Wednesday, 22 April, 2020
Equities – Cant Live here
TY looking a touch tired at these levels… While I’m not convinced of a collapse they could pull back short-term. We have been buying
TYK0 139 puts, expire this Friday, currently 8/10 64ths
BUND trades heavy.. first support 172.45 then more important double bottom around 172.20 area … before we open up the trendline support currently rising to 171.39 today..
Our case is “equities cant live here” … going to be more pain post the retail onslaught of by the dip FOMO and we target 2200 over the next month or two.. In the three previous big sell-offs — 1987, 2002 and 2008 — it took between one and a half to four months after the VIX peaks for equity market to bottom, BofA noted. During that time, the S&P 500 rose anywhere from 15% to 25% before falling again. Things will get worse before they get better – US equities sitting at what one would think is rarefied air… Stocks have to crater again in this environment as its just not possible for US Stock mkt to be within 15% of record highs… We cant rationalise it. The market has been too keen to extrapolate out of the crisis into a normal environment
As we approach month end it feels as though pressure of a break higher in price is building for TY. Month end has attracted some fast money attention buying already and there has been a growing short base in TY on the supply story that is beginning to come under pressure. Once we roll through that I think we will start seeing some stop and momentum buying if we can breach 139-14. We’ve seen some macros fairly high conviction long TY and they continue to chirp recently that “real yields rising, real yield curve flattening, Ted rate still elevated, world banks hideously under performing… Its all very bullish TY and USD as pessimism about the global system continues to see participants edge closer to owning more collateral”
One month TY upside vol has remained at current levels of late, elevated, but well off the highs, but above the long term average peaks.. Call skew is back to flat vs puts
Over the next month we would look at a target of the old .31 low on US TY yield (141 strike in TYM0) as an unfolding scenario and equity collapse and would place option premium on this. And look to accumulate upside on any short term sell off.. for now indications are:
141 calls 24/64s 26 d
142 calls 15/64s 17d
143 calls 10/64s 10d
141/143 cs for 14 (16d)
141.5/143 cs for 9 (10d)
short vol for the month:
141/142/143 ladder for flat -4d
Lets keep an eye on weakness into US supply next week, potential new 20yr coming to mkt for the first time since 1986 and use the sell offs to get into upside calls
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2020-04-22 05:12:22.494 GMT
By Joanna Ossinger
(Bloomberg) — U.S. stocks are likely to see new lows if
VIX patterns from yesteryear hold sway, according to Bank of
America Corp.
The current bear-market rally most closely resembles what
occurred in 2008, and suggests there’s limited further upside
before a turn that drags the S&P 500 to fresh lows, strategists
led by Benjamin Bowler wrote in a note Tuesday. They drew that
conclusion by measuring from the peak of volatility in the three
most recent major sell-offs and comparing those with the present
one.
Volatility markets are “underpricing the risk of a
secondary market shock,” they wrote.
If the S&P 500, which is up about 15% since the March 16
peak in the VIX, continues to trade in line with the 2008-09
bear-market rally, it would top out around 2,960 as the economic
impact of this crisis get priced in, according to the report.
In the three previous big sell-offs — 1987, 2002 and 2008
— it took between one and a half to four months after the VIX
peaks for equity market to bottom, BofA noted. During that time,
the S&P 500 rose anywhere from 15% to 25% before falling again,
they said.
The analysis is at odds with strategists at JPMorgan Chase &
Co. and Goldman Sachs Group Inc., who maintain that the worst is
likely over for stocks. At the same time, others like
Guggenheim’s Scott Minerd see risk of the S&P 500 falling well
below its mid-March closing low of 2,237.40 as markets work
through the implications of Covid-19’s effect on economies,
companies and public health globally.
The BofA team recommend selling upside equity calls to fund
downside put spreads and selling volatility puts on the belief
markets are pricing in a recovery path for the economy that is
too optimistic.
To contact the reporter on this story:
Joanna Ossinger in Singapore at jossinger@bloomberg.net
To contact the editors responsible for this story:
Christopher Anstey at canstey@bloomberg.net
Adam Haigh, Ravil Shirodkar
