The benign consensus and VIX at 17 is inconsistent with 95th percentile SPX shorts.
Something has to give.
Who would you guess has
sold more albums?
Nirvana or Tupac?
subscriber-only
Benign Consensus
Current Views
20JUN USDCHF
0.8850 digital put @ 20%
spot ref. 0.9275
21JUN USDJPY
123 digital put @ 20%
spot ref. 131.30
April 17, 2023
Benign Consensus
Markets have settled on a consensus narrative of gradual disinflation, one more Fed hike in May, lower volatility, and a non-combusting US banking system. This has taken the VIX back to levels last seen in February 2023 and January 2022. Those were both terrible times to be long stocks, but the complacency this time is less evident as CFTC data shows S&P shorts in the 95th percentile as discussed last week.
Until bearish positioning is unwound, or VIX gets down to the 2021 range lows of 15ish, it’s going to continue to be hard work trading stocks from the short side. The benign consensus is out of line with extremely bearish positioning in stocks.
VIX, 2021 to now
Friday’s action in FX has killed the USD down momentum trade for a bit and it feels to me like we are entering a few weeks of low vol chop. There are bits of global economic data each day this week, but the important US data has come and gone for now and tightening lending standards are a slow, creeping malaise, not a fearsome insta-hit to the US economy.
Still, the USD rebound is likely to be short-lived as a gradually slowing and disinflationary USA, continued optimism from China, and decent data in Europe (including this week’s ZEW, probably) all put us right in the middle of the USD smile. Furthermore, we are back up towards the top of the post-Silvergate range in US yields and I think we peak in the 3.60%/3.70% area in 10s and the 4.25%/4.40% area in 2s.
US 2-year and 10-year yields not too far from the top of the range
If you can figure out a way to be short USD and short vol for the next two weeks, I think that will work out well. I would stay away from AUD and NZD as their seasonality reached peak bullishness last week (see Friday’s am/FX) but currencies like EUR and CHF and CAD should do OK. Also discussed Friday: Perhaps we are entering a period here where USDCAD drops back toward the bottom of the range on the back of OK sentiment in the US, strong oil prices, and a rinse of stale short CAD positions.
Also note that historically USDCAD trades like a risky asset proxy to some extent and falling VIX tends to coincide with lower USDCAD. Not all the time, but much of the time. Here is the chart:
USDCAD vs. VIX, mid-2021 to now
I am as worried about Canadian consumer debt as the next person, but the bear CAD thesis is not playing out because Canadian jobs remain plentiful. Structures that benefit from both lower FX volatility and lower USDCAD over the next few weeks look good to me.
For example, doing something like a 1-month 1X2X1 (1.3250/1.3150/1.3050) makes sense.
If you look at the market profile chart for USDCAD below, you can see that we spent a solid eight days in the 1.3425/1.3540 equilibrium zone and made a single print as we gapped down out of it and through 1.3425.
That means 1.3425 should now be significant topside resistance in USDCAD and I expect we are making a new, lower range with 1.3425 on top and something between 1.32 and 1.33 as the bottom. Short USDCAD with a stop through 1.3450 is a reasonable expression of this view and I like that. I am not putting it in the sidebar for now as I have the USDCHF and USDJPY and don’t want to overload with USD shorts. I do like it … and I really like finding ways to sell vol and be short USDCAD in one package.
Final Thoughts
Finally, I am not interested in equity valuation (at all), but I found this podcast with equity valuation legend Aswath Damodaran to be extremely insightful. It’s about the intersection of data and narratives, why polymaths succeed on Wall Street, and many other useful topics.
Keep your head up.
good luck ⇅ be nimble
Tupac has sold more albums (60 million) than Nirvana (56 million)
Interesting backstory notes on Tupac Shakur from Wikipedia:
Tupac Shakur transferred to the Baltimore School for the Arts in the tenth grade, where he studied acting, poetry, jazz, and ballet. He performed in Shakespeare’s plays—depicting timeless themes, now seen in gang warfare, he would recall—and as the Mouse King role in The Nutcracker ballet.
At the Baltimore School for the Arts, Shakur befriended actress Jada Pinkett, who became a subject of some of his poems. With his friend Dana “Mouse” Smith as beatbox, he won competitions as reputedly the school’s best rapper. Also known for his humor, he could mix with all crowds. He listened to a diverse range of music that included Kate Bush, Culture Club, Sinéad O’Connor, and U2.
