I agree, there will be pumps to crush the shorts, and dumps to crush the longs, but ultimately down and to the right for equities, with QT throughout 2023. The FED team is trying to tell us, Kashkari and Evans have both noted that they expect to keep rates high in 2023, but the market doesn't want to listen. Maybe Powells history of pivoting has confused things. I have insight into how this will affect the crypto market from my 4 years of trading it, let me know if you are interested in teaming up for an article or a convo. Thanks for your continued great work.
Love when I agree with you! And love that you actually come out and say it. Thanks again for this. I don’t enjoy betting against the market but find myself doing it a lot lately
EU, Japan and China are fighting the FED. None of mentioned economies is following US. Euro is already trading below one Dollar. Interesting to see what the future will bring, but the US Dollar that strong hurts the economy and eases energy prices.
Ugh I think even on fundamentals, it's fairly obvious with rising interest rates, persistent inflation, global slowdowns, a lot of lagging indicators, more energy spikes, more saber rattling, a major China recession, an inverted yield curve, and a rising 10-year treasury yield are signs enough.
It's really not just about the Fed or sentiment at this point. As the 10-year is going up since August, inevitably it does create another continuation of the bear market.
Bad news is not good news forever, it would not take much bad news for Apple or Microsoft for the entire NASDAQ to swing the stock market down again.
Great write up! I’m particularly fascinated by the structural component of the market - you discuss impacts on volatility regarding option usage in general, and I was curious if you had thoughts on their exploding trading volume at large.
Obviously an individual stock has a finite cap of available securities for trade, but I’m unaware of any such limits in the derivatives market. If equity shares are a currency, options are Monopoly money; free to create ad nauseam.
In a system where the worlds collide and the existence of options leads to buying underlying securities as a hedge though, is there potential risk of a theoretical limit being reached where this would override the underlying (real) market’s finite capacity in a material way? Would this be problematic?
If that theoretical limit were to be reached, conceptually speaking, is price volatility the true extent of the risk here?
Unwinding of derivatives is on top of my mind as well since 2020 and the Meme craze putting more logs into that cozy fire. Some crazy swings like $BBBY are indicators that this is happening in single stocks which are in this tug of an ideology war. The mad volatility swings driven by bits and pieces of unsubstantial news - like an "actvisist investor" being interested or suddenly disinterested in a stock - are far wider than those a war of valuation ever could produce outside of sudden takeover/bankruptcy news.
It's going to be quite interesting probably on the markets when the reality of recession(s) settle in across the globe. That potential plunge from the cliff of irrationality can be quite harsh.
I like your substack posts, but there's a few things wrong here.
>Similarly, if enough people were to buy S&P 500 puts at a 2,000 strike, the market would fall to there as well.
Gamma squeezes only work on individual stocks, not the index. Market dealers will happily absorb all those options and will have negligible "gamma squeeze" effect. What would actually happen if that many puts were bought is that the market would dip a few % around options expiration dates and then promptly go back up as dealers add liquidity to the order book as a part of their hedging requirements. The requirements that actually causes markets to take a drastic nose dive like march 2020 is when no one is buying puts, or are writing puts more than there are being bought. Only then when those short puts are caught offsides and everyone is forced to grab protection, does VIX go to the moon. The sell off so far this year has been very orderly and expected, which is why VIX has been fairly muted. I would highly recommend reading this paper on how dealer hedging works for the index. https://squeezemetrics.com/monitor/download/pdf/The_Implied_Order_Book.pdf
I'm also fundamentally bearish on tech stocks for the next year or so, but it helps to make sure the information you're using is accurate. A volmageddon like event will eventually happen, but only when people are loudly declaring the bear market to be over and don't grab any protection, which we are getting awfully close to...
QT hasn't even begun though has it. Balance sheet still grows they are just buying at a less furious pace. Only reinvesting proceeds no "new" purchases.
I don't believe we are in QT until we actually reverse and start shrinking. This is currently just less QE.
I'm glad you put pen to paper. Uninspiring times call for squiggly lines. Appreciate what you do.
Another rational post in an irrational time. Thanks again TLBS.
I agree, there will be pumps to crush the shorts, and dumps to crush the longs, but ultimately down and to the right for equities, with QT throughout 2023. The FED team is trying to tell us, Kashkari and Evans have both noted that they expect to keep rates high in 2023, but the market doesn't want to listen. Maybe Powells history of pivoting has confused things. I have insight into how this will affect the crypto market from my 4 years of trading it, let me know if you are interested in teaming up for an article or a convo. Thanks for your continued great work.
Love when I agree with you! And love that you actually come out and say it. Thanks again for this. I don’t enjoy betting against the market but find myself doing it a lot lately
I love when I agree with you
Always appreciate your insight my man, and couldn't agree more on your points in this article.
Thanks for this writeups, amazing content as always, thanks TLBS!!
Thanks a lot. Intuitively, I was afraid to invest in long. Your article helped to take a fresh look at the problem and deepen my knowledge.
EU, Japan and China are fighting the FED. None of mentioned economies is following US. Euro is already trading below one Dollar. Interesting to see what the future will bring, but the US Dollar that strong hurts the economy and eases energy prices.
Ugh I think even on fundamentals, it's fairly obvious with rising interest rates, persistent inflation, global slowdowns, a lot of lagging indicators, more energy spikes, more saber rattling, a major China recession, an inverted yield curve, and a rising 10-year treasury yield are signs enough.
It's really not just about the Fed or sentiment at this point. As the 10-year is going up since August, inevitably it does create another continuation of the bear market.
Bad news is not good news forever, it would not take much bad news for Apple or Microsoft for the entire NASDAQ to swing the stock market down again.
Great write up! I’m particularly fascinated by the structural component of the market - you discuss impacts on volatility regarding option usage in general, and I was curious if you had thoughts on their exploding trading volume at large.
Obviously an individual stock has a finite cap of available securities for trade, but I’m unaware of any such limits in the derivatives market. If equity shares are a currency, options are Monopoly money; free to create ad nauseam.
In a system where the worlds collide and the existence of options leads to buying underlying securities as a hedge though, is there potential risk of a theoretical limit being reached where this would override the underlying (real) market’s finite capacity in a material way? Would this be problematic?
If that theoretical limit were to be reached, conceptually speaking, is price volatility the true extent of the risk here?
Unwinding of derivatives is on top of my mind as well since 2020 and the Meme craze putting more logs into that cozy fire. Some crazy swings like $BBBY are indicators that this is happening in single stocks which are in this tug of an ideology war. The mad volatility swings driven by bits and pieces of unsubstantial news - like an "actvisist investor" being interested or suddenly disinterested in a stock - are far wider than those a war of valuation ever could produce outside of sudden takeover/bankruptcy news.
It's going to be quite interesting probably on the markets when the reality of recession(s) settle in across the globe. That potential plunge from the cliff of irrationality can be quite harsh.
I like your substack posts, but there's a few things wrong here.
>Similarly, if enough people were to buy S&P 500 puts at a 2,000 strike, the market would fall to there as well.
Gamma squeezes only work on individual stocks, not the index. Market dealers will happily absorb all those options and will have negligible "gamma squeeze" effect. What would actually happen if that many puts were bought is that the market would dip a few % around options expiration dates and then promptly go back up as dealers add liquidity to the order book as a part of their hedging requirements. The requirements that actually causes markets to take a drastic nose dive like march 2020 is when no one is buying puts, or are writing puts more than there are being bought. Only then when those short puts are caught offsides and everyone is forced to grab protection, does VIX go to the moon. The sell off so far this year has been very orderly and expected, which is why VIX has been fairly muted. I would highly recommend reading this paper on how dealer hedging works for the index. https://squeezemetrics.com/monitor/download/pdf/The_Implied_Order_Book.pdf
I'm also fundamentally bearish on tech stocks for the next year or so, but it helps to make sure the information you're using is accurate. A volmageddon like event will eventually happen, but only when people are loudly declaring the bear market to be over and don't grab any protection, which we are getting awfully close to...
QT hasn't even begun though has it. Balance sheet still grows they are just buying at a less furious pace. Only reinvesting proceeds no "new" purchases.
I don't believe we are in QT until we actually reverse and start shrinking. This is currently just less QE.
The QT by the Fed seems to be more bark than bite from what I can understand.