Galactus – Devourer of Day Traders
Mister Rogers used to have a segment on his TV show where he spent time with the people in his Neighborhood. Being aware of some of the participants in the STIR (Short Term Interest Rate) futures neighborhood will be helpful to your trading. Over the years, I had previously mentioned:
· The “Z Algo,” when the Z futures contracts could have on the order of 2x as much open interest as the other contracts. The Z Algo seems to have died, as the Z futures open interest is only about 16% higher than surrounding contracts, which is negligible considering the intuitive year-end interpretation of Z futures.
· The Longer-end “Fly Algo,” that basically keeps all the butterflies trading in a very tight range.
· The 800 pound “Gorilla,” that basically results in above-normal length of trending markets.
Today, I want to discuss a new algo that I have noticed for some time, which I will call Galactus – Devourer of Day Traders.
But first, my thoughts on the prior week:
· Trump is preventing US companies from acting “optimally.” Walmart said they were going to start raising prices because of tariffs and Trump said Walmart should eat the price increases. I think Walmart lukewarmly walked back some of their original commentary. Trump told Apple to start making phones in the US. Trump nixed a proposal from an Amazon subsidiary from publishing tariff effects. As the tariffs start ramping up and taking a toll, it’ll be interesting to see the continued interaction between firms and the Donald. You don’t want to get on his bad side. As Harvard and Zelensky found out, Trump is petty as hell. I’m wondering to what extent Trump interference could weigh on some stock prices as trade negotiations deepen.
· On the bright side, Trump seems to be speeding deregulation… like approving mining companies, approving US steel collaboration, etc. This will help growth on the margin.
· Bessent said the Supplemental Leverage Ratio may change as soon as the summer to allow banks to buy more Treasuries. I think this should be mostly priced into the market, as it has been discussed for some time. I’m wondering if we will get a “sell the news” moment when it is officially announced (or soon thereafter).
· The EU released a trade proposal: “The new offer is said to include proposals that take into account US interests, including international labor rights, environmental standards, economic security and gradually reducing tariffs to zero on both sides for non-sensitive agricultural products as well as industrial goods.” I laughed when I read the first two items because Trump could care less. What Trump wants is to know how they are going to narrow the goods trade deficit. While it is possible that the EU trade delegation is completely clueless, I think it is more likely they are stalling. Trump is going for easy Kosmo Kramer coffee deals and the next deadline isn’t until early July. The man’s going to be out of office in 3.5 years and trade deals can take years. Needless to say, Trump went a little nuts on Friday and threated additional tariffs because of the lack of progress in EU talks.
· Bessent said to expect more deals in coming weeks, so that could be interesting. Hopefully the deals are with some countries that have more than the baseline 10% tariff. As mentioned previously, it may be easier for countries to just to accept the 10% (with some strategic carveouts) and wait it out until the next President.
· The Supreme Court said agency rulings don’t apply to the Fed. This should take away the market jitters the next time we get the Trump rant when Powell does nothing. Now that Trump knows he can’t follow through on his threats to fire Powell, maybe his tantrums will be even more entertaining to watch! June 18th is the next FOMC meeting.
· The Fedspeak was mostly hawkish. Goolsbee (usually a dove) said “bar is a little higher for near-term cuts.” But Waller kept the ease dream alive by saying that if tariffs remain at 10%, the Fed could cut in the second half of the year. As expected, the hard data has held up well. But I think the markets are underestimating how quickly the data can change as the year goes on.