The Chop Will Continue

This is a Cycle Ender

Let’s start off high level… Every US recession excluding the pandemic downturn was preceded by an oil price shock. The conflict in Iran is a potential cycle ender.

Stagflation is THE Risk

This is a great chart from Kantro (Strategist at Piper, i.e Cornerstone) - The exact levels are not what is important here. The larger point is that inflation is a risk - and stagflation is the big risk. The longer the Strait of Hormuz is closed, the higher the probability of stagflation is.

Protecting the Right Tail

Somebody on Twitter made the chart above and jokingly said “I think I solved the stock market, all you need to own is tech and energy”.

The funny thing is they are directionally correct. In a world of elevated geopolitical risk (think the 1970s) what is important is not protecting the left tail of deflation (by owning bonds) but by protecting the RIGHT tail of inflation (via gold and energy). Too many people are stuck in the last decade. As we have been repeatedly writing about for over 2 years, the 60/40 is dead.

Everybody is Hedged

Ok now let’s talk about trading this. The problem is everybody knows the risks. Hedge fund L/S managers are the least levered in the past 15 years. Everybody is buying puts. Everybody is reading the developments in the Middle East. Everybody now knows what Urea futures are.

All this ‘knowledge’ and awareness means you are far more likely to get a choppy slow grind lower (we wrote about this a month ago and thus far it has been dead on).

CTA Positioning

We started writing this note on Monday but couldn’t get it out in time. The theme was going to be ‘watch out for a short squeeze’. Now that it is underway, the squeeze might have some legs, but we have already closed the short-term calls we added.

Now comes for looking for a re-entry on our shorts. But we are going to be patient, some of the 2022 counter-trend rallies retraced upwards of 50%-75% of the previous drawdown.

Bear Market Rallies

For now, we are in the camp of this being a cycle-ending bear market. If the Strait re-opens in the next week, we’ll cave on that thesis. But that is unlikely.

So instead, the game plan is the same as we have laid-out throughout the last few weeks. Lean short. But be tactical as possible. Most of the largest rallies in history have come in bear markets. Tuesday’s surge is likely the first of many this year.

We are back to neutral (slightly long random long-term names we like) but are looking to get back short. 6700 on ES is where it gets interesting.

Remember - the repeat of 2022 is in the early innings as long as the Strait is closed. This could be a cycle ender, but everybody knows that. And in the words of Ben Hunt - when “everybody knows that everybody knows” it changes the dynamic entirely.

Expect chop. The VIX isn’t going to 70. Retail is likely to be sliced to pieces this year. This is a veteran trader’s market.