WEEKLY MACRO NOTE - Doing by not doing

Read Time: 7 mins

Too often we feel compelled to action, chasing trades that are not there, investing while we should be waiting.

Understanding the subtle art of doing by not doing, is possibly the hardest, and yet most rewarding skill an investor can develop.

TABLE OF CONTENTS

• WEEKLY WRAP UP

• EARNINGS REVIEW

• SENTIMENT

• ECONOMIC CALENDAR

• THE ROAD AHEAD

WEEKLY WRAP UP

This was my plan as of last week.

The SPX opened the week at 3970, and after falling to gain much traction below 3940, between Thursday and Friday the market rallied back to the top of the range.

Friday saw a relentless rally fueled by almost 400K SPY 0DTE options being purchased with strikes between 400 and 403 driving a oneway race higher.

After 4 weeks of gains, the Dollar took a step back and declined -0.70% with the EUR and the GBP gaining 0.85% and 0.87% respectively.

The Mexican Peso presents an interesting macro divergence against a generally strong dollar. Up 25% in the last 15 months and +2.4% in the last week alone, you could say it is off to the races.

The Central Bank of Mexico was one of the first CBs to start hiking monetary policy aggressively, having taken rates from 4% to 11% in the last year and a half, which certainly helps. Surging remittances have also been a plus, although I suspect the real driver in this has been a demand in the form of reshoring capacity out of China and back to the Americas.

It could be an interesting pair trade to place against the Chinese Yuan short.

After 3 down weeks, equity markets put in an astonishing end-of-week rally, with the SPX closing up +1.90% and the Nasdaq100 up 1.68%.

Part of the story behind Friday’s squeeze was bond yields falling back below 4%, this too was mentioned in last week’s roadmap.

If there is any consolation for the now-wounded bears it is that Bond Market volatility remains elevated, with the MOVE at 122.

Equity Volatility on the other hand was systematically compressed and pushed lower with the VIX closing at 18.48.

Hedgeye has a really useful way of contextualising the VIX by dividing it into 3 buckets of volatility

VIX < 19 investible bucket
19 < VIX < 29 chop bucket
VIX > 30 fucked bucket

Think of it as Green, Yellow and Red lights.
GREEN LIGHT (VIX under 19) gives you the go-ahead to go long
YELLOW LIGHT (19 < VIX < 29) means you want to be cautious and expect markets to whip around.
RED LIGHT (VIX over 30) STOP, high volatility and selloff likely

So in theory at 18.5 we are in the investible bucket of volatility if it weren’t for the fact that throughout 2023, every time the VIX has dropped under 19 it has been a bit of a Jack in the box, not spending much time below, and rapidly springing back up over 20.

Perhaps more interestingly we are once again at extremely low levels of tail hedging, with everyone focused on short-term options (50% of the volume) few have insurance if you look out beyond a month.

GOLD found support at $1800, rallied to $1855, and in the process signalled that equities were likely to do the same.

If there is one takeaway from these weekly notes that I send you, is that a lot can be understood about the market by looking at the relationships between various asset classes. This is in fact one of the tools I lean upon the most on a day to to day basis.

These relationships change, and at different times different ones matter more than others, but staying on top of this can go a long way in understanding market dynamics.

One last example to prove the point is what I said last Sunday about TSLA

TSLA gapped down on Thursday to $186, after what was received as a very disappointing investor day with no new car reveals or any other exciting narrative to sell. The stock however found buyers (the 0DTE crew love this ticker) and closed back over $190, another indicator of broader market strength.

Now I do apologise if this week’s edition is a bit repetitive with me showing some of last week’s calls, the reality is that I have found the market quite difficult to trade over the past few months, and this is despite my being quite on point in terms of the levels & plans I have shared on this blog.

So the above exercise serves the purpose of reminding me of the importance of sticking to one’s plan and that above all trading is an exercise in disciplined decision-making, where all emotion and bias must be stripped out.

I hope this also helps you as a subscriber better understand how to get the most out of my newsletter if you are actively engaged in this market.

Finding signal amongst the noise, and simplifying the complex is one of the challenges we face as investors every day. Understanding the dynamics of the ever-changing macroeconomic landscape and what it means for global markets has, and always will be, an essential part of any investor's decision-making process.

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Over the next few weeks, I will also be sharing some longer-term investment ideas, which you might be interested in discovering.

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