One Last Yolo?

Gimme Shelter

When I set out to write a Shrubstack, it was intended as a way to force myself to put on paper my thinking and hopefully share something interesting to the readers (assuming anyone showed up!).

In the space of a month, I wrote about long duration and the UK 2061 Guilty Gilt, the Biotech ETF XBI, the Russell RTY and even the China Tech KWEB. Really disgusting stuff at the time, even though they all had a decent rally (even the Gilty Guilt is +16% in a month!).

The question I now pose to myself, and to you:

What’s really left until the end of yet another eventful year?

Another Fed meeting, another CPI print, another NFP print and a few hundred billion of $ Treasury issuances, courtesy of Janet (Oh and NVDA results. Can’t wait for more AI AI AI AI AI AI AI AI AI AI AI!)

Anyway, none of the above are particularly Black-Swanny (famous last words) and the markets are cruising near the highs of the year:

• The SPX wizzed through my 4444 target and is now at 4500

• The US10yr got down to my 4.444% target and now at 4.50%

• And the VIX got crushed down to 14, near the lows of the year

• Lots of 4s there, except for the $NDX which is flirting with 16,000 (Weekly chart below)

And this is the VIX, beaten down like no tomorrow:

My buddy Florian Kronawitter (who writes the excellent “The Next Economy” on substack (which if you haven’t subscribed already, you should) shared this thought-provoking chart on hedge fund positioning (source: GS). Let me translate it for you:

Hedge Funds are FULLY invested (gross at the 5yr highs), but they are are CAUTIOUS / BEARISH (low net exposure).

So If you are wondering why Biotech / Russell / Junk had a massive rally during the last couple of weeks, well, now you know why: hedge funds were mostly long quality and large-cap tech and short Junk. And then Yellen came out for the first punch and then the cold CPI gave the KO combo-kick to the hedge funds. This was the hedge fund Pain Trade and it played out. As Nature intended.

So where are we now then? Hedge funds are very invested and they seem to be losing money, or at least underperforming. And what will they do?

Well, the sensible ones will probably de-risk into year-end so that they fight another day, whereas the ones that are in trouble will probably chase anything that could make them money before bonus season and redemptions kick in.

To put this in context, I will shamefully recycle my favorite meme, courtesy of yours truly:

So with the market up 10% in a month, I want to take a bet against the greed of the chasers and against any de-risking flows.

With the VIX at 14, SPX >4444 and US10yr having tested 4.444%, that’s too many 4s for me not to buy protection!

As a result, I added a Nasdaq hedge (mentioned in the substack chat at $NQ 15,968) and I bought puts on SPX (ES spot 4,500).

Worth repeating 100 times, I always use stop losses with these shorts and my sizing on the puts is always sensible and proportional to my portfolio invested. I may close these positions at any time.

Nothing here is investment advice. This is the trading journal of a shrub. Don’t Be Stupid.