The main US stock indices continue to struggle to break mid-June all-time highs, while EU markets have rebounded from the election sell off, as the market anticipates that Le Pen’s party will be unable to obtain a majority at the upcoming second round of the French elections on Sunday 7 July. Since our last weekly note, positioning still remains broadly elevated, both in Retail, Long Only Funds and CTAs, while hedge fund selling appears to have started to spill over to the broader US stocks, compared to more focused selling on Tech stocks over the last weeks, pointing to a more cautious overall stance ahead; single stock selling is currently at its largest notional value of the last two years.
In terms of seasonality, looking at July in isolation, it has historically (1992-2023) been one of the strongest months of the year, with particular strength in the first two weeks of the month. However, strong Julys tend to be preceded by weaker June months, and in 2024 we have seen outsized gains in June, all while momentum appears to be stalling, potentially pointing to a reversal of the trend. In terms of volatility, there is a notable bifurcation in election year seasonality, as all the recent major market turmoil occured in election years, i.e., the 2000 dot.com Bubble, the 2009 GFC and the 2020 Covid Pandemic. Excluding these black-swan years, volatility remains broadly subdued for the second half of the year, with a short-lived rise around the elections.
As mentioned in our previous weekly note A volatile week ahead? more than 80% of the S&P 500 is now in buyback blackout period, which we see as a headwind for stocks in the short term as significant buy-side pressure that supported the market now vanishes. In addition, significant market liquidity has been withdrawn from the system over the last two weeks, with all four main liquidity sources we track, removing liquidity and boosting US treasury yields. The liquidity impulse, as measured by the MoM change in US reserve balances which the SP500 closely tracks, is now pointing to market downside from current levels.
This week is packed, with economic reports and key events, with the market focused on Fridays US Jobs report where the market estimates 190k jobs have been added (previous 272k). Tuesday features the US JOLTS report, Eurozone CPI, and a panel with Powell and Lagarde. On Wednesday, key data include the US services ISM, the ADP report, initial jobless claims, the FOMC minutes, China's Caixin services PMI, and Eurozone PPI. Thursday highlights include the UK election and Swiss CPI, while Friday includes Eurozone retail sales.
In light of the significant weakening in market liquidity we maintain our Sep24 440 Puts on the QQQ.