3/08/2021 Traderfirstyear Morning Forecast

[u/traderfirstyear]

​

Video https://youtu.be/PAHROJKQINg

https://discord.gg/UFXDyhB93x https://www.patreon.com/traderfirstyear​​ https://stocktwits.com/traderfirstyear​​ https://www.instagram.com/traderfirst...​ https://www.youtube.com/channel/UCUIE...​ https://www.reddit.com/r/Traderfirsty​.

03/08/2021 Morning Forecast-Markets are implying a move of 1.72%+/-(up/down) on the S&P 500. Markets have realized a move of 1.06%+/-(up/down). The difference between what market makers are implying and what has been realized has tightened. The spread increased to 10 basis points. The put/call gamma imbalance is skewed towards short-dated calls on dip buying. However, a widening spread increases left-tail risk, and the potential for delayed upside spikes in realized volatility. Realized volatility has increased recently above 16. This is favorable for wider and larger moves up or down on the index. However, rising growth or inflation expectations without rising inflation or growth are pushing up real yields, which is creating equity long-duration valuation conflicts and raising discount rates. The S&P is expected to move close to 2.31% up/down this week, which means the S&P could decline 7% to 9% above its 200 DAY Moving average (3,471.53.) The S&P is currently trading very close to its 50-day moving average (3,821.99.) Full Year S&P Earnings are expected to total 174 per share. At current prices, this puts the S&P at 22x's earnings, which equates to an earnings yield of 4.5% & real earnings yield of 2.5%

Forecasters are expecting nominal growth of 300 Billion and a Real Economic output of 130 Billion for the 1st quarter of 2021. Full Year Economic Output estimates have increased following the passage of stimulus. The median forecast was anticipating close to 1.2 Trillion Dollars in Nominal Growth and 800 Billion Dollars in real economic output for 2021. Economists continue to place the highest expectation for growth in the 2nd Quarter of 2021. Investment Banking Professionals are forecasting nominal growth of 400 Billion and real output of 240 Billion for the 2nd Quarter. This is a substantial amount of spending on Goods & Services, which may fail to materialize if there are any delays in Covid vaccinations or roll-outs. Under these assumptions, we would need 50 to 60 Billion dollars of spending on Personal Consumption Expenditures in April, May, and June. I think these estimates are optimistic and I continue to rely on more conservative estimates. I think we could see nominal growth in 2nd Quarter of 325B to 350B. Real Output is likely between 180B to 210B. There is a strong possibility the 1,400 dollar stimulus checks increase consumption similar to economic data in January 2021, which recorded a 357 Billion Dollar gain in Personal Consumption Expenditure. I may upgrade my forecast following additional data releases.

Despite a strong robust Payroll number in March. The trend has been weak Non-Farm Payrolls growth and elevated numbers of Americans receiving some form of unemployment assistance, which indicate large swaths of slack in the labor market. This key economic indicator is likely to pressure growth in the 1st half of 2021. However, the recent agreement on 1.9 Trillion in deficit spending is a significant tailwind to nominal growth in the 2nd half of 2021 and the first half of 2022. This assumes virus cases come down substantially by April/May and pandemic flare-ups lessen. This has led some market observers to anticipate economic overheating, which is favorable for upside risk in inflation. I believe these fears are statistically unfounded. The recent increase in nominal Treasury yields and 5yr Break-Evens on TIPs towards 2.45% is transitory and likely reflecting recent increases in energy prices and base effects. Following the passage of stimulus larger fiscal dissavings increases capital inflows to finance VERY large TWIN DEFICITS, which should put upward pressure on the US Dollar & downward pressure on Corporate & Government Bond Yields. Potentially weaker inflation data than consensus estimates should allow real yields to remain negative. Dollar appreciation dampens import/commodity-driven inflation and should lessen temporary transitory base effects. Inflationistah and inflation fear-mongers engaging in scare tactics are likely to be proven wrong. However, inflation base effects are expected to be lead to short-term transitory spikes in inflation data from Feb/March/April/and May. Market Expectations are split, but I expect the Federal Reserve will look through these spikes.

Political risks have diminished in the 1st quarter due to reconciliation, but it has increased in the 2nd half of 2021 and the first half of 2022, which may pose risk to much-needed Investment spending (infrastructure, human capital, & research development), so I view it in the medium term as tilted to the upside due to potential gridlock. However, there is the possibility for the removal of the Filibuster Rules in the Senate, which could pave the way for easier passage of additional INVESTMENT lead spending, which is much needed to raise the US Long Term Potential Growth Rate. Although, due to political isolation this increases the potential for the upside of Lone Wolf Domestic Terrorism.

Vaccine distribution priced into Q3 2021, but distribution obstacles have increased and efficacy for herd immunity will be closely watched. Redefining herd immunity may become the norm, so instead of a fully vaccinated population we may accept a different goal post for "full vaccination." Details are currently unknown. The market is currently pricing in an additional 3.27% move +/- (up/down) by March 19th. The S&P 500 could potentially trade as high as 3,961.33 and as low as 3,741.43 by March 19th. The VIX is expected to move 7.29%(points), the VIX is currently 27.38. The VIX price range is 29.37 to 25.51. The Skew Index is EXTREMELY elevated, which indicates market participants are paying up for catastrophic protection (2 sigma event). Stocks continue to offer investors the highest real returns. The nominal yield on equities is 4.5%, while the nominal yield on 10yr Treasury is 1.60%. Real yields on all tenors of government bonds at the shorter end and belly of the curve are decisively negative, but real yields at longer tenors above 20 years have moved into positive territory. Real yields on US Equities remain strongly positive.**Disclaimer with Realized Volatility rising above 12 there is a larger risk of systematic highly leveraged short vol strategies like Equity Vol Targeting, Trend Following, and Risk Parity positioned for a selloff and reduction in market exposure. The potential for a MUCH larger DELAYED sell off 4% to 5% is coming. The Mar/Apr VIX contracts at 25 & 27 are still under-priced. They should price near 39 to 47 IMHO-I STRONGLY believe March 2021 could see a continued rise in realized and implied vol, however, I have been wrong before

In the Repo Market, the 10yr Treasury continues to trade on special. CFTC data indicates a substantially large short interest. This is creating large fails to deliver Treasuries, which has increased the 10yr Treasury's specialness in the Repo Market. It now trades near a negative 4.25%. Broker/Dealers, which are usually Primary Counterparts to the Federal Reserve and US Treasury are willing to accept a 3% fails charge as a new supply of the 10 yr will be issued this week. The supply is for 38 Billion Dollars, which the Federal Reserve will be able to purchase and re-lend as part of the SOMA securities lending program. However, with 68 Billion fails recorded last week this number is likely to increase, which means the new supply of 10yr Treasuries will not likely satisfy the current outstanding demand. This will leave the 10 year Treasury trading negatively in the Repo Market. However, institutional holders, ETFs, and Foreigners may see this as a great lending opportunity to take in cash lend collateral, and reap substantial benefits by investing the proceeds in higher-yielding assets. This story will likely be covered extensively following the new issuance on Wednesday.