Big Week
Posted on Sunday, December 12th, 2021
We have been writing about the “big week” and December 17th and it is now upon us. This week is packed with important items. The FOMC meets this week and the market has been struggling with the possibility of less accommodative policy out of the Federal Reserve. The week comes to a conclusion with a very large options expiration which will influence the market for weeks to come. The biggest item might be our daughter’s graduation but that is not on anyone’s economic calendar. We will let you know how things go but Diane has a very special surprise in store for our girl. I am pretty sure she doesn’t read my weekly note so I will let you know what it is next week just in case so as not to spoil the surprise.
You know we have written extensively in the past about the sand pile and complex systems. In essence we feel that that there are very few news events that are capable of moving the market if the market is not in a position to fall. It is the position of the market that allows the news event to be deemed important. That position is based on leverage, lack of hedging and in particular how the options market is positioned. Valuations, while extreme, cannot bring down a market. The short term narrative game that CNBC plays is not one that can move the market. Two things can most definitely change the direction of a market – fiscal and monetary policy. While the Federal Reserve tried for years to generate +2% inflation it was not able to do that solely with monetary policy. It took Congress about 15 minutes to generate it when they passed the COVID emergency spending bills. Supply chain issues combined with immense fiscal boosts from Congress in response to COVID have had the effect of supercharging inflation.
That has the Fed talking about cooling off things from a monetary perspective. That, in turn, has the market on edge. Since the Great Financial Crisis (GFC) of 2009 the market has risen on the ever expanding balance sheet of the Federal Reserve. If that balance sheet were to shrink then market participants feel that, ipso facto, the stock market should fall. As Jerome Powell (FOMC head) spoke about curtailing that policy in recent weeks the market flipped into a negative gamma position. Market participants were highly leveraged and had not buying insurance to the downside. Most felt that we would simply rally in to year end like we tend to do. They were all in and not positioned for pressure in the market. Once we flipped into a negative gamma position in the options market that allowed markets to flip out. We have explained it before like a horse (stocks) in the barn. If we are in a positive gamma position then everything is fine and the daily machinations and trivial news events will not affect the market. The horse stays in the barn. If we end up in a negative gamma position dealers are forced to chase the market – selling when it is down and buying when it is up. That is why you have seen such volatility in recent weeks.
Individual stocks have managed to have their own little bear market away from the averages. The top 5 stocks (Apple, Microsoft, Nvidia, Google and Tesla) account for 65% of the gain YTD for the NASDAQ! The market turned back into a positive gamma position by the close on Tuesday. The market rocketed back up and sustained a range of 150 points on the S&P on just Monday and Tuesday while the rest of the week’s range was only 48 points. That’s positive gamma. Not necessarily higher but more subdued. While we enter this week in positive gamma the important issue will be where do we close the week? If we get the positive gamma close we are looking for- then the Santa Claus rally can start. It is historically a very positive couple of weeks for the market. Therein lies the rub. If we don’t rally when we historically do then that tells us that the market may be in for a spot of trouble. We are watching financials, corporate debt and high yield bonds closely. December 17th. It’s going to be a big day!
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.