Drones, The Fed, and Other Conspiracies
It's conspiracies all the way down this week...
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This week’s theme is conspiracy theories and things that aren’t real. For that, we’ll need to talk about drones, the Fed, and market corrections.
But first, let’s look at the state of the markets as we head into the week.
Bitcoin caught a nice bid this week, culminating with a very nice pump Sunday night.
Eth and Sol up and down small on the week, respectively, with Bitcoin dominance continuing to outperform.
It was a relatively sedated week for stocks, with NDX finishing up around 1%, SPX down 50bps and RTY lagging substantially, down a little over 3%.
Looking at things post-election, it’s interesting to see that small caps have entirely given up their outperformance, and the Nasdaq has resumed its rightful place as the GOAI (greatest of all indexes).
The picture is even clearer YTD as we head into the end of 2024.
A Closer Look At Russel
The Russel has been the gift that keeps on not being given this year, but I think we are looking at a good setup here to long.
First of all, we are heading into the best 4 week period of seasonality of the year.
Second, it just bounced nicely off the 50-day EMA.
Third, it just gave up most of Trump's gains. From outperformer to laggard, the Russel 2000 story.
And all of this is happening against a backdrop of ever-weakening market breadth. In fact, we had an 8-day streak of negative breadth that has only been matched a handful of times in recent history.
This is leading commentators to call for a market crash. “US Stocks are expensive, especially the S&P500. This only ends one way…” yadda yadda yadda.
What if it ends in another rotation trade? If Mag7/large caps start to crack (or even just lag!) a bit, investors will look around, realize that Europe still sucks, China is uninvestable for a multitude of reasons, but there are these small-cap US stocks that outperformed after the last Trump win…
I bought Russel calls last week, and I might add more on the open. I’ve been tilting small-cap. Let’s see how long they can make me regret it.
Quick aside: I am super bullish on tech in the longterm. It might be a bit overheated here, or it might now. I think an NDX and RTY barbell is looking pretty good right now.
The SUV-Sized Drone In The Room
Some peculiar things have been happening in the air above US military bases both abroad and at home.
This is not a conspiracy publication; it’s a trading publication, so I will try to stick very closely to the facts and their implications.
Still, most tail-risk events start as conspiracies before they become mainstream (COVID, Trump's 2016 victory, the Russian invasion, and so on).
A couple months back, there were small news stories about drones over United States military bases. That story started escalating about a month ago with drones being spotted by civilians above US military bases in the United Kingdom.
However, it only really started to gain mainstream attention this week.
For those who question the existence or significance of these drones, we obtained definitive proof on Friday when an international airport in New York had to shut down for an hour because of drone activity.
So what are they?
Well, they have been described as roughly similar to SUVs in size, and in all the photos, they have the red and green running lights required by the FAA.
The running lights, combined with the size and logistical challenges behind launching and then retrieving them every night (they only fly at night) really takes a lot of foreign and low-profile possibilities off the table. In other words, they seem unlikely to belong to private groups, Russia, or China.
That leaves the United States Government.
So, the United States Government is operating a large number of drones domestically in the United States, and lying about it.
As a trader, this screams “tail risk” to me. Could it be an exercise? Sure. But if it isn’t, are they flying drones for legitimate purposes like detecting a threat?
That’s what people are saying, including Joe Rogan on Sunday.
If the narrative that the United States government is looking for a WMD or other sizable threat takes hold, it won’t matter if it’s true or not. People will get spooked. And then there’s the chance that the narrative is true…
If you’re going to panic, panic early.
I don’t want to fear monger but downside protection is cheap. I put on a mix of the Jan 31st 5900/6000 SPX puts, and I’ll continue to evaluate.
To be clear—I think there is a tiny chance it’s serious. But, even very small chances need to be considered if the price is right.
The Fed, GDP, and Other Conspiracies
This week, we get GDP numbers and the Fed decision. The current estimate for GDP is 2.8%, a solid rate.
The Fed’s decision is already pretty much known by markets which are pricing in a ~97% chance of a 25bps cut. So the decision itself is unlikely to be consequential, but the dot plots and guidance will be.
We saw a tick-up in PPI last week.
It will be very interesting to see how the Fed responds to the latest slate of inflation data.
Will they poor cold water on the market’s expectations for three rate cuts in the next 12 months?
Let’s watch.
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Good luck out there!
Disclaimer: The information provided here is for general informational purposes only. It is not intended as financial advice. I am not a financial advisor, nor am I qualified to provide financial guidance. Please consult with a professional financial advisor before making any investment decisions. This content is shared from my personal perspective and experience only, and should not be considered professional financial investment advice. Make your own informed decisions and do not rely solely on the information presented here. The information is presented for educational reasons only. Investment positions listed in the newsletter may be exited or adjusted without notice.