Foreign stocks were hammered last night as they followed U.S. stocks down. The computerized trading programs, or CTAs, went from a position of “max long” on the S&P 500 to “43% long” in one week, which equates to selling $88 billion of S&P 500 futures. With corporations unable to buy stocks during the blackout period before earnings, stocks are finding it difficult to rise with the largest buyer on a forced vacation.
As I suggested yesterday, risk-parity funds did sell last night to the tune of $600 million of S&P 500 positions. This is a relatively small amount that can increase as volatility increases. The CTAs won’t do any more selling unless the S&P 500 falls below 2,710, where they will drop to a “9% long” position by selling $57 billion of S&P 500 futures.
Treasury yields dipped in overnight trading as analysts indicated the ‘flight to safety’ trade of Treasuries is no longer valid. Today’s 30-year Treasury auction saw very strong foreign interest, indicating foreigners do not believe in the U.S. inflation narrative. The safety trade hasn’t kicked in because nobody believes this market sell-off will last more than a day or two. Once you realize the largest buyer is on vacation, there is more risk to the downside than upside.
The Core Consumer Price Index came in softer than expected but at +2.3% YoY is still higher than the Fed’s 2% target. Inflation is starting to roll over as the growth rate in the money supply continues to decelerate. With the unemployment rate at the lowest level since 1969, the question remains, how is inflation going to continue rising from here? The Fed’s models show an inverse correlation between unemployment and inflation. With unemployment so low, the odds are we are closer to peak inflation than we are to a boom in inflation, especially as the Fed continues to destroy money through their balance sheet unwinding.
Stocks closed again in the red, with the S&P 500 closing just over the critical 2,719 level where the CTAs will enter another round of selling. Look for further weakness as margin calls are likely occurring for those who borrowed money to buy stocks and are now upside down on their margin limits. Those receiving margin calls have 24 hours to either add cash to their accounts or to place a sell order. Selling begets selling, especially in an overvalued, illiquid market!
Treasuries were a safe haven today as investors started moving money into bonds. Risk-parity portfolios should enter another round of selling tonight as the VIX volatility index closed +8% higher.
Physical gold and the miners staged a big one-day move making it look like the bottom is set. Buying an initial move off a bottoming pattern can be a gamble, as sellers may look to sell into the strength. The gold miners are a long way from a technical breakout, but their first move over their 50-day moving average is key. Hopefully, we are on the cusp of the bottom I’ve been looking for.