MacroVoices #336 Charlie McElligott: Is There Another Shoe To Drop For Equities?

Episode Summary

Executive Summary: Macro Voices episode 336 centered on the post-CPI rally across equities, the dollar’s softening, and crude oil’s attempted bottoming, with Eric Townsend skeptical that lower inflation prints justify a durable Fed pivot. Guest Charlie McElligott argued the equity bounce was driven less by fundamentals than by positioning, systematic covering, and dealer gamma dynamics, while warning inflation may stay sticky and a later disappointment could hit markets again. The post-game focused on using options to express bullish tail-risk in crude with defined downside.

Main Topics: Equity market rally and the Fed pivot narrative (Priority: 5/5): Eric and Charlie debated whether the strong summer rally in the S&P 500 reflected a real macro turn or mostly a reflexive move driven by a softer inflation print, easing financial conditions, and crowded positioning. Why the stock rebound happened: positioning, CTAs, and gamma (Priority: 5/5): Charlie argued the rally was largely mechanical: heavily short systematic exposure, vol-control buying, dealer hedging, and short-covering all amplified upside once prices started to rise. Inflation may cool, but not enough for a true dovish pivot (Priority: 5/5): Charlie rejected the idea that the Fed can quickly return to QE/ZIRP-style easing, saying inflation and labor conditions remain too hot and that markets are prematurely pricing cuts. Crude oil: bottoming attempt vs. another leg lower (Priority: 4/5): Eric and Patrick discussed crude’s stabilization near its 200-day moving average, bearish inventory data, collapsing backwardation, and the possibility that the market has already seen the low or may still have one more washout. Gold strength and treasury yields (Priority: 3/5): The hosts noted gold’s recovery above $1,800 as potentially constructive but still unconfirmed, while 10-year yields remained in a tight range below 3% despite the equity rally. Options strategies for crude oil tail upside (Priority: 4/5): Patrick laid out several low-cost structures—bull call spreads, ratio call backspreads, and butterflies—to capture a potential explosive upside move in crude without heavy upfront exposure.

Key Arguments: The S&P rally was not primarily about better fundamentals; it was driven by a squeeze in bearish positioning and systematic flows after bad news came in less bad than feared. Markets had priced an early 2023 Fed cut too aggressively; Charlie argued that with inflation still high and labor tight, a dovish pivot is not realistic in the near term. Financial conditions eased too much during the rally, prompting the Fed to maintain hawkish messaging and forcing the market to re-price cuts lower in the curve. Inflation may decline from extreme levels, but sticky supply-side pressures mean it may stall well above 2%, likely around 4-5% for a period. The equity advance was supported by short CTA covering, vol-control buying, and dealer hedging as options gamma shifted from short to long. Crude oil’s setup is conflicted: inventory data were bearish, backwardation collapsed, and recession risk weighs on demand, yet structural supply concerns and energy switching could still support a longer-term bull case. In crude, options structures can express a bullish tail view while limiting downside, which is useful given recession-related demand destruction risk. Gold’s move above $1,800 is encouraging but needs confirmation above the 100-day moving average to be more convincing. The dollar’s recent pullback was viewed as consolidation, not necessarily a trend reversal. A major source of market instability has been the combination of crowded short positioning, meme-stock call buying, and gamma-driven dealer hedging that can quickly amplify both rallies and selloffs.

Data Points: Episode number: 336 - Macro Voices episode identifier Recording date: August 11, 2022 - Episode recording date S&P 500 move: ~500-point advance over the prior month - Patrick described the rally as a very bullish advance SPX rally from low: ~15% to 20% off recent lows - Patrick compared it to typical bear-market rallies Dollar Index level: Holding around a 104 handle - Eric said the dollar was softening but not breaking trend WTI crude price: Nearly $95/barrel - Crude stabilized and rebounded near the 200-day continuation moving average EIA crude inventory change: +5.5 million barrels - Reported as bearish because it occurred in mid-August SPR draw: -5.3 million barrels - Most of the crude inventory build was offset by Strategic Petroleum Reserve releases Cushing crude build: +723,000 barrels - Regional inventory detail from the EIA report Gasoline inventories: -5.0 million barrels - Offsetting bearish crude build Distillate inventories: +2.2 million barrels - Additional inventory build in distillates U.S. production: 12.2 million barrels/day - New cycle high, up 100,000 bpd week over week Gold price level: Above $1,800/oz - Gold regained a psychologically important level Gold 100-day moving average: $1,844 - Eric said a move above this would be more convincing 10-year Treasury yield: Below 3% - Yield remained range-bound despite the equity rally Implied Fed cuts priced: ~60 bps by end-2023 - Charlie said the market was still pricing significant cuts later next year Q1 2023 cuts priced: 0 bps - Charlie said the market had removed cuts from the first quarter window Inflation rate mentioned: 9.1% - Charlie used headline inflation as evidence the Fed cannot pivot dovishly soon Unemployment rate mentioned: 3.5% - Charlie cited tight labor conditions Wage growth: All-time highs (Atlanta Fed wage growth) - Used to argue inflation pressures remain firm CTA flows: ~$70 billion of covering flow over the last month - Charlie estimated CTA buying/covering as a major driver of equity strength Vol-control buying: ~$12 billion bought; another $20-30 billion potential - Charlie described additional systematic demand for equities Dealer-implied futures buying: ~$600 billion - Estimated futures demand from dealer hedging across SP, SPY, QQQ, and IWM options S&P hedge fund beta: 9th percentile - Charlie said hedge funds were extremely underweight beta to SPX Macro fund beta: 18th percentile - Macro funds were also underexposed to equities Hedge fund leverage short positioning: 0.1 percentile / 1.9 percentile referenced - Charlie stressed levered funds were extremely short and vulnerable to squeeze SP aggregate CTA positioning: 0.1 percentile / lowest in 11 years - Charlie said aggregate CTA exposure had been cleaned out One-month realized vol: Near 100th percentile recently - Used to explain why vol-control would mechanically buy as volatility fell Crude call spread example: $125/$150 bull call spread for just over $1 - Patrick showed a low-cost upside structure for a large crude breakout Ratio call backspread example: Sell 1x $100 call; buy 3x $125 calls using about $6 credit - Presented as a zero-cost, high-upside strategy with defined risk Butterfly example: $150/$175/$200 butterfly for about $0.20 - Very low-cost tail bet on an explosive crude move

Pivotal Quotes: "The market preemptively too early priced in easing start of next year. I don't think that's possible." — Charlie McElligott: Charlie pushing back on the idea of an imminent dovish Fed pivot "This was a rally that nobody was there for." — Charlie McElligott: Explaining the squeeze as systematic and positioning-driven rather than fundamentally justified "I'm still skeptical of this rally, but frankly, I didn't think it could get this far, and it sure has." — Eric Townsend: Eric’s framing of the equity market rebound

Implications: Listeners should view the equity rally as vulnerable to a disappointment if inflation stays sticky and the Fed stays hawkish. For energy investors, crude may offer long-term upside, but near-term recession risk argues for defined-risk option structures rather than outright longs.