Another week with a record high for North American large cap equity indices. The SPX moved above 4,000 and the TSX above 19,000 for the first time ever. We closed just a tad off all time highs on both. The other two major indices NASDAQ and Russell 2000 have bounced off recent lows, but have yet to move above their previous highs. Gold reversed its down trend and both the Dollar and Rates have halted their uptrends. Vaccine rollout excitement seems to be driving sentiment, but a corporate tax hike proposal from the White House may have some investors on edge. One thing that’s becoming a trend even before the ‘Sell in May’ proverb has been a trend lower in volume in both the US and Canadian equities. Options volume, especially calls, has been on the decline as well. This week we have the start of Q1 Earnings’ Season, starting with the big banks. ECM has a light calendar, but a few are quite big. The largest and most anticipated is the Coinbase direct listing, which looks like it's coming on Wednesday. It’s expected to be very large with a private market value between $60-$100B. There are also three $1B+ IPOs scheduled in AppLovin, TuSimple, and Agilon health. Array Technologies (ARRY.O) has a large unlock of their IPO stock of 38M shares of the 127M total outstanding. Look for some possible selling pressure there. As I'll touch on below, I’m also alert for how overall equity sentiment is playing out. Some of that might depend on how trends in the Dollar and Rates go. Earnings Watch
Going forward this section will be a bit lighter. Diving into a few names a week hasn’t added as much value in keeping track of markets as I thought it might. I still want to be aware of which big names are reporting and what is expected of them. Here’s a shot of the top names by market cap that report this week.
Best of the Week:
This article was something I had yet to see covered during the SPAC boom, and I found it weird that it came up on a Sports related site. The reason this makes sense to be on Sports business page is because of all the celebs, including athletes, that are joining boards of SPACs to take advantage of the boom. The issue is when you join a board, you become a fiduciary for the trust the SPAC creates to take in its IPO money. If something goes wrong, or the company does something fishy, shareholders can file a suit, like they did with Churchill Capital Corp III. To combat this, board members of public companies take out Directors and Officers (D&O) insurance to protect their personal wealth from any such suit. The problem is the insurance companies in this space are charging a lot of money to take out these policies. According to the article, premiums have gone up about 30% this year and it’s not rare for the cost to be 10-20% of the coverage. According to a report I found from Fitch, D&O insurance is mostly written by the largest insurers like Axa, AIG, Chubb, etc. SPAC INSURANCE SPIKES, CREATING LEGAL EXPOSURE FOR BOARD MEMBERS
Best of the Rest:
As expected, more and more information about the Archegos situation is leaking out after some good reporters have had time to make some calls. You can definitely see some extra volume hitting on Thursday. As an example, ViacomCBS traded 1.6 times it’s 20 day average volume. That’s a blip on the chart after Friday and Monday trading 7.5x and 5.5x respectively. I would hate to have been the salesperson making those calls to funds looking for buyers. Either they knew there was a boat load behind it, or they were kept in the dark and saw more inventory being unloaded the next day. Both would have clients very unhappy with you. These are the risks of being on the sales desk, but it’s still not fun. Morgan Stanley dumped $5 billion in Archegos’ stocks the night before massive fire sale hit rivals
Dr. Ben Hunt and Rusty Guinn of Epsilon Theory have a great conversation around the role leverage played in the Archegos, Greensill and Melvin Capital. They take us through how hedge funds use it and how the game is played. They reference that blow ups happen for one of three reasons (leverage, liquidity and concentration) and it's usually when more than one is used. Rusty notes that you can almost always get away with one, but almost never get away with all three. When things are going well maybe two and when things aren’t two will be what kills you. Ben thinks credit and leverage are the fuel of the economy, but when the privileged players are allowed to weaponize it for private gains and socialize losses, it’s not in the best interest of society. I loved this conversation.Leverage and Its Discontents - Listening time: 75 minutes
According to data by HFR, hedge funds are off to quite a good start. The 6.08% return in Q1 was only bested in five other quarters in the last 20 years and two of those are in the last three previous quarters. The article highlights some of the performance across different fund styles.Hedge funds enjoy biggest first-quarter gains in 20 years, as event driven and equity strategies fuel returns
These are a couple of astounding charts. I saw Danielle’s Tweet early in the week and save it for inclusion. Over the weekend, I found a couple more takes on the BofA report. One using the DataStream charting data, so it was better that I didn’t need to create this on my own. The only reasoning I can see behind this would be the upper middle class that are in office based jobs that have not seen much impact on their employment are pumping additional dollars into savings and investments. “Big flow to know: inflow to stocks past 5 months of $576 billion exceeds inflow in the prior 12 years of $452 billion.”
Melt up? More money poured into stocks in past 5 months than last 12 years
Refinitiv and MetaStock recently hosted Dr. Alexander Elder on how to identify opportunities using technical analysis. Then Michael Covel re-shared two of his interviews with Dr. Elder. If you’re interested in technicals and behavioral finance, this will be a great way to spend a few hours with one of the best educators on the topic. As we're still in the midst of an unusual time, I think technical analysis is an important way to evaluate securities. Alexander Elder Rewind with Michael Covel - Listening time: 103 minutes
Technical Analysis: Identifying Trade Opportunities with Dr. Alexander Elder - Watch time: 64 minutes
One of the ideas around trading volume was that pros trade at the close and “Joes” trade at the open. The idea has always been that retail investors do their research after work and place trades at the open the next day. This is a very wide generalization. We saw Cowen touch on this when they launched their new algo, see the chart from their report on open and close volume below. The NYSE Research team put out another piece around this shift highlighting the differences among sectors and also showed that the paired imbalance is starting to appear much earlier in the morning. Buyers and Sellers Meeting Earlier in the NYSE Opening Auction
Periodic auctions essentially used to be the job of the specialists on the NYSE. If you had a large enough order, the specialist would basically find a bunch of flow on the other end and hold a periodic auction. Today that market structure is a little different. Many of these periodic auctions take place on broker dark pools. The biggest from my days on the desk was ITG’s POSIT, but there are many more now. Cboe was the first exchange to have a periodic auction in Europe and they’re trying to bring this to the US now. These periodoc auctions are available in Europe right now, but only see 1.5% of total turnover. Cboe gets green light from SEC to launch US equities periodic auctions
Many have speculated that the SPAC revolution will dry up the private market opportunities. Well, Q1 of this year saw a record for global venture investments. $125B is the first quarter over $100B according to Crunchbase. The majority, $85B, of this record amount was in Late Stage and technology growth. Global Venture Funding Hits All-Time Record High $125B In Q1 2021
Jesse is one of the people out there that’s been warning of overbought conditions for a bit now. This past week, he joined MacroVoices to talk about his current views on US markets. The chart book he came with has a few interesting charts, but the last one is what caught my eye. We’ve all seen the charts of rates trending lower, but Jesse has added the 12 month percent change to the right axis. Interesting to see the liquidity events that surround the spike higher in rates. The most recent rip in rates is still going and is the largest in terms of rate in the last 50 plus years I have data for. It might be a chart crime, but I zoomed out back to 1963 and looked at the standard deviation of these moves, the current change is a 6+ sigma event. Listen to Jesse the whole chat here. I find a ton of value with Erik and Patrick’s pre and post interview talk, but if you just want to hear Jesse, start at about the 8 min mark going for about 40 minutes.Jesse Felder: Macro Roadmap for the S&P500 - Listening time: 68 minutes
Chart Book - Jesse Felder - MacroVoices 04 08 2021
Another nice chart from the SpotGamma team. This one looks at the net between Buying to Open and Selling to Open for both Calls and Puts from the OCC. This means the short gamma trade is here. This generally means the underlying will be range bound and see reversion to the mean. More index puts are being shorted then bought
These next two charts were in The Market Ear Sunday night chart book and are a couple more charts showing market participants positioned for more upside. On top of these two charts, they also shared a note from Morgan Stanley Prime Brokerage, “US Equity L/S gross leverage was up 2% WoW, but continues to hover in the upper 190’s range as gross flows have been fairly mixed over the past couple of weeks. As for net leverage, levels fell 1% to 66%, though they remain just off of highs since 2010 (still in the 100th %-tile). In other regions, EU gross leverage rose 3% WoW but remains well below peaks seen earlier in 2021, while net leverage was unchanged."
Thanks for reading. I hope your week is a soaring success.
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