If yesterday's bizarre, month-end market action feels a little bizarre, where we first saw a day-long drift lower before everything surged in the last 10 minutes, it's because it was. This is how JPM's head of cash trading, Ron Adler, summed it up (and note his picking up on what we said ten days ago in "Unprecedented Hedge Fund "Destruction" Sparks Massive Degrossing As Offside Exposure Hits March 2020 Crash Levels" where we discussed the historic unwind of offside short positions and near-record degrossing across the hedge funds space):
It’s a very unwindy Monday (Mondays remain the new Fridays), and while SPX volumes are -17%, overall JPM volumes are -2% and we are ~1.1:1 better for sale (with a similar lean in TMT). Futs continue to hold in >4600, but demand at these levels remains reluctant. John Schlegel, Head of Global Positioning Intel, noted on Friday that the rally has been quite frustrating for HFs and has led to broad de-grossing in the market. That’s continuing today with the high short interest names outperforming JPTASHTE Index. We have subsequently seen more profit-taking in MegaCap tech (though this feels more repositioning/month-end related vs. anything else), while MSFT oscillates around its 50dma.
As we turn the page to August, it does feel that we are seeing the market become both consensus bullish and well as consensus in making a call for a pullback before resuming the upward trend, myself included.
We did have a client pushback on this view, choosing Scenario 1 from yesterday’s Market Scenarios (reposted below) where stocks keep marching higher.
This view is driven by (i) buyback flows returning; (ii) long-only re-risking; (iii) re-risking from the UHNW and Family Office segments, both domestically and internationally.
The client’s point is that the shift from bear to bull is not fully reflected in market prices and that while some folks are predicting a pullback, it could be more shallow that those predictions suggest.
There are several important themes above, but the biggest one is the tactical Market Scenarios (available in their entirety to pro subscribers) that Adler is referring to. They are a reference to the following matrix, created by JPM's Market Intelligence group headed by Andrew Tyler and "comes from a series of conversations with folks from around the industry and while it is not exhaustive, may give some guidance for the balance of the summer."
