Morning Notes – 5/25/2022

Good Morning:

• Futures rallied as high as 3969 overnight before rolling over when Europe opened.

• Volatility estimates remain high, with another 100 point range projected around the open today,

• Resistance is at 4000, with support at 3900. then 3877.

• As we push toward the Memorial Day holiday this weekend, expect liquidity to deteriorate from its already fragile state.

• This will continue to invoke 2-way volatility.

• Allow for both rallies and declines to extend as Dealers buy and sell into them counterintuitively – forced by the negative gamma.

• Traders will also be watching for the 2 pm ET
  release of the Fed Minutes from the last meeting. I expect the minutes to be hawkish as hell, and so should traders. Jawboning appears to be the Fed’s primary strategy at the moment.

• Longer-term Treasury bonds (e.g., TLT) look poised to reverse the downtrend higher from a volatility squeeze.

• Other Fed rate increase forecasting measures (e.g. Fed Swaps) seem to be backing off draconian rate hike forecasts a bit, with economic growth deteriorating and global tensions high.

• So, long-term government bonds could be reversing their downtrend for the wrong reasons.

• If the reversal reflects a flight to quality, stocks may not follow treasuries higher.

• Option positions continue to accumulate at the 3900 strike. This accumulation can serve to make 3900 a more robust support level.
• Contrast this behavior with the past few weeks, when traders bought mostly puts at strikes less than 4000, and the market seemed to have extra velocity on moves under that level.
• This buildup of call positions at 3900 or greater (albeit light and just starting), plus the appearance of Dealers shifting to buyers at less than 3700, leads me to discount the risk of the capitulation Wall Street keeps expecting.
• Yes, we could have strong moves lower, and I still give an edge for markets probing lower into June expiration.
• However, the idea of a “limit down with VIX greater than 40 capitulation” seems less and less likely as the street is well-hedged from an options perspective.
• Options positions are not the end-all, but they can represent a live model of Wall Street’s current positioning.
• To the upside, an extended rally is unlikely until we get clarity from the Fed and/or a further buildup of call positions.
• In short, the market remains tentative, and our intermediate and long-term models stay in cash, awaiting an algorithm buy trigger.
• The Founders Group will begin accumulating September monthly calls in the TLT today to position for a rally in longer duration treasuries.
• We also continue to day trade futures, but as yet, there is no solid buy signal from the Navigator Algorithms. They are, however, only a razor’s edge from the buy.
• As they say, however, close only counts in horseshoes and hand grenades.
• The street is still very short, and it would not take much to send that group running for cover, perhaps after the Fed minutes are released today.
• Durable goods orders came in less than consensus this morning. Remember, the bad news is good news, as it takes the pressure off rate increases.

Stay tuned,

A.F. Thornton