This year, the US market appears to have seamlessly pivoted from “low interest rates are bullish for equities” to “stronger growth is bullish for equities”, leading to a scramble by fund managers to get long at almost any price as they have been pessimistic (and thus underweight) on equities throughout most of 2023.
The chart below shows the extent of the change in sentiment, with Asset Manager net longs going from 20,000 in mid- March to over 71,000 last week (18/7/23).
In contract, leverage investors were short 32,000 contacts and dealers, (against whom these asset managers are trading) are short nearly 38,000 contracts.
Under normal circumstances, one might be inclined to ignore this, but it is rare to see hedge funds and dealers on the same side of a market, making this a situation to watch closely.
Part of the reason for this scenario is that despite the Fed hiking rates, markets have chosen to “fight the Fed” by buying bonds and equities, thereby easing “financial conditions”  to the same level as in May 2022, (when the Fed started its programme of 50 basis points hiking).
What Could De-rail Markets In This Environment?
We may have seen this week a glimpse into that potential future on Thursday.
News of a potential relaxation of the Japanese Governments yield curve control policy (one that had been trailed before and would not normally affect the US Technology Index) saw a 2.25% fall in the space of just a few hours.
The panicky reaction to what has been known and that has little direct relevance to the NASDAQ suggests market participants are very nervous.
It may not take much for them to pull the trigger on sales once again.
Another potential catalyst is inflation.
The easing of Financial Conditions cited above could easily lead to a resurgence of inflation leaving long Duration asset markets (particularly the NASDAQ) vulnerable to a sharp fall.
Markets are not positioned for this risk.
The best way to play this is via options; September Put options are currently (as of 30/7/23) priced (via spread betting firms) at relatively cheap levels.
Buy the 15400 Put option (229.7), sell the 15200 put at 168.9 and finally sell the 14700 put at 87.9, giving a net credit 27.1 points.
Thus the investors gets paid to wait and would only lose money on a fall below 14480 (which represent a decline of 8.6% from current levels).
Of course this is possible, but it does not appear likely and there is time to take action to mitigate this risk (by buying the 14600 strike put for example) in the next 47 days before options expiry day.
 The “Financial Conditions” Index attempts to measure the overall situation for markets and businesses, asking whether or not access to credit is getting easier or harder. As the Index falls, credit conditions are getting more expansive, making access to financial credit easier to find.