Back Portfolio Strategy

Growing Risk of an FCI Tightening Induced Drawdown

Published on May 13, 2026

∙ Download the PDF Report

Dennis DeBusschere

Brian Herlihy

Kevin Brocks

Sophia Wang

DAILY STRATEGY: Low Vol and Defensives outperforming yesterday is consistent with a financial conditions tightening trade as 10yr yields approach 4.5%, the level that has led to a reversal in correlations this cycle (HERE). The AI buildout trade came under pressure too. AI names are less rate sensitive but, as we argued on Monday, are impacted by meaningful FCI tightening trades. Yesterday’s inflation data indicated another hot month of inflation* and investors are becoming more concerned that the SOH will stay closed for longer. There is a risk of an extended FCI tightening trade.

Momentum drawdowns tend to be rapid. In the most recent drawdowns – urate spiking in the summer of 2024, Liberation Day, the Iran War – it took ~2 weeks for Momentum to drop -10%. We would hedge against a Momentum drawdown now. Our Momentum factor is highly exposed to Semis, Energy, Tech Hardware, Cap Goods, and Materials. Those are the same industries that are driving small cap outperformance, which makes the IWM a good hedge right now. Jeff Jacobson, 22V’s Derivatives specialist, likes the following structure…

Trade:
Buy IWM June 18^th 278/250 put spread for ~$5 (IWM ref 282.57)

From Jeff…

Trade Details:

Buying the June 30-point put spread in IWM following 20% rally off the March lows
Starting to see real weakness in several of the more cyclical areas of the market (that tend to be more levered to IWM)
Put spread starts ~1.6% below spot and is capped to the downside at the 200-day moving average
Trade offers a ~4.6x to 1 max payoff on the limited-risk hedge
IWM has stopped outperforming SPY as well, even as markets have continued to rally
Please reach out to Jeff or the 22V sales team for updated pricing and execution capabilities

*Gerard’s cut of the consensus readthroughs of core PCE from core CPI shows a YoY core PCE ticking up to 3.35-3.4% (HERE). As Gerard put it succinctly, “The inflation news so far this month does not look good… It continues to be concentrated on the goods side, but supercore services have also been accelerating.” The spread between core inflation and financial conditions continues to widen.

Charts…

CPI implies Core PCE will tick higher to ~3.35-3.4%. We will get more precise estimates after PPI today and, to a lesser extent, Import Prices tomorrow.

A graph of a price

AI-generated content may be incorrect.

The gap between core inflation and financial conditions is widening. There is a greater risk of a financial conditions tightener trade now. We would still be long the mega themes that are working, like the AI capex buildout, but hedge against a drawdown.

A graph of blue and orange lines

AI-generated content may be incorrect.

Momentum drawdowns tend to be rapid.

A graph of orange and blue lines

AI-generated content may be incorrect.

Cyclicals vs Defensives PE is elevated.

Small cap returns are dominated by the AI capex beneficiaries – Cap Goods, Semis, Tech Hardware – making small caps a good option to hedge against a Momentum drawdown.

DISCLOSURES AND DISCLAIMERS

Analyst Certification

The analyst, 22V Research Group, primarily responsible for the preparation of this research report attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2) that no part of the research analyst’s compensation was, is, or will be directly related to the specific recommendations or views in this research report.

Analyst Certifications and Independence of Research.

Each of the 22V Research analysts whose names appear on the front page of this report hereby certify that all the views expressed in this Report accurately reflect our personal views about any and all of the subject securities or issuers and that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views of in this Report.

22V Research (the “Company”) is an independent research provider. The Company is not a member of the FINRA or the SIPC and is not a registered broker dealer or investment adviser. 22V Research has no other regulated or unregulated business activities which conflict with its provision of independent research.

22V Research, LLC is a professional services and independent publication organization. 22V Research, LLC is not a securities broker-dealer, not a member of the Financial Industry Regulatory Authority (FINRA), not a registered investment advisor (RIA) and not a member of SIPC.

Securities transactions, when offered, are offered by 22V Securities, LLC through LPS Capital, LLC. Certain employees of 22V Securities, LLC are dually registered as securities representatives of LPS Capital, LLC or Analyst Hub Securities, LLC. 22V Securities, LPS Capital and Analyst Hub Securities are members FINRA, SIPC.

https://brokercheck.finra.org/

Current Ratings Definition.

SECTOR OUTPERFORM: An “outperform” rating anticipates the company will outperform the S&P Regional Banking Index (peer group).

SECTOR PERFORM: A “market perform” rating anticipates the company will perform in line with the S&P Regional Banking Index (peer group).

SECTOR UNDERPERFORM: An “underperform” rating anticipates the company will underperform the S&P Regional Banking Index (peer group).

Limitation Of Research And Information.

This Report has been prepared for distribution to only qualified institutional or professional clients of 22V Research Group. The contents of this Report represent the views, opinions, and analyses of its authors. The information contained herein does not constitute financial, legal, tax or any other advice. All third-party data presented herein were obtained from publicly available sources which are believed to be reliable; however, the Company makes no warranty, express or implied, concerning the accuracy or completeness of such information. In no event shall the Company be responsible or liable for the correctness of, or update to, any such material or for any damage or lost opportunities resulting from use of this data. Nothing contained in this Report or any distribution by the Company should be construed as any offer to sell, or any solicitation of an offer to buy, any security or investment. Any research or other material received should not be construed as individualized investment advice. Investment decisions should be made as part of an overall portfolio strategy and you should consult with a professional financial advisor, legal and tax advisor prior to making any investment decision. 22V Research Group shall not be liable for any direct or indirect, incidental or consequential loss or damage (including loss of profits, revenue or goodwill) arising from any investment decisions based on information or research obtained from 22V Research Group.

Reproduction And Distribution Strictly Prohibited.

No user of this Report may reproduce, modify, copy, distribute, sell, resell, transmit, transfer, license, assign or publish the Report itself or any information contained therein. Notwithstanding the foregoing, clients with access to working models are permitted to alter or modify the information contained therein, provided that it is solely for such client’s own use. This Report is not intended to be available or distributed for any purpose that would be deemed unlawful or otherwise prohibited by any local, state, national or international laws or regulations or would otherwise subject the Company to registration or regulation of any kind within such jurisdiction.

Copyrights, Trademarks, Intellectual Property.

22V Research Group, and any logos or marks included in this Report are proprietary materials. The use of such terms and logos and marks without the express written consent of 22V Research Group is strictly prohibited. The copyright in the pages or in the screens of the Report, and in the information and material therein, is proprietary material owned by 22V Research Group unless otherwise indicated. The unauthorized use of any material on this Report may violate numerous statutes, regulations and laws, including, but not limited to, copyright, trademark, trade secret or patent laws.