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If you have not already done so, please read all disclaimers, as the following report is not intended as a financial recommendation.
The balance of risks to the market continues to remain uncertain, however we believe that in the short term volatilty will be capped as we enter a period of a grind up for the next few weeks. The trade war continues to dominate the financial news, however recent happenings at the Federal Reserve and Treasury have been quite illuminating. Last week (3/19/25), the latest Summary of Economic Projections (SEP) was released. Interestingly, year end projections were revised down for GDP from 2.1% to 1.7%, Unemployment expectations from 4.3% to 4.4%, and Core PCE from 2.5% to 2.8%, all while 2 cuts continued to projected. In other words, this signaled a lower tolerance for a slowdown in growth, than a rise in inflation in our opinion. Furthermore, QT was winded down from 25 billion a month to 5 billion a month which the bond and equity markets loved. Leading indicators continue to be mixed about whether or not a recession is in the horizon, but it seems clear that the Fed is in tune to any risks on growth ahead, making us opportunistic on larger drawdowns in equities. Scott Bessent (US Treasury Secretary) has been conducting numerous interviews on Cable Networks and Podcasts describing his vision of the US Economy in great detail. In his view, the US Debt and Deficit are unsustainable and the past few years have devastated the working class through the erosion of the purchasing power of the US dollar. His priorities are to bring down US Federal Debt in a controlled manner to 3% Deficit:GDP, deregulate the Financial System to allow the private sector to releverage up and reorder global trade to bring back American Jobs via Tarriffs, low and predictable taxes and an accomadative regulatory environment. Our personal feeling is that over the next 3-6 months, this administration would welcome a recession if it happens although it remains unclear if this is their intent. The primary reason for this, is that the 5 year anniversary of ZIRP is approaching, and Private Equity, Venture Capital, Publically Traded Companies, and the US Treasury are looking to refinance at lower rates. A recession would provide the pretext for rates to come down and QE to be restarted ushering in another growth cycle for the US economy. If this is the path this administration wishes to follow, a lower risk investment strategy is advisable for us, which we are looking to transition to at an appropriate stage.
There are quite a few different paths that the market can take over the next few weeks, but as we got our 8-12% decline until March OpEx that we expected, we now look for another upswing/consolidation for the next few weeks. This path largely hinge on the key events listed in the chart, in particular how the trade war plays out. April 2nd should provide more clarity. Ideally, we get a resolution for the majority of nations with tarriff capitulation, however the 2nd best scenario would be an immediate raise without retailiation from the rest of the world. The worst scenario (at this time), would be another push in the deadline, leaving more uncertainty about the trade war and potential escalations.
As called out in last month's update, the decline we expected caused our puts to appreciate significantly, allowing for additional capital to be raised to rebalance the fund to better face the anticipated headwinds with a potential slowdown in growth. Although, this isn't certain, the odds of growth slowing down are elevated due to Tarriffs, a reduction in federal,state and local spending and the labor market already cooling. Due to tax season approaching, a retest of SPY 550ish is certainly possible, but we largely expect a bounce due to oversold conditions to atleast the election gap and/or the yearly open at 577 and 590 respectively. If we have that 550 retest, we will look to add multi-month calls, otherwise we will continue to sit tight with dry powder handy for another round of puts when the situation calls. We do think that this decline is largerly played out with sentiment extremely low, and with VIX showing the hallmark short term doubletop, we should begin to see a rangebound SPY that grinds higher. Options aren't the best tool here given how high IV has been jacked up, but we do anticipate some opportunties to present themselves in the coming weeks, once things cool down.
Below we will provide updates on positions referenced last month in addition to some potential new positions we wish to accumulate on a downswing:
We will provide an update next month (4/20/25). Please follow our X Account for the latest @ap_analytics_cm . As always, feel free to reach out to anish@ap-analytics-cm.com to discuss any of these items.
Anish G. Prasanna
If you have not already done so, please read all disclaimers, as the following report is not intended as a financial recommendation.
The balance of risks to the market continues to remain volatile. As discussed in our inaugural report, Federal Spending has seemed to be the bedrock of the Economy over the past several years. However, with DOGE's early successes in reducing the 1.8 Trillion deficit, this stability is now potentially threatened. In 2024, total US spend was 6.75 Trillion, comprising of 3.5 Trillion for entitlements, 1.1 Trilion for Interest on Debt and 2.1 Trillion for Defense + Discretionary. To balance the annual deficit without touching entitlements and Debt Interest, 86% of defense + discretionary spending would need to be cut, which would cause a massive economic shock. This seems highly unlikely, but in any case, with the labor and housing markets cooling, and inflation concerns reacclerating with leading indicators like copper futures jumping, there are certainly concerns to the market that should be hedged appropriately. This is all with a backdrop of a Federal Reserve that remains in a reactionary posture (as opposed to a proactive one) in that they are waiting for clear signs of issues before making a move to cut rates. Lastly, we are nearing the 5 year mark of COVID-19 ZIRP debt financing. This debt expiring negatively impacts liquidity in the credit and financial markets. Although till this point we have only enumerated downside concerns, we are not suggesting that there are no reasons for optimism, rather that hedging is extremely important to protecting long term capital growth.
There are quite a few different paths that the market can take over the next few weeks, but we are placing the base case as a 8-12% decline until March OpEx as outlined below. These paths largely hinge on the key events listed in the chart, but also on how events shape out globally in Europe, Japan, China, etc. German Elections look to largely suggest that economically populist policies may remerge potentially contributing to a change in currency dynamics. Similarly in Japan, the Yen continues to appreciate which is a headwind to US Equities. Favorable results for NVIDIA on Wednesday could provide the ingredients for another rally, however it is critical to note that this quarter post-earnings bumps have been muted on upside surprises and below-expectation results have caused bigger than usual downswings in stock prices.
Due to the risks mentioned above and weak seasonality post February OpEx, we have opened a tranche of PUT options at the 600 Strike for April 30th 2025 at 11.61. The fund remains largely long, but we are actively looking to reduce long side exposure by rebalancing the positions mentioned below. Downside targets to SPY that we are looking at to begin montezing the Puts include the 589 Yearly Open, the 576 Election Gap, the 2023 October AVWAP at 524 and October 2022 AVWAP at 465. It's largely unlikely that we have a down swing past 10% at this juncture, so at this time the target is 576 to unload the Put Position. If SPY breaks above 615, we'd look to remove these puts and rebuy at a further expiry and strike during a rip in early March or early April. However, we strongly feel that a 8-12% correction is due before another rally can be catalized by the Federal Reserve, or the Government. In such a case, we would expect that the Fund's results underperform market benchmarks like the SPY, QQQ and IWM temporarily until the subsequent rally occurs.
Below we will provide updates on positions referenced last month in addition to some potential new positions we wish to accumulate on a downswing:
We will provide an update next month (2/23/25). Feel free to reach out to anish@ap-analytics-cm.com to discuss any of these items.
Anish G. Prasanna
Happy New Year to all of our readers!
If you have not already done so, please read all disclaimers, as the following report is not intended as a financial recommendation.
In 2024, the fund achieved a 57% growth on investment greatly surpassing expectations and the S&P500, QQQ, and IWM benchmarks of 25%, 26%, and 11% respectively. The coming year will likely be more challenging from a macro economic perspective but often times these present the greatest long term rewards.
Over the next few weeks, we expect to see a key inflection point develop as we gain more clarity on the incoming adminstrations implementation on trade, immigration and national security. A key heuristic to monitor as this situation develops will be the 10 Year Treasury Yield ($TNX), which should act as a several month leading inverse indicator of economic strength (as it historically has). Simply put, bulls do not want to see spikes resume on the 10 yr, after the good housing data we received on Friday which temporarily alleviated concerns of a slowdown in the housing sector pertaining to residential home builders. In addition, we received good earnings data from the US banks and are awaiting MAG7 earnings starting in 2 weeks. Between these earnings, a new administration, the Bank of Japan interest rate decision on the night of 1/23 (remember the carry trade implosion?), and corporate stock buybacks resuming on the 24th, this is largely a developing and dynamic situation that is worth monitoring. Both the magnitude and order of these policy decisions are important as we enter this new market regime. In short, we expect the range of outcomes to broadly expand under the Trump administration, and we will, therefore, position accordingly.
As our last update correctly laid out, we have largely trended upwards since december OpEx (12/20). However, given the expected potential volatility ahead we have added SPY Puts at the 585 strike for the March 31 2025 Expiry at a cost basis of 10.26. At this time, the fund is still positioned long (albeit less so), and we are actively looking to get it closer to neutral if we continue to chop until month end and the 10 yr yield reverses the Friday move. A move to the 100 day moving average (581) or even 200 day (557) would make logical sense over the next few weeks and would be good multi-month buys. President Trump views the stock market as a metric on the performance of his adminstration so pullbacks will be good opportunities to add.
Below we will provide updates on positions referenced last month in addition to some potential new positions we wish to accumulate on a downswing:
We will provide an update next month (2/23/25). Feel free to reach out to anish@ap-analytics-cm.com to discuss any of these items.
Anish G. Prasanna
This report will attempt to outline a few potential market pathways for the start of 2025, given the latest economic data and the forward guidance from the Federal Reserve provided by the Summary of Economic Projections (SEP). If you have not already done so, please read all disclaimers, as the following report is not intended as a financial recommendation.
The media and markets initially had an extremely bearish reaction to the FOMC meeting on 12-18-24. The SP500 (SPY) immediately shot down after the 2PM release and continued to trend down to ~585 from ~603 (-3%). Technically, this did do some damage as the index broke below the 8, 10, 20 and 50 DMAs. In addition, Gold and Bitcoin also made big moves down, while Yields shot up (TNX).
Although the Federal Reserve did cut 25 basis points, the forward guidance they provided only suggested 2 cuts for the entirety of 2025 and 2 cuts for 2026. This pivot in monetary policy to a more cautionary rollback of rates is what shook the markets. However, digging deeper into the SEP points us to, in our view, a much more reactive Fed to any weakness in the labor market while also attempting to take out some froth in the markets in anticipation of the incoming administrations fiscal and trade policies (percieved to be inflationary). In other words, we think that this is a good move AS LONG AS the Fed is reactive to deterioration in the labor markets, particularly in the housing sector. The evidence of this can be seen in their adjustments of the Unemployment Rate, Real GDP, Core PCE Inflation and Federal Funds Rate (FFR). In short, they moved up projected year end 2025 FFR from 3.4 (what they projected in september) to 3.9 (bearish in the short term) and increased their year end 2025 tolerance of core PCE inflation by moving up (bullish) to 2.5 from 2.2 (what they projected in september), while also moving down their tolerance for a detoriation in the labor market by moving down year end 2025 Unemployment to 4.3 from 4.4 (projected in september). Given that the unemployment rate is already at 4.2, the bar of cutting more than 2 times is now just an increase of .1%. Said simply, since September, the Fed is less tolerant of volatility in the labor markets in comparison to economic price stability (inflation) - but they are penciling in fewer cuts. Nonetheless, these actions do put the economy at greater risk of a recession in a pursuit to engineer a perfect outcome (i.e. no reacceleration of inflation).
The primary reason we feel confident that the Federal Reserve is looking to support the labor market moreso than is priced in by their SEP is from the recent history of the Powell Fed. Below are 3 graphs charting SEP projections (FFR, Core PCE, and Unemployment) since 2018. A sample of 6 is obviously not statistically significant, however it's important to note that the SEP projections have never really panned out (granted that would be a high bar). Therefore, these projections are best understood as a tool of the Fed to achieve current policy objectives.
With the current market focus being on the Federal Reserve, it is critical to understand that fiscal policy, trade and corporate earnings is what is essential to monitor here to understand market dynamics moving forward. Given the lower threshold for labor weakness, in particular, homebuilders are what we are choosing to drill down on at this time. Earnings in this sector have been mixed, but the entire sector has shown weakness (i.e. XHB) particularly over the last month. Profit margins have been getting squeezed for these companies as they now need to incentivize more than before for potential buyers due to mortgage rates sticking between 6-7%. New homes sales data is what needs to outperform in order for the labor market to remain stable. If the new homes market continues to detoriorate, homebuilders will begin layoffs from the record highs they are currently employing. Its also important to note that if housing completions continue to trend higher than housing permits and housing starts, there is an upside risk to Unemployment. Given that these risks have increased due to the markets reaction to the Fed's SEP, we are choosing to increase our allocation into TLT from 0% to 2.25% as a multimonth trade anticipating another Federal Reserve Pivot by the middle of next year.
Nearer term, we are beginning to see some weakness across all indicies (DIA, QQQ, SPY, IWM). In particular, IWM has not had a good time since the election as rates have continued to trend up. Small and Mid-Caps will be a tricky trade, so we will steer clear of that. As mentioned above, the economy is at an elevated risk of a growth scare over the next two quarters, but we continue to be optimistic about US equities over the longer run so our positions will remain on, but we are looking to tactically hedge in mid January and/or mid February to decrease the fund's downside risk during such a drawdown. Before that, however, our base case is that a Santa Rally occurs taking us to atleast 600 again on the SPY (base case depicted in red + red/yellow below). After that, we look to place small hedges (1-2% size at out of the money strikes) to take advantage of any volatility over the next couple weeks.
The multimonth trade that we are targeting is a move to the 100DMA (571) and/or 200DMA (548) in January/February as buyable dips that should hold for the long term bull trend. We are looking to opportunistically dollar-cost-average if the 100DMA is reached and aggressively add if the 200DMA is reached.
Below we will provide updates on positions referenced last month in addition to some potential new positions we wish to accumulate on a downswing:
We will provide an update next month (1/19/25). Until then, feel free to reach out to anish@ap-analytics-cm.com to discuss any of these items. Happy Holidays, Merry Christmas and a Happy New Year!
Anish G. Prasanna
This report will attempt to outline a few potential market pathways for the rest of the year, and provide our thoughts on a few different companies that could be uniquely positioned to outperform during this market regime. If you have not already done so, please read all disclaimers, as the following report is not intended as a financial recommendation.
The current economic cycle has proven to be quite anomalous in comparison to the last several decades. Numerous “Market Wizards” predicted a recession in 2022 due to rate hikes, although the market did experience a downturn, it also had the quickest bear market recovery (since 1990). All in all, it lasted for a total of 282 days, and led to returns in 23 and 24 YTD of 26.19% and 26.68% (SPY).
Several structural dynamics and tailwinds emerged that could have explained the miscalculation. These factors are listed below:
Ultimately, although these market tailwinds exist and could be expanded through the Trump administration (i.e extension/expansion of the 2017 Tax Cuts and Jobs Act), There also exist numerous headwinds that are projected to have an increasing impact on the economy and market conditions moving forward including:
Nearer term, event volatility unwind from the November 5th election produced a sizable rally across all 4 major indices (SPY, QQQ, DJIA, IWM). This trend is likely to continue as we have tailwind flows of Vanna, Charm around the largest yearly expiration date of 12/20, in addition to seasonal tailwinds associated with releveraging and the corporate stock buyback window reopening. These flows will likely be front run even before they are realized. These tailwinds will be particularly strong from the period of 12/2 until 1/1, Below are a few potential scenarios (illustrated in red white and green) for SPY:
Ultimately, we anticipate a move to the 100DMA (560) and/or 20DMA (582) as buyable dips for an upwards swing into mid January. Accumulation (dollar cost averaging) during the post-opex windows (the start of each window is marked by the red vertical lines and run until the end of month) is how we intend to execute this move by targeting the March 21 2025 expiries at OTM strikes (preferably lower IVs ~10).In particular, the date of 11/21 marks a seasonal bottom during election years. This position is intended to be unwound around January 17th, at which point we will reassess the bond, volatility, and equities markets to position unallocated capital.
Additionally, we intend to target the following stocks with favorable thematic characteristics to accumulate shares into this upswing as long term holds for the forseeable future.
We will provide an update next month (12/22). Until then, feel free to reach out to anish@ap-analytics-cm.com to discuss any of these items.
Anish G. Prasanna