🗞 Investors Are Scared

WHILE YOU POUR THE JOE… ☕️
Ape Together Strong

During the “Liberation Day” selloff in April, it looks like the margin calls issued across the board were met, but by whom? 👀 

We’ve shown you the commitment of traders report, and how institutions did come in to aid the market higher, but that didn’t last very long, as they then started dumping two weeks into the April rally.

The ones who got caught were retail investors as a whole, and now the warning signs are flashing across the board…

Speaking of warning signs, let’s get on with today’s email 📧…

SOUNDING BOARD TIME
Party’s Over

What you see here is the 10yr / 2yr yield curve in the United States, which is arguably one of the best measures of the credit, liquidity, and business cycle.

Notice how we’re back to (and above) the 2022 recession fear levels, and we keep steepening. 📈 

If you’re not familiar with the yield curve, I won’t bore you with the academic explanation, all you need to know is that this steepening means liquidity is heading out of the market.

And

With less liquidity comes volatility in the S&P 500, which we have seen in the past few weeks.

Okay we got one driver, but are people starting to react?

They actually are…

This chart covers the rolling correlations between the S&P 500 and the EUR/USD, which is considered a major “risk-off” asset, one which investors start to buy during times of uncertainty and volatility.

Well, the Euro has outperformed the Dollar by 10% year-to-date (we told you to buy it at $1.04 so you’re welcome). ✅ 

Here’s what matters though:

• As the S&P 500 and the EUR/USD become correlated, it means that fear is likely heading to a cyclical high

• You see higher correlation regimes compared to WTI and Bonds as well, not good at all

Alright now let’s zoom in to the cherry on top shall we?

Right after signing a trade deal with the UK, Trump said that everyone should go and buy stocks.

I think that was a gauge to test where the market is, see how much it could attract new buyers at the $5700 mark.

And the reaction was sad, we couldn’t manage to break the weekly highs, meaning there aren’t any more strong buyers out there. 🐻 

Now this is something I was warning 115+ traders about in our morning meetings, because of the following:

You may have never seen stuff like this, and that’s okay, because no furu has seen it either so they can’t explain or teach you.

I worked at Goldman Sachs and had to use such tools, so I can hehe 👿 

What you see there is volatility on a rolling basis for the S&P 500, which is compressed to the lower range of five-year averages, meaning there isn’t a lot of action happening otherwise known as no aggressiveness on price.

Secondly, volume is well below the quarterly averaes, in fact this week recorded the lowest volume day in the studied period, as the index made higher highs.

If you know anything about volume and auction theory, you know this means the market doesn’t see its fair value in this $5600-$5700 range, it’s either much higher or much lower. 👀 

But, that’s where spreads come into play…

We are still at a second standard deviation on these spreads, which are typically used by algorithmic traders to find biases an hunt for directional views.

All told, I think we have the right cocktail to see the S&P 500 retest that bear market level of $4900 before we know it. 📉 

GO AND MAKE IT HAPPEN
Refresh Your Toolbox

In case that risk-on and risk-off conversation got you scratching your head.

And then you gave up when we went onto correlation swings, then today’s reading recommendation 📖 will serve you well.

Not a book as usual, but this time I want to send you over to one of our best performing newsletter that goes over a Global Macro Primer.

To your success,

G. 🥃