"No One Really Knows Anything": Top Goldman Trader Warns Stocks Held Captive By Energy, Face "Violent Up/Down Gaps"

We are currently in "an exceedingly fluid trading environment," according to Goldman Sachs head of hedge fund coverage, Tony Pasquariello, with the equity market currently held captive by intraday movements in energy prices...

...and the energy complex, like all physical commodities, is governed by the brute forces of supply-and-demand. 

At the same time, however, stocks also live in the future. 

While I worry about local risk/reward, perhaps that feature helps explain why S&P has fared better than one could have guessed - we’re only 3% off the highs despite the possibility this winds up being the largest monthly oil shock on record. 

In effect, it’s the spot-vs-forward tension that defines the current degree of difficulty for stock operators.    

When the basic setup is wildly complicated, I try to simplify the equation. 

So, I assume that risky assets will struggle until the energy complex stops ripping (I say this with regard to both price AND realized volatility). 

Maybe the highs in oil were marked on Sunday night, maybe they weren’t, but that negative feedback needs to break for stocks to breathe easier. 

It’s here I’ll invoke Daan Struyven’s latest framework, where we haven’t changed the year end call, but the risk of taking out the highs from 2008 / 2022 certainly remains.

Along the near-term path, I suspect that violent, gap up / gap down price action will continue. 

Again, the overwhelming force is geopolitical, and no one really knows anything, so I assume a very wide distribution of potential outcomes. 

In that context - and, again, at the risk of oversimplification - I’d argue the priority is to remain highly flexible in your thinking and risk taking.

Regarding flows and franchise activity, to this point in time, position reduction across global equities has been orderly. 

While the intensity of risk transfer ebbs and flows with the breaking news, I’d stop short of saying that we’ve seen panic or capitulation.

I’m not arguing that’s a necessary condition for a local bottom, I’m simply saying that I haven’t felt it yet on our trading floor.

Specific to the US market, and specific to professional traders, the discretionary community has been a consistent seller since mid-December. 

When I take stock of all products - including futures, ETFs and options - it feels like net exposure is fairly under control. 

With that said, there are few moving parts that warrant close monitoring:

i. that last point only concerns the discretionary crowd -- the systematic community retains plenty of length that would come for sale at lower prices. 

ii. while NET exposure in the US is arguably battened down, I would not say the same of GROSS exposure -- while I suspect it runs structurally higher than it used to, our measure sits near all-time highs.

iii. while I don’t worry about it very much, option market makers would get short S&P gamma on a move towards 6500 -- also note next Friday brings the black magic of quarterly expiry. 

More broadly, I suspect the macro community has moved their feet and meaningfully (but not fully) reduced pain trades across front end rates, currencies and select metals. 

Finally, I read this quote once from HR McMaster, who borrowed it from John Keegan (link). 

It stuck with me for several reasons, one of which is the quality of the writing:

the study of battle is therefore always a study of fear and usually of courage, always of leadership, usually of obedience; always of compulsion, sometimes of insubordination; always of anxiety, sometimes of elation or catharsis; always of uncertainty and doubt, misinformation and misapprehension, usually also of faith and sometimes of vision; always of violence, sometimes also of cruelty, self-sacrifice, compassion; above all, it is always a study of solidarity and usually also of disintegration. 

While I don’t believe that one should use war as a metaphor for other things, you can probably apply some parts of this to the challenge of managing risk in the current moment.

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