Weekly Update - WE Nov 22, 2024
Inaugural post, OPEX, VIX >17, US10Y hitting a trendline, uranium
This is the inaugural post, the first of a regular weekly series. In these posts, I will recap what happened last week and summarize my preparations for the upcoming week.
Recap of Last Week
On Friday we saw consistent selling pressure throughout the day in equities ($ES down by 1.3%) with a brief stop at 5900 (where the day also exactly ended), volatility spiked (VIX reached a high of 17.55, up from the prior day’s close of 14.40), while other asset classes were relatively unaffected (crypto surged; bonds, crypto, and oil flat).
Given that the selloff was contained to equities only and was not driven by some broader macro theme, I believe the selloff and volatility surge were highly mechanical, driven by OPEX, and should normalize pretty quickly.
Both CPI and PPI numbers this week came in on estimate.
Trump hit the ground running, making multiple appointments this week (Musk and Ramaswamy to DOGE, RFK Jr. to HHS, Lee Zeldin to EPA, Tom Homan as Border Czar, and others).
After the election, the Fed seems to have shifted its stance to more hawkishness, and the odds of another 25bps cut in December dropped from 72% to 59% following Powell’s speech on Thursday.
On Friday, Russia imposed restrictions on the export of enriched uranium to the US. The same day, Russia also announced it would cut gas supplies to Austria, effective the next day (it was a long time coming, timing may be coincidental). Anyway, I wonder if that is indicative of the state of the ongoing discussions about the war in Ukraine.
Preparation for the Upcoming Week
Macro: No super important data points, unemployment claims on Thursday, PMI on Friday.
Equities: The market context is mixed. On the positive side, we are beginning a seasonally strong period with a positive macro outlook. On the negative side, the market is priced for perfection (ERP at zero; SP500 at 22.5x earnings - 90th decile - driven primarily by tech, industrials, and consumer discretionary). Key narratives remain the risk of inflation acceleration, labor market deterioration, and long-term yields.
I remain invested and on Friday I marginally increased positions in SPY, QQQ, and IWM and sold puts on ES.
I plan to sell puts on ES if VIX stays above 16.
Volatility: Currently, I see the fair value of VIX in the range of 14.5 - 16.0. Both the futures and term curves look normal, even after Friday’s VIX surge. I don’t see any events that could have a major impact on VIX ahead. November contract expires in 3 days.
I remain short volatility, especially given that the futures are above my fair value estimate.
I increased my long SVIX and short UVXY positions on Friday. UVXY’s historical election performance is a tailwind.
I have a long-vol hedge and will increase it once the VIX dips below 14.
I plan to add to my SVOL position (given the high treasury yields and relatively good VIX futures pricing).
Bonds: 10-year yields hit 4.5% as the market sees Trump’s policies as more likely to be inflationary. At the same time, yields hit a trendline. Should yields remain at this level, or go higher, this would be bearish for all assets.
I plan to buy TLT as I am not as worried about Trump policies’ repercussions and see a 4.5% 10-year yield as a good entry point.
China: Chinese stocks continue to slide on the back of the disappointing stimulus and the market’s view that Trump is negative for Chinese stocks. I have the opposite view - I believe stimulus will be unveiled gradually, and that the potential (threat) of tariffs will accelerate any stimulus in the pipeline, which would outweigh any negative consequences of the tariffs per se (especially on tech giants active mainly in China and not so much in the US). 13F releases showed that some key managers bought China in the last quarter.
I am watching FXI and BABA for re-entry.
Energy: I am working on a uranium primer.
I remain invested in URA and U.UN.
Crypto: I wonder if the massive surge from the last two weeks has run out of steam.
I remain invested in IBIT but may reduce it by half this week.
Other:
On Friday, I bought AMSC.
I remain short DJT.
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