Expectations

They can sometimes prove too high a bar

"Expectation is the root of all heartache." —William Shakespeare

Watching the USMNT on Monday night against Belgium, one could feel the level of expectations that had swept across the USA. Even though the US was taking on a higher ranked team, the momentum from FIFA allowing Balogun to play against Belgium was real. Even the announcers, former US players themselves, were showing their bias and leaning toward the US.

Those expectations were dashed early and often by the superior Belgium squad as it easily won 4-1. If you had told US fans in January that they would be playing int he Round of 16, I think all would have been stoked. However, now that we had seen the team play well in the group stage, and felt the momentum, losing, even to a better team, felt like a disappointment. Expectations had crept up too much.

I can only hope, as the announcer said near the end of the match, that US fans will remain fans of the sport in the US and not just wait for four years to tune in if the US is doing well. That said, they have been saying that since Pele same to the NY Cosmos back in 1975. The reality is every sport in this country is second fiddle to the NFL & college football. That isn’t a bad thing, it is just reality. It doesn’t mean we can’t enjoy jumping on the bandwagon when our team (regardless of sport) is doing well.

We just need to keep the expectations in check.

Dollar debasement trade

In June of 2024, the US Treasury Department issued final digital asset broker regulations. 2025 became the year of the digital asset treasury companies with momentum from passage of the GENIUS Act and discussion on stablecoins. It didn’t hurt that Liberation Day in April filled the narrative that countries and companies wanted to diversify away from the Dollar because the US government was actively debasing it.

Michael Saylor of Strategy was the primary hawker of the trade, but he got plenty of support from the likes of Tom Lee. Saylor promised ‘diamond hands’ and would never sell the Bitcoin Strategy purchased. It became the largest holder of Bitcoin in the world. It was such a ‘no-brainer’ that highly leveraged trades began across the world. Perpetual futures in Asia, and levered ETFs on Strategy among other things. This drove prices of crypto to all-time highs in September, only to see this vertical move completely wiped out, and then some, as the levered trades were unwound. While those getting long using leverage were certain this was a one-way trade, those expectations were not met. In fact, the past few weeks at the lowest levels since 2024, Saylor has capitulated and Strategy has been forced to sell. Could this be a sign we are near the bottom?

Affordability

I said affordability would be a major issue this year and I am standing behind it. There is a lot that goes into it but the poster child for it is home price affordability. If you look at late 2023/early 2024, we got to levels of affordability that were the worst in history. Worse even than the 2006 housing bubble.

Affordability is moving in the right direction, but is still a long way from being resolved. This will play a major part in the 2026 mid-term elections. It determined the 2024 election, and based on the latest poll from Gallup, shared by Marko Papic of BCA, inflation and prices are still a top issue

A lot of smart people I follow are pointing to the US 1-year inflation swap market collapsing, and suggesting it is ‘mission accomplished’ on price levels. There are a couple problems with this. First, this market-based measure is highly sensitive to the price of oil. Second, consumers (University of Michigan data) and the Fed itself (NY branch) still see higher levels of inflation one year ahead.

I made a simple average of the market, consumer and Fed inflation expectations and overlaid that versus the PCE that the FOMC watches. This inflation forecast (INFL_FC) leads the PCE by about 2 months. It does suggest the index should roll over, but still sees it well above the 2% (or even 3%) target.

I have written before and I still believe that inflation is not a number, but a mindset. While the market is starting to get sanguine about inflation, it is clear consumers do not feel this way yet. If gas prices fall further, there is a chance, but right now it is still an issue. The NY Fed measure is actually still rising. There are market expectations when it comes to inflation that are likely to be disappointed.

Earnings

I wrote on LinkedIn today:

It is also to see the presumed disappointment around the earnings at memory companies. Micron put up great numbers on the top and bottom line and told investors that the 2H of the year looks even better. However, that day's price action marked the top in the stock & it has headed lower

Last night, Samsung also put up really good numbers, in absolute terms and relative to expectations. They weren't quite as good as Micron, though. After all, Samsung is a diversified tch name. The stock responded by heading lower

Throw into the mix that SK Hynix is pricing a large ADR IPO this week, hitting the market with more supply

Overall, when stocks don't go up on good news, that is a bad sign. It is a sign that too many people are on the bandwagon, many of whom do not understand why they are there. Much like the new fans of the USMNT perhaps

Like the Will Ferrel commercial during World Cup games, though, these bandwagon fans will jump off and head to the next idea/theme/punt. That can leave a mess for the real fans who may not be as disappointed in the showing

This is important because these memory names have been driving the bus. Their negative price action is dragging the Nasdaq below its trendline. That points to further weakness ahead of other tech earnings that will come in the last couple weeks of the month

It will also give pause to traders and investors in non-tech as we approach earnings next week

Disappointment leads us to short-term reaction that may not be consistent with long-term fundamentals of direction

The rapid sell-off in these names is leading to an unwind of the Momentum factor by quant and systematic funds. 3 weeks ago, this factor was up 28% on a long-short, market-neutral and sector-neutral basis. That is a grand slam. People buy yachts with that performance. In 2 weeks, it has been cut in half.

That is real pain ladies and gentlemen. So much so, that even discretionary managers, who were surely riding the momentum wave in some way shape or form, are going to have a long, hard think about how they want to position going into earnings, which start in earnest next week. Suffice it to say, earnings expectations are quite high (kudos to EJ at Cantor):

While last quarter was exceptional in terms of earnings outcomes relative to expectations, the bar is even higher. On top of that, as we see in the memory names, even blowing away numbers is not enough. Michael Kantrowicz at Piper sees the strong ISM pointing to even more earnings growth, as it has historically.

My concern would be that the positive earnings surprises in the market are outstripping the economic strength. The ISM data last week was fine. Not raging bull market good. It was fine. Above 50 still, but lower than last month. New orders to inventories rolled over some. Still expansion, but maybe not as much as the stock market is expecting.

There are those darn expectations again. Bill Shakespeare would tell us that we are at the risk of heartache, as those who are long memory names, or emerging markets/Korea, or momentum stocks are finding out. When the bar is high, or when everyone is on the same side of the boat, it can be dangerous.

Trade ideas

There were quite a few votes for trade ideas. While I am usually hesitant to do this, because I do not want to run afoul of regulators, and because I have no idea what anyone’s risk book looks like, I figured I would give a couple. These are ones that I have talked about for the CME Group, but I think they are quite relevant.

The first is SOFR. There are still expectations of a hike in September and more than a full hike by December. While I think there are still affordability and inflation issues, I do not think the FOMC will want to move so close to an election without clearly obvious data. I don’t think we will get definitive data that causes a change in direction of policy. In addition, the long-term bond market is watching commodities and think it is mission accomplished. As such, I think 3-month SOFR futures could drift back higher.

I do not think we are going back to the rate cuts we saw earlier this year because of the sticky inflation. I think a lot of nothing from here. As a result, I like selling SOFR strangles (96-96.25 strikes) with the breakeven 95.90 (below the lows) and 96.33 (right where the technical resistance comes in). Sure, on a big move you have risk, but I think betting on nothing in short-term rates is better than better on something. I think falling gas prices bring down the rate hike expectations, and we are a far cry away from rate cuts.

The next idea I put out yesterday, based on looking at the Micron and Samsung numbers. The Nasdaq futures have broken below the trendline. This does not mean that the uptrend is broken. It does mean there is a lot of selling pressuring from futures traders. I think there will also be selling pressure from hedgers ahead of earnings. I can see a move lower from here.

The busiest tech earnings week is the last week of the month. This is the time to watch, and I want an expiration that captures it, thus the NEN6 expiration 29,250-28,000 1 by 2 put spread. I like this idea whether you are long and looking for a hedge, whether you want a stand-alone bearish options idea, or if you are short and want to leverage your short position. The sweet spot for the trade is -5% from here. The downside breakeven is down 9%. If futures simply go back higher, it costs nothing, so you don’t lose on it. Sure, there is risk-managing to do on a big move lower, but that is not the base case.

I didn’t really shorten the write-up. The majority of voters were fine with the length. The trade ideas are a new feature. Let me know your thoughts on that.

I am trying to keep my expectations in check for the feedback, because I like to be pleasantly surprised and not heartbroken. You want to do the same with your portfolio right now.