Daily Brief For April 4, 2023

Daily commentary for U.S. broad market indices.


Administrative Bulletin

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JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic believes the equities rally will falter, with headwinds from bank turbulence, an oil shock, and slowing growth poised to send stocks back toward their 2022 lows over the coming months. Kolanovic says this is “the calm before the storm,” adding that the equity rally is masking weaknesses from recent bank collapses and a decline in corporate profits and growth.

Read: Black Knight Mortgage Monitor Report.

As a validation, we can look to ISM’s inventories exceeding that of new orders, and a dip in cost-push prices, Bloomberg’s John Authers explains. The overall ISM measure is recessionary; the upcoming earnings season may be unforgiving, and companies with weaker EPS are likely to be penalized more due to the prospects of a recession.

Graphic: Retrieved from Sergei Perfiliev. “Based on this relationship, today’s PMI reading of 46.3 implies an earnings contraction of about 8% over the next 12 months or an SPX EPS of 204. Using the current forward PE ratio of 18.7, this leads to an index level of about 3,815. A ‘recessionary’ PE ratio of 15 will see the index at ~3,060, assuming earnings don’t fall further.”

Tech’s outperformance, driven partly by a supply of previously demanded downside put protection, has become even more magnified recently as traders ramped up bets that banking system stresses prompt the Federal Reserve to hit the brakes.

Read: SOFR Futures And Options 1st Edition

Graphic: Retrieved from @countdraghula. “We aren’t seeing the same thing for out-of-the-money calls on front-end futures. BUYING A CALL on front-end futures is taking a bet on Fed rates collapsing, especially if it is considerably out of the money, as below. Pricing for these is still sky high, despite some calm.”

Over the past weeks, we anticipated the markets trading “spiritedly for far longer,” quoting the likes of Kai Volatility’s Cem Karsan, who said the signs of a combustible situation would emerge when options implied volatility is sticky in a market rally.

Typically, as the market trades higher, volatility levels for fixed-strike options should decrease. If broad implied volatility measures are bid and fixed-strike volatility increases, this may lead to a more combustible situation as options counterparties begin to thin out on volatility, resulting in less support.

We maintain that you can monetize the example call structures we provided and roll some profits into bear put spreads (i.e., buy put and sell another at a lower strike), though you may limit your expectations. Some think there is a greater likelihood of a “crash-less selloff, a grinding de-leveraging.”

Read: China’s Yuan Replaces Dollar As Most Traded Currency In Russia.


Don’t use this free letter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements. Separately, you may view this letter’s content calendar at this link.

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