{"id":1447674,"date":"2024-01-04T15:05:00","date_gmt":"2024-01-04T20:05:00","guid":{"rendered":"https:\/\/bugaluu.com\/news\/?p=1447674"},"modified":"2024-01-04T15:05:00","modified_gmt":"2024-01-04T20:05:00","slug":"the-times-they-are-a-changin-how-to-trade-the-next-algo-shift","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/the-times-they-are-a-changin-how-to-trade-the-next-algo-shift\/1447674\/","title":{"rendered":"The Times They Are A-Changin’: How To Trade The Next Algo Shift"},"content":{"rendered":"

The Times They Are A-Changin’: How To Trade The Next Algo Shift<\/span><\/p>\n

\n

By Peter Tchir of Academy Securities<\/a><\/em><\/p>\n

The Times They Are A-Changin\u2019 \u2013 Impacting Market Signals & Correlations<\/h3>\n

We, the market, have collectively learned a few things in the past few years. Primarily lower yields = higher stocks<\/strong>. That was probably the single biggest lesson since COVID and ZIRP. Lower yields = higher stock prices.<\/em><\/p>\n

We learned that stocks are \u201clong duration\u201d assets. We learned that tech stocks are even longer duration assets. The “everything” or “QE” trade became a dominant theme<\/strong>. It didn\u2019t mean we didn\u2019t experience \u201crisk-off<\/strong>\u201d days (bond yields lower, but stock prices lower), or \u201crisk-on<\/strong>\u201d days (bond yields higher, but stock prices higher), they just occurred with less frequency and they seemed to drive the market for shorter periods than in the past. The \u201ctraditional\u201d risk-on or risk-off made a lot of sense. If the economy was doing well, bond yields should be higher, but stocks should be higher as well. And vice versa. Like, you know, bad news used to be bad, and good news used to be good.<\/p>\n

The Role of Algos<\/h3>\n

I strongly believe that algo\u2019s played a large role in enforcing this behavior of \u201clower yields = higher stock prices<\/em>\u201d. While AI needs to \u201clearn\u201d and be \u201ctaught\u201d, I think many algo\u2019s are much simpler. They are like sharks, almost mindlessly and mechanically, swimming through the water, looking for things to eat. This is neither an admonishment against algo\u2019s nor praise for them, it is a simple fact about the market structure we live in.<\/p>\n

The algo\u2019s<\/strong> that identified \u201clower yields = higher prices\u201d thrived. They likely bred other algos and certainly did well enough to be allocated more and more capital. As humans<\/strong> became committed to the concept of \u201clower yields = higher prices\u201d, the algo\u2019s still had first mover advantage, but that only helped solidify the relationship and possibly exaggerate it (make it larger than it should be). Throw in stop losses<\/strong> and even 0DTE options<\/strong> (zero day to expiration options) and we live in a world where moves can be fast and large, and often skewed to the \u201ceverything rally\u201d trade.<\/p>\n

Signals and Correlations Always Change and Are Moving Now<\/h3>\n

While the \u201ceverything rally\u201d is far from dead, it seems very \u201clast year.\u201d<\/strong> I think sometimes when we go back and remember what the \u201ctells\u201d for the market were, we realize how varied they can be (anything from Chinese Treasury TIC data, to some survey of bank lending, etc) and how short-lived many are. Geopolitical may be short lived, but it is influencing markets right now.<\/strong><\/p>\n

<\/a><\/p>\n

Let\u2019s start with yesterday\u2019s price action on the 10-year treasury<\/strong>. Treasuries tried to \u201cbounce\u201d in price terms right after the series of 10 am numbers<\/strong>. Prices paid on ISM were \u201cbetter\u201d than expected (a weird piece of data to glom on to, but it seems to excite the inflation is over camp (I used to be a card carrying member, so I can relate). JOLTS seemed to confirm last month\u2019s \u201csurprising\u201d drop in jobs available and the QUIT rate was lower, while the HIRE rate was also lower \u2013 both bad for those looking for the bottom of the employment cycle). But that move was short lived.<\/p>\n

Markets were \u201cfixated\u201d on the FOMC minutes due out at 2pm<\/strong>. Treasury prices initially declined (the minutes were not as dovish as the press conference, which is an important signal), and then resumed their march higher. Maybe that could all be explained from the reaction (and pre-positioning) of the FOMC minutes, but I believe something else was at work here.<\/strong><\/p>\n

Treasuries were marching higher from about 11am until 2pm. Was that all in anticipation of \u201cdovish\u201d minutes? (which we didn\u2019t get) Or, was something else going on?<\/strong><\/p>\n

Like headline after headline about bombings<\/strong> in the Middle East. That was on top of previous headlines about warships<\/strong> and supply chains<\/strong> (see Academy\u2019s Warship SITREP<\/a>, and latest Around the World<\/a>).<\/p>\n

<\/a><\/p>\n

We\u2019ve tightened up the chart to just yesterday\u2019s trading.<\/p>\n

If this was an \u201ceverything\u201d rally, stocks should have done much better than they did. They failed to pop on ISM\/JOLTS (bad news is bad?), but more importantly (from a \u201cchanging\u201d signal perspective) they faded as treasuries rallied all afternoon and stocks certainly didn\u2019t behave as though the FOMC minutes were dovish (a correct interpretation).<\/p>\n

Oil, popped earlier in the days (as soon as bombings hit the headline) and were well bid all day. Economic news was definitively NOT good for oil, yet oil was higher<\/strong>.<\/p>\n

Signals and Correlations in Today\u2019s World<\/h3>\n

Anyways, enough reminiscing about how things were, and let\u2019s think about how to think about moves in today\u2019s world. A world where geopolitical risk is high (markets don\u2019t seem to care that according to reports, Xi says China firmly supports Iran in safeguarding security \u2013 which doesn\u2019t seem good, especially given how much oil is allegedly finding its way from Iran to China).<\/p>\n

I think we can start with the \u201csafest\u201d signal \u2013 oil.<\/strong><\/p>\n

Oil will rise and continue to rise as tensions intensify. The biggest risk, from my perspective is that the U.S. hits a point where it feels forced to curtail Iranian oil shipments<\/strong>. At some point, if this occurs, the Saudis may increase production, but that is unlikely to occur below $90 a barrel. I\u2019m looking for oil prices to continue to move higher as this shifts from a traditional supply\/demand story to a geopolitical interference risk story. I do like energy company stocks even better than oil, but both should work right now and are the major tell.<\/p>\n

Stocks. <\/strong><\/p>\n

I like energy companies outright, so I\u2019m almost getting the geopolitical risk for \u201cfree\u201d.<\/p>\n

I do not like the stock market here, as per previous T-Reports, and think higher energy prices, especially as a direct result of geopolitical tensions will weigh on stocks.<\/strong><\/p>\n

But what about bond yields, in their own right and how they will impact stocks?<\/strong><\/p>\n

Do NOT expect lower bond yields to be good for stocks. <\/strong>Bond yields are not going to be the main driver, certainly not every day, for stocks. Geopolitical risk is going to be a bigger factor and that will outweigh the impact bond yields have on stocks. If anything, we should see more \u201crisk-on\u201d and \u201crisk-off\u201d days, but look for some other signal to drive stocks as the bond\/stock correlation isn\u2019t the same as it was much of last year.<\/p>\n

Finally, on the bond side of things, geopolitical tensions should help drive yields somewhat lower, at least initially.<\/strong> We could see the \u201cclassic\u201d flight to safety<\/strong> trade in the early days, which seemed apparent yesterday.<\/p>\n

My fear is that \u201cflight to safety\u201d doesn\u2019t last.<\/strong><\/p>\n

As oil prices go higher<\/strong>, will the Fed really shift to an easy money stance like they \u201cnormally\u201d would in times of geopolitical stress\/uncertainty? I do not think so, at least not initially.
\n\tAs tensions escalate, as munitions are used (and need to be replaced), as military activity across the globe increases, concerns about spending will rise.
\n\tNow back to China TIC data. If China continues to deplete their inventory of bonds (largely through maturities rather than active selling), will that come back into focus?<\/p>\n

The worst outcome, and one that I think is increasing in probability, is that we will see higher yields, higher oil prices and significantly lower stock prices.<\/strong><\/p>\n

If the algos that made all the $$$$$ by buying stocks whenever bond yields went lower start losing money, they will be shut down or constrained rapidly.<\/p>\n

What happens when the \u201cgeopolitical\u201d algos, algos trained or designed to trade geopolitical risk rather than Fed risk, gain in prominence? <\/strong>At exactly the time humans become concerned about this and positioning seems set up to trigger stock losses (sentiment seems to be skewed towards being long stocks and long bonds and neutral energy after that trade struggled much of last year).<\/p>\n

Bottom Line<\/h3>\n

The Times They Are A Changin\u2019 \u2013 Change with them! <\/strong>I\u2019m the most bullish I\u2019ve been on energy and energy stocks<\/strong> in sometime (probably toss all commodities <\/strong>into that mix).<\/p>\n

I\u2019m the most bearish I\u2019ve been on equities and am targeting 4,500 on the S&P 500 sooner than later.<\/strong><\/p>\n

Credit spreads will widen in sympathy<\/strong> with equities, though this is largely an equity valuation and \u201cset-up\u201d problem (the set-up being the conditioning to lower yields = higher stocks) so credit should outperform equities quite handily here<\/strong>.<\/p>\n

On bonds, maybe, maybe, just maybe, we get some \u201cflight to safety\u201d trade, so I\u2019m only mildly bearish on bonds right now, but will sell any rally in bonds<\/strong> as I think the problems facing the bond market, from the geopolitical risk, will outweigh the \u201ctraditional\u201d safety bid.<\/p>\n

Happy New Year!<\/strong> (sarcasm meter on high).<\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nThu, 01\/04\/2024 – 10:05<\/span><\/p>\n

\u200bhttps:\/\/www.zerohedge.com\/markets\/times-they-are-changin-how-trade-next-algo-shift<\/a>\u00a0<\/p>\n

\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"

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