What’s Goin on Everybody?

The Nasdaq printed a record yesterday, and the funny thing about it is that nobody owns it.

That's how I opened I'd Trade That this morning. Then I said, "Goodbye, everybody. That's the show." Every major index finished higher. Futures were up again.

So who bought it? Who's actually buying?

Well, the selling went away. We walked through five stories, and every one ended with a trade attached. The last one pays precisely when the other four hurt… and it costs less than it did before the war started.

Let me walk you through it in the replay below or you can read the wrap up.

People ask me where the market's going as if I'm Nostradamus. I don't know. What I can look at is positioning.

Fundamental hedge fund net leverage (what funds own after subtracting what they've shorted) fell for a third straight week to 53%. That's the seventh percentile of the last year, so the most aggressive money in the market is carrying about as little risk as it has in 18 months… into a record high. Make it make sense.

Record highs are supposed to come with magazine covers and people in the barbershop talking about the hot stock. Everybody's supposed to feel like a genius, and nobody does. Tops typically don't get built in these empty rooms.

This is a mechanical market, not an emotional one. The single largest buyer of U.S. stocks is companies buying their own shares, and right now that's off by rule. About 93% of the S&P 500 sits in its earnings blackout window.

Buyback authorizations this year total $1.27 trillion. The people who control that money can't touch it until the windows reopen around October 15th.

You're not betting on a story here. You're betting on a mechanical bid returning to a market that's already been sold.

So I want to be long the SPDR S&P 500 ETF Trust (SPY). Just don't buy at the extremes of the day. If we get a shot near 777 around 10 o'clock, buying the 777 call and selling the 780 into the end of the week is a clean play, okay?

This is a week-long trade, not a year-long trade.

The Crowd's Already on One Side of the Boat

Story two is small caps, and the damage was real. The third quarter was the third worst for small versus large since 1990, and the Russell 2000 sits about 9% below its August high, testing its 200-day moving average.

There's a reason for it. More than 40% of Russell debt is short-term or floating, so those companies pay today's interest rate, and the S&P 500 barely notices. Different companies got completely different bills for the same 5%.

So the obvious trade is shorting these names against big tech. But at least one major desk just pulled that trade, and the reason had nothing to do with fundamentals: falling oil or falling yields could produce a very vicious squeeze.

And who's holding the record short in Russell futures? Leveraged hedge funds.

A weak company and a good short are two different things. The fundamentals tell you whether a business is deteriorating, and positioning tells you whether you can still get paid for knowing that.

So the trade is a call spread on the iShares Russell 2000 ETF (IWM), but only once it clears its 20-day at 283.83. That's your line in the sand.

Go out a week. The 282/286 call spread cost $2.37 to make $1.63 when I pulled up the chain.

The entire downside is the point of the structure. Number three is the bottleneck in the market, and it's a sector the big money has largely abandoned.

What Every Chip Runs Through

Data centers could reach 9% of U.S. electricity use by 2035. Every model, every chip, everything goes through electricity, and utilities are positioned at an all-time low, minus two and a half standard deviations.

Everybody hates them because rising yields hurt utilities twice. That's a very fair reason, but you got to remember, you don't invest for today, you invest for the future.

A permitting bill is advancing through Congress, and permitting is the real bottleneck for data centers. Transmission permitting is one of the very few things a divided Congress might actually pass, because both parties want the build-out in their districts.

That puts the State Street Utilities Select Sector SPDR ETF (XLU) in play. It's trading at 40.67, right at its 20-day.

Buy the 40 call and sell the 41.50 for October 16. Breakeven is 40.94, the target's around $42, and you've got roughly a 55% probability of profit for a 60% return.

All right, two more things. Story four is Brazil, and it's under-followed on this tape. Flávio Bolsonaro led incumbent Lula 47% to 45.2% in Sunday's first round, and the pollsters had it the other way.

But the headline's not the story. The story is the Senate, where right-leaning parties lifted their share to 63%. A president with a hostile legislature can't pass fiscal reform, and a president with 63% of the Senate can.

The iShares MSCI Brazil ETF (EWZ) already moved about 12%, and you don't want to chase a gap in an election you can't forecast. Wait for a pullback and for RSI and MFI (two gauges that flag when sellers are worn out) to hit oversold at the same time, then treat it as a day trade.

The Cheapest Insurance on the Board

Finally, there's still a war going on. I don't think people remember that.

In oil options, put skew (the extra price traders pay for downside protection) rallied. Upside calls cost less today than they did before the war even started. This is very weird to me.

Five tankers got hit in four days, and U.S. officials warn Iran may act before the midterms. Yet upside protection got really cheap at the moment the risk didn't go away.

The correlation between crude and the 10-year yield is the tightest in 35 years. An oil spike is a yield spike. Trades one, two and three all need a calm rate environment, and this is the thing that breaks it.

So I'd go long the MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN (OILU) if it taps its eight-day moving average. That's my hedge while everything else moves.

Now, I'd be remiss if I didn't tell you what breaks all of this. The 10-year just logged its fifth straight weekly rise, and last Tuesday's 5-year auction priced the second-biggest tail on record (buyers demanded a higher yield than expected). We've got three more auctions this week, and we need to see demand.

I'll be back tomorrow at 9:20 am to talk you through the markets and the opportunities…

See you there,

Garrett