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Market Pulse: Recession Watch

By Ardi Aaziznia  |  
Market Pulse  |  
Apr 14, 2022
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Hello Traders,

Hello to all of our new subscribers and welcome to this week’s newsletter. This is where we discuss the market and use a top-down approach to come up with a trading opportunity.

The Big Picture

The theme in the market remains the same. The yield curve continues to flatten and invert, and that leaves investors in risk assets worried. This worry is very clear from last week’s sectoral performance where defensive names definitely took charge.

We know the Fed is tightening and tightening fast. Fast tightening is not particularly loved by the equity market because it pulls the rug on liquidity, halts buyback plans (just look at Starbucks which recently canceled their buybacks), and so much more.

The chart below shows the performance of equities during fast (and other) cycles.

This week is earnings season and the banks are first up. Here are the key things to look for this earnings season:

  1. Beat or miss: are we seeing beats on earnings?
  2. Inventory buildup: have inventories increased quarter over quarter?
  3. Bank earnings: has loan generation slowed down? What is the outlook?
  4. Housing and builders: are we seeing inventory markdowns (i.e., should we be expecting housing prices to drop)?

The answers to these questions will tell us if we are entering a recession or not. I myself will be paying close attention to all of the filings this week.


Option Trades for the Week

The theme for me remains the same: run a beta neutral portfolio with a mix of long and shorts while also exploiting volatility. Below you can review the summary of my trades for the week (as of the writing of this newsletter).

Although I have not done the research yet, I am also looking at a potential relative trade to ride the European recession theme: short Europe discretionary and long Europe staples or conglomerate (e.g., Nestle or a similar name).

Tweet of the Week

The tweet of the week goes to Bloomberg’s Joe Weisenthal and his tweet regarding the housing market. We knew that the mortgage rate going above 5% would cause some kind of slowdown in demand, but we did not know by how much. Well, we now have some early signs with the big one being that the buying of second homes has slowed down tremendously. It’s another sign that consumption might be on its way down.

One Last Thing:

I am also now on twitter! Let’s connect there as well for more of a dialogue.

To your success,
Ardi

Peak Capital Trading

Peak Capital Trading was formed in 2020 as a proprietary trading firm based in Vancouver, British Columbia, Canada. Founded by veteran traders and Wall Street executives, our mission is to work with a diverse pool of Canadian and international traders in order to establish the leading firm for trading US stock market equities.

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