Consolidation Time

A time to chill

Imagine you are a macro newsletter guy whose main source of revenue is selling FX options. Then imagine that your view is that FX goes nowhere for two weeks. What do you do? Here’s how I see things:

• Stocks have completely removed the war premium and accept that oil will be higher for longer. The global supply shock framework is wrong, or the timing of that shock has been wrong as it was supposed to be here by now. This does not mean that there is not going to be a supply shock and shortages, but we have gone from pricing in that dire scenario to dismissing it.
• VIX back on an 18 handle and it’s difficult to think what would truly shock markets right here. Escalation in Iran will be scary for a short time (one day?) but with the AI fever back, people will simply say: Does Iran impact tech earnings? No? Okay cool.
• Economic data is irrelevant as it will be distorted by what the market is viewing as a transitory shock.
• Stocks overbought but still in a bullish setup and tech earnings coming over the next few weeks. Hard for me to imagine a company like Apple disappointing but easy to imagine them delivering a topside surprise.
• Private credit fears have subsided. Whether that is right or wrong doesn’t really matter in the short term.
• Warsh nomination is going to be a circus but not a market mover.
• USD weakness should continue but in a low vol, grinding kind of way.
• PBoC not really endorsing aggressive USDCNY weakness here. That’s a headwind for overall FX vol and for USD bears.
• Markets are tired. A lot of capital and mental energy were spent in March. Markets can’t go pedal to the metal forever and now it’s time for some consolidation and chilling.
• If the analog is Liberation Day (massive shock, followed by relief)… May and June of 2025 were quiet and rangebound in most FX pairs as the market ran out of energy and USD sellers were done.

It’s hard to sell FX vol in limited downside and make real money, and I know these sorts of ideas are useless for retail, which is half my subscriber base. But the idea of selling vol applies to the overall mindset for trading anything over the next few weeks. More mean reversion, not extension. Take profits, don’t double. Don’t be long a ton of vol, be long carry, and so on.

Short USDCHF vol is a good trade if my view is correct as lower USD and lower vol usually mean higher EURCHF and so EURUSD up and EURCHF up = USDCHF doesn’t move much. Here’s what I think will work.

Sell put spread: 0.7800/0.7780
Sell call spread: 0.7860/0.7880

In 100 million USD you collect $160,000 and if it blows through one or the other, you lose $270,000. This is ballpark price off 0.7832 spot. From a “I like leverage” point of view, this looks bad, but from a “I like positive EV” point of view, I think it’s an excellent trade. I will put it in the sidebar for posterity. This trade is essentially a bet on consolidation between now and month-end and/or EURUSD and EURCHF both go up, but not that much. While it’s much more fun to make leveraged, directional bets, ultimately we are here to maximize profits and EV, not fun.

A few people asked me why I did not put the short USDCAD from 1.3830 in the sidebar. The short answer is: I whiffed. The longer answer is that it started out as Tim Power’s idea, which I liked, and then wrote about. And thus I didn’t quite get over the hurdle for putting it in the sidebar. I hope you did it, though.

Note that in the multiverse, you can lose on both the put spread and the call spread, but in real life, on this timeline, you cannot.

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Stocks

The blistering hate for MSFT and friends has reversed and now I don’t see any real obvious behavioral edge in stocks. We took out all the angry sellers in just about everything and now there’s an air of jubilation from Team Nothing Ever Happens, but not enough to make me want to flip short. Flat isn’t bad. We have scaled tremendous heights in a short time and tactically there is no asymmetry at this point.

QQQ is just barely up through the all-time highs, but not exactly a clean breakout yet.

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Final Thoughts

1. Bad breadth is not bearish but it has implications for stock selection and lead/lag. This new all-time high in stocks is driven by an extremely narrow group. Orange line below shows 52-week high data for NASDAQ—looks similar for S&P 500 and other U.S. indexes.

2. The birds are back this morning. Good sign!

Have a day.

Black-capped chickadee range

Black-capped Chickadees are highly intelligent, and social birds. The can store food in thousands of locations and remember those locations for more than a month.

They also hang frequently hang upside down, which most birds do not. This allows them to better forage for seeds and bugs.

good luck ⇅ be nimble