Market Squeezes Higher as Russian-Ukraine Situation Worsens

The NASDAQ is +285, oil down 5.6% and yet news out of Russia is anything but conciliatory. This is typical of Wall Street, always seeking the short term trade in favor of longer term outlook. By judging today alone, one could never tell we were edging towards a World War or perhaps a recession. But bear in mind, it’s just 1 day.

Russia imposes sanctions on Hunter Biden, Hillary Clinton, and other US officials

Russia bans Canadian Prime Minister Justin Trudeau from entering the country

Into the close yesterday I bought TQQQ. I have since sold that position and instead opted to get long China into this bloodshed. I am in YINN — already +6% but still holding to see if it can jimmy higher into the close. There has been unprecedented carnage in China/HK, with shares of BABA leading the way lower — now below its IPO price. In the past few hours we have also seen a big reversal to the upside in the oils and other commodities, but I am not chasing those either. I am +83bps for the session, 80% cash, patiently waiting in the tall grass.

If you shorted VXX hoping to profit off peace in the Ukraine, your brains have been blown out today.

We started to see this yesterday with VXX outperforming UVXY, which should be impossible since the latter is supposed to be 2x VXX. Now we have a full fledged ramp in VXX, likely due to shenanigans in the derivatives markets and also to some extent trapped shorts. Whatever the reason, which I’m sure we’ll soon learn, this ETF is now broken and you should steer clear of it.

GS on VXX pic.twitter.com/wj7WWtt7jG

— zerohedge (@zerohedge) March 15, 2022

The PPI came in a bit less than expected so celebrations all around. In recent days we’ve seen a complete reversal of the commodity trade/panic and more importantly complete and utter destruction of Asian markets.

LONDON GAS OIL HAS COLLAPSED pic.twitter.com/cfM99GtWe4

— The_Real_Fly (@The_Real_Fly) March 15, 2022

This is all very deflationary, coupled with the fact that companies are missing earnings (see coup), one could begin to make the case for rates to come down and for bonds to rise. I’m presently long TLT.

We are of course reliant upon the war in Ukraine and it doesn’t help that Russia just accused the US of helping Ukraine develop biological and nuclear weapons. Nonetheless, it would seem probable that things might slow down a bit here and stocks catch their footing if only for a few days before resuming the inevitable downward slide.

I couldn’t get a handle on today’s tape because it was so different from what I’ve been accustomed to since the war fears began. Then it dawned on me: COVID IS BACK.

CHINA FACING RENEWED COVID SURGE
pic.twitter.com/o8IfeBfl1J

— The_Real_Fly (@The_Real_Fly) March 15, 2022

China Orders 51 Million Into Lockdown As COVID Numbers Spike
CHINA HAS LOCKED DOWN LANGFANG CITY NEAR BEIJING
FOXCONN SUSPENDS OUTPUT AT CHINA HQ, IPHONE SITE IN SHENZHEN

What else could explain the sudden deleterious drop in oil and other commodities than the market pricing in potential and calamitous total lockdown of China and perhaps much more?

For the past two years, China had at most 50-100 new daily covid cases. Now it's 5000, and it is shutting down key supply chain arteries that feed the US economy.

So bizarre

— zerohedge (@zerohedge) March 15, 2022

The last time we had people in China WELDED into their buildings toilet paper was the most sought after human luxury, just after Clorox bleach, and we all hoarded food and paper towels as if the end of the world was upon us. What greater way to punish Russia than to capsize our own economy and cause a massive spike in unemployment and suffering, paving the primrose path towards negative crude again. Why Evil VLAD would definitely stop the war then, forced to be poor and desolate. His whole army would soon rebel and acquiesce to the transgendered leadership at NATO, who could then offer some diversity training to all of the Z car driving modern Nazis, intent on subjugating their neighbors just to prevent some other actual Nazis from placing NATO missile batteries of peace within range of Moscow.

The vaccine stocks appear to be in play again, as the war seemingly fades into the background with the orchestra music blaring the latest jingle to cajole your 5 year old to get another booster shot.

The NASDAQ was down 250, but the carnage was far more severe — with SAAS stocks down another staggering 5.7%. At this point it’s fair to call this a crash, tech stocks on the whole off by almost 40% YTD. For the most part during 2022, oil and commodity stocks have been safe havens. Not today pal, as oil got lifted off its feet and smashed down into the pavement cracking its head all over the earth — off by 7%+ for the session. The action in many of the hot trading stocks, especially uranium, absolutely destroyed. UEC was off by 17.5%.

I had entered the day 20% short via TZA/UVXY and the rest long a variety of commodity stocks — all buried in deep losses — setting me back by 5.3% for the day. I wanted to hold, but did not allow myself the luxury. I bit the bullet, ate the losses, in order to slow things down. Something is of course wrong. We have the 10yr soaring to 2.14%, +14bps, beat downs in junk and high grade credits, and overall gloom set upon every industry but old man stocks.

Into the close, I sold out from my inverses, took a TQQQ position to pair with a handful of commodity stocks and kept 75% cash just to torment me during tomorrow’s trade. I hated the day and never feel good after a day like this. I was never in it — down 3% at the open and kept diving lower all day. I made two trades, both losses, and so I called it a day. I could’ve tried to trade — but if I was off I risked a far worse day than -5.3%. It was grim all around — but with this sort of pathetic surrendering of the market I feel it is also constructive for a mean reversion trade.

The Stocklabs long dated algorithms flagged oversold today.

No signal can supersede the absoluteness of panic during a time of war, especially world war. I do not pretend to have all the answers. I can tell you, however, the commodity trade was offered a severe blow today in a very atypical manner and although I still hold some — I feel the trade needs some time to cure itself from today’s damage. The likely trade here is to fade tomorrow’s open and if commodities dive again — start buying with some seriousness.

On the issue of the VIX:

1 x VIX (VXX) gains were nearly 2x the 2x VIX product UVXY. These ETFs are designed to break and it looks like something is very fishy with them now.

For the past 10 weeks I’ve trade with precision and turned a -10% into +17% on a YTD basis. That all changed today with a boggering for the ages, doomed for -5.3% due to a confluence of events that had bee heavily long UVXY and commodities into a broken tape. The net result was sharply lower stocks and my hedge not hedging. I ended up closing out my UVXY position just prior to its lift the past hour. I swapped it for SOXS.

My gut tells me I should hold the commodity stocks — since the fundamental stories still persist and they should bounce. However, at -5.3% for the session, I lost my right to doing anything at all, short of maybe a quick day trade.

I will likely take one some other positions towards the end of the day — but none too much. I am now just up 0.85% for the month of March and would like to preserve my gains to the best of my abilities, in a tape filled with tricks and traps. I know, the move lower in WTI was somewhat predictable. However, and this goes without saying, all I was looking for was one more day.

The bear case for commodities is actually quite bearish for the overall market. It would imply demand destruction and recession. Same thing happened in 2008. Oil went up a lot alongside every other commodity, until recession hit and unemployment soared and the whole complex collapsed.

Above are two indexes inside Stocklabs, one focused on just energy and the other a representation of the whole complex.

Our 6 month algorithm is now oversold inside Stocklabs for the oils, a stark difference to what we saw on Friday where 88% of stocks were ranked bullish.

These routs are always caused by crowded trades and people stampeding for the exits. Often times the masses are wrong, leading to great trades for those buying into weakness. The commodity trade, however, is reliant upon the actual prices of the commodity and must of that is based on economic realities — not some people on Reddit crowding into a trade for meme value.

WTI is now off by 8%, Dow +300 and the German DAX +2.6%.

Some perspective, the last time the oil sector was down over 6% in a single day was during the halcyon days of negative crude in peak COVID panic of 2020. The next largest drop was Dec. 2021.

I’m not selling yet.

We have a peace in Ukraine trade happening without any discernible peace. Nevertheless, markets look like they want higher, with exception to tech, which is affected by the Shenzhen COVID lockdowns. The price of WTI is -5%, Copper -2.2% and the US 10yr is soaring to 2.08%, up more than 6bps.

Over in Europe the German DAX is up more than 2%.

The assumption seems to be at some point Zelensky will acquiesce to Russian demands. And if so, I am sure markets will rise. But what if some of the doomsayers are right about Putin’s long term goals? What if his next step is to target other countries? The immediate hope trade is a peace deal. We attempt to price this in at least twice per week and almost always give up the gains after realizing there will be no peace deal and Russia is only increasing the ferocity of their assault.

I suspect this will fade too; however, I am uncertain if commodities will recover today, as their holes are fairly deep and the trade is crowded with hot money.

NASDAQ futs turned down 25 — profound weakness found in China tech stocks which all look like zeroes.

In case you wondered what happened to COVID, it’s making a comeback in China with over 3,000 reported cases yesterday forcing China to lockdown the tech hub city of Shenzhen thru 3/20, a move that will only make supply chain issues worse, and it should be noted there are nearly 18 million residents in the city.

In Ukraine, Russian missile strikes destroyed a NATO weapons training and transfer center, killing more than 100 according to Russia. Who knows, they’re all lying. But one thing is for sure, this is an escalation against NATO weapons spilling into the country. Russia has warned that any convoy of ships with weapons to Ukraine will be viewed as legitimate military targets. They have no choice, and if you’re a war hawk in the US — this is how you start WW3. Get the Poles to send weapons and have Russia attack the Poles and then trigger Article 5 and voila.

Peace talks between Russia and Ukraine are expected to continue Monday, so headlines out of that meeting might greatly affect futures.

Some other noteworthy developments

TURKEY WILL NOT JOIN IN SANCTIONS AGAINST RUSSIA, JOINING MEXICO AND BRAZIL

RUSSIA SAYS THEY WILL INCREASE COOPERATION WITH CHINA

WESTERN SANCTIONS HAVE FROZEN MORE THAN $300B IN RUSSIAN CASH AND GOLD, CAUSING RUSSIA TO PAY DEBT IN RUBLES UNTIL ASSETS ARE UNFROZEN

RUSSIA IS TARGETING FOREIGN MERCENARIES IN UKRAINE

Maybe this is the road paved by Putin, drag both Syria and Iran into the conflict to keep America busy. Or, perhaps these reports that 6 missiles hitting a US consulate in Erbil Iraq are inaccurate? We do not know for sure yet. Either way, this is an escalation.

Reports of multiple Iranian Fateh-110 short-range ballistic missiles striking the US base in Erbil, Iraq

FATAH 110 MISSILES EN ROUTE FROM TABRIZ, IRAN TOWARDS US CONSULATE IN ERBIL IRAQ
pic.twitter.com/wad9T8MEEA

— The_Real_Fly (@The_Real_Fly) March 12, 2022

MULTIPLE LONG RANGE MISSILES FIRED AT US CONSULATE IN ERBIL, IRAQ

pic.twitter.com/YwGIVxCvmF

— The_Real_Fly (@The_Real_Fly) March 12, 2022

People believe this strike was in response to two Iranian officers killed last week by an Israeli strike in Damascus.

UPDATES:

U.S. OFFICIAL CONFIRMS NO U.S. MILITARY CASUALTIES FOLLOWING ATTACK IN ERBIL – REUTERS

“Iran reports that this is revenge for the elimination of two Iranian officers in Syria by Israeli Air Force forces, and that Erbil launched a missile strike on the headquarters of the Israeli Mossad.”

US CONSULATE IN IRAQ HIT WITH WHAT IS BELIEVED TO BE IRANIAN MISSILESpic.twitter.com/3T3HEYLtvs

— The_Real_Fly (@The_Real_Fly) March 12, 2022

geolocation of a video showing missiles launched from Khasabad https://t.co/vChFIzfNcX https://t.co/gShLvpArI0 pic.twitter.com/iDWucRCdeM

— Samir (@obretix) March 12, 2022