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(Free) Rotation Trade Underway. Looming Liquidity Crunch Risk Exists
One of our favorite trading rules is in play
Danny Riley
June 08, 2023
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Our View
When will the stock market sell off again? Well there are a few major events coming up that could change the tide.
This Fry-day’s option expiration is one, but next week is a quadruple header. Now that President Biden has secured his budget funding, the Administration has ordered the US Treasury to offer up to $1 trillion in new bonds to quickly refill its coffers. This in itself will cause a liquidity problem. I think at least part of the recent weakness is tied to this.
“JPMorgan strategist Nikolaos Panigirtzoglou estimates a flood of Treasuries will compound the effect of QT on stocks and bonds, knocking almost 5% off their combined performance this year. Citigroup macro strategists offer a similar calculus, showing a median drop of 5.4% in the S&P 500 over two months could follow a liquidity drawdown of such magnitude, and a 37 basis-point jolt for high-yield credit spreads.
The sales, set to begin Monday, will rumble through every asset class as they claim an already shrinking supply of money: JPMorgan estimates a broad measure of liquidity will fall $1.1 trillion from about $25 trillion at the start of 2023.”
Next week, Tuesday is the dreaded CPI number and the first day of the Fed’s two-day meeting. Wednesday is the PPI number and the Fed's rate decision and FRY-day is the all important June Triple Witching.
In a nutshell, there is an overload of economic and headline activity coming next week.
Our Lean — Danny’s Trade & A Rule Favorite
This is Danny Riley’s personal trading plan for the day.
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MiM and Daily Recap
The ES traded up to 4296.25 on Globex and opened Wednesday's regular session at 4292.75. The ES traded 4191.75 and then like it does most days, it ripped up to 4304.75 and pulled back down to the 4278 level at 10:53. The ES short-covered up to the VWAP at 4290.50 at 11:46 and then did a low step down to 4269.25 at 1:44. After the low, the ES rallied up to 4282.25 at 2:25 and pulled back down to a higher low at 4271 and traded back up to the 4281 level at 3:23 as the early imbalance showed $537 million to buy.
The ES traded 4274 on as the 3:50 cash imbalance showed $577 million to buy and traded 4274.50 at 4:00. After 4:00, the ES traded in a 5-point range and settled at 4273.25 on the 5:00 futures close, down 15.50 points or 0.35% on the day.
In the end, the NQ weakness dominated the ES. In terms of the ES's overall tone, it was weak but it also held better. In terms of the ES’s overall trade, volume was and has been tracking on the high side at 1.848 million contracts traded.
Technical Edge
NYSE Breadth: 64% Upside Volume
Advance/Decline: 65% Advance
VIX: ~$14
The Nasdaq fell 1.3% on Wednesday, as mega-cap tech and semiconductors finally took a breather. The S&P dipped 0.4%, but the Dow gained and Russell 2000 ripped, climbing 0.3% and 1.8%, respectively.
There is clear rotation going on — at the sector and at the index level.
Put another way, there is money rotating out of tech (specifically big-cap tech) and into small caps, but also biotech, financials, industrials and materials. The question is — as it always is with rotations — how long will it last?
If tech can avoid puking lower and the rotation remains strong, then this is very bullish price action. But if the rotation lacks follow-through, it can quickly turn into chop and we’ll have to again rely on mega-cap tech to prop up the indices.
We have a lot to cover.
IWM / RUT / RTY
IWM Daily
A big burst over the $180 level and the 200-day moving average.
The IWM / RUT / RTY is now into the 61.8% and moving explosively. If it can continue higher, $192-$193 is next, followed by $196 and ~$200.
On the downside, you want to see it hold $180 and the 10-ema.
S&P 500 — ES
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Open Positions
Bold are the trades with recent updates.
Italics show means the trade is closed.
Any positions that get down to ¼ or less (AKA runners) are removed from the list below and left up to you to manage. My only suggestion would be break-even (B/E) or better stops.
** = previously mentioned trade setup we are stalking.
Down to Runners in GE, CAH, LLY, ABBV, AAPL, MCD & BRK.B. Now Add META, AVGO, UBER, CRM and AMZN.
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Go-To Watchlist
Feel free to build your own trades off these relative strength leaders
Relative strength leaders →
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LLY, CAH
Relative weakness leaders →
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Economic Calendar
