on April 22, 2024

Due for a Bounce but the Rallies Keep Failing

Earnings heat up

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Our View

I don’t remember a time when there were so many negatives — and how and when they would start to impact the US economy. I think I know how the economy is doing, but why not ask ChartGPT?

“The United States is expected to keep churning out growth in 2024. The International Monetary Fund expects the American economy to expand 2.1% this year — more than twice its forecasts for growth in the major advanced economies Japan, Germany, the United Kingdom, France and Italy.”

That’s all fine and dandy, but this doesn’t cover the blistering geopolitical problems that are spiraling out of control and it doesn’t cover the pension funds mass exodus from pulling billions out of the stock market. After record runs and extreme risk, the funds are taking money out of stocks and rotating into bonds.

The largest US fund, the California Public Employees’ Retirement System (CalPERS), is planning to move close to $25 billion out of equities and into private equity and private debt. It isn’t just the pension funds…the public has been dialing back expectations and moving toward lower-risk assets like bonds and notes. This can be a tricky venture, when the funds sell stocks they risk potential stock market gains.

It’s a big deal.

Goldman Sachs analysts estimate that pensions will unload $325 billion in stocks this year, up from $191 billion in 2023 as large retirement funds rotate their positions. The California Public Employees’ Retirement System reduced its target stock allocation to 37% from 42% while ramping up investment in private equity and private debt. The fund expects those two asset classes to return 7% to 8%. It’s not just the CalPERS moving money out of stocks. The $260 billion New York State Common Retirement Fund said earlier this month that it plans to shift money into private equity, real estate, and real assets. The $80 billion Alaska Permanent Fund Corp. is cutting back on equity risk, too.

This is not exactly an encouraging sign. Many of the big retirement funds have outstanding track records and as I have always said, “if you want to know where the S&P is going, follow the money.”

Our Lean

There are only 9 economic releases this week with the Personal Consumption Expenditures index (PCE) on Friday and no scheduled Fed speak. The S&P futures are now 330 points off its high and down 5.75% in the first 15 seasons of April. The best way to describe the decline is ugly.

NVDA, the S&P’s bellwether, has fallen $217 from its high and fell 10% on Friday, its worst day since March 2020. It’s down $129 in the last 5 sessions. This week, ~30% of the S&P reports earnings but some of the big names include: Meta, Microsoft, Alphabet, Tesla, and Chipotle.

Here is a great read by FactSet on the 2024 Q1 earnings season.

Our lean: There have been some good dips to buy but the money trade remains on the sell side of the trading card. I think the key to this is NVDA and the 10-year note. If they are weak, it’s almost impossible for the ES to hold the rallies but I also think things are getting extremely oversold.

If the ES gaps lower I want to buy the open, if the ES rallies 20 pts I’ll sell half and put in a stop. On the other side of the card, if the ES gaps 20 to 30 higher, my lean would be to sell it — but my gut feeling is we will see a bounce today / this week.

The CFTC Commitments of Traders report has been released, showing futures positions as of Tuesday’s close. Highlights of speculative positioning include: In fixed income, there was massive short-covering in 10s (145k) and long bonds (59k), with buying also evident in 5s (45k) and a few ultras (1k). While ultra-10s saw selling of 54k, the aggregate duration short fell by 138k TY equivalents. At the short end, traders effectively sold 336k SOFR contracts, taking the speculative position short. In FX, traders bought dollars aggressively. Other than buying of 1.8k NZD, specs sold every other currency on the board, including 20.5k euro, 19.6k sterling, 29.4k CAD, 8.7k AUD, 3.5k yen, 4.4k CHF, and 12k MXN. The aggregate dollar long rose by $8 billion on the week and is now and its largest size since the middle of 2019. In equities, traders bought 137k S&P contracts (!), the biggest weekly purchase since June 2020. The position is now long 74k contracts, the biggest long in nearly two years. NDX positioning was little changed on the week, while specs sold Dow (3k) and Russell (11k) contracts. The VIX short fell by 9k.

MrTopStep Levels:

How to use MTS levels

MiM and Daily Recap

ES Recap

After dropping in the final minutes of the day, the ES plunged lower after Israel counter-attacked Iran and fell all the way down to 4963.50 and then rallied all the way up to 5056.50, 93 points off the low and open FRY-day’s regular session at 5047.25. The open was pretty much like we have been seeing for the last three weeks: sell-off and then the dead-cat bounce. After the open, the ES sold off down to 5038.25, rallied up to 5050.00, pulled back, and then rallied up to 5068.00 at 9:50, sold off down to 5040.50, rallied up to a lower high at 5054.00 at 10:10 and it was the high that set up the decline. The ES traded down to the VWAP at 5028.25, rallied up to another lower high at 5045.00, and then sold off down to 5602.75 at 12:50.

After the low, the ES rallied up to 5030.00, pulled back to 5017.50 at 1:40 and then rallied up to 5037.00 at 2:00 and traded down to 4992 at 2:50. After the low, the ES rallied back up to 5009.75 at 3:20 and then dropped down to 4992.75 at 3:47. The ES traded 5097.50 as the 3:50 cash imbalance showed $1.4 billion to sell, traded 5091.50 and then rallied up to 5004.75 at 3:55 and then rallied up to 5008.00 at 3:59 and traded 5003.50 on the 4:00 cash close.

In the end, it was all about the failed rallies. In terms of the ES’s overall tone, there is a high level of complacency with an exorbitant amount of risk. Nvidia was weak and was dragging down the NQ, which was dragging the ES around with it all day. In terms of the ES’s overall trade, volume was high: 601k traded on Globex and 1.646 million traded on the day session for a total of 2.247 million contracts traded.

gs cta levels: CTA Flows 4/19/2024 Over the next 1 week… Flat tape: Sellers $26.9B ($16.1B out the US) Up tape: Sellers $13.8B ($10.6B out the US) Down tape: Sellers $50B ($22B out the US) Over the next 1 month… Flat tape: Sellers $40.8B ($19.6B out the US) Up tape: Buyers $40.8B ($16.8B into the US) Down tape: Sellers $229.8B ($77.2B out the US) Key pivot levels for SPX: Short term: 5122 Med term: 4886 Long term: 4615