Citi head of equity trading strategy says S&P at mid-4000s is not unreasonable

Key Concepts:

• Tariffs and their impact on growth and recession risks
• Credit market hedging and potential weakness
• Bond-equity correlation breakdown
• Semiconductor sector positioning and earnings risks
• Market sentiment and squeeze risk
• Impact of tariff headlines on market movement

1. Client Positioning and Market Sentiment:

• Most clients are positioned for downside risk.
• The market experienced a "wake-up call" with aggressive squeezes higher, indicating washed-out positioning and negative sentiment.
• Carter Braxton Worth's point about washed-out positioning is reinforced.

2. Tariff Impact and Recession Risks:

• The market is concerned about the knock-on effects of tariffs on future growth.
• Recession risks are not fully discounted by the market.
• The market has likely priced in the tariffs that have already been announced around the 4900 level on the S&P 500.

3. Credit Market Dynamics:

• Significant hedging activity has been observed in the credit market, particularly in HYG (high yield) puts at strikes in the mid to high 70s, indicating institutional investor concerns.
• The bond market experienced one of its biggest moves in 3-4 years.
• Upcoming bond auctions are crucial, with concerns about dollar-based trade potentially reducing demand for dollar-based bonds.

4. Bond-Equity Correlation:

• The breakdown of the bond-equity correlation raises awareness, as one side of the trade will need to be confirmed.
• The rates market is often considered to be "right," making the move in yields significant and requiring caution.

5. Semiconductor Sector Analysis:

• Semiconductors were previously a growth driver with heavy positioning but have pulled back almost 30%.
• Semiconductors are considered a leading indicator.
• Semiconductors were up about 3% today.
• Stability in the semiconductor sector is needed.
• Semiconductor stocks are at the "vortex" of position dynamics and earnings.
• Earnings will be a significant wild card.

6. Semiconductor Earnings Strategies:

• Companies have three choices regarding earnings:
  • Defend numbers with strong evidence.
  • "Kitchen sink" approach (lowering expectations significantly).
  • Punt and talk about uncertainty.
• Semiconductor companies are unlikely to successfully defend numbers due to tariff exposure, leading to potential earnings risk.

7. Market Response to Tariff Headlines:

• The intraday market change in response to a false headline about delaying tariffs by 90 days indicates significant squeeze risk and negative sentiment.
• The initial positive move hurt shorts, making them less confident in pressing their positions after subsequent tariff headlines.

8. Squeeze Risk and Sentiment:

• The market's reaction to tariff headlines reveals substantial squeeze risk due to negative sentiment.
• Shorts were negatively impacted, leading to a more balanced risk-reward assessment for shorting the market.

9. Data and Research Findings:

• HYG puts at various strikes kind of somewhere in the mid to high 70s.
• Semiconductors were down almost 8% last week.

10. Conclusion:

The market is currently characterized by negative sentiment, washed-out positioning, and concerns about the impact of tariffs on growth and potential recession risks. The credit market shows signs of hedging, and the breakdown of the bond-equity correlation adds to the uncertainty. The semiconductor sector, a former growth leader, faces significant earnings risks due to tariff exposure. Market reactions to tariff headlines highlight the potential for squeeze risk and the need for caution.