Daily Brief - And…we’re back!

TLDR: At 21.23 forward P/E, only during the dot.com and 2021 was SPX more expensive than today. Draw your own conclusions…but beware, there’s much more happening in the market.

This is one exciting time for macro investing.

The Fed wants to be dovish, but can’t and might in fact need to raise rates. US Elections are looming, and the odds are clearly favoring the more pro-market and tanned of the 2 candidates. European elections saw an avalanche of extreme right-wingers coming to the fore, and whether that’s good or bad for markets is a question mark. US New Order PMIs touched 45 (ouch!) for one month and then recovered a bit. Our Leading Indicators are pointing both up and down, with TLI being bullish and Rangefinder bearish. AI keeps shining, and we really can’t stress enough how its impact on productivity deserves to be priced in equity valuations.

Confusing, isn’t it? But confusing can be good, because it means we should expect momentum - in some direction - once the air clears.

The market could price a higher probability of a Trump win and keep rallying - or it could retrace on the back of profit taking. In both cases, when VIX is showing a meek 12.12 we are free to express either directional view at a very low cost. In fact, we can even play both scenarios.

The key thing we need is a catalyst, to put the market into higher gears. Upcoming ones include CPI on July 11th, FOMC on Jul 30th, and the possible Biden replacement if it ever happens. In addition, we track our Leading Indicators in expectation of a clearer directional bias.

So you’ve got it all set - a nice set of countervailing macro factors, catalysts on the horizon, and cheap options to deploy your risk in this absolute mess.

How to play this setup: If you’re a trader

If you want to express a bearish view, we advise you play around with structuring a 1x2P or even a 1x2x1P - aka skewed butterfly, like so. If you like upward momentum instead, vanilla calls are probably your simplest and most effective tool. For non-directional bets, butterflies-,Long%20Iron%20Butterfly,-Call%201x2) and condors are cheap.

How to play this setup: If you’re an allocator

We can’t forget a very important piece of evidence. Buying equities at their top P/E has always led to sub-par returns in the long term. Now QE is a thing of the past, but AI is a thing of the future - can you afford not to be in it? We don’t envy the choice. Considering the bull case is still very valid, and bonds look interesting, risk parity might well be your go-to solution.