/ February 04
Daily Briefing
*The market started in risk aversion mode following the weekend announcement of 25% tariff on imported goods from Canada and Mexico; the initial reaction was pretty brutal, with the S&P 500 and Nasdaq Composite trading down as much as -1.9% and -2.5%, respectively; although the Canada and Mexico tariffs made headlines, there was also a 10% tariff on imported goods from China beginning at midnight;
*Subsequent news emerged that Mexico's President Claudia Sheinbaum said she had a "good call" with President Trump and he agreed to "pause tariffs for one month; Justin Trudeau also addressed some of Trump's concerns by announcing a CDN$1.3 billion (US$900 million) border plan;
*SPY successfully tested short term support at the 50 and at the 20-DMAs; with the MACD signal now turning to a SELL crossover, it looks like more downside pressure is mounting; there should be some support below the 50-DMA at around $585 (100-DMA), but the real risk is a full retracement to the 200-DMA, at around $550-$560 (-6.34%);
*The MACD signal needs just a couple of bearish sessions to cross over to the sell-side;
*The options market is also signaling concern about potential downside with short-term skew on SPY being the most elevated of all sector ETFs; notably, by Monday’s close, the negative skew value (-1.4) is higher than Friday’s close, which stood at -3.4, so this is a definite improvement;
*This improvement can be seen on the day’s bullish volume, which was 84% of all contracts traded on SPY; bullish volume was dominant also at the medium term expiration, which is probably more important for our analysis here;
*However, the trading regime is turning into a momentum chasing game, where options dealers will exacerbate volatility instead of calming it down; SPY now has $-542M in gamma exposure, with most of the negative values recorded in short term contracts; this explains how yesterday the market was -2% down at the open, then bounced +1.5% by mid-day;
*Such aggressive price swings are the hallmark of a negative gamma regime and make for a rough day-to-day environment; as investors, the takeaway here is to keep our head cool and expect these swings rather than get emotionally sucked in by them;
*Leaving the options market aside for now — stocks bounced but never fully recovered due to ongoing fears about tariffs impacting growth and pressuring inflation higher; the lower finish was also influenced by increased selling in heavily-weighted sectors like information technology (XLK, -1.35%), consumer discretionary (XLY, -1.32%), and financials (XLF, -0.4%);
*There were some pockets of buying interest, though, leading the consumer staples (XLP, +0.39%), utilities (XLU, +0.54%), and energy (XLE, +0.63%) sectors to close higher;
*The January ISM Manufacturing Index came in at 50.9%, vs expectations of 49.1%; manufacturing sector activity overall moved into expansion territory for the first time after 26 straight months of contraction, underscoring an improved demand backdrop seen in the pickup in the new orders and employment indexes;
*Treasuries settled mixed in response; the 10-yr yield settled three basis points lower at 4.54% and the 2-yr yield settled three basis points higher at 4.27%;
*TLT gained +0.81% but still trades below our stop level ($89); Enterprise is front running a rise above the stop-level by including TLT in its portfolio despite the technical challenges; from an options market perspective, this bet is justified, with TLT enjoying better risk-reward than SPY;