Traders are loading up on bets against the stock market – and this time it’s not a signal to the contrary, says Citi

Markets continue to absorb the fallout from this week’s Federal Reserve policy decision. The S&P 500

gave up part of its latest rally after Chairman Jerome Powell suggested borrowing costs were likely to peak higher than investors had previously thought.

The benchmark remains down 22.5% for the year. The Nasdaq 100
filled with former tech darlings turned outcasts, is down 35.2%.

If actions had an anthem, it would be “God knows I’m miserable nowby 80s indie popsters The Smiths. Play on a loop.

As the chart below from Citi shows, on Fed Day traders bought heaps of put options on ETFs following the likes of the S&P 500, Nasdaq 100 and Russell 2000, the biggest batch expiring in just two weeks from today. Traders seem to be betting on more downside for stocks.

Source: Citi

However, this degree of negativity can provide a bullish contrarian indicator. Eventually, even pessimism is exhausted. Witness Platoon
whose shares cratered nearly 20% to a new low after Thursday’s results, but ended the session up 8%.

Does that mean we’re ripe for another bounce? Don’t bet on it, says Citi. The bank’s global strategy team led by Jamie Fahy said investors should be wary of another decline in shares.

“Despite some high-profile revenue losses throughout the current season, overall third-quarter US revenue was okay. With a surprise EPS of 4% and growth of 3%, this is not not too different from the previous season. Despite this, we would like to warn that all is not well in the actions,” writes Fahy in a note to clients.

There are three main reasons for his caution.

First, and this should really come as no surprise, the Fed is no longer the friend of the market, even though some still cling to the previous era of ultra-loose pampering.

Powell “failed to appease the market on his pivotal dreams. As Fed peak prices reach a new high, stocks threaten to revisit lows. Net short positioning is much cleaner now compared to 4 weeks ago,” says Fahy.

Second, the internals of the stock market are what he calls “soggy”. “Despite recent upward market compression, defensives continue to outperform cyclicals, while Citi’s default basket probability remains at rock bottom… The EPS recession is on its way, and that may add another 20% drop in the market.

That would take the S&P 500 below 3,000, its lowest since spring 2020.

Finally, seasonal tailwinds – on which many bulls pin their hopes – are unlikely to come to the rescue.

“It may seem odd to look at short stocks in a period of what has historically shown strong seasonal performance. But as noted by Citi’s quantitative strategists, the traditional Santa Claus rally has not been delivered. when the returns for the first 10 months of the year are negative,” says Fahy.

Citi concludes that they recommend going short on stocks via S&P 500 put options.


Stocks attempt to snap four-day losing streak with S&P 500 futures

adding 0.7% to 3754. The dollar’s latest rally pauses, the dollar index

down 0.4% to 112.53 in sterling

and the euro

push higher. The 2-year Treasury yield
which is particularly sensitive to Fed policy, is up 3.5 basis points to 4.763%, its highest levels since 2007.

The buzz

It’s jobs report day again. The Fed’s Powell stressed in his comments on Wednesday, after announcing another 75 basis point rate hike, that the level of interest rates at the end of this tightening cycle will be determined by evidence that the inflation is falling significantly. And the Fed expects to get there that the labor market will likely have to weaken.

But it’s still strong. Data released at 8:30 a.m. showed that 261,000 net jobs were created in the United States in October, more than the 205,000 forecast by economists. The unemployment rate was expected to remain at 3.5%, but rose to 3.7% and growth in average hourly earnings was expected to remain at 0.3%, but recover slightly to 0.4%.

PayPal actions

is down nearly 5% in premarket trading, flirting with five-year lows, after the digital payment group has revised downwards its revenue forecasts for the full year in an after-hours statement.

Prepare for a longer wait. Starbucks

says “customizable drinks”, the kind ordered by someone who needs both skinny jeans and a latte, and which are harder to make, will help pick up the slack when the going gets tough economic. Shares were a bit higher after the coffee chain reported results after Thursday’s closing bell.


is would have suspended employment as it tightens its belt in line with other big tech groups. But at least they’re not worker dumping en masse as Elon Musk would soon intend to do on Twitter.

Hong Kong Hang Seng Index

rebounded 5.4% as hopes continued to grow that Beijing would relax its zero COVID-19 policy and after US audit inspections of Chinese companies have ended. The prospect of increased economic activity in China sent U.S. oil futures higher

3.4% to $91.15 a barrel.

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The market is still trying to regain some balance after Wednesday’s Fed-inspired reversal. Or, to be more precise, the Powell Shellacking. That’s because it was the Fed Chairman’s comments and not the Open Market Committee’s rate hike and accompanying statement that rattled traders.

The chart below shows how the S&P 500 fares over the last 90 minutes of Fed Day action — in other words, from 2:30 p.m. EST when Powell kicks off his conference call. Press. The reaction to Powell’s latest chatter was the worst ever. If the Fed Chairman really wants a falling stock market to help him fight inflation, he just needs to keep talking.

Source: Bespoke Investment

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