Whatever Happened To Sell in May?

Published on: May 15th, 2023

Markets are pricing a battle of degrees. Few fundamentally disagree with the broad direction of macroeconomic travel and this makes trading that much more difficult. Below Julian “takes the under” on growth and inflation and presents some ideas about how to manage risk in his more negative scenario.


  • TD
    Troy D.
    16 May 2023 @ 01:58
    Hi Julian, I enjoyed reading this report - much thanks. Just wondering whether, given recent momentum and price action in NDX and tech over the past few weeks plus, whether you may consider the possibility that this sector of US equities might be worth longing over the coming months. I appreciate your reasoning to suggest that remaining flat or short US equities going forward would be beneficial, however after listening to Tony Greer this morning on the DB, and with Raoul and others being very positive on tech for what seem very valid reasons, could you yourself be persuaded into a similar camp? I know next to nothing compared to yourself, but just like the look of the chart and can see what appears to be some momentum there. Cheers.
    • HM
      Harry M. | Real Vision
      17 May 2023 @ 12:12
      So tactically its possible. Fundamentally we dont really get why megacap equities have been so strong but perhaps the market thinks they are recession hedges? We noticed technical arguments which suggested possible counter intuitive long positions. Generally if the fundaments say down and the technicals say up, go with the technicals. Its amazing how often we can get a fundamental analysis wrong, or its just too early.
  • LM
    Lawrence M.
    16 May 2023 @ 03:47
    If someone could illustrate how they put on the SFRZ3Z4 Calendar Spread I'd appreciate it. I'm using Interactive brokers.
    • HM
      Harry M. | Real Vision
      17 May 2023 @ 12:08
      Oh boy! I use IB too and I think I should be given a cookie everytime I figure out how to do futures spreads. Took me ages to figure it out, but it involves finding the SOFR future (SOFR3?) and then finding the preferred spread. I think its quoted as negative. Still, I did manage to do it in the end, even if it was a frustrating morning.
    • JL
      J L.
      16 May 2023 @ 11:31
      type SOFR3 -> combinations -> futures spreads choose the desired dates for the legs, in this case the Z contracts expire in March of the following year, see here https://gyazo.com/5667a684c1ea4523629f717962f9e24e click OK or ADD the spread is quoted backwards at IB, i.e. DEC24 minus DEC23, so you will need to short the spread from +1.45ish Tread carefully, each contract is 250k, so 4 contracts will move 1000$ every 10 basis points change in the spread hope that helps
    • IB
      Ivan B.
      16 May 2023 @ 09:50
      I'm also trying to decode instructions...
  • JL
    J L.
    16 May 2023 @ 11:45
    It would be great you guys could also give some commentary on the 5Y-30Y steepener trade that has been mentioned before. I know it's not something you want to track in the portfolio but if you can dedicate it a line or two in the reports that would be appreciated by those of us who have something like that on. In particular how it relates to the SOFR steepener and which one is preferable at the moment. Many thanks as always
    • HM
      Harry M. | Real Vision
      17 May 2023 @ 12:10
      Well, its been working! One wonders if thats new flows entering the trade on the anticipation of a debt ceiling deal? But 5s30s has been working. 5s30s and the SOFR steepener are not directly comparable. There are scenarios where the SOFR spread might work and the 5s30s would not. So its about what risks you are prepared to take and what scenarios you are happy to dismiss. Happy to go a bit deeper to explain if necessary
  • JM
    John M.
    16 May 2023 @ 17:01
    Great insights as usual. In this instance, I am a little conflicted about having the bond/lower rate trades (TLT, IEF, GLD + EUR/GBP). I see the argument for the ~recession/weakening economy, however it seems like there are other forces at play here - i.e. "fungibility of rates" as Julian has talked about before, with higher than expected inflation in Europe and a strengthening CNY. Also, market expectations of rate cuts at odds with fed forecasts, seems there is a good chance the fed will try to hang onto credibility by keeping rates higher than markets expect? Is there any argument that could give me stronger conviction in these trades?
    • HM
      Harry M. | Real Vision
      17 May 2023 @ 12:03
      Something is weighing on bond yields. I suppose it might be the positioning, but that would also imply that most of the market is waiting for shoes to drop. Makes the lower rates trade quite vulnerable here even if it is right in the longer term.
    • JM
      John M.
      16 May 2023 @ 17:04
      Also, feels like tech is ignoring rates for the last ~2 months, any thoughts on why or if we are set up for correction?
  • JM
    Jake M.
    16 May 2023 @ 18:35
    Julian. Is the risk of debt ceiling bullish or bearish for your bond trade position? I see Raoul referred to 2011 debt ceiling situation where bond actually rallies. However, this seems counter-intuitive as it's the US government credit rating at risk. Can you explain the dynamics here?
    • HM
      Harry M. | Real Vision
      17 May 2023 @ 12:02
      I think JB sees it as net bullish. Right now the debt ceiling is keeping additional paper off the UST market. So on a flow of funds basis its macro stimulative, but also markets stimulative. When they reach a debt ceiling deal it will normalize UST flows, and that is net bearish for risk assets. You could say that it will be net bearish for bonds but unclear if bigger bond flows will push yields higher. It probably is a net steepener, so a flow negative for the long end but I doubt this is a decisive factor.
  • TK
    Theo K.
    17 May 2023 @ 20:05
    Thank you
  • PQ
    Pascal Q.
    12 June 2023 @ 05:49
    In June the SFRZ3Z4 has bounced quite well though a bit surprising SFRH4H5 is still depressed, i would have expected these 2 to move closely together, any idea what is going there?