The Hunt for Red October
Jump To
So I know I said in a few episodes ago that the market would be alright the worse the data gets, that’s still likely true.
However, tightening credit conditions might be an issue and we’ve also just broke some major technical areas on the S&P500 which are a concern as we head into October.
If you remember the movie from 1990 with Sean Connery, The Hunt for Red October it was this hide and seek game under the ocean in nuclear subs between to submarine commanders.
Right now it’s a game of hide and seek with investors and Uncle Jerome.
Three weeks ago in this episode I shared the idea that good news is bad news noting a lot of money on the sidelines.
While that is still true it might be a blood-bath come October and we’re going to explore why in this post.
There are many who are tucked away in money market funds and bank deposits.
- Recent data showed that combined assets there hit an all time high at $22.9 trillion.
- Bank deposits also grew in September to $17.3 trillion.
The Hunt for Red October
When they experience pressure and when the S&P breaks down, which it should, then we have the first problem at hand; forced selling across the S&P and Nasdaq.
We have positioned subscribers for this in a recent market note.
- Money is hiding out in Corporate credit and Money Market Funds.
Weighting by Sector
- The top 7 names in the S&P500 account for the majority of the gains YTD – take them out and we’re up less than 5% this year.
- The Nasdaq is almost identical.
- It’s my belief that this is driven in large part by AI but also, short-term options trading by retail traders. What we are seeing is similar to Gamestop and AMC from 2022: artificial price moves.
I released a recent short idea for subscribers to The LongVol Membership to capture this downside market potential as we head into the fall and end of year.
Housing & Real Estate
- Mortgage is at it’s lowest demand since 1995.
- Multi-family housing starts are rolling over
- Delinquency rates are at lows (in the US, not Canada).
- Average payment on a $500,000 mortgage is now $3,600/month from $2,000.
FOMC Meeting Notes
Higher for longer and unchanged as expected. Two episodes ago I mentioned that being a possibility considering deteriorating data.
Will be tough with higher rates and credit tightening which might become an issue for households and businesses.
Numbers came in much lower than expected dropping 25.5 points.
New orders dropped 26.2 to 10.2.
- Higher for longer with rate cuts not likely until mid to late 2024
- This will put pressure on households and business
The Hunt for Red October
I don’t believe in seasonality studies for companies/stocks; it’s too voodoo for me to get a sentiment read on the market at large.
But then again, my intention is not to gauge the market at large being I run an absolute return framework, but, it’s important to have a gauge.
- S&P500 trading down -5% or near $4,100s from here through October is a large theme for me to consider.
- Energy names should pullback for technical reasons only – great for me and clients to re-add into.
- Nivida is a problem if the market goes – that has set up a nice asymmetric trade that we have on.
- Housing data should continue to deteriorate.
The new TLV Membership changes take effect October 1 so make sure to subscribe if you want to be grandfathered in.
The Mastermind is just 3 weeks away.
If you want to ask questions for the next show on the AMA section at the end please use this form.
Next Lesson
Patience Pays and Stock Market Sentiment
GXO Logistics and Stock Market Sentiment
Ready for Take Off or Jet Lagged?
About the Author
Daniel Bustamante is the founder, managing partner, and CIO of Bustamante Capital L.L.C., a multi-strategy hedge fund management firm based in San Juan, Puerto Rico. He has over 10 years of experience in the financial industry, specializing in equities, futures, and event-driven trading strategies.
He is also the founder of TheLongVol.com, a blog and newsletter that shares his insights on his investing process, travel, and other private investments. He has been featured in Bloomberg, Arizona Business Journal, Business Insider, Yahoo! Finance, Forbes, Seeking Alpha, and other publications over his career on Wall Street.
1 Comment