Election Volatility & Uncertainty
FOMC decision postponed till Thursday
Hey everyone hope your day is going well, we just wanted to share a few thoughts and charts today and provide an update to Friday’s markets and settlements. We know all eyes will be on the election tomorrow and then the FOMC decision which has now been pushed out to Thursday. The markets are expecting another 25bp cut and why not, we got the juicy 50bp variety initially and now its time to slow walk things back down.
The FOMC has this luxury because they can essentially act in between meetings if they have to, so what is the rush to lower rates then? The markets are widely expecting a 25bp cut, but maybe Powell will shock the markets and deliver another 50bp cut, if he does I would expect a major negative shock to equity markets and expect bond yields to plunge.
I would expect this outcome because it means Powell and the FOMC see something the markets don’t and no matter what peoples expectations are for future inflation, the FOMC would obviously be worried about negative job growth and deteriorating global demand.
When we look at the US Bond market in particular the 30Y bond, yields have run up quite a bit. Now have yields run up due to forced selling to raise cash? Possibly and I would think that has more substance as an excuse than large funds thinking rates will not fall due to inflation concerns. This technical chart set up is ripe for a yield smash in the long end here and volatility due to the election and FOMC certainly packs enough fire power to get this move started. A move below 4.41% in the 30Y would suggest we are most likely cycling back down toward a lower yield environment:
Our proxy for equity technically lies within the Nasdaq futures and the QQQ ETF. When we look at the December futures the Nasdaq line in the sand seems clear to us on the weekly and that level is 20050. I would think that real sellers will start to accelerate the downside below this on a weekly close:
When we look at the QQQ the matching technical level is 485:
Even the December SP500 has a clear market with 5725:
The MEGA8s that we follow has also clearly broken down as we chart this group. Big funds cannot move large big chunks of stocks easily and thus they do it over time as to not disrupt the natural flow of the markets. The trend channel is clear and thus a breakdown outside of this would be pretty significant:
Ok let’s take a quick look at the SOFR curve today depicting the short rate markets expectations and the expected Fed Funds associated with the SOFR prices. We will expect this SOFR curve to continue its downward trajectory:
This curve will continue to reprice lower if the FOMC does decide to keep the pedal down on the rate cuts and as many long time readers know, we know the global central banks love to solve all the worlds problems with more QE and lower rates, so why would this time be any different!
Ok onto last Friday’s settlement sheet where you can see profit taking or selling hit most of the major markets outside of the equities on Friday:
When we look at our MEGA8s data last weeks option hedge the QQQ 500C short worked out well, this week we will target the 498C strike at $3 or better or we may opt to also put on an outright 480P on the week to get a better risk/reward tradeoff on the whole basket should a larger move ensue.
Amazon hit a new market cap high in regards to the net change since 5/10/2023:
I can’t help but think the biggest loser in the next down trend, the real down move will be Nvidia, but its too early to call that yet, but obviously a lot of buyers in that stock that need to monetize should things start to move south!
When we look at the total market cap of the group, well, the double top is still holding strong:
OK that is it, we have brand new US Govt 10s and 30s on tap this week. I would suspect these auctions to be well received given the recent back up in yields but with everything obviously going on, these issues will be overshadowed by tomorrows election:
Ok guys hope this data helps, I hope you continue to stay with us and refine some of your current trading and investing endeavors. If you can’t support the work financially at least share our work with others so that we can grow our subscriber base and reach. We want to make sure we reach as many as possible, so that we can all become better informed about the relevant topics that effect our financial markets. We would expect volatility to spike here so don’t be shocked at the size of the moves or the outcomes, because anything can happen! So keep your wits about you and don’t make dumb mistakes, make calculated pre planned decisions and its always the most well prepared that generally obtain the most optimal outcomes! Till next time, cheers.