YCUP
It was an interesting week with large moves in indices: high volatility and fear on Monday as the Nikkei ticked down overnight over 10%. Algo’s, momentum traders, scripts, line drawers, etc followed the numbers and sold everything down. Buying the dippers or ‘smart’ money waited a bit and possibly took advantage of the so called Yen Carry Unwinding Panic (YCUP) and brought the US stock index back to unch for the week. What is YCUP? Just read those other 4592 posts online about it. Anyway, in 5 years no one will remember the YCUP downticks of 2024.
momentum: I sell because you sell
YCUP is/was a classic example of a sudden change of course of a large flow of money that causes market momentum to change and all stocks worldwide to collapse. It does not matter anymore what the fundamentals are of a company are at that time, it just gets brainlessly sold. These days, lots of people only look for day trades (this generally backfires on average) and focus at correlations and betas and not at medium/long term valuations. If stock A and B plunge, we need to sell C. This relatively value trading makes sense if done well, cause there is money in correlations and spread trading. But this is generally not the money a person sitting at home can capitalize easily on. Its a professional game, all about speed, information, accuracy, models and capital.
Relative value (good leg & not so good Leg)
If you do not know which leg is best, cause you do not understand the fundamentals and reasonable pricing, you buy 1 leg and sell 1 leg. One of them is probably not so great, but the spread makes and relative value can work out for professionals (solid trading firms) who know what they are doing.
Play a game where you can win
In these kind of situations, where people lose track of fundamentals, the best opportunities generally arise in picking up (high) quality stocks that are punished with the rest. That’s what we focus on in the newsletter. We recently took a large position in a stock that has been dumped heavily on low volume and now is a potential 2-3 bagger after very strong earnings and a outlook raise! Want to find out?
Upcoming week
High volatility might remain for a few days/weeks and we might get another YCUP round. As you can see below the VIX is still at elevated levels versus a few weeks back.
The S&P has been trading in a wide range over the last few weeks and higher realized can be expected than when the S&P was making all time highs bidaily. Still, as I have mentioned before, so far the index downticks have just been a mild correction.
An important figure to watch next week is the US CPI inflation figure over July, published on Wednesday.. There is a significant change (around 50%) for a 50 bps rate cut in September. A solid deviation from the CPI expectation can move this chance quite a bit around. There is a 2.9% CPI and a 3.2% Core CPI year on year expected. This CPI print will be closely watched and can easily move the S&P 1-3% on that day.
