I Trade for a Living - What Comes After the Rally & the “Hidden QE”

Yesterday was one of the most aggressive rallies we’ve seen in a while as you can see from the ROC of the NDX. https://preview.redd.it/wqceh2loijhh1.png?width=2754&format=png&auto=webp&s=fe5d7e914d857d5001365c42fdf8beac2fd354d0 We are again seeing this spot-up, vol-up dynamic which looks to be coming partly from fund managers seeing the aggressive rally, fearing they’ll underperform and starting to buy OTM call options to capture more of the upside. When market makers are on the other side selling those calls they become short gamma and as the market continues higher they are forced to buy more of the underlying to keep their exposure delta neutral. Put simply, managers get FOMOed into the market and that creates additional options buying which market makers then have to hedge by buying the underlying asset. This basically creates a feedback loop where the rally itself creates more buying pressure as those calls move closer to the money. The sheer magnitude of yesterday’s rally does make me wonder whether someone blew up somewhere as well but that’s a topic for another day. You can see this from the skew as well which has absolutely collapsed https://preview.redd.it/s1iixmiqijhh1.png?width=2167&format=png&auto=webp&s=42a237dcbd847729f358bbbf161e0e629dcbfa35 While the market overshot some of the targets from the previous analysis I managed to capture a good part of the move in SOXX but did not manage to increase the SPY longs because it did not pull back to my levels. I closed on the SOXX at 535 if we see a move towards $520. Main resistance is at $550 where market makers will step in with some hedging. Important thing to note is that the vol regime is still negative meaning market maker will hedge WITH price action so moves will be sharper. This changes above $547. https://preview.redd.it/d5kfafc2jjhh1.png?width=751&format=png&auto=webp&s=8675a63b0506a3fbe04430621f9482de58d999d6 I will continue trailing the SPY and add the part of the position I closed if we start moving towards $760. Market makers will buy dips until that level. https://preview.redd.it/htyvuo83jjhh1.png?width=754&format=png&auto=webp&s=40944be5c31a27554b4f6419d7d811e9ecbaefa4 Qs are likely to find support at $720 and note that if the market goes through this level the hedging mechanics from market makers will change and they will start hedging with price action, which can amplify moves in either direction. It’s likely we see some choppiness between $720 and $730 for now as when we have index up, VIX up returns tend to be small and sometimes negative in the next 1-5days. https://preview.redd.it/6fjtme74jjhh1.png?width=662&format=png&auto=webp&s=8ffbd1ae77c5d532588b04217853d6c73b9f52aa On oil I am seeing some energy stocks in my high conviction flows in addition to a longer term contract on USO (oil proxy) likely in prep for today’s talks which, if they fail could start a move towards $130 on USO as theres definitely volume there. If anything causes a pullback in equities from here it’s likely to be this. https://preview.redd.it/8r0446y4jjhh1.png?width=657&format=png&auto=webp&s=fb3214df9f92000f4069c84cc40564ea53cac015 The next part is a bit longer but some of you aksed me about my longer term views on the market and while I continue to expect a grind higher supported by earnings and way the US gov is financing its deficit is also becoming an important factor. I’ll try to explain it as simply as I can so bare with me. As I mentioned on Monday one of the things I have been monitoring closely is Treasury issuance and how the government is financing the deficit. Treasury currently expects to borrow about $739 billion in Q3 and another $628 billion in Q4 or roughly $1.37 trillion during the second half of the year. An increasingly large part of that financing is being pushed into short term Treasury bills and not longer dated notes and bonds. Net bill issuance is about $270 billion in July alone and estimates put total 2026 bill supply at around $827 billion. Last year that was roughly $360 billion and with that bills now represent around 22% of marketable Treasury debt. So, I consider this a form of fiscal QE because T-bills are highly liquid and cash like with very little duration risk (their market value is much less sensitive to changes in interest rates than longer dated bonds). The fiscal deficit continues injecting money into the private sector but financing more of it with bills means investors aren't being forced to absorb nearly as much long-duration risk. This is important as large issuance of longer dated debt can push yields and term premia higher while also tying up balance sheet and risk that could otherwise be deployed elsewhere. Bills are much easier for money market funds and institutions to absorb and they can also be readily used as collateral in the funding markets. So the government can continue running a large deficit without removing nearly as much liquidity and risk taking capacity from the financial system. At the same time, the Fed is currently making around $10 billion per month of additional Treasury purchases to maintain adequate reserves, alongside its reinvestments. Together with the fiscal impulse and the shift towards bill financing it creates a more supportive liquidity environment for equities. BUT the risk comes later if the fiscal impulse becomes sufficiently inflationary to push long-term yields materially higher which would eventually start working in the opposite direction. We are not there yet and I will likely be buying potential dips we see. My models are showing modest increase in volatility over the next month despite near term vol decreasing but I am not seeing any systematic risks.