Since the first quarter rally, the S&P 500 has been stuck in a 150 point range between 4050 and 4200. As we get closer to mid-June, that range has narrowed to almost 50 points. If one were just to look at the stock index, one would be forgiven for thinking that all is well and that the markets are only going through the summer months.
But if you look below the surface, there has been quite a bit of discrepancy in terms of themes, rotations, and several consensual business plots. Leaving behind the AMC (AMC) and GameStop (GME) shenanigans, the market is stuck between chasing growth or value, even reflation trading is now taking a break. So what is really going on?
June is one of the quadruple quarterly witchcraft months where stocks, index options, and futures all expire. This is quite an important time given the size and amount of money that tends to be invested in each of the quarterly futures contracts. Many funds that have portfolio downside protection must decide whether to let their worthless puts expire or carry them over. This “technical adjustment” causes a bit of fun and play in the futures and options markets, as market makers who sell options have to buy back the first month and sell the following months to adjust their exposure.
This has a delta effect which can sometimes be bearish given the delta in the time value of options further down the calendar. More importantly, as we get closer and closer to the expiration, which is June 18, the gamma effect is causing dealers to keep the market as close to the “strike” as possible in order to to minimize their losses at expiration. In this case, open interest is significant around 4200. Simply put, this means that dealers have every reason to see the market close at or near this level, called the “pinning effect”.
June has been a quiet month so far, but as we move towards key CPI data this week on Thursday and the Fed’s FOMC next week, the market could expect some volatility to come. . The big debate in the market right now is one of inflation being transient as the Fed continues to claim or something more sinister. The jury is out, but pending the printing of the May CPI.
When you look at all the components that make up the core index, like car prices and user rents, it won’t be surprising to see a surprisingly high impression, even above 4.9% in May, against 4.2% in April. , because it would be the highest level since September 2008! Core inflation is expected to drop from 3.4% to 3.6%. The point is, the Fed really doesn’t know whether this inflation is transient or secular in nature. It is to hope. The amount of fiscal and monetary stimulus was unprecedented last year and just because it hasn’t happened in the last decade doesn’t really mean it can’t happen. produce this time around.
Looking at supply bottlenecks in shipments and chip shortages, there is a severe constraint on the goods and inventory that can be purchased currently, hence the high daily shipping rates. The surge in demand has come at a time when supply simply cannot catch up. It may take a while, and the only question is whether the market and the world can handle it, especially since the job market is still close to eight to 10 million jobs. They have no incentive to start a job as they prefer to live on stimmy checks. The Fed may have saved the markets, but it created a monster.
While the Fed’s balance sheet is heading towards 8 trillion dollars and the ECB’s balance sheet towards 7.7 trillion euros, the Fed’s balance sheet is now equal to 36% of US GDP against 77% for the ECB and 134% for the BoJ. These central bankers are in no way responsible, as they are clearly printing more to stimulate growth. When will it stop? How much can they print the next time the repo market swings or if we have another LTCM or mortgage crisis?
We’ll wait and see how Fed Chairman Powell addresses market and investor anxiety as they chair the June FOMC. We know Fed members have been talking about some sort of cut, but the market has been on life support since last year, so it will be interesting to see if it will be able to hold its own as the Fed cuts. the liquidity shot. bowl.
Investors here are torn on the subject of inflation versus deflation. This week and the next may cause some big moves, given the open interest level around 4200. Be aware that the market may look calm at the moment, but if we have any surprise, the move away from 4200 may be quite violent and quick, both ways as it breaks with the strike, given the level of open interest. Then again, the market appears to be running out of ammo here, if not for the gamma pinning effect over time. June tends to be a weak month, seasonally.
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