Last week, the S&P 500 May Index options expired, and the market was pinned to the 2900 strike going into expiration on Friday. Given the fundamental bearish backdrop as the futures fell below 2900, 2850, it caused aggressive futures selling as the market makers needed to be hedged when their out of the money puts started getting activated, making them longer than they needed to be.
There has been a challenging tug of war between the bulls and the bears in May, as the former is trying to break 2930 to target 3000 to the upside. As the market briefly fell down to 2775, the bears rejoiced as they have been desperately trying to break 2830, targeting 2750 and then 2650. The market rally had been losing steam going into May and the momentum was waning. Coming in Monday morning, according to TFF Leveraged Fund data, the "net" position in the SPX was short $47.1 billion, and the Nasdaq too was short $3.5 billion. Fed Powell's 60-minute interview over the weekend caught the market by surprise, and caused the violent rally across the board. But what really rallied?
During his 60-minute interview, Powell, after being asked if the Fed just flooded the system with liquidity, answered "we printed money digitally and as central bank we have the ability to create money digitally, and there is a lot more we can do". That was all the nerve short futures holders needed to close their shorts, along with Moderna (MRNA) talking about a positive phase 1 trial for Coronavirus (similar to Phase 1 Trade Deal with China when market used any headline to cover shorts even though the ultimate outcome was a year away). As always, the market needs a narrative to explain the move, as opposed to finding the real reason that caused the move in the first place.
Monday night, as the market closed at 2960, equities are exactly the same level they were back at the end of April. Despite all the cheers and calls for V-shaped recovery and new all-time highs, the market has really done nothing over the past month. It has chopped around a 150-point range, but is still at the same level.
Yesterday the moves across the board suggested the theme was one of "recovery". Cyclical sectors that have been laggards during this bounce, like Energy, Financials, and Industrials, were up 8% on average. That is not a healthy market recovery, it is a short squeeze! The darling Technology sector that has been the market leader was underperforming quite a bit -- only up 1%, with some names down on the day even. We all know that more than 20% of the market cap is in the top 5 stocks.
It was pure sector rotation as money switched around to close some consensual positions rather than be caught short, in case the Fed was about to embark on a new printing spree. Even 10-year U.S. Bond yields were up quite a bit from their 0.6% level, trading up to 0.74%.
If this is a genuine economic recovery, we should see a much more protracted rally in the above mentioned cyclical sectors, other than just a bounce. Given the backdrop of higher loan loss provisions and second derivative lockdown effects on businesses and mortgages, companies spending less, being more cash strapped, with a hint of even negative rates, this does not suggest a positive time to own Financials.
Gold, via the SPDR Gold Shares (GLD) , and Silver, via the iShares Silver Trust (SLV) , started the day rallying up 3%-4% as the Fed's money printing press only meant further Fiat currency debasement. Precious Metals have broken out from their recent consolidation and are up 17% over the past month. These two saw some profit taking as yields moved higher during the end of the day, and some consolidation is possible after the recent run, but the theme is very prevalent.
The S&P 500 has now once again reached the key 20-day moving average of 2960. The same debate comes to mind. Will this be a repeat of 2018 -- which saw a collapse after a squeeze in Q4 2018 to the 61.8% Fibonacci retracement level -- or like 2019 -- when the market broke decisively higher, forgetting that anything ever happened?
There is a wall of worry to get through before calling for new all-time highs. The market could be in a sideways chop until we actually see what Q2 earnings look like and what the ultimate demand is once economies do reopen. Given the amount of U.S. Treasuries coming to the market over the next few weeks, that should keep a cap on the markets for now, especially at a time when the Fed is purchasing less assets over the next month. The run rate for the next few weeks is a lot lower than the $600 billion per week purchase rate back in March. And we all know what exactly has been supporting the market -- Quantitative Easing.