The market can play foolish plays on people. NVDA was a prime example. I thought expectations were way too high and that risk/reward wasn’t attractive, given the over-reliance on one binary event to determine the path forward. I hate binary events unless I am sports betting. This was no different. I guess sometimes it’s just better to get out of your own way and let the charts speak, which didn’t move away from the bullish stance.
What now? Interestingly, research would suggest that contrary to consensus, equities with large run-ups into earnings do not pull back after the event but continue their trend higher. While dispersion is high, a double-digit up day on earnings usually sees further advances over the coming quarter.
Bond markets continue to trade heavily as more rate cuts are being priced out.
Option implied rate distribution would suggest only a 25% probability of 150 bps of rate cuts coming through this year, while this was priced as the expectation (50 delta) a month or so ago. Equally, the no cut in ‘24 probability (25d put) is priced at 25%, with the median (50d) pricing bang on the Fed’s dots at 75 bps.
So far, this does not leave any negative markers about the direction of equities. Why?
A reason could be that the curve is not really indicating a major bond shift, as it’s merely pushing out rate cuts rather than flipping the script. The “put” certainty is still very much ingrained in the equity market’s psyche.
Similarly, the drift higher in yields is not accompanied by increased implied vols. The chart below shows the 3m option expiring on 1y1y, 2y2y, and 5y5y straddles, drifting lower since the start of the year.
Meanwhile, the minutes of the last FOMC meeting highlighted the consensus view that the Fed needs to wait for significantly more data before easing. This was even before the very strong January NFP and the overshoots to the CPI and PPI.
This still leaves me wondering what story follows next. Is data going to sufficiently slow down for them to cut, or are we going to see more of the same dynamics, at which point markets will need to assess whether rate cuts are even warranted? Read my piece on a likely inflation revival for more insight and discussion on this.
For now, let’s look at what’s in store for us when looking at our book of charts. For those interested in the TradingView scripts, I have added a new addition (reversal histogram) to the mix. Get in touch if you’d like access.
Let’s go!