Being right and making money are not always the same thing.
What do these words
have in common?
almost, billowy, abhors,
access, biopsy, bijoux,
billow, and chintz
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am/FX: 2023 Came Early
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December 2, 2022
2023 came early
Someone asked me yesterday if I still like my three trades for Q1 2023 now that they have moved so much. Short answer: no, not here. The first one was long NZDCAD (video with Alf here, and full am/FX here). See chart as the market narrative focuses on the scary consumer debt servicing situation in Canada and reopening vibes in China.
NZDCAD hourly since May 2022
The second one was buy 6-month USDJPY, CADJPY and GBPJPY puts (am/FX here). USDJPY has dropped from 139 to 134, CADJPY from 105.00 to 99.90 and GBJPY ~unchanged. Still great levels to buy downside GBJPY, but need to wait for better levels on the other two. The large RHS GBPCAD M&A is probably a good explanation for some of the GBP vs. CAD divergence here. I doubt that effect lasts much longer.
USDJPY, CADJPY and GBPJPY since late September
The market has repriced the JPY on weak US data and lower bond yields (and views of yen cheapness) and is now positioning for Kuroda’s replacement in 2023. At this point, I would be taking profit on USDJPY shorts, not putting on new ones.
The final trade for 2023 was covered in “am/FX: Good News for Bonds” and sadly that’s the only position I put on. The idea was that Korean Export data was signaling that near-term future US survey data would come in weak, and 3m/10y inversion is generally good for bonds. Chicago and ISM confirmed this.
While today’s am/FX might sound like a victory lap, it’s not. I thought there would be opportunities to get into these trades in December, and the only one I got was the long bonds. 66.6% Whiff. Being right and making money are not always the same thing.
Here’s what bonds have done:
TYZ2 back to November 14
As discussed yesterday, my plan was to cut the long TY on a weak payrolls figure but with bond futures trading 8 ticks from my take profit right now, it makes no sense to hold into the event risk. I am taking profit on that position now, before NFP.
My views now
My feeling is that the market is pretty heavily invested in the China reopening and disinflation trades at this point, both intellectually and financially. The risk now is that SPX closes back below the 200-day and this was all just a cleansing of the shorts and catnip for year-end seasonality bulls. That said, it still makes no tactical sense to be shorts stocks because we have just ripped through the 200-day and momentum is strong.
I’ll get super bearish stocks on a daily close below 4050 and stay on the sidelines until then.
NFP
See yesterday for my main thoughts on NFP. I think the risk is a weak number, especially AHE. There is a point where the number is weak enough that it could be concerning for risky assets. If, for example, NFP is negative and the UR ticks 0.2 higher… I would guess stocks pop huge and then close below 4050 on the day.
The “bad news is good news” meme that the market has embraced will end up being wrong, in my opinion. Bad news is good news when it leads to Fed easing. Right now, we have abysmal economic data from the regional and national surveys and a Fed that’s about to hike 50 more bps into it despite 3m/10y inversion. Bad economic data might look like good news for now, but there’s a threshold, soon, where it won’t.
Much like we saw in 2001, the market is cheering as the end of the hiking cycle is visible. But much like we saw in 2001, I think that optimism will prove short-lived. But I’m not going to sell into a raging bull move that just broke the 200-day. I would rather sell modest weakness.
A simple strategy for equity bears is to stay flat above the 200-day and get involved below
Final Thoughts
You might want to own some December 13 vol for CPI. The idea of disinflation is so firmly entrenched now in the mind of the market that if that number were to come in strong somehow. BLAMMO.
Finally, you are doing yourself a major disservice if you are not actively exploring AI platforms like midjourney and openAI. Check them out on the weekend; this technology is bigger than crypto, possibly bigger than the internet. There is an absolute Cambrian explosion going on in easily-usable AI. It will completely transform the way human creativity operates.
Have an alphabetical day.
good luck ⇅ be nimble
“aegilops” and “spoonfeed”
are the longest English words with their letters in alphabetical and reverse alphabetical order
If you believe spoon-feed must have a hyphen, the next one is “trollied.”
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aegilops
noun
An ulcer or fistula in the inner angle of the eye.
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More common examples of words with all letters in order:
almost, billowy, abhors, access, biopsy, bijoux, billow, and chintz
Billowy!
