Coiled Spring Capital Mid-Week Report Mar 22, 2023

How much paper and analysis were wasted trying to figure out what the Fed would do today? Quite a bit we surmise. Our take after the banking debacle from last week was a less hawkish Powell, only raising 25 bps. Thats exactly what happened. Into the event the market had eclipsed the pre-SVB high and was attempting to break this DTL from the Feb peak.

Was this a good set up to press longs? Absolutely not. The dilemma the Fed faces is an almost impossible thread needling exercise. Does that sound like something you want to bet on? This is why we expressed a wait and see approach to the outcome. There was little need to be aggressive in front of such a binary event.

Here is the excerpt from last week’s Macro Report:

“Fed panic is not bullish and there will be repercussions. When that occurs is difficult to predict. Can a fed pause cause a larger relief rally? Sure. But we suspect sellers will return at higher levels….this does not seem like a high risk/reward moment. Nor do we have the type of alignment we like to see to make bigger inflection calls. We’d prefer to buy extreme weakness if it occurs to the levels we’ve been discussing for weeks. We’d also be inclined to remove our tactical trading longs into any rally into 4100-4200 on the SPX. Currently, we are stuck right in the middle of that SPX range.”

Today’s rally stopped at 4039. Not quite the 4100 we were hoping for but enough to consider removing some of our long exposure into today’s event. We sold 50% of our $GOOGL (+13%) long and exited our $IWM’s (+4.5%) on yesterday’s spike.

Here is the excerpt from our long Russell trade idea, indicating low conviction and why we used strength to exit.

The issue today wasn’t that Powell said anything that wasn’t somewhat expected, but that Yellen was simultaneously speaking with a Senate subcommittee, contradicting Powell’s comments regarding broader protection for depositors. This coupled with the commentary that Powell would stay the course to stamp out inflation, sent the algo funds to push the sell button. First of all, we highly doubt the Fed is going to let bank depositors suffer ruin after bailing out SVB. And second of call, Powell was never going to back off his mandate to fight inflation. Why is that new news? This would damage the Feds credibility and likely cause more of a stock market rally. Powell is not interested in pushing stocks higher, which is what we wrote about last week. He wants a subdued market and why the risk/reward into the event was so poor.

Another excerpt from last weekend’s report:

“Couple this confusion with a potentially very binary Fed meeting, and being too exposed seems like a mistake.

Tread lightly which means lower position size and tactical trading only.”

Sometimes the best decision is no decision. There are simply too many unknowns and landmines to consider anything but tactical trading in this environment. This means quick exits because, as we saw today, the market can turn on a dime.

SPX 1 minute chart from today says it all.

Was today a turning point for bulls or bears?

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