Daily Brief For April 14, 2023

“Owning downside asymmetry” is starting to look “more attractive.”


Consensus is a tightening cycle that climaxes on May 3 with one final 25 basis point hike. Most traders price three cuts after—one in July, November, and December.

Note: After the release of strong bank earnings today, this analysis remains intact.

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

Though policymakers are successful in walking up traders’ interest rate expectations, the long end of the yield curve hasn’t budged much; despite the response to banking turmoil helping “calm conditions, … and lessen the near-term risks,” many believe the Fed will have to pivot, soon.

The Federal Reserve’s ranks expect a “mild recession,” too, validating people such as Bank of America Corporation’s (NYSE: BAC) Michael Hartnett, who said investors should steer clear of stocks. Hartnett added the expectations of a recession would solidify following the upcoming earnings season, a test of how companies have managed headwinds like the bank crisis and slowing demand.

Graphic: Retrieved from Bank of America Corporation (NYSE: BAC).

Despite billions in redemptions over the past week or so, the market’s strength can continue for longer, though. Here’s why.

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via The Market Ear.

Contextually, positioning overwhelmingly supports the market at this juncture. That’s per the likes of Cem Karsan of Kai Volatility have explained.

Falling volatility has led to billions more in buying flows from volatility-controlled funds rebalancing their risk exposures, Tier1Alpha adds, noting “there is a chance realized volatility [or RVOL] will continue to decrease until the end of next week as long as the SPX returns stay muted. If volatility rises beyond the +/- 2% threshold, net equity sales could exceed $5 billion.”

“This is not expected due to favorable CPI data and dealer positioning,” however.

With markets likely to be contained in the short to medium term, and fundamental weaknesses, such as the Fed hiking long-end yields, likely to cause them to fail in the long run—play near- or medium-term strength via call spread structures, and use the profits to lower the cost of longer-dated bets on markets or rates falling. 

In support of this view, per The Market Ear’s summary of some Goldman Sachs Group Inc (NYSE: GS) analyses, “the disconnect between Nasdaq 100 (INDEX: NDX) and bond yields has grown to statistically significant levels.” Thus, “owning downside asymmetry” is starting to look “more attractive.”

Graphic: Retrieved from VIX Central. The compression of implied volatility, or IVOL, is a booster for equities. ​​Investors are mostly bullish with a +1 Put, +100 Stock, -1 Call position, while dealers hold the opposite with a -1 Put, -100 Stock, +1 Call position. As the volatility trends lower (e.g., S&P 500 realized volatility or RVOL is ~10), options lose value, and dealers must buy back their short stock to re-hedge. This supports the market.


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