit risk.

So you think the Russell is outperforming as we move into a recession? No.

This brings us to where we are today, I laid out the flow dynamics in equities here:

Equity RED Day

Capital Flows
·
July 24, 2024
Equity RED Day

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.

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The main update is that we saw a significant reversal at lows today. This will be a critical level to monitor into the PCE print tomorrow:

This brings us to the trades I have been running.


Trades:

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