📝 40% of S&P 500 Tactical Shorts Have Been Covered: UBS Strategy

Underscoring the demand to fade the rate rally and reinitiate downside this week, Friday marks the second straight day of new shorts in UST 5s ($2.1m/01, $4.1m 2d build shorts), and also new shorts out in Ultra Bonds ($3.4m/01). There has been strong indirect bid in UST auctions this week - in overnight data, Japanese buying of foreign bonds over the past week was the most significant since January, while Japan was a heavy seller of foreign equities, with their fifth heaviest week of selling in data since 2000.

In index space, short cover again led with $3.4bn in S&P shorts bought back, with $580m in RTY shorts liquidated and $200m in NDX shorts covered. Over five days, $5.1bn in S&P shorts have been covered, approx. 40% of the $11bn in tactical S&P shorts noted on Thursday. I am keeping focus on RTY/SPX ratio, which has continued to breakout toward March highs and close to year-to-date highs. Conversations / flows have centered around reinitiating cyclical outperformance trades as yields closed above their 100 dma on Thursday, while Energy bid across oil, natural gas and RBOB were all driven by new length in the complex ($1.6bn aggregate).

In the custom basket space, Aaron Nordvik observes meaningful outperformance of Profitless Tech relative Growth with Free Cash Flow. Aaron's conclusion is that Profitless Tech has been more of a dead cat bounce than sustainable trend. I would agree with this, particularly given the fundamental bias among the macro community in demand to pay rates here. - UBS Strategy