1/2/24 Daily Market Note: Wait & See Returns
Closing Put Spreads on QQQ & IWM and VIX Calls
Note: Happy New Year to all! Today’s Daily Market Note is written from a personal journaling standpoint.
Hi Folks -
2024 starts with sector rotation in focus as high-beta semiconductor names and FAAMG stocks are rotated into last year’s under-performers in themes such as Energy, Healthcare, Thrift Shops (DLTR/DG/FIVE), and the U.S. Dollar DXY index as institutional investors take a wait & see approach for incoming macro data.
The macro climate will be in close focus with FOMC minutes, ISM manufacturing, Job Openings, and the monthly employment report released later this week. Richmond Fed President Tom Barkin will also speak later this week. And in Asia, China's important Caixin Services PMI will be released on Thursday.
Over the weekend, I sent out a note on tactical hedging into the New Year with Put Spreads on QQQ and IWM as well as VIX Calls. I closed those transactions today at modest profits, as with any downside move, I am completely content with a piece of the move (I will immediately close Long Put positions once reasonable profits are made). I have learned over time that any hedging profits made trading downside is a bonus.
QQQ Put Spread rose 14%, the IWM Put Spread rose about 5%, but the VIX Calls somehow only rose 2-3% despite spot VIX going up 7-10% earlier today. In the future, I may ignore VIX Calls and opt for regular long Put Spreads on the index ETFs instead when I hedge. Only seeing a 2-3% advance on the VIX Calls on a 7-10% Spot VIX bump today was personally disappointing and highlights how difficult market-makers have made it to profit from being long volatility even if the opinion is correct. My journal observed that the VIX soared to 14+ in the morning yet our 13 Strike VIX Calls (in-the money) only advanced 2-3% even though the option Delta implied it should have moved higher. This subdued VIX Call reaction was perhaps a prelude to the intraday bounce back that we are seeing in SPY, DIA, and IWM as of 130pm EST (this post).
Until I see VIX at 15+, the current intraday VIX suppression tells me that Sellers do not yet have full authority and today’s context is for now purely sector rotation and a knee-jerk reaction to hawkish technology curbs between U.S. and China. Once we see VIX at 15+ (and it stays above that level), we will begin to see more range expansion in U.S. markets and hopefully offering more intermediate-term entries in solid companies.
In China news, China’s EV production numbers from BYD, Li, and XPEV were solid. My thinking is that the sector is being sold down as Investors believe that these delivery/production numbers could mark a high point due to U.S. tariffs, a generally unfriendly EU bloc sentiment towards China EV imports, and softer economic sentiment back in China’s Mainland. I like China’s EV sector prospects for 2024.
Xi Jinping’s New Years speech on China's domestic macro challenges is putting a dampener on consumer names JD/BABA/PDD, but sets in motion the intention to use more forceful monetary and fiscal policy to right-ship the confidence crisis currently occurring.
Only move today was to close those Long Put Spreads and VIX Calls. No other action, and will continue to do equity research in the background and share actionable ideas when they are merited. I am actively looking for core positions to build & hold once certain stocks/ETFs return to value-areas for me.