Caution Ahead

I think equities are about to get heavier for a simple reason, real rates are grinding higher, and that is a heavy weight on the entire equity complex, small caps first, then the broader EQ market. What makes this setup more uncomfortable is how real yields are rising, it’s being driven more by the nominal leg than by a fresh inflation impulse. In other words, this looks like duration repricing, not reflation.

You can see the stress starting to show up in options as well. ES put/call skew is getting rinsed, and the 3-month Z-score looks meaningfully worse in ES than in NQ and RTY, an early warning that protection is being repriced in the benchmark.

Later today I’ll publish a second note that assesses the equity internals and positioning, using the internal framework we’ve been discussing to pinpoint where the fragility is concentrated.