As mentioned in our 13 May note CPI miss? Risks to the upside, lagging rent data was setting up the market for several months of downside surprises in CPI, fuelling the push of the main US stock markets to all-time highs on the back of hopes for lower interest rates from the FED. The melt up move has been further exacerbated by Mega Tech buybacks running at above average volumes over the last few weeks, pushing the S&P 500 above the negative gamma threshold of 5300-5400, with the QQQ now breaking through our target of 475 (All Eyes on NVIDIA... again), at channel resistance and RSI 82, pricing what looks like perfectly blue skies ahead.
Although equities breaking all-time highs could be perceived as a bullish catalyst itself, we are now entering the buyback blackout period ahead of 2Q24 reporting season and with the FOMC and CPI data release now behind us the market is lacking a significant near-term catalyst to push stocks higher in the short term. However, due to significantly deteriorating market breath, where only five mega cap tech stocks account for 60% of YtD performance in the S&P 500, we see several potential risks ahead that would justify a cautious or even outright bearish market view in the short term. One of the risks we believe the market is currently ignoring are re-emerging escalation risks in the Russo-Ukrainian war, as both parties have failed to reach a peace agreement – all while Russia sends submarines to Cuba. The Cuban Missile crisis 2.0? The discounting of risk has been reflected in a significant sell-off in energy stocks in tandem with the tech stock melt up, albeit with rising oil prices and speculative bearish oil bets reaching multi-year highs (Long SXEP Dec24 410 calls – Fresh risks to the upside).
In addition, a notable trend over the 1Q results period has been the increasing warning by companies of weakening demand ahead, as the perennially strong consumer appears to be breaking, with the UMich Consumer sentiment unexpectedly slumping to its lowest print since last November, the largest three-month drop (5 sigma miss) and the biggest miss of 2024. In line with the weakening consumer, the job market is also showing signs of weakness as the recent “strong” prints have been supported by an increasing US deficit, while the majority of job growth has been in lower-quality, part time and migrant occupied jobs. We are also weary of risks of higher yields as the US Treasury is set to issue record high amounts of debt in 2024. Although spillover effects from the upcoming French elections into the US are unlikely, it nonetheless remains a risk.
We propose Sep24 440 puts on QQQ costing 0.72% of spot