Making Sense Of Everything

What a time to be alive. Seriously. The markets are the craziest they have been in a very, very long time. Lets rewind back, just a bit. First, remember when all of the ARKK names topped? It was a little bit after all of the cousins and in-laws started talking about how they were making money in crypto back in thanksgiving.

Well guess what, that ended up being not only the secular high in crypto, which is a drop in the water with regard to how much notional value it makes up in the financial instruments world, but in the general market as well. Right around the time that crypto started to crash and breakdown was the same time that all of the ARKK basket names started to have a fundamental shift of character.

Fast forward around a full year, you know what really started to dig the grave into these names? Interest rates. To add insult to injury (most of these stocks were already down ~30-50% off highs), the 2-year yield thought it would be a nice idea to start pricing in rapid inflation and strong labor market growth at a time when tech stocks were getting destroyed. Why did they get cut up so bad? Well the market has gotten very, very good at discounting future earnings and pricing stocks today for how much money they are going to make a few years out. In our most recent, case try 20 years out (HAHA).

In short, as soon as interest rates started to rise rapidly, investors soon had to discount the valuation of some of the high price multiple names across the board. This bled into tech stocks around late December as the rate of change of the 2-year yield started to go parabolic.

The market breadth is absolutely terrible at the moment.

To add even more insult to injury, Putin decides to invade Ukraine. Like really???

RSX (the Russian ETF) loses 90% of its value due to sanctions across the world.

Because of Germany's reliance on Russian gas exports and how high energy prices have soared as a result of this, the DAX closed on the lows on Friday down almost 20% off its peak high. This is just in a couple of months.

European funding for dollars on trading desks is so bad that the CDS on some of the banks went to near Covid highs. Below is the credit default swaps 5years out on Credit Suisse.

And stocks? Well, they are holding. They have been stuck below the 200 day moving average, but holding firm for such crazy moves across the board, especially in Europe. Typically, buying the S&P when the DAX makes new 20 day lows is a favorable bet. I would avoid all structural risk holding until peace talks are very apparent from both parties in the Baltic region.

The S&P is about to enter its most seasonally bullish period, ever. The next 2 months have a very strong annualized sharpe just off pure buy and hold during this period.

My bigger picture view is that shorting an index is generally a silly thing to do, especially something like the S&P. With discussions with peers today, high tech names that have strong liquidity like AAPL, AMZN etc which are often used as collateral on floating rate markets for high net worths might be the real "catch up to risk" play if things really start to escalate. Given the seasonality, I would avoid shorting outright indices. Highly convex wings on highly liquid tech names though? Sign me up.