My feeling has always been that liquidity is not good enough but sell side will probably tell you otherwise and it’s true that you can get quotes on euro stoxx as well as SX7E (banks sector) div futures options. But never looked at volatility pricing etc really so won’t give you any worthwhile insight.
As a side note I’d add that Div futures, especially longer maturities, tend to be heavily influenced by structured equity products desks hedging activity. So to be handled with extra care as they sometimes over/under react to fundamental drivers.
agree, wouldn’t trade options on div futures. for context 2023 div futures trade ~$120m/day…ok but not flowing like water.
as an aside, but important one, i misunderstood how eurostoxx dividend futures are structured and assumed they were like US div futures and paid out when realized. this is not the case and they are paid out of 2022 earnings, so 2023 less interesting. i need to update the post to reflect this info…away from PC. sorry for any confusion.
the notion that the recent stock rally from the bottom bears resemblence to the summer rally is not a sufficient reason for expecting a repeat of the last time. market seldom offers the same opportunity twice. if anything a re-test of the june low, as we have been stuck here for the past 2 weeks, is likely to see it break to the downside as the support level at 3600 is now weaker. while there is likely to be wild short term rallies due to bearish positioning and short covering, i'd be very cautious chasing such rallies unless there is significant and meaningful change in market narrative, e.g. some clear signs of inflation coming down substantially and fed signalling pivoting intent.
thanks. sorry if i gave you the impression that the summer scenario was a repeat. think i suggested history rhymes rather than repeats. my point was a hot cpi and inflation concern is not new…in fact we had similar concerns this summer and we had bear market rally anyway. there was no explicit fed communication of pivot, but market ran w/ it anyway. what i suggested on 9/30 in Bear Bounce was the pre-conditions we’re in place for a rally/squeeze. in fact in that note i said who knows what narrative the market will hang on to to justify the price move.
of course just bc conditions are in place doesn’t mean it will happen. that said, we have tried a few times in the last 10 trading days…so i view the call as a bit of a draw at this point. but it agree…it has a shot clock…if it doesn’t take shape then we move on and let calls or call spreads expire worthless…the cost of insurance.
thank you john. appreciate the feedback and recognition. i promise you i wont be right 100% of the time…but will be more right than wrong and will get the big things mostly right.
thanks for your insights which i always appreciated. We've actually already had several big rallies in the past 10 days, but they were quickly faded. it is very difficult to trade such rallies unless one can be extremely nimble. Instead of getting chopped up in chasing these technically driven rallies, i'd prefer to long when equity prices are more aligned with fundamentals, as they still seem very expensive relative to rates and macroeconomic conditions. From a technical standpoint, a perfect long entry point would have been the first test of 200 wma at 3575 when es futures opened last Sunday, very strong support there and we rallied 200 points off that. Now I am not at all interested in longs around the 3600 level, tested too many times and very weak now.
ok, again i’m not suggesting anyone go long or think this is some durable bull market. my post on 9/30 was focused on pre-conditions for bear market rallies after a sharp move lower from mid Aug. i actually don’t think our views differ that much…if at all
thanks RF. appreciate the feedback. maybe a little…but as time passes and we don’t get follow thru on up moves i’d be lying if i said it makes me more confident. i’ve held calls and call spreads against a defensive book and it’s an amount of premium i’m willing to lose if it doesn’t play out. can’t win them all
i z-score each item individual and then average those scores. i take the averaged score at the start of earnings season and evaluation market performance in the first 3wks of earnings season assuming that carries bulk of market opinion about the full season.
thanks philip. properly calibrating the setup into earnings season is something i've long thought about. a light bulb went off and i came up with this measure which i think does a good job of capturing the mood entering earnings season. of course if #s are bad enough then it won't matter, but my sense is 'inline' numbers with already marked down expectations will probably be good enough for now.
CTA = commodity trading advisor. it represents trend following hedge funds that trade futures based on price moving averages, trends, etc. they are currently short equities in decent size...and near max short. as prices stop falling and if they were to rise a bit that short position would be covered...and then higher prices brings out more buyers from this group.
Any views on the SPX div futs? SDAZ3 looks pretty rich relative to SDAZ4 & SDAZ5. Imo could be a better play than looking for the growth slowdown to drive duration higher given hike & hold seems in play. cheers
yes, see the comment below. i misunderstood europe divs which payout based on last year's earnings. US divs are more implied/realized and apparently incorrectly assumed they were similar.
2024 divs imply -12% growth from 2023. frankly i think that is also a short...but far less compelling then i originally and mistakenly assumed.
i'm reviewing/confirming what i was told and will update the trade
Thanks for the work. What is your view on bonds? Looks like 2/10 spread can continue to invert more from here but absolute level on 10yr above 4 is also looking quite fatigued.
i tend to agree. think there is value in 10yr at 4%…but coming from someone who thought there was value in 3.25-3.5 range. i’ve been adding muni closed end fund that also trades at 15% discount…near lows other than most extreme 2008 periods. not a massive position but building and buying dips.
Interesting. I've never bought munis before but I've certainly heard good things. A closed end fund, so that doesn't mature does it? The fund is constantly buying new munis?
A quick remark though on Sx5e dividends. If you want to play a correction in Eps, then it’s not dedz3 I’d short, but dedz4.
Dedz3 is a future on dividends paid in 2023 out of 2022 eps, which we already have rather goid visibility on. Q3 will be ok (cf no big pre-announcements), so, bar an horrible Q4, 2022 eps will be ok.
So imho the only way dedz3 really corrects is a bet on a wave of windfall taxes from gvt on banks/energy/utility names. This may happen, but is a totally different bet from your fundamentally bearish european equities eps trajectory.
Sharing your view on eps, I’d sell dedz4, as to me the main risk is on 2023 eps.
thank you. i will review this as i thought dividend futures were based on realized dividends paid during the year (maybe just US method). will look at 2024 and modify trade accordingly. thanks for flagging
Thanks Mr. Blonde.
Mike Wilson seems to have the same targets as you have.
great minds think alike i suppose
Never traded options on div futures.
My feeling has always been that liquidity is not good enough but sell side will probably tell you otherwise and it’s true that you can get quotes on euro stoxx as well as SX7E (banks sector) div futures options. But never looked at volatility pricing etc really so won’t give you any worthwhile insight.
As a side note I’d add that Div futures, especially longer maturities, tend to be heavily influenced by structured equity products desks hedging activity. So to be handled with extra care as they sometimes over/under react to fundamental drivers.
agree, wouldn’t trade options on div futures. for context 2023 div futures trade ~$120m/day…ok but not flowing like water.
as an aside, but important one, i misunderstood how eurostoxx dividend futures are structured and assumed they were like US div futures and paid out when realized. this is not the case and they are paid out of 2022 earnings, so 2023 less interesting. i need to update the post to reflect this info…away from PC. sorry for any confusion.
the notion that the recent stock rally from the bottom bears resemblence to the summer rally is not a sufficient reason for expecting a repeat of the last time. market seldom offers the same opportunity twice. if anything a re-test of the june low, as we have been stuck here for the past 2 weeks, is likely to see it break to the downside as the support level at 3600 is now weaker. while there is likely to be wild short term rallies due to bearish positioning and short covering, i'd be very cautious chasing such rallies unless there is significant and meaningful change in market narrative, e.g. some clear signs of inflation coming down substantially and fed signalling pivoting intent.
thanks. sorry if i gave you the impression that the summer scenario was a repeat. think i suggested history rhymes rather than repeats. my point was a hot cpi and inflation concern is not new…in fact we had similar concerns this summer and we had bear market rally anyway. there was no explicit fed communication of pivot, but market ran w/ it anyway. what i suggested on 9/30 in Bear Bounce was the pre-conditions we’re in place for a rally/squeeze. in fact in that note i said who knows what narrative the market will hang on to to justify the price move.
of course just bc conditions are in place doesn’t mean it will happen. that said, we have tried a few times in the last 10 trading days…so i view the call as a bit of a draw at this point. but it agree…it has a shot clock…if it doesn’t take shape then we move on and let calls or call spreads expire worthless…the cost of insurance.
Thanks for your diligent and honest response. This is what sets you different from others.
thank you john. appreciate the feedback and recognition. i promise you i wont be right 100% of the time…but will be more right than wrong and will get the big things mostly right.
thanks for your insights which i always appreciated. We've actually already had several big rallies in the past 10 days, but they were quickly faded. it is very difficult to trade such rallies unless one can be extremely nimble. Instead of getting chopped up in chasing these technically driven rallies, i'd prefer to long when equity prices are more aligned with fundamentals, as they still seem very expensive relative to rates and macroeconomic conditions. From a technical standpoint, a perfect long entry point would have been the first test of 200 wma at 3575 when es futures opened last Sunday, very strong support there and we rallied 200 points off that. Now I am not at all interested in longs around the 3600 level, tested too many times and very weak now.
ok, again i’m not suggesting anyone go long or think this is some durable bull market. my post on 9/30 was focused on pre-conditions for bear market rallies after a sharp move lower from mid Aug. i actually don’t think our views differ that much…if at all
Your top shelf macro analysis and thoughts are consistent must reads. Bravo.
Question: Is there any bounce left in this current ( residual) bear rally?
Thanking you in advance for any response.
thanks RF. appreciate the feedback. maybe a little…but as time passes and we don’t get follow thru on up moves i’d be lying if i said it makes me more confident. i’ve held calls and call spreads against a defensive book and it’s an amount of premium i’m willing to lose if it doesn’t play out. can’t win them all
this is cool - can you provide color on how you construct ESSS? is it the average of the 1m zscores for the 3 listed series?
i z-score each item individual and then average those scores. i take the averaged score at the start of earnings season and evaluation market performance in the first 3wks of earnings season assuming that carries bulk of market opinion about the full season.
thanks, any hints on what you are using for revisions? trying to replicate this study for myself
using FY2 estimate revision breadth but will also measure/consider quarterly revisions for the season in focus
Thanks Mr B, love the ESSS. I’ve never seen data complied this way before. Bravo
thanks philip. properly calibrating the setup into earnings season is something i've long thought about. a light bulb went off and i came up with this measure which i think does a good job of capturing the mood entering earnings season. of course if #s are bad enough then it won't matter, but my sense is 'inline' numbers with already marked down expectations will probably be good enough for now.
what does CTA flows mean ?
CTA = commodity trading advisor. it represents trend following hedge funds that trade futures based on price moving averages, trends, etc. they are currently short equities in decent size...and near max short. as prices stop falling and if they were to rise a bit that short position would be covered...and then higher prices brings out more buyers from this group.
thanks!
Thank you. :)
Any views on the SPX div futs? SDAZ3 looks pretty rich relative to SDAZ4 & SDAZ5. Imo could be a better play than looking for the growth slowdown to drive duration higher given hike & hold seems in play. cheers
yes, see the comment below. i misunderstood europe divs which payout based on last year's earnings. US divs are more implied/realized and apparently incorrectly assumed they were similar.
2024 divs imply -12% growth from 2023. frankly i think that is also a short...but far less compelling then i originally and mistakenly assumed.
i'm reviewing/confirming what i was told and will update the trade
very sorry for the confusion.
makes sense. Thanks for the update & no worries!
Thanks Mr Blonde. Chapeau on the squeeze call.
Is there another way to express the short Europe thesis without futures? FEZ?
Thanks for the work. What is your view on bonds? Looks like 2/10 spread can continue to invert more from here but absolute level on 10yr above 4 is also looking quite fatigued.
i tend to agree. think there is value in 10yr at 4%…but coming from someone who thought there was value in 3.25-3.5 range. i’ve been adding muni closed end fund that also trades at 15% discount…near lows other than most extreme 2008 periods. not a massive position but building and buying dips.
Interesting. I've never bought munis before but I've certainly heard good things. A closed end fund, so that doesn't mature does it? The fund is constantly buying new munis?
correct it’s like an ETF typically with a fixed duration…so doesn’t naturally mature or roll off.
Thanks for your insightful work, as usual.
A quick remark though on Sx5e dividends. If you want to play a correction in Eps, then it’s not dedz3 I’d short, but dedz4.
Dedz3 is a future on dividends paid in 2023 out of 2022 eps, which we already have rather goid visibility on. Q3 will be ok (cf no big pre-announcements), so, bar an horrible Q4, 2022 eps will be ok.
So imho the only way dedz3 really corrects is a bet on a wave of windfall taxes from gvt on banks/energy/utility names. This may happen, but is a totally different bet from your fundamentally bearish european equities eps trajectory.
Sharing your view on eps, I’d sell dedz4, as to me the main risk is on 2023 eps.
thank you. i will review this as i thought dividend futures were based on realized dividends paid during the year (maybe just US method). will look at 2024 and modify trade accordingly. thanks for flagging
This is really useful, many thanks.