Sunday Forward Note - 2024/04/21
Sunday Forward Note - 2024/04/21
Big tech under the weather.
Another week full of surprises.
After experiencing its rainiest episode in 75 years, Dubai is underwater, while the Nasdaq lost 5.5% over the week. Things were so hot lately that we'd forgotten these outcomes were even a remote possibility.
Yet, the mood has shifted, and markets are now readjusting their different scenarios for the second half of the year. As a result, the S&P 500 lost 3.25% this week, its steepest weekly decline since the last week of May 2023, when the market braced for a well-orchestrated debt ceiling crisis, sorted out at the last minute, as per the script.
No debt crisis this time, but some similar theatrics, albeit a tad more explosive, were coming from the Middle East. As expected, Israel retaliated the retaliation after a deluge of missiles put their Iron Dome to work over the weekend. Futures markets plunged on Thursday evening after the city of Ispahan was hit, and the VIX was poised for a spikey open above 20 as we braced for a fierce and decisive response from the Islamic Republic. However, after it became clear the two countries would not seek further escalation, the movement reversed overnight, and the market opened on Friday as if nothing had happened.
At that point, many thought it would be a sunny Friday, rallying towards the all-time highs.
Que nenni.
Instead of champagne, the Magnificent Seven shareholders were served a hot Bloody Mary. NVDA was issued a short-selling restriction after losing more than 10% near the end of the session. It's now trading at $762, just above its level from February 2024, before it posted stellar earnings that catapulted it close to the $1,000 per share mark.
The results weren't any better for the others, while surprisingly, the rest of the market held up just fine: the usually laggard Russell 2000, full of small and mid-caps, for instance, closed Friday in the green while the big indices were dragged down by big tech.
So why this turn of events? Well, first of all, we're in the middle of earnings season, and next week, we'll receive earnings from Tesla on Tuesday and from Microsoft and Google on Thursday. Could the market participants be trimming their portfolios ahead of these events? Potentially.
Most importantly, as we mentioned last week, we've entered a new market regime, and the big mistake would be assuming that we're going back to what we've seen over the past six months—back to school was for real, and it's not time to kid around anymore.
The first key item on the agenda is the situation around rates. In a short and concise intervention on Monday, Chairman Powell was pretty straightforward: "Inflation is taking much longer to cool off." And in case you refused to read between the lines, Goolsbee from the Chicago Fed was even more explicit: "Three months of inflation surprises can't be dismissed."
Let's just say that the horizon for a rate cut in June became much cloudier. Unless some surprisingly good data emerges in the next sixty days, the case for higher rates for longer is much stronger than it was a few weeks ago. The next FOMC meeting, scheduled for May 1st, will be decisive and provide some key answers about the situation.
Therefore, we're in a market very similar to January 2022, right before the invasion of Ukraine. Although it can feel like the markets are primarily driven by the geopolitical context, the way they shrugged off the tit-for-that dance between Iran and Israel tells you that they aren't too fazed by that as long as we don't go into a full-scale war.
Instead, the markets reacted to the rate story: from seven rate cuts to likely 0, it took four months to readjust the perspective. Yet, despite this radical shift, the VIX didn't break the 20 level. We had a very pressing question last week—are we in the acceleration phase of a volatility spike, or should we get used to a more neutral and elevated implied volatility regime?
The answer is clear—you've called for the wind for months. It's here. Now be careful what you wish for: do you really want to have to deal with a hurricane?
In other news
In case you've forgotten, this year is the year of the Olympics, which will take place in the City of Light, Paris. It's supposed to be a one-of-a-kind event, 100 years after the 1924 Paris Games, where Coubertin pronounced the famous cursed sentence, "The important thing is to participate."
However, there has been a mixed reaction from the French themselves (they always complain, though—can we really take their opinion seriously, anyway?) and international travelers. What better example of this than signals from Airbnb data? What was supposed to be the biggest Airbnb event in history has failed to materialize. The question remains unclear: Is it because the prices are too high or because people are uninterested?
One thing is for sure—the French have three more months to work on their hospitality skills... and pricing strategy.
Thank you for sticking with us until the end! As always, we've handpicked a few must-read articles for you this week:
Since we’ve been writing on Substack, there have been only a few publications we’ve been really excited about (there we go, us being French again…). However, if you are serious about volatility not from a theory but from a practical and trading point of view, you must subscribe to
. Their latest analysis on short-term seasonality in 0DTEs is top-notch. Because Mike, the author, is very cool, he gave Sharpe Two’s readers a special discount. Redeem it now!Another excellent article from
—with Tesla losing 40% since Jan 1st, 2024, this week's earnings report is already shaping to be a decisive moment for the electric vehicle giant.Finally, this week, we've dived deeper into the data surrounding the overnight trade. Spoiler alert—it's not just our best trade of 2024 so far; it's our best trade by a mile.
That is it for us. We wish you an excellent week ahead, with fewer missiles and more positive earnings.
Happy trading!
Ksander
Data, charts, and analysis are powered by Thetadata and Dataiku DSS.
Have access to our indicators using our API.
Book a consultancy call to talk about the market with us.
Contact at info@sharpetwo.com.
Disclaimer: The information provided is solely informational and should not be considered financial advice. Before selling straddles, be aware that you risk the total loss of your investment. Our services might not be appropriate for every investor. We strongly recommend consulting with an independent financial advisor if you're uncertain about an investment's suitability.