Oil prices extended recent gains today, despite chaos across other asset classes, on concerns supply could be disrupted as Iran tested a ballistic missile in the Gulf of Oman, while demand hopes were led by OPEC raising its economic forecasts.

Oil was also supported by a major technical break.

“A rare day to see crude decouple from equities” said Rebecca Babin, a senior energy trader at CIBC Private Wealth.

“Positioning, which has become increasingly important for the direction in crude, was pared down last week,” and “builds in inventories are expected this week and may temper upside.”

The question is, can oil maintain this through the inventory data.

API

• Crude +8.5mm (+2.8mm exp)

• Cushing +512k

• Gasoline -7.2mm (-1.0mm exp) – biggest draw since Sept 2021

• Distillates -4.0mm (-2.2mm exp) – biggest draw since May 2023

According to API, crude stocks built by a bigger than expected 8.5mm barrels last week, but that was offset buy a major draw in products…

Source: Bloomberg

WTI was hovering around $77.80 ahead of the print and extended gains after…

WTI was helped technically by a break above its 100DMA and 200DMA…

All of which means Messers Biden and Powell have a problem…

Source: Bloomberg

As rising crude and surging wholesale gasoline prices mean pump prices are due for a big jump.

Authored by James Howard Kunstler via Kunstler.com,

Think About It

“It’s not enough to be against globalism or the WEF, we have to also be for something better.”

– Tom Luongo, Gold, Goats ‘n Guns

Mr. Luongo makes an important point.

I want you to think about this: there is a reason that the WEF-Globalist cabal is losing the battle to control and dominate the rest of us. They are trying to power straight into the opposing currents of reality. Above all, they seek to centralize power and decision-making. But the world is moving in the opposite direction. All of the WEF’s aims founder on the macro trends unspooling in history.

The rising rule for human affairs now is that anything organized at the giant scale is going to wobble and fail. There will not be any world government run by the creatures of Davos or Brussels, or Washington DC, or any other place that the grandiose imagine would be their seat of global power. It’s not going to happen so you can stop worrying about it. But you’d better prepare for what is happening: everything in our world wants to get smaller, slower, finer, and more local. Anything that opposes these trends is pissing into the wind.

Since every activity we humans practice has to move in that direction, we are seeing colossal industries, institutions, and arrangements crack up: everything from national government to long-distance supply chains to giant retailing outfits to worldwide business networks to overgrown universities and high schools to transport matrices to metroplex cities to mega-farms to political parties.

Where the rot is probably greatest, but more veiled for the moment, is in the operations of organized capital, the banks and money systems, including financial markets. When these monsters blow, as they must, all the others will shake, rattle, and roll. They have to blow because the fuel tank is emptying.

American oil production may be at an all-time peak now at about 13-million barrels-a-day, but most of that – about 8-million – is shale oil, which is a manifestation of our tremendous debt roll-up since 2009. Now that we’re at the absolute limits of debt, we’re also at the limits of shale oil. The production of shale oil paralleled the accumulation of all that debt both in size and rate of increase, and as the debt goes bad – meaning, unpayable – the organized capital sector will blow and shale oil production will fall as sharply as it rose. It is also a fact that shale oil is subject to natural limits – we’re out of “sweet spots” to drill.

That’s America. Europe is way worse because aside from whatever oil is left in the North Sea (not much), Europe has no oil. Europe’s largest gas field — Groningen in the Netherlands — is scheduled to cease operations in October of this year. You all know what happened to the Nord Stream pipelines. And then Germany, in some psychotic fugue state, shut down its entire nuclear power industry, while France is just not replacing its nuke plants as they age-out. Europe is completely screwed. They won’t have anything we might call modern industry. In the meantime, the WEF is playing them like a flugelhorn, keeping them distracted with “green” politics, an unchecked immigrant invasion, and sexual confusion.

A lot of the same nuttery afflicts us in the USA, of course, but none of that alters the real macro trends. Our federal government is not really getting more powerful, it’s cracking up, starting from the very top, with a mentally incompetent president – the secret that everybody knows. Agencies like the DOJ and Homeland Security may seem more tyrannical for the moment, but they are actually breaking as institutions because in their lawlessness they’ve lost the trust of the people — and nothing is more fundamental to a civilized society than trust in the law. That’s what consent of the governed  means.

So, the period of disorderly transition we’re in is not moving toward greater dominance by giants, but to the survival of the small and nimble. We will not see capital formation like the orgy of recent times; rather the vanishing of things falsely presumed to be capital, contraction not expansion. You’ll be struggling to identify and preserve real wealth, which you’ll find in unexpected places, like the friends you can count on, your reputation for honesty, your dependability, acquired skills, and your health, physical and psychological.

The WEF won’t be able to impose its Globalist nightmare of elite transhumanism and surveilled bug-eating serfs, and they know it now. They’re running scared. The vile Yuval Noah Harari has even said so publicly. The political figures and agents serving that cabal will be lucky if they are not hanged in the public squares. The political criminals here in America, the hoaxsters, the grifters, the seditionists, the Lawfare agents, the election fraudsters, know very well the danger of their looming prosecutions, and that’s exactly why the Democratic Party and its blob henchmen and flunkies are acting like desperate lunatics.

Expect: failed national governments, maybe even state governments; failed supply lines; failed electric supply, failed trucking, failed big box stores, failed supermarkets, failed giant companies; failed banks, failed investments, failed money, failed news orgs, failed airlines, failed car dealers, failed hospitals, failed colleges, and much more.

But don’t discount human ingenuity and resourcefulness, our ability to work-around and reinvent systems for daily life, even if it’s on a downscaled and more modest level.

Expect rebuilt local economies from production to wholesale to retail. Expect smaller stores, fewer things to buy but much of it better quality. Expect a lot less long-distance travel but a lot more happening in your locality. Expect the rebirth of local culture – theaters, live music, news-sheets, dances – to replace all the canned entertainments we’re used to. Expect small private academies to rise to replace the shuttered central schools. Expect small, local clinics to appear from the ashes of the medical conglomerates. Expect Americans to return to churches as an organizing mechanism for community relations. Expect more formality and less slobbery in public. Expect all of us to feel a renewed sense of gratitude for being here instead of rage, resentment, and grievance, because it’s likely there will be far fewer of us around.

*  *  *

Support his blog by visiting Jim’s Patreon Page or Substack

For the better part of the last 6 months we have been documenting the slowdown in EV adoption, with major legacy automakers scaling back on investments, switching to hybrid plugin models and saturating the market with competition.

And a new note from RBC this week seems to suggest that the slowdown isn’t close to being over.

Analyst Tom Narayan wrote on Tuesday morning in a note to clients: “Key takeaways thus far from earnings season are that the EV slowdown is not showing any evidence of an inflection, Level 4 autonomy headwinds continue to persist, and fears over supplier inventory overbuild are likely overblown.”

He also suggested that he would “prefer owning Stellantis into Thursday’s print, Ferrari on conservative 2024 guidance and demand strength and Mobileye/Tesla on successes with SuperVision and FSD.”

Citing his reasoning for the EV slowdown not bottoming out, Narayan wrote that “Ford’s EV losses worsened sequentially again in Q4/23 (-$1.57B in Q4 vs -$1.329B in Q3). EV loss guidance for 2024 came in worse than consensus expectations (~-$5B+ vs ~-$4B).”

He also cited Tesla’s “vague delivery guidance for 2024” pointing out their ‘’notably lower’’ growth in 2024 vs 2023 guide, which he says is “due in part to uncertainty on macro conditions – affordability, interest rates etc.”

He notes that consensus for Tesla is “calling for 14% growth in 2024 vs 2023, which would be a notable downshift from 2023’s 40% growth level, but investors are worried about price cutting to achieve consensus level volumes.”

Narayan also cited pressure deeper on the supply chain noting that “Magna delayed breakeven guidance for megatrend investments to 2026 from 2025 largely due to the EV slowdown.”

He notes Stellantis has been de-risked and looks a better option heading into earnings: “Stellantis reports this Thursday. H2/23 consensus numbers have come in and now we think numbers are largely derisked. We could also see something more concrete in terms of 2024 EBIT guidance – we might not get EBIT but we could get margins. After GM and Ford’s above consensus levels, STLA could be strong as well.”

The note also points out that General Motors revealed its 2024 financial outlook, which anticipates a $1 billion decrease in funding for its Cruise autonomous vehicle division. At the same time, Magna has announced its intention to concentrate on assisted driving technologies, indicating no current interest in acquiring companies specializing in lidar technology for Level 4 autonomous vehicles.

Narayan’s reasoning also lies in the fact that Level 4 autonomy is not being developed as aggressively as it once was. 

The emerging trend suggests an industry shift towards enhancing Level 2+ autonomous driving technologies rather than developing full self-driving capabilities in-house, Narayan says. This approach aligns with the strategies of companies like Mobileye and Tesla, which continue to develop and promote their respective SuperVision and Full Self-Driving (FSD) systems.

By Jane Foley, Head of FX Strategy at Rabobank

Right from the very first week of the year, Fed officials and other G10 central bankers have had reasonable success in pushing back against market expectations for early rate cuts. Following the blow-out January US labour report and candid remarks from Fed Chair Powell in the same week, the market has all but lost interest in the chances of a move by the FOMC as soon as next month.  No central banker wants to be remembered as the policymaker that cut rates too soon and threw disinflationary pressures off course. That said, while Rabobank retains the forecast that the Fed’s first move is unlikely to be before June, there is still considerable market interest in a potential rate cut as soon as May. Today’s release of the US January CPI inflation data will provide the next test of how close the Fed is to achieving its goal of returning price pressures back to the 2% level and of reducing rates this spring. The market consensus stands at 2.9% y/y for the headline number, down from 3.4% y/y previously. The market median for the core CPI inflation number is 3.7% y/y down from 3.9% y/y. (ZH: The final number came in superhot compared to estimates and slammed shut the door on any early rate cuts).

Yesterday’s release of the NY Fed’s survey of US consumer inflation expectations showed no movement over the 1- and 5-year horizons. These held at 3.5% y/y and 2.5% y/y respectively.  However, expected inflation over 3 years dropped to 2.35% in January from 2.6% previously. This was the lowest in nearly 11 years.

While the signalling from the report was not clear-cut, with the inflation uncertainty index rising in both 1 and 3 years, there was other good news. The median for commodity price growth expectations fell. This included goods such as fuel, food and rents which should be encouraging for Fed doves.

That said, comments from Fed Governor Bowman yesterday were designed to reign in any optimism. She remarked that rate cuts in the “immediate future” would not be appropriate.

The S&P may have closed off its intraday highs last night, but the ability of the index to push beyond the 5000 level appears to signal confidence in the outlook for the US economy or/and the likelihood that Fed rates are on the brink of pushing lower. Recently, concerns over the breadth of the rally and the number of firms that are experiencing a boost to their stock price again came to the fore. That said, the FT is reporting that yesterday more than two-thirds of the stocks in the S&P finished higher. Yesterday Nvidia Corp. overtook Amazon to become the fourth most valuable US company. Arm holdings was a strong performer on the back of market excitement over the firm’s spending on AI. The fourth day of the Lunar New Year holiday ensured a quiet session in Asia overnight with markets closed in China, Hong Kong, Taiwan, and Vietnam. In Japan, the Nikkei 225 continued to push higher on the back of gains in the tech sector. The weakness of the JPY is also a supportive factor for the exporter heavy Nikkei.

The FT is reporting that the EU is proposing to sanction three Chinese companies and one Indian business as part of its latest move to pressure the Russian economy. If approved, this would be the first time that businesses inside China and India have been directly impacted by EU sanctions.  Under the terms, EU companies would be banned from dealing with the listed companies. Businesses in Turkey, Thailand, Sri Lanka, Serbia and Kazakhstan would also be on the list. 

European officials have been reacting to comments from former US President Trump that Moscow could do “whatever the hell they want” with Nato members that failed to meet the alliance’s spending target of 2% of GDP. Nato secretary-general Stoltenburg warned that Trump’s outburst undermined “all of our security, including that of the US”.

Authored by James Rickards via DailyReckoning.com,

Despite the Wall Street happy talk about the Federal Reserve winning the battle against inflation, that battle has not been won.

Headline CPI (the kind Americans actually pay) was 3.1% in January – lower than December but notably above expectations. However, ‘core’ and ‘supercore’ were more problematic – up 3.9% YoY (flat from December) and up 4.4% YoY (highest since May 2023) respectively.

In other words, inflation is not gone and may even be on the rise with higher oil prices lately due to geopolitical concerns. The Fed will not raise rates, but they will not be quick to cut them given continued inflation.

Inflation has a way of sneaking up on investors in small increments and can do a lot of damage before investors see it for what it is. Sure, 3.4% inflation is a lot better than 9% inflation.

But a 3.4% inflation rate cuts the value of a dollar in half in 21 years and half again in another 21 years. That’s a 75% dollar devaluation in just 42 years or the course of a typical career from age 23 to age 65.

(By the way, I’ll be live tomorrow at 7:00 p.m. ET as part of the Zero Hedge debate series on the future of the U.S. dollar. If you want to check it out, go here to learn how.)

That’s one of the main reasons I recommend gold. Gold is priced in dollars. Inflation means the dollar is worth less in terms of purchasing power. That means it takes more dollars to buy gold, so the dollar price of gold goes up.

What you may lose in the rest of your portfolio in terms of dollar purchasing power is made up in part or all from the profits you make on the higher dollar price of gold. Owning gold will protect you from the ravages of inflation. You’ll have your inflation protection in place 24/7 and won’t be caught off-guard.

Get Diversified!

Geopolitical conflicts and political turmoil often result in unforeseen consequences. These consequences can include supply chain disruptions, economic sanctions, asset seizures and freezes, bond defaults, bank failures and inflation. Oil prices can spike if key waterways are closed, or a vessel is sunk.

Economic sanctions and financial warfare can cause recession or a banking crisis almost overnight. Assets such as stocks, bonds, real estate and alternative investments can be adversely affected by such changes without warning.

Gold tends to be insulated from such shocks because there is no issuer, no creditor and no country involved. It’s just gold. That means you can hold it safely and wait out the turmoil without adverse effects.

Gold prices do not correlate closely to stock prices. Gold and stocks are driven by separate factors. That makes gold a good diversification asset for portfolios that are heavily in stocks. When a portfolio is highly diversified, it can produce higher expected returns without adding risk.

The difficult part is finding asset classes that really are diversified. Buying 50 different stocks is not diversification since you only have one asset class — stocks — and the behavior of various shares will be highly correlated in times of stress. Gold is genuinely diversified from stocks and will improve portfolio returns.

Golden Tailwinds

Gold prices have been trending higher lately with some volatility along the way. Gold hit an interim bottom of $1,831 per ounce on Oct. 5, 2023, and then rallied to $2,089 per ounce on Dec. 1, close to an all-time high.

Gold retreated slightly and then hit another high of $2,093 on Dec. 27. The rally from Oct. 5 to Dec. 27 was a 14% gain in just under three months. That’s an excellent performance.

Today, gold is around $2,033 per ounce, still close to the recent highs. These trends toward higher prices have been driven by lower interest rates; continued inflation; geopolitical concerns about the Middle East; and continued buying by central banks, especially Russia and China.

All those trends will continue. One of the principal drivers of the gold price rally is the steep decline in interest rates in recent months. The interest rate (expressed as a yield-to-maturity) on the 10-year U.S. Treasury note plunged from around 5.0% to 4.0% in a matter of weeks at the end of 2023.

Don’t mistake a 1.0% move for something small. That’s an earthquake in bond markets, especially in such a short period of time (47 days). A 1.0% move in that short a period of time has only happened in the Treasury market six times in the past 30 years.

Rates have backed up slightly in the past month, but that’s to be expected. Nothing moves in a straight line. The decline in rates will resume in the months ahead as the U.S. economy moves into disinflation and recession. That will give a boost to the dollar price of gold since notes and gold compete for investor allocations. Lower interest rates generally make gold relatively more attractive since gold has no yield.

Meanwhile, Russia and China and other central banks have been adding to their gold reserves consistently since 2008. Total gold reserves have increased from about 600 metric tonnes to 3,000 metric tonnes in Russia, and over 2,000 metric tonnes in China (although there is good reason to believe that China’s gold reserves are much higher, perhaps double the official figures or more).

That increase in gold holdings will continue and probably accelerate as the U.S. threatens to seize Russian reserves in the form of Treasury securities and as progress is made on the new BRICS gold-linked currency.

The 10% Rule

Every investor should have an allocation to gold in her portfolio. It’s an excellent diversification and can be a powerful asset to have in the face of natural disaster, infrastructure collapse or social unrest.

I recommend a 10% allocation of investable assets to gold. In calculating investable assets, you should exclude home equity and the value of any private business. Don’t gamble with your house and livelihood.

Whatever is left (stocks, bonds, real estate, alternatives) are your investible assets. Allocate 10% of that amount to gold. That allocation is high enough that you’ll make significant profits (and protect against losses in the rest of your portfolio) if gold soars, but small enough that your overall portfolio won’t be hurt badly if gold goes down.

A 10% allocation is the sweet spot for both profits and downside protection. The bottom line is gold is like an anchor for the rest of a diversified portfolio. It is physical so it is not easily frozen by government fiat.

It offers diversification because it does not correlate to other asset performance (except Treasury notes on occasion). It is the best hedge against inflation.

Gold should not dominate any portfolio, but it should be part of every portfolio.

On Tuesday Iranian state media published footage of what was described as part of a simulated military attack on a major Israeli airbase by the elite Islamic Revolutionary Guard Corps (IRGC).

The IRGC utilized naval assets to fire a range of munitions, including from ships and submarines in what is clearly a threatening message aimed at Israel amid its ongoing onslaught in Gaza, in the context of the planned Shahid Mahdavi exercises.

Top commander of the IRGC, Gen. Hossein Salami, claimed that his forces for the first time successfully launched a long-range ballistic missiles from a warship. 

“The IRGC for the first time has fired ballistic missiles in the Gulf of Oman,” state television cited. “The firing of a long-range ballistic missile from the warship was successfully carried out.” 

“This new achievement increases the range of our naval influence and power to any desired location because our ocean-traversing warships can be at any point in the oceans,” Salami announced. “There will be no safe place for any power that wants to create insecurity for us.”

The video features two Iranian-made long range ballistic missiles, the Emad and Qadr, which are showcased being launched and hitting targets.

Watch the IRGC simulated attack on an Israeli airbase below:

⚡️BREAKING

Iran has released a video in which it targets a mock-up of Israel’s Palmachim air base hosting F-35s, by land and sea with precision ballistic missiles.

Netanyahu recently issued a warning to Iran from this air base

In addition, Iran seems to have prepared special… pic.twitter.com/oZnxM4Vx7A

— Iran Observer (@IranObserver0) February 13, 2024

Importantly, and sure to gain the attention of leaders in Tel Aviv, the whole IRGC exercise envisioned an attack on Israel’s central Palmachim airbase, which has been used heavily in Gaza operations.

Iranian state television has described Palmachim as “largest airbase of the Zionist regime in occupied territories.” The simulated attack, and then subsequent release of a propaganda video, appears to telegraph what leaders in Tehran would like to do in terms of war plans.

🚀 شلیک موشک بالستیک دزفول از ناو شهید مهدوی به صورت کانتینر پرتاب pic.twitter.com/XxnojGeM3y

— MESHKAT (@projectmeshkat) February 13, 2024

Israel has for years warned allies that it is in the path of Iran’s increasingly longer range ballistic missile arsenal. Israeli officials have not only complained about what they see as a burgeoning nuclear weapons program, but increasingly sophisticated and longer range delivery methods.

By Simon White, Bloomberg markets live reporter and strategist

Options-driven fever of investors fearful of missing out in a market at all-time highs is helping push stocks higher, and has the potential to culminate in a blow-off top.

FOMO is once again in evidence as both the S&P and the Nasdaq make new highs. If you fear you’re already missing out, what better strategy than to use the gearing of options to make up for lost ground? This could drive a potent self-fulfilling rally that contains the seeds of its own demise (ZH: see “”Everyone Is In The Same Trades And All-In”: Goldman Tells Clients To Get Out Of “Parabolic” Tech Stocks“).

Options are the financial crystallization of greed and fear. Buy call options when greedy; buy put options when fearful. And if you’re only somewhat greedy and not too fearful, you can sell calls or puts. Today, greed is in the ascendant and fear is in abeyance. That’s a recipe for a blow-off top.

How can this happen? Over the past month, S&P call prices have risen more than put prices. The red line in the chart below is of S&P option prices by strike a month ago, while the white line is their price today.

The white line has risen more than the red line on the right-hand side of the chart, that is at higher strikes, versus at lower strikes. This shows it is likely investors are buying more calls than puts, i.e. they are increasingly taking leveraged long positions on the market with unlimited upside. Falling put/call ratios, both in price and volume terms, corroborate this. The effect is even more pronounced in tech and the Magnificent 7.

This sort of action has the potential to lead to a rapid rise in stock prices that finally exhausts itself, culminating in an abrupt selloff. The reason is falling and ultimately negative gamma.

When gamma is positive, as it is more often is, the hedging behavior of option dealers – who take the opposite side of investors – represses volatility, as they must sell after the market rallies and buy after it sells off to rebalance their positions.

But when gamma is negative, dealers must chase prices, and volatility can quickly rise. Negative gamma is commonly associated with falling markets. Investors tend to own deeper out-of-the-money puts for protection. As the market begins to fall, these puts become more in the money and dealers must increasingly sell more of the underlying index to hedge.

Yet more often, negative gamma leads to a rising stock market. That’s even more likely when the fear gauge is low. Why bother hedging downside if you think stocks can only go up? Demand for protection, i.e. buying puts, falls, and thus there is an absence of this source of self-fulfilling dealer selling.

Instead, the opposite dynamic becomes more likely. Investors are long out-of-the-money calls, which is a potential deep source of buying by dealers, pushing gamma more negative, forcing yet more buying as the market rises.

That continues until something breaks, more often than not a rise in implied vols when the calls become in-the-money, which triggers a cascade of selling by dealers (this is due to one of the lesser-known Greeks, vanna, the derivative of the option’s delta with respect to volatility). Voila! – a blow-off top.

The current dynamic could have more room to run before we get there. Gamma is still positive, but it has been grinding lower [and as ZeroHedge pointed out, expect a collapse in gamma this week as “Massive “Unclenching” Looms As 90% Of Dealar Gamma To Expire By Friday“].

The call buying by investors adding negative gamma is being tempered by investors taking leveraged long positions by selling out-of-the-money puts. The first represents greed, the second a lack of fear. Both expect the market to keep rallying.

Selling puts generates some selling as dealers hedge, but as the market moves higher, investors are more likely to take profit on their positions, which necessitates the dealer buying back their hedge, pushing the market higher.

The current investor preference for selling puts and buying calls, rather than the more usual buying of puts and selling of calls, is thus the perfect recipe for a blow-off top – especially if outright greed starts to dominate and investors prefer uncapped upside to stocks, i.e. long call exposure.

As mentioned above, the tech sector and largest stocks are seeing a more magnified version of what is happening in the broad index, with investors driving up call prices relative to put prices. I thought it would be interesting to see what sectors are leading the advance when we go into a blow-off top.

There is no standard definition for such a top other than there’s sharp rally into it and a rapid selloff after it. I defined one as being when the trailing monthly and quarterly returns for the S&P are more than 7%, and the forward monthly return is less than -4%. That gives us a not-too-numerous list of blow-off tops that contains many of the times you would expect, such as the run-up to the end of the tech bubble in 1999/2000 (white bars are the tops, gray bars are recessions).

Looking at what sectors were leading on a one and three-month basis at these times (using the Fama-French definitions to get data back to 1940s) gives the table below. Interestingly, tech does not make up the majority of times as I would have expected. On a one and three-month basis, consumer durables was most commonly leading the market, followed by tech and energy, while on a three-month basis, tech is in equal second place with energy.

The tech and communication services sectors have been taking turns in leading the current market (on a three-month basis), but there is little, historically speaking, to prevent another sector taking the lead in any final, capitulatory move higher.

The Nasdaq and S&P today almost meet the ex ante criteria for a blow-off top, with their trailing quarterly returns more than 7%, but their one-month returns still under 7% at ~5-6%. And various measures of equity-index breadth are not yet near extremes, suggesting the rally could keep going for now.

It is starting to feel a little “last days of Rome” as markets drive relentlessly higher, seemingly unimpeded. The underlying set-up shows that – until the barbarians break through the gates and stocks run out of luck – the grape-eating excess could reach new heights of decadence.

Learn how volatility is really driving markets during today’s free SpotGamma webinar here at 1pm EST:  Volatility, Avoid the Riptide.

With equities surging higher, the signs of rampant bullishness are percolating. Year-to-date, broad based equity indexes, like the S&P500, are +5.8%, while leading sectors like the SMH (Van Eck Semi ETF) have surged an eye-watering +17.8%.

But, how do you know when the bullishness has gone from a “strong trend” to “exuberance”?

For that, we turn to the options market, wherein we can measure shifts and changes in future (implied) volatility estimates and options prices to draw out statistical measures of demand.

Here, we are going to focus on the concept of skew. Skew describes, for a given stock, the variation in implied volatility across options with different strike prices but the same expiration date.

For example, if calls expiring in 1-month have an elevated IV compared to an equivalent downside put, we denote this as an elevated call skew. Higher call skews imply that there is a lot of demand for calls, as the high IV’s could be the result of traders bullish expectations.

In the plot below we’ve ranked current skew readings for top stocks (%’ile vs the last year), and plotted it on the Y axis. As call IV’s increase relative to puts, the values shift higher in the plot.

The X-axis is “IV Rank”, which measures how high at-the-money (ATM) volatility is for various stocks. Generally, as earnings pass, stocks ATM volatility decreases (moves left on the X axis). In times of high fear, IV increases, which would shift readings to the right on this plot.

As you can see, there is a bright yellow color at the top left of this chart, which informs us that the bulk of stocks measured (the 131 stocks with >500k open interest) have skew readings that are >= 80th percentile readings. This is the result of calls being bid up over puts. Further, because the yellow color is to the left on this chart, we can infer that traders see little risk of a market decline.

Drilling down further, we’ve compiled a list of stocks with top skew ranks. As you can see, many of the Mag 7 (green) & top semi-stocks (yellow) are >=98th %’ile readings! Further, major ETF’s like SPY, QQQ and IWM (blue) are >=90th %’ile.

This objectively informs us that calls have reached peak relative levels of valuation. Said another way: the bullish tech trade is very crowded.

Let’s drill down even further to NVDA, which is the darling of the equity market, and now the 3rd largest stock in the S&P500. It reports earnings on 2/21, with the stock up nearly 50% since Jan 1.

As a result of the stocks tremendous move, and traders bullish anticipations, skew, plotted here for 1-month options (green line), is extremely elevated. We call this a “heavy” call skew because out-of-the-money calls have a higher IV than ATM options, or even relative downside puts.

You get a further sense for how extreme current readings are when you compare them to 1-month skew, from just before their most recent earnings (November ’23, gray line). As you can see IV is now both much higher (the green line raised over the gray line), but there also a much larger call skew (higher strikes now have much higher relative IV’s).

With this type of skew we think its hard for NVDA’s earnings to beat traders bulled up expectations. It’s not that NVDA’s actual earnings results can top expectations, its that the stocks price reaction may have a hard time overcoming the exuberant price expectations.

We’ve seen two other times in recent history when NVDA skew was as elevated to current readings: into NVDA earnings on Nov ’21 & June ’23 (black lines). As you can see, into both earnings dates the stock saw incredible returns, and then after earnings, the momentum stalled.

As with those prior periods, we now see the stock markedly higher into upcoming 2/21/24 earnings, with similarly rich call IV’s/prices.

Interestingly there were not major, immediate reversals for NVDA after these earnings, but those dates marked the final stages of broader market rallies (SPX, bottom plot).

Under the hood, heavy long call demand creates a negative gamma positional environment. This infers that dealers, who are selling calls, likely need to hedge by buying stocks as stocks go higher. This creates a reflexive feedback loop: higher stocks draw more long call demand which draws more hedge-buying from dealers.

However, there is a possible moment to break this feedback loop over the next week. Today we get the CPI report, followed by 2/14 VIX expiration & 2/16 options expiration. With CPI coming in red hot, certainly hotter than expected, it could pull out some of this excess call demand, resulting in dealers needing to unwind long stock hedges (although clients will defend any downside ferociously with even more call buying… until they tap out).

Further, the VIX + equity options expiration will likely serve to reduce many of the options positions which are supporting the rapid rise in equity prices. We believe the removal of these positions will lead to a correction in stocks, with the S&P500 testing the 4,900 level.

Should that 4,900 level break, we would look for a longer, more protracted selloff, wherein volatility escalates significantly.

Join us as we further unpack this dynamic at a free 1pm ET webinar and what could happen next:  Volatility, Avoid the Riptide.

A nor’easter is blanketing parts of the Mid-Atlantic and Northeast with snow on Tuesday morning, creating messy conditions for commuters traveling along the I-95 corridor.

New York City Mayor Eric Adams advised residents to stay home as the metro area anticipates receiving more than 8 inches of snow, marking the highest snowfall total since Central Park recorded 7.3 inches in January 2022.

During a press conference on Monday, Mayor Adams said New York City public schools will close on Tuesday and all students will move to remote learning. 

“We expect slippery roads and limited visibility,” the mayor said, adding, “We’re strongly encouraging New Yorkers, if you don’t have to go out, stay home.”

Eric Adams wraps up in $700 Fendi scarf as he warns of ‘serious’ Nor’easter that is set to blanket NYC in up to 12 inches of snow: ‘If you don’t have to go out, stay home’ pic.twitter.com/3GJZjtUviZ

— News News News (@NewsNew97351204) February 12, 2024

Suburbs west of the city are forecasted to receive upwards of a foot of snow. Northern New Jersey, eastern Pennsylvania, and southern New England are also expected to receive about a foot. 

If Adams wished to employ the illegals, his administration could hand them shovels and salt, instructing them to get to work today. But we doubt that – as some lucky migrants will watch the winter storm unfold from their luxury hotels, paid for by the taxpayer.