How Far Will This Dead-Cat Rally Bounce: Goldman, JPMorgan Traders Duke It Out

While regular readers are well aware that among Goldman’s flow traders (who actually are damn good at what they do unlike the bank’s equity sellside research desk which is quite often atrocious and just follow the penguin echo-chamber parade) the likes of Scott Rubner (whose reports we cover in our professional subscriber section) are staunch permabulls and always see the light at the end of the tunnel, one name that always takes the contrarian, a growing bearish faction has been headed by Matt Fleury who has recently emerged as one of the biggest Goldman trading desk bears (see from March “Goldman Trader: “The Set Up For An Equity Market Crash Is As High As I Have Seen It” where Fleury was spot on). Which is why we found it notable that earlier this week, just as stocks were tumbling, that none other than Fleury turned strongly (if briefly, or rather ‘tactically’) bullish, saying “equities are very oversold here. I think the scope for a relief rally from here very good into early July.”

Goldman’s biggest desk bear, Matthew Fleury: “Locally, equities are very oversold here. I think the scope for a relief rally from here very good into early July.”

— zerohedge (@zerohedge) June 22, 2022

Below we excerpt some of the key charts he highlighted in his note (available to pro subscribers):

1. Percent of SPX names 52 week highs vs lows:

2. The number of SPX names with a 9d RSI sub 30 is 345x.

This is where that will look like if that holds to 14d RSI middle of next week:

3. We are pricing in a large earnings downgrade now:

4. Percent of names in SPX500 trading above 50dma:

5. Percent of names at 52week lows:

6. The bid for FAAMG calls has evaporated

… and so forth. The full note is available to pro subscribers in the usual place.

We bring this up because Fleury was obviously right, and the tactical rally, dead cat bounce, whatever you want to call it is here, with spoos surging 200 points in just the past few days.

Of course, Fleury did not flip from bearish to  bullish – he merely timed, correctly, the latest dead cat bounce into what still remains a bear market, and will be a bear market until the Fed pivots (some time in September), and relents dovishly at which point all asset classes will explode higher.

But what about the duration of the current bear-market rally: how long can this dead cat continue to bounce?

For the answer we go to JPM index trader Jason Hunter (whose note is also available to professional subs) who writes this morning that the S&P 500 is trying to build upon the initial rebound from the extreme oversold conditions realized last week, and “needs to clear 3810-3900 resistance to confirm a short-term trend reversal.”

Well, with spoos now trading at 3,890, it appears that the reversal is now here, even if heading into today’s data the signals skewed bullish as Hunter adds, echoing Fleury: “the deep oversold conditions and bullish momentum divergence signals already in place imply an increased probability for additional upside into July.”

How far does the JPM strategist see the move extending? According to Hunter, “the potential bullish momentum signal on the weekly time frame that can trigger this Friday would bolster that upside bias for the early weeks of summer. We believe the move will extend toward key resistance levels near 4100 over that period... A move through that area is required to bullishly shift the medium-term trend dynamics, something we think would coincide with shifting inflation and policy rate expectations.”

But before everyone rushes to mortgage their newborn and pledge their left kidney to buy spoos, a less euphoric take comes from our friends at SpotGamma, who point out in their morning note that “rallies into June OPEX should be categorized as “short covering” and subject to failure.” That said, the Gamma geeks add that they look for a “positive drift” into 6/30 expiration, with SPX 4000 their major upside level into 6/30. On the other side, the 3600 JPM 6/30 short put strike (3620) is their major downside support into June 30th (the June 30 expiry removes large put positions and may expose the market to further downside into July).

Some more observations from SG:

While volume & OI continues to build at 3800 in SPX, its 380 in SPY thats gained some decent size. If you check the data table below you will see that 4000 is the largest gamma level for SPX (aka “Absolute Gamma Strike”) while its 380 in SPY. This is looking like its setting up a pretty clean range of 3800-4000 into next Thursday (June quarterly OPEX).

We noted last week that the loss of June OPEX would bring a reduction in negative gamma due to puts expiring. This equates to a reduction in volatility (as dealers have smaller hedges), which generally produces upward drift in markets. You can see the lower vol thats been produced below. The bottom histogram shows us the distribution of S&P prices for the last 5 days (red) vs last 30 days (light blue).

Spotgamma also ends on a bullish tone, however, and notes that if equity vol is going to start coming in here (VIX now

In short, the onus is now on the bears to push risk lower.