Both the S&P 500 and the NASDAQ entered correction territory last week, falling 10% below their record-highs on 20 February, posting their fourth consecutive week of losses into a seasonally weak period for US equities. The week ended with what appears to be the start of a potential rebound, for now, supported by the cooler CPI print that helped subdue the stagflation fears sparked by an also seasonally affected hot CPI print in January.
Although uncertainty related to the ongoing news flow about tariffs and signs of a weakening consumer, further exacerbated by today’s weaker-than-expected Retail sales print, are expected to put a lid on the market’s previous overly optimistic expectations for the US economy heading into the start of the year, several technical indicators point to oversold conditions in the short term. An oversold RSI29 for the SPY and both members trading below their MA20 and above an RSI70 are currently at levels where price tends to reverse to the upside. In terms of positioning, while Long-Only funds posted one of the largest two weeks of selling activity of the last few years, retail participants gave up on buying the dips and started selling, CTAs continued adding to their short positions in US stocks, the Hedge fund cohort has now turned to buyers of equities over the last few sessions. Although support from buybacks is expected to remain subdued due to the ongoing blackout period over the next few weeks, analysts’ estimate that the quarter-end rebalancing of Pension funds is expected to add more than USD40bn to US equities, on the back of one of the largest imbalances on record.
The call skew also reached a 5-year low early last week, which coupled with the relatively benign spike in the SDEX suggests that market participants chose to unwind positions rather than employing puts as a hedge. The VIX curve is currently inverted, which has also typically coincided with strong SPY rebounds supported by negative dealer gamma to the upside. Further corroborating a likely strong rebound is our liquidity proxy implying a c.4% rise in the SPY over the next month.
This coming week will be packed with central bank meetings with rate decisions due from both the Fed and the BoJ on Wednesday and the BoE on Thursday, with all central banks expected to hold rates unchanged. Although the market is fully pricing out a rate cut by the Fed and expects limited guidance on the rate cut trajectory ahead given the uncertainty, analysts will look towards a potential statement regarding a pause in QT by as early as April or May. The main focus in Europe will be the vote on the proposed fiscal expansion in Germany where the Bundestag and the Bundesrat are expected to vote tomorrow and Friday in favour of a package that is expected to add fiscal stimulus of 3-4% of GDP by 2027.
We maintain our SPY Mar25 570/580 Call spreads proposed in last week’s note Going for it!