Tag: BTFD

Markets Closed for MLK Holiday, Futures Down Though, or Not.

Oh boy we need that plunge protection tomorrow… or not. Continue reading “Markets Closed for MLK Holiday, Futures Down Though, or Not.”

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Santa Clause Rally 2 Weeks Late.

The Santa Clause Rally came 2 weeks late (always BTFD!) According to MarketWatch, small-cap stocks, as gauged by the Russell 2000 index RUT, +1.04% , are off to their best start to any year in the past 32 years, boasting a gain of 8.8% (WOW) over the past 12 trading sessions, according to Dow Jones Market Data. That’s outpacing the large-cap S&P 500 SPX, +1.32% the U.S. stock-market benchmark, which is up 5.2% over the same stretch — a performance, however, that likewise is the strongest 12-day start to a calendar year in 32 years. You can think Central Banks and Powell being Trumps right hand man for that.

The Dow Jones Industrial Average DJIA, +1.38% is up 4.5% over the same period, while the Nasdaq Composite Index COMP, +1.03% has logged a 6.8% advance.

Is it a reason to cheer? Perhaps it would be if not for the fact that the gains are the strongest since 1987, when the Russell popped 11.87% over the first 12 trading days and the S&P rallied 11.22%. 1987 is a year that lives in infamy on Wall Street.

On Oct. 19, 1987, the Dow sank 22.6% in a single session, marking its steepest percentage drop ever. That is not at all to suggest that similar action will play out this time around but you can never be to sure.

However, a number of strategists have been warning that gains in small caps aren’t likely to be lasting. MarketWatch’s Chris Matthews writes that investors have been drawn to the relative bargains that small-cap stocks are trading at compared with their larger-cap brethren, but noted that analysts are advising caution in investing in the group (don’t listen).

Separately, MarketWatch’s Barbara Kollmeyer, citing Andrew Lapthorne, a quantitative analyst at Société Générale, warns that U.S. small caps will be in the center of the next storm for stocks because those companies tend to carry larger debt loads relative to their heftier peers and are sensitive to rising interest rates.

“U.S. small caps have been taking on a massive amount of leverage over the past few years,” particularly starting in 2013 during the [quantitative easing] years, wrote Lapthorne.

Although the Federal Reserve appears to be in pause mode, the central bank does want to eventually normalize interest-rate policy, which may add more friction for small-cap names.

Back in 2018, shares of those companies enjoyed a bounce because they were perceived as being more resilient than larger multinational companies amid trade disputes between the U.S. and its trade partners, namely China. However, after punching higher, that rally faded hard and fast as a resolution between Beijing and Washington failed to materialize.

Investors should hope that the same narrative, or an uglier one, doesn’t play out this year. If us at BTFDClub had to bet unless there is a recession buy all dips!

Contrarian Indicator

The latest BofA Fund Managers Survey, which took place between Jan 4-10 or just after the worst December for the S&P since the Great Depression, polled a total of 234 panelists with $645bn AUM, investors’ expectations for global GDP growth continue to fall, as net 60% of those surveyed think global growth will weaken over the next 12 months, the worst outlook on the global economy since July 2008 and below the trough in Jan. 2001. In fact, as BofA’s Michael Hartnett observes, FMS Global macro expectations are “too low unless recession imminent”, which of course means that all else equal, Wall Street is now certain that a recession is imminent. As our astute readers will understand shortly, this is a contrarian indication and therefore should be buying hands over fist as the money managers will need to play catch up on their portfolios after the dismal December selloff.

As the next chart will show, inflation is negligible so the central bank will curtail its interest rate ramp in the future (also Trump is DADDY.)

Balls to the Walls

A trader made a massive bullish trade on the S&P 500 on Monday, putting at risk hundreds of millions of dollars of capital. The trade is reminiscent of, and has drawn comparisons to, Warren Buffett’s giant bet on global stocks more than 10 years ago (The king of BTFD Fags.) 

On Monday, a trader sold 19,000 S&P 500 put options that would obligate him or her to buy the index at 2100 on expiration in December 2020, according to Reuters. The index would need to drop no more than 22% from Monday’s closing level of 2582 and the bettor stands to rake in $175 million in premiums.

The move is reminiscent of Berkshire Hathaway selling billions of dollars in index options premium between 2004 and 2008, before ultiamtely being bailed out by the Treasury and the Fed. It was a broad bet that the global market would rise over the next 15 to 20 years and, although initially the trade was made anonymously, it was eventually revealed to be Buffett’s Berkshire Hathaway.

Berkshire has netted over $4 billion in premium from the sale of these options, the final chunk of which is set to expire in 2026. And even though Monday’s bet was not nearly as big as Buffett’s, it still could wind up costing the trader hundreds of millions if the market moves lower than the trader expects: should the market drop by 34%, the trader stands to lose about $558 million.

A second lot of about 3600 of the same puts traded on Monday, putting the total volume for the contract at about 24,000 on the day. On Friday, 5500 of these contracts also changed hands.

One trader guessed that the option write was a hedge against another position by a large bank.

Benn Eifert, chief investment officer at QVR Advisors in San Francisco stated: “The natural sellers of long-term downside puts are structured products desks at banks, who are hedging exposure they get from retail clients who buy structured notes that have embedded short put options. That would be my default guess on this.” As anyone’s guess, this person is definitely counting on BUYING ON THE FUCKING DIP!