OK, the market is finally paying attention.

The market has been complacent for a long time, ignoring all macro concerns and event risks due to the AI ​​craze/dovish Fed/low probability of recession, and we are finally seeing a significant change in the behavior of US investors , the market opened with a massive sell-off in New York after a sharp recovery during overnight trading in Asia.

We have long been accustomed to buying dips in the U.S. market, and after several months of consecutive gains, shorts in the stock market have all but disappeared. Is the recent rise in yields (2-year ~ 4.9%) starting to affect overall sentiment, causing stock investors to start to change their behavior? Are losses in fixed income and cryptocurrency markets enough to prompt markets to shift to a defensive stance? While it's too early to tell, we're definitely feeling the early buzz, and it's definitely worth keeping an eye on as earnings season gets into full swing over the next 2-3 weeks.

On the economic data front, the US consumer’s outperformance continues, with March retail sales up sharply, with overall growth of 0.7% month-on-month and data excluding autos up 1.1% month-on-month, both significantly exceeding expectations, with core spending, control groups and physical goods all performing strongly. The continued resilience of the consumer will help improve GDP forecasts and put pressure on the possibility of a rate cut, which has fallen to below 20% in June.

On the economic data front, the US consumer’s outperformance continues, with March retail sales up sharply, with overall growth of 0.7% month-on-month and data excluding autos up 1.1% month-on-month, both significantly exceeding expectations, with core spending, control groups and physical goods all performing strongly. The continued resilience of the consumer will help improve GDP forecasts and put pressure on the possibility of a rate cut, which has fallen to below 20% in June.

The sharp rise in fixed-income implied volatility represented by the MOVE index highlights market unease about the Fed's dovish rhetoric. Fed officials used carefully orchestrated talk to tame bond volatility in the first quarter, however there was a degree of market revolt as dovish guidance became increasingly inconsistent with the strength of the economy and inflationary pressures.

In fact, in addition to interest rates, the overall volatility of macro assets including stocks and high-yield bonds is rising, and the leverage positions of bonds and stocks are also in relatively extreme situations. CTAs are shorting bonds in large quantities (yields are rising) while going extremely long on stocks.

This extreme positioning could lead to more volatile price action in the coming weeks, especially given the high geopolitical tensions and extremely high earnings expectations for this quarter. If the SPX closes below its 200-day moving average this week, it could force CTAs to change their long stance, the last time this happened in the summer of 2023, followed by a further price drop of about 5%.

Finally, the restriction period on stock buybacks will last until the first week of May, exposing the stock market to further downside risk in the short term, so be careful not to buy the dip too early.

Cryptocurrencies are also struggling with the overall downturn, with traders facing very real losses and liquidation losses as BTC/ETH prices fell by 10% this week while other major altcoins fell by around 20% during the period. Given the extent and speed of the decline, we believe P&L management will be the main driver next, rather than the halving narrative or other mainstream narratives, and will prompt investors to significantly reduce leverage in the coming weeks.

It will still take some time for the macro to reach a new consensus and get clearer guidance and more certainty from the Fed, while fundamental investors will need corporate earnings to support their firm belief in US stocks at their current high valuations. Good luck to everyone.