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Fading the calls

$940bn worth of options traded on Thursday last week, making it the single biggest volume day for U.S. options… ever. Interestingly, 70% of the options traded have expiries less than one week. Also worth of note is that options volume was 140% equities volume and the vast majority of those options being bought were calls. …

Fading the calls Read More »

Bigger picture

There are not many good looking setups on the local market for us this week, so we’ve decided to rather look at some bigger picture themes. On that note, last week we wrote about how the market is looking and feeling a little stretched, although it seems that we got it wrong. Overall, sentiment is neither extremely bullish or bearish at this stage and equity positioning by larger active funds is still mostly underweight.

Headed for new highs

The market has become very strange indeed. The trend is so strong and there are so many dip buyers around that it seems the part will never stop. Although, whenever there are a few down days, the mood turns really dark and a semi-panic seems to take over. This is one more thing that worries us when thinking with the longer-term hat on. Why are traders to extremely negative when the market ticks down only a few percent? How much is the average trader geared and long the market? What happens when the market pulls back 10%? What happens when the Fed actually hikes interest rates? And what happens if the Fed hikes rates and starts tapering at the same time? These are some of the questions that we are pondering. But for now, the show goes on and the bulls keep dancing. Buckle up, because we’re headed for new highs.

Purely a technical perspective

Our bullishness last week was clearly not the right call. Volatility has crept into the market and there is a lot of uncertainty around what happens next. Therefore, in order to clear our own minds of bias, we will be looking at markets from purely a technical perspective this week.

Jackson Hole week

All eyes are on Jerome Powell and the Jackson Hole symposium this week. Jerome Powell is expected to talk on the 26th of August and the market is waiting to hear when we can expect tapering. Although tapering the does not mean a sudden and abrupt end to QE, the market certainly will pretend that it does up until the very minute that it actually happens. We think it is almost inevitable now that we see some tapering by the end of the year. This does not mean that we see interest rate hikes, or a complete end to bond/asset purchases by the FED. It does mean though that the rate at which they are providing liquidity to the market will slow down. This could cause a bit of a speed wobble and some risk-off sentiment.

Setups are sparse

excited about. Overall though, we expect the week ahead to be ‘risk on’. At least for the developed world. South African markets might be facing its own headwinds and continued currency fallout as a result of the cabinet reshuffle last week. Setups are sparse, so play defense and don’t try to force trades that are not there.

Mixed signals

As anticipated, the FOMC made no changes to interest rates last week and are unlikely to make any real moves without very clearly communicating it to the market. Our focus now shifts to the Jackson Hole symposium to be held near the end of the month. We think that Jerome Powell will likely use Jackson Hole as the platform on which to start communicating tapering warnings to the market. At some point the FED must admit that the printing is creating inflation. Although it will likely not do so directly, we can watch the language use around the topic. It was interesting to note that Powell essentially admitted that he does not know ‘where’ inflation is coming from. He also stated that inflation is likely to stay around longer than initially anticipated.

The BTFD crowd win again

markets) seem to be very attractive ‘underperformers’ that seemingly offer a huge amount of value. Generally the thinking is that we are entering into a new global growth phase and that the underperforming emerging markets ‘should’ catch up to developed markets. That is an enticing narrative and one probably worth positioning for. However, there are some warning signs that are not going away and are difficult to ignore.

Be patient and hold the longs

We have to admit that today’s post was difficult to write. It is hard to focus on opportunities in the week ahead while our country appears to be… well, having a really rough time. We often say that we must filter out the noise and focus only on those things that can accurately analyse (aka. the chart), so that is exactly what we are going to do. Besides, the world’s financial markets are looking fairly good and we’ve positioned well for strength in the offshore portfolio’s. The only thing to do now really is to be patient and hold our positions.

Buy the dip

The second half of last week got really wild, really fast. Given the fact that hardly anything has changed – in the sense that there are no interest rate hikes on the table for at least another year and a half, and that the FED will continue to buy $120bn worth of bonds every month – we think that the market might have had a bit of a strong ‘knee-jerk’ reaction to the FOMC minutes. Thus, we say buy the dip. As long as the free money keeps flowing, it will be difficult for the market to sustain downside.

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