Fast-money quants known as commodity trading advisers have been amassing a big short bet since May. JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou estimates that they are sitting on a $150 billion short bond position that they may unwind in a rally.

The flip side of the extreme shift is that negative surprises can have an outsize influence. In March, banking turmoil caused equities to sink and Treasuries to rally, forcing commodity trading advisers to unwind $200 billion of bonds in the span of a few days, according to JPMorgan Chase & Co. A growth scare could reprise this episode.

Nevertheless, it will be hard to stop the market momentum. Strategists have revised upwards their S&P 500 targets and economists have softened their dire predictions. Some of the biggest downside risks threatening the economy — inflation rising to a four-decade high, a looming recession — have since faded.

“It would require a massive rally in bonds that would probably only occur with some sort of growth scare from a data shock,” said Charlie McElligott, cross-asset strategist at Nomura Securities International. “We have seen economic growth data hold, labor staying firm, and even US housing recovering.” 

Eoin Treacy's view

The first half of the year delivered a storming rally on Wall Street, from deep oversold conditions. Despite interest rates ramping higher, long-dated bond yields have been static with the 4% level continuing to hold. Stocks are rallying in anticipation of rates peaking and bond yields are static as inflationary pressures subside. It seems to me that overweighting when trends are already overextended is risky.

When downside exposure is on sale, it is not a bad idea to buy some. I remain wedded to my conclusion that quantitative easing results in deflationary fears. Inflation is coming down and I don’t think it will stop until we see how much money is printed and how long it is left in the system. That is why I remain short stocks and long bonds.

The Nasdaq-100 reversed yesterday’s decline to finish close to unchanged for the three-day roundtrip. The trend of small reactions, one above another, remains intact.

The iShares 20+ Year Treasury Bond ETF is testing the lower side of its range and the downward bias is still intact. A clear upward dynamic will be required to confirm support in this area.

These charts demonstrate that my positioning is at best early and at worst wrong. That’s the risk of acting before clear evidence a trend has broken.

This email from a long-term subscriber may also be of interest.

“I know of one especially astute, erudite and practical student of the market who suggested over a year ago that the Fed would be one and done in its interest rate hike program. I wonder how that analyst reflects on that position? 
Always enjoy and value the FullerTreacy service.”

Thank you for your kind words and patronage of the service. I was wrong, and as soon as I realised I was wrong, I began shorting the technology sector. That began in March 2022. I was also clear in pointing out the similarities between the tech mania in 1999 and the peak of the cloud computing sector at that time.

I did not think the economy was strong enough to absorb so many rate hikes. I totally underestimated the sheer volume of cash that had built up in consumer and corporate balance sheets during the pandemic.

The thing to remember now is that high rates erode those savings and the process is still underway. Just because a recession has not occurred does not mean it has been avoided. As I have said repeatedly, the time to be most alert to downside risk is when the yield curve spread begins to trend higher following an inversion.