Welcome friends, to today’s edition of Coffee and Options. This week was extremely interesting – the bears were left scratching their heads as Microsoft followed up recent layoff news with poor guidance. Yes, folks figured that no one is going to announce layoffs and then come out with a smashingly good outlook going forward – that would be just weird wouldn’t it? Well, they were right, sort of. They were right on the news but all over the place on stock performance. Bears were wrong, but then right, and then resoundingly wrong: MSFT jumped $10 afterhours following initial numbers only to be given the smack down to unchanged once the guidance was expressed. The next day saw a crush down to around 230, the recent low from a week earlier, before mounting what can only be described as a heroic rally into the end of the week.
From a broader perspective, good news was suddenly good again for stocks (remember when good news was bad because it meant an angrier and more Hawkish Fed?). Some data was notsobad with durable goods 5.6% versus 2.5% forecast. Jobless claims were 186K versus 205K. And US GDP was 2.9% versus 2.6% forecast. So isn’t that bad for stocks because the Fed won’t much like it – it’s essentially failing in its efforts to slow things down, right? Well, recall that markets are flow machines – where is the cash, and where are the flows. Things just got much too negative, with every bear and chartmaster following the usual gameplan. And it finally smacked them upside the temple.
I sent out a note to followers last Monday that said:
“It just feels like we're one or two good tech reports away from a face ripper. So much bearishness. So many people looking for that last dip to 3500. Too many people on one side of the boat, at least in the short term. Market getting expensive but doesn't matter for now”
Let’s face it, a lot of the bears have been absolutely dead-on this past year, every rally was met with further selling, particularly in rate sensitive growth. But I just had a hunch that too many people were on one side of the boat, expecting things to worsen before getting better.
So, cash-heavy managers, and bears, are having to stare this kind of chart, and they’re none too pleased at the moment:
Just as volatility tends to cluster, so too does wrong-siding (they are really one and the same if you think about it). I don’t know how long this can go – the market is undoubtedly getting expensive and for sure the recessionary effects of rate hikes are probably lagging by quite a bit. Why? Well, print trillions and cut rates to zero and then wonder why things aren’t crashing in the economy so quickly… The conditions for spending-for-longer are still in place. Yes, we are starting to see some cracks emerging but the winning narrative might just be soft-landing, for now, and that is a big change from the extreme doom and gloom of 2 months ago. Yes, employment issues can lag and I fully expect that picture to worsen. But for now, we trade what’s in front of us as markets climb the wall of worry.
Nice note by GR-Decter this week shedding some more light on market misconceptions. The big consensus has been that “earnings estimates still need to come down!!”. This has been a common bear mantra, but the fact is that according to FactSet consensus for 22Q4 growth is actually -3.9%. Revisions have fallen on 1M and 3M and average sell-side FY23 is now $210. Can they go lower? Sure, but again too many people on one side of the boat. Remember that markets often move on the marginal news – if too many people think one thing then it only take the slightest opposite news at the margin to cause a reversal.
Another sign of markets digesting things in a good way is that longer term vols are coming down in some big cap names. Apple 180-day vol has been absolutely crushed lately. Think of that as long-term volatility suddenly experiencing a sea-change in sentiment. Quite bullish, but also good news for those of us who need to hedge client positions – it’s great to buy insurance before the roof is on fire, and 2023 so far is offering us less expensive ways to do so for portfolios.
Finally, a picture I recently took from the Canmore Engine Bridge. I hope you agree it’s just nourishing to look at…. Until next time, may your coffees and volatility strategies be rich and rewarding.
Hans Albrecht, CIO and Portfolio Manager, Gamma Capital Advisors
DISCLAIMER:
None of the content in this newsletter is to be construed as investment or life advice. It is strictly for educational and entertainment purposes. Always check with your advisor to make sure that any investment falls within your risk tolerance parameters and profile.
Feel free to reach out to Gamma Capital Advisors at info@gammacapitaladvisors.com
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