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Positioning Watch – Spread-trading the way through the current environment

Rate cuts have been pushed a bit back by central bankers as economic data keeps surprising, but price action doesn’t truly reflect the dynamics we’ve been used to through 2022 and 2023. How should you play the current environment?
2024-02-05

Very interesting dynamics in markets lately, with the NFP report Friday shocking markets at first glance before sending them back into rally-mode, likely a signal that asset pricing will be more about underlying fundamentals and economic data rather than interest rates alone. Despite rate cuts being pushed back a bit by both data and central bankers, the US economy is going strong, and the “interest rates work with a lag” arguments have been swept away for now, which leaves us with good news actually being good news.

This week’s positioning watch is chart-packed with short and concise text – Enjoy!

Equities

  • Retail Investors’ allocation towards stocks has remained fairly stable since 2022 and has retracted after the boom in late 2023, but despite having a high correlation with the performance in small vs big equities (Russell 2000 vs S&P 500), Large Cap has outperformed Russell 2000 and other small cap indices by MILES since 2022. Small caps have normally been where you try to gain higher risk due to higher beta, but small caps have surely not been a place to be – and will likely not be going forward (Long SPX vs Short Russell looks like a decent trade). ISM services printing at bizarrely high levels today sends equities down a notch, but RTY is down roughly 2% with SPX down only 0.5%.  (Chart 1)

Chart 1: Huge divergence between small and large caps

Rate cuts have been pushed a bit back by central bankers as economic data keeps surprising, but price action doesn’t truly reflect the dynamics we’ve been used to through 2022 and 2023. How should you play the current environment?

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