August fourth, two thousand twenty-five
《Hedging, Muted Moves, and Pullback》
“Hedging, Muted Moves, and Pullback”
One, Hedging
As anticipated in last week’s Notes, the sharp reversal following the data shock left the market briefly oversold: equities fell, the dollar weakened, and interest rates declined...Today, asset prices have begun trading in the opposite direction to this overreaction.
The weakening data also provide more justification for the rate-cut path Trump wants, The market is merely shifting from the previous ideal combination of “solid growth + gradual rate cuts” to expectations of rate cuts，Therefore, the basic view is that the current backdrop is insufficient to sustain a major reversal in risk appetite; it will only bring more hedging activity, especially hedging against equity downside Before October, demand for hedges against recession risk will rise again.
Chart: Notes 250718 “Goodbye, Goldilocks”
Regardless, The shelf life of the Goldilocks trade is indeed getting shorter and shorter, beginning to resemble a narrative curse. Since last year, the trade’s life span has gone from quarters, to months, and now it can last only a few weeks.
From the perspective of cross-asset portfolio hedging, Currently, the correlation between SPX and U.S. interest rates is hovering around a median level of just +10, providing excellent leverage for hedging a U.S. recession outcome.
Chart: If a recession occurs, falling equities and declining interest rates will form a leveraged hedging portfolio
This can be viewed alongside the Treasury section of yesterday’s weekend Wrap; hedging activity will continue to build from today.
Two, Moderation
As mentioned earlier, Before data that provide a meaningful directional signal emerge, the market can only trade on moderation. This moderation applies not only to U.S. equities, which are shifting from Goldilocks to a hedging phase, but to broader markets as well.
Kugler’s resignation, downward data revisions, Trump’s plan to nominate a new Fed chair this week, and to nominate a new BLS director, All of this should have ignited rallies in gold, silver, and the foreign exchange market, but it did not happen At least based on price action, those who chased the move must be very disappointed; this is a typical case of a muted response to a news shock.
Many assets have ample reason to make impulsive moves, yet continue to perform sluggishly, All of this confirms our view of the moderation trade.
Three, Pullback
In a trending market, a stochastic oscillator at a high level does not necessarily mean the market is overbought, because the trend itself can keep the indicator elevated for a long time. But if the market is near the top of a range and the stochastic is also high, it becomes a genuine overbought signal that can easily trigger a pullback.
In particular, when a shallow pullback occurs in a strong trend, be especially cautious if the stochastic turns upward again, this is a classic bullish trap signal, because the trend may still have further deleveraging and unwinding ahead.
The sharp decline in S&P futures open interest amid rising volume also indicates that a correction is underway. This is common after a market becomes overheated for a time and some capital exits, This does not necessarily mean the trend is over; it is more likely a small correction. The first pullback phase roughly corresponds to a return to around the price levels at the start of the year.
Four. Final summary
So, from today through October, there are basically three themes to pursue from a macro perspective:
1. Hedging trade allocation
2. Short-term countertrend swings in overbought and oversold conditions during shock-driven trading; no truly large swings during periods of easing
3. A downward valuation adjustment in U.S. equities, from strong growth plus modest rate cuts to modest rate cuts, broadly corresponding to the price levels at the start of the year
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As for the level of detail, we’ll probably get down to the industry level. For mainland China, we’ll try to avoid crowded trades; if we write too specifically, someone may jump the gun. We may be able to be more specific about U.S. equities, but readers will still need to think through and fill in the details themselves, There are no trades to copy directly!。
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Wishing you all the best.
2025.08.04
Note: All content herein is for reference only and does not constitute investment advice or serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for their decisions.