What's Driving the Market Today? (June 17, 2024)

Hi YXI Friends

In this article, I will show you my own market pulse dashboard. The dashboard provides a bird’s eye view across various market assets:

1. Market Liquidity - RRP & TGA and their impact on 10Y UST, QQQ, SPY

2. Sector ETF Performance

3. Individual Stock Performance and Comparative Analysis

4. Interest Rate Futures - Fed Funds Futures & SOFR 3M

5. WTI & Gold Futures - Impact on CPI

6. BTC & ETH Futures - The carry trade

Let’s have some fun!

Tools I find useful:

TradingView: I use TradingView for all my chart analysis. It is very fast and simple to play with, including the mobile and desktop apps. Sign up here to get $15 off your new TradingView plan.

Koyfin: I use Koyfin for stock screening, comparative analysis, and fundamental analysis. It provides very comprehensive data and features at a reasonable price. Sign up here to get 15% discount off all Koyfin plans.

Fastgraphs: I find Fastgraphs very useful in gauging whether a stock is underpriced or overpriced versus the fundamentals. Sign up here to get 25% off using the coupon “AFFILIATE25” at the check out.

My market pulse dashboard

(12pm EST/ 5pm BST)

Everyday, when I open up my spreadsheets, I run a checklist to gauge the market conditions. I will run through them with you below in real time.

1. Market Liquidity - Reverse Repo & Treasury General Account

Note that the Treasury General Account balance has been declining since its recent peak in April. The TGA is basically the US Treasury’s bank account with the Fed. It goes up when it collects tax receipts or issues debt, and goes down when it spends its budget, for example on government worker salaries.

We observe that the decline in the TGA balance has a moderate correlation (between 0.3 and 0.5) with a decline in the 10-year bond yield. This is because as the Treasury spends money, it has a net positive effect on market liquidity. When the Treasury hoards money, financial conditions tend to tighten, and bond yields rise.

The TGA balance at times also has a negative correlation with stocks. In May, the falling TGA balance was moderately associated with the daily rises in both SPY and QQQ.

2. ETF Sector Performance

The overall market, needlessly to say, has been very bid in the past year. All but 3 sectorial ETFs show positive momentums with 20-day averages above the 50-day and 200-day.

Technology, Communications, and Home Construction have been the stars of the past year.

However, IWM (Russell 2000) has significantly lagged both QQQ and SPY, returning just 8% versus 31% and 25%.

Moreover, the short-term price reversals among sector ETFs look bearish, as all but two ETFs (Communications and Technology) showed a positive return in the past 30-days. There are significant selling activities in Financials, Energy, Metals and Mining, Oil and Gas, and Gold Miners.

3. Individual Equities

Individual stock names are grouped by their types (except for the Magnificent 7, which have their own league).

When a big move happens, I first check two things: 1) are the stocks’ peers also in red? (i.e. a beta move), and 2) what’s the Z-score? They help me understand if the move is individual or collective in nature.

A Z-score of +2 or -2 means the stock has moved 2 standard deviations from its average volatility, which should only happen around 5% of the time. It signifies the unusualness of the move.

I have also added here each stock’s most positively and negatively corrected names on a 3-month period. For example, Microsoft shows an unsurprising strong correlation with QQQ, but is moderately negatively correlated with Lockheed Martin. This could be useful in constructing a balanced portfolio.

I would also like to caution that correlation does not mean causation. When the broader market is bullish, we could see two unrelated stocks moving up at the same time and show a strong, but ultimately meaningless, correlation.

We compare price multiples across peers versus growth and margins

These comparisons are extremely useful in evaluating the relative expensiveness of each stock compared with other opportunities. The companies fundamentals, such as revenue growth and gross margins, are supplied by Koyfin. (In case you missed, you can get a 15% off from Koyfin subscriptions through the link at the top of this article.)

For example, after a relentless 200% rise in the past year, NVDA has only just come in line with other Magnificent 7s in terms of forward growth adjusted EV/ Revenue (NTM) multiples.

Apple, in contrast, looks expensive due to its lack of growth projections, unless we see the latest set of Apple Intelligence features seriously boost iPhone sales.

Price multiples need to be evaluated against a broad set of business performance. For example, MSFT is twice as expensive as GOOGL in terms of revenue multiples, but it enjoys a much higher EBITDA margin (53% vs 35%). Moreover, with the Apple integration with ChatGPT, investors is voting that MSFT is ahead of GOOGL in the AI race.

4. Interest Rate futures - Bond Futures, Fed Funds Futures & SOFR 3-Month

We use Bond Yield Futures (traded on the CME), Fed Funds Futures, SOFR 3-Month Futures, as well as the SOFR OIS Curve to get an overview of the market’s projection of future interest rates.

These are markets with serious liquidity and money on the line - much larger than equities. They not only reflect what the market thinks of the Fed, but can often lead the FOMC decisions.

The Fed is also very careful not to surprise the market. If the market expects a rate cut but the Fed decides against it, the Fed would inform major news channels (e.g. WSJ) to ensure the market correctly reprices the FOMC decision.

Through the Fed Funds Futures, we can see that the market has put a floor on the Fed’s upcoming rate-cut cycle at just below 4%. This is very high compared with the 0-2.5% interest rate that we experienced since the Financial Crisis.

Note that the Fed Funds Futures need to be re-interpreted as “FOMC Steps” because interest rate decisions are binary for each meeting. We interpolate FOMC decisions using dates of the FOMC and the futures prices for that month (which are averages of each month’s Fed Funds rates).

SOFR stands for Secured Overnight Financing Rate. It's a benchmark interest rate used for short-term dollar-denominated loans and derivatives. Since 2023, it has replaced LIBOR (and Eurodollar Futures).

Today, the yield curve has put on a bear-steepener, with the far-dated yields rising faster than the near-date yields.

Bullish / rally in bond markets means yields lower (prices higher), while bearish / sell-off in bond markets means yields higher (prices lower).

5. WTI & Gold Futures

Oil prices have great implications on inflation data, affecting both the macro outlook and input prices of real businesses.

Data since 1986 suggest that when WTI is above $80 per barrel, CPI is above 2% two-thirds of the time. Today, WTI is reattempting the key $80 level that it lost in May

Gold acts both as a commodity and a safe-haven. From the October 2023 low, Gold Spot ripped higher by 35% to just shy of $2500 in May. But it has recently retreated to consolidate above $2300. We see that Gold sold off slightly today.

6. Crypto Futures: BTC and ETH

Finally, the fun ones, BTC and ETH futures.

You may notice that the shape of the curve means that BTC contracts further out are more expensive than those closer to spot. This presents an opportunity for “carry” (sometimes also known as the “basis" trade”.

Traders can sell BTC futures that expire in September 2025, and buy the near-dated futures (e.g. September 2024) to capture the price difference (73k - 67k = 6k), while staying market neutral.

This works as long as the shape of the curve does not change and blow up in the carry trader’s face. It can happen if there is a tidal wave of buying interest but the futures in the far dates rise a lot faster than the near dates. Then the carry trader can lose more many in the long-end than they make in the short-end.

The longer end ETH contracts are not very liquid, explaining the weird shape in the curve observed today.

A quick word from the author

Thank you for joining me on this journey.

Please feel free to share any suggestions or comments, either directly through email or in the comment section. Your support is really appreciated.

— Yimin, June 17, 2024

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

References

1. RRP Daily (FRED - St Louis Fed)

2. Fed’s Balance Sheet (FRED - St Louis Fed)

3. Treasury General Account Balance (Treasury.gov Fiscal Data)