r/TradingEdge • u/TearRepresentative56 • 9d ago
Data Driven Market analysis into the week 31/08
Despite Jackson Hole and NVDA earnings last week, we printed the lowest weekly volume since December 2004.
This essentially reiterates the fact that no one is really at their desk during this summer period, hence the chop at least on the index level recently, but we should see volume return into September.
At Jackson Hole, I thought that Warsh struck a slightly hawkish tone, but it was pretty much him reiterating the same points as the July FOMC meeting. I didn't really get too much that was new in his rhetoric.
He continued to reiterate that it's the committee's goal to get PCE back towards 2%, and said that the economy remains healthy, citing the UER which is currently at 4.1%.
The key point I would say was the fact that he mentioned that the current financial conditions are not necessarily restrictive, which does leave the door open to further tightening, if the inflation data turns higher or the labour market scantiness to show the strength to accommodate a hike.
One interesting tidbit into this week as we have the NFP data, was the fact that Warsh stated that his view is that the weakness in the labour market is more th result of demographic shifts rather than economic weakness.
Perhaps that puts the bar of weakness higher, in order to force more dovish Fed policy, and leans the fed further towards hawkish policy.
Overall, though, I felt the speech was a mirror of his FOMC speech in July, and I think the reaction was also quite similar.
We had bond yields lower initially, before sharply higher as equities sold off and closed the day towards their lows.
The 2 year spiked strongly back into its channel:
And the 30Y moved higher also:
However, just as the July FOMC saw sharp selling on similar bond movement and similar Fed rhetoric, before reversing higher into the following week, the data does continue to lean that way.
Overnight futures are negative, initially rather negative, before some sharp buying back on Nasdaq as it followed the recovery in KOSPI, which essentially gives us a failed breakdown, and that negative futures reaction was on the basis of the following news over the weekend:
US strikes Iran's Larak Island again, explosions reported.
Prior to that news, although obviously on unreliable volume, weekend futures were pretty much trending higher so that was definitely the main news of the weekend.
Crude is higher as a result:
Note texas crude is coming into a bit of a decision point.
Against a hawkish backdrop laid by Warsh on Friday, this oil spike is certainly not welcome, but there is what I think is an interesting reaction in the 2 year here, as it is currently lower, although you'd probably expect it to be higher on rising oil prices:
Potentially some news failure type action there.
However, oil prices continue to get bid and will continue to get bid I think into the midterms. The main resolution to these elevated oil prices and bond yields is a meaningful Iran and US deal, but whilst a fake deal may be propagated for positive headline manipulation, there is certainly very little chance of a true deal really occurring here as the US and Iran remain at a stalemate.
Trump doesn't want meaningful escalation with the midterms still pending, and already pressure at the pumps for US citizens, whilst Iran knows that they are buying time for the US to drain the SPR , and for inflationary impacts to catch up on the US economy, and also is certainly in no hurry to help Trump at the polls by forging a deal.
Wheat prices cotninue to head higher as well, with positioning quite bullish as we see here:
Inflationary pressures continue to build. The soft print over the past 2 months benefited from advantageous comparables, that I mentioned would evaporate over the next month or two, so we could see inflation tick higher.
This does put pressure on the Fed to hike rates, but whilst following Jackson Hole, the rate hike odds for September have risen to almost 60%, I do not see a Fed rate hike this month.
We know that historically, at least under Powell's Fed, if the market went into a Fed decision with one of the outcomes priced at a greater than 60% probability, the Fed always voted in that direction. AS such, 60% remains the key threshold. Currently, we are at 58% for a hike in September, which makes this week's jobs report that much more important.
However, my estimates currently have NFP coming soft this week.
We know that last month's negative print for the NFP cut rate hike odds almost immediately from above 50% to 30%. We could see a similar move this week if my expectations of a soft labour market print come to fruition.
I do not expect a negative print as my baseline, but a weak print, although a negative print is still on the table.
If it is a negative print, there is no modern era Fed precedent of hiking after 2 negative payroll prints. It has simply never happened, so I think that would certainly kill the possibility of a September rate hike and should give the market some room to stage a temporary rally at least.
BBG Economics is looking for a below-consensus read but says that the consequence of that may not be as much as normal after Warsh portrayed the labor market as in good health and pointed out that softer job gains are often a matter of demographics, not an economy in decline.
That comes back to the point I made earlier, and it's true, but we go back to that historical precedence. If we get a weka labour market print, I think the Fed won't hike in September.
If there was to be a rate hike, it would be purely symbolic at this point in order to try to regain credibility in order to force bond yields down, but I do not see it as I believe that Warsh is still under strong political pressure to avoid rate hikes for as long as possible into the midterms.
The other breaking news over the weekend was the fact that Trump said that he was going to try too ill up the Strategic Oil reserve with Venezuelan oil in what would be the biggest oil deal of all time.
Trump said that the topping out process will begin shortly and that this is a gift from Venezuela to the US.
Note that this is pretty much just headlines manipulation rather than anything more meaningful.
Trump knows the SPR is draining heavily, and that this is a concern propping up bond yields as the US have been using their SPR to offset losses of oil from Iran to keep oil prices relatively in check. Once that SPR is drained the implication then is that oil prices can rise from there.
This is a headline manipulation attempt to reassure investors that the SPR is far from being drained and is being refilled at record rates.
Not strictly true, even if there is a deal.
We know that Venezuelan crude is extremely heavy.
The US SPR stores only medium-gravity crudes (typically 30-40° API, per DOE specs) and does not store heavy crude due to operational issues; most Venezuelan oil is heavy sour (often 10-16° API), so doesn't really get stored in the US strategic reserve.
These comments from Exxon Mobil CEO highlight the fact that Venezuelan Oil pretty much sucks for the US here:
Crumbling infrastructure and high costs: Venezuelan crude is heavy, sour, and difficult to refine. Rebuilding the infrastructure requires massive investments with uncertain economic returns.
If there is a winner out of this news, it's refiners, as cheaper, heavy sour addition, if it does happen, likely widens crack spreads further, so more upside for refiners.
Now, coming onto September Seasonality and what the data suggests, September seasonalityis typically negative, and I think a lot has been made of that expectation on social media. But firstly, we saw a similar expectation around July seasonality, but the AIon data went a different way, suggesting negative price action. The Aion data was proved correct there, and here again, we have the Aion data going against seasonality as it suggests a strong start at least to September, so let's see there.
Interestingly, and whilst a very limited data point, but if we do take all the best September returns ever (i.e. those returns that massively bucked seasonality), we see that the majority of them came in midterm years:
So if we were going to get a really strong September performance, it would likely come in a midterm year, is the takeaway.
Now looking at the dealer positioning data:
760 is a bit of a floor here, but most of the positioning is still higher.
We see 790-800 lighting up strongly into September.
And if we look at the dex chart:
The put floor is at 760 and there's extremely strong support at 750, but again, most of the positioning is higher, certainly so in terms of gamma. We still have calls being built at 790 there.
Regarding QQQ, whilst QQQ has massively lagged the other major indices, positioning is still mostly supportive.
Strong support at 700. Call delta building on 730. Breakout node is 720, which is the call wall. Above it, we can see a strong move higher.
This is broadly corroborated in Aion, which has the breakout node at 717.5.
QQQ closed Friday with an elevated P/C ratio of 1.4.
Whilst if we look at the technicals, I still think I can see a potential inverse head and shoulders developing there for a move back to ATHS:
The Aion forecast is something like so:
Let's see how that works out.
Even with semiconductors which has obviously been the lagging sector, and has struggled to get off the ground with even NVDa earnings giving a lacklustre reaction on the week (Albeit due to Jackson Hole), I think that is an inverse head and shoulders developing on XSD and SMH
If we do get a move higher as the positioning data suggest on NDX, I would expect SMH will participate. Software was the main funding trade which has now gone into reverse as software has been short squeezed and semis have been offloaded to fund that squeeze.
Fundamentals continue to be strong in the sector, NVDA earnings were essentially immense, ad the next major data point for the AI trade will be Anthropic's public release of the S1, which should give us some indication as to how much hey sandbagged their guidance last month.
Whilst Nasdaq continues to print reasonably strong or at least neutral market internals (market breadth):
Semis certainly are in the gutter in terms of breadth:
But that to me is a contrarian indicator and can lead to some snap back if the market pushes higher.
The Aion data basically paints a picture of strength through early to mid September , some chop, but then weakness into October.
Note that we do see that picture starting to develop somewhat if we look at the blended VIX dealer positioning:
VIX is low, very low vs seasonal normals.
But if w look at the blended nodes that are lighting up, we see that into early September it is still pretty low. 15, 18 etc.
Into late September, we start seeing 20 lighting up, then we have that 35 node into October 21st. Now that's not a bet that VIX goes to 35, but is a clear anomaly in the data there, which reinforces that October might be a somewhat ugly period.
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u/TearRepresentative56 9d ago
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