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Market Internal Insight
Over the past three weeks, market internal dynamics have been relatively clear, as indicated in recent publications. However, current signals are weaker and more mixed, with a bearish inclination. The delay in tariffs without a resolution is insufficient, as it perpetuates volatility, eroding alpha (return/volatility). If tariffs are lifted or significantly reduced, equities would likely rally regardless of internal market conditions. This explains the low fast money exposure (UBS PB L/S Net at the 17th percentile vs. 1-year and 42nd percentile vs. 5-year) and a market positioning bias towards upside options (SPY Call Open Interest at the 100th percentile vs. 1-year and 83rd percentile vs. 5-year). My primary concern is a risk parity/multi-asset unwind and foreign selling, which could lead retail investors to incur losses on recent purchases and switch to selling. Two market signals indicate short-term downside risk: a 4-month Recovery Score above 25% last Friday with weakening momentum and an anticipated CTA Death Cross for both SPX and NDX.
Recent Market Insights:
1. 3/20: High short interest versus pension rebalance, retail, L/S HF, and foreign buying post-oversold conditions suggested a significant short squeeze risk—advised buying month-end upside.
2. 3/26: Recommended switching strategies to leverage pension pre-buying rallies before tariff announcements.
3. 4/4: Post-tariff announcements, risk control indicated large sellers with capitulation signals in VIX and intraday volatility—predicted a local bottom on 4/6.
4. 4/10: After a historic week, noted overbought conditions following a +10% rally.
Bearish Market Internal Factors:
1. Intraday Recovery Score: Last Friday, the 4M Intraday Recovery Score exceeded 25%, usually a positive signal. However, weakening momentum and a 2M Score Collapse indicated a short-term bearish outlook.
2. CTA Sell Trigger – Death Cross: Expected on Monday for both SPX and NDX unless significant gains occur. Historically, simultaneous death crosses are rare but often followed by market declines.
3. Risk Parity/Multi-Asset Unwind: Recent equity volatility spikes suggest UBS RP model equity exposure may need to be halved. Although volatility typically normalizes, a partial reduction is expected.
4. Foreigner Flow: Significant foreign sales of U.S. assets recently, driven by reduced U.S. exceptionalism and tariff uncertainty, could impact markets.
5. Option Open Interest: Current positioning suggests under-hedged and highly leveraged to the upside, with low put/call ratios indicating vulnerability to downturns.
6. Excess Flow: Despite a significant SPX decline, buying surged post-tariff delay announcement, indicating possible overbought conditions susceptible to downside.
Mixed Market Internal Factors:
1. UBS RMM Flow: Currently supportive but could shift as recent selling suggests potential changes in retail equity exposure.
2. CTA Equity Exposure: Short-term bearish but medium-term supportive, with rebalance scenarios indicating potential for both selling and buying.
3. UBS PB L/S Exposure: Short-term exposure is extremely low, but long-term exposure is modestly low, justified by increased volatility.
Bullish/Supportive Market Internal Factor:
- Risk Control Exposure: S&P 500 Risk Control Exposure remains low, with limited potential for significant selling even with a notable SPX decline.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!