This viewpoint disregards the fact that S&P 500 futures are already 2.5% higher than Monday’s intra-day low. The key point being is that with the last price in index futures at ~1848 the market is right back at the 50% retracement of the April high (~1892) and low (~1803).
In our view this thought process misses the point. The real takeaway is that after weeks of instability many are finally resigned to a pause in the mean reversion of last year’s strategies. This also includes a contraction in the very high intra-day volatility. Meaning, the peak-to-trough index ranges should narrow into option expiration.
While we do not fully agree with the shift in sentiment we are mindful that the price action argues in favor of a retracement in certain strategies and we will adjust some positioning in the model portfolio to be prudent..
Firstly, the model portfolio pre-market closed out the entire short Small Cap (IWM) and long Large Cap (SPY) relative value strategy. We covered the IWM short for 112.22 and sold the SPY long at 185.36. While we still believe this is a great intermediate-term theme the fact is that we never thought we would be able to generate more than 5% of outperformance this quickly relative to when we deployed the strategy on March 19th. We will look to re-initiate this position in the near future if it were to retrace 3-4%.
Secondly, the model portfolio opened a new tactical trading position. Specifically, we bought $20 million DAX (63 GXM4 June) and sold $20 million CAC (334 CFK4 May) index futures. As previously stated we believe France will outperform Germany in the intermediate-term but we needed a short-term structure that would outperform if China’s data was supportive to European growth, US equities bounce, and there was a short-term climax in sentiment around the Russia-Ukraine conflict. The CAC has now outperformed the DAX by 6.5% in 2014 and is currently at the low point of the year. Before resuming the downward trend we are looking for a 2-4% bounce in this pair led by the DAX. We would be quick to cut this position if the S&P 500 makes a new low or there is escalation in Eastern Ukraine that impacts risk-assets enough to force the DAX to resume its downside leadership.
For those that do not have the capability to trade futures the closest US ETF equivalents are long EWG (Germany) and short EWQ (France).
Finally, in the first two hours of today, the model portfolio will buy $12 million of the SPDR S&P Retail ETF (XRT) and sell short $12mm of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). While we believe in the rotation into Energy and out of Discretionary in the intermediate term the XOP has outperformed the XRT for nine (9) days in a row and both o there 9-day RSI’s are near oversold/overbought levels. Again, this is nothing more than adjusting positioning to take advantage of what could be a 4-5% retracement in a key relative value strategy.
Sight Beyond Sight is a daily macro analysis of global markets as viewed by market strategist Neil Azous. The content herein is republished with permission from Rareview Macro LLC. To subscribe to this publication (Free 10-day Trial, no credit card required), please visit www.rareviewmacro.com