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Hey There Income Hunters,

 

There was a lot of white towel waving happening on Monday.

 

The SPDR S&P 500 Trust ETF (Ticker: SPY) broke the key 430 level early on and we barely had a dead cat bounce the rest of the day. . 

 

Why was SPY 430 so important?

 

Well, below 430 a ton of large Put positions were put on to hedge equity portfolios due to the uncertainty of the Fed tightening cycle. The pre-hedging kept the down trade orderly until yesterday, and here’s why …

 

Option flow can be a major driver of price action as investors use puts as insurance in bear markets to avoid liquidating their long-term holdings. 

 

Market makers who sell the puts to money managers will then sell stock against their short put position. However, if prices continue lower, they will have to sell more stock due to the variables, like gamma, that impact stocks. 

 

So, now that we are headed to lower strikes where all the puts reside, dealer and market maker adjustments could begin to accelerate the downtrend. 

 

Having this intel is extremely useful as a trader because you can get more aggressive with your positions when you hit certain areas of the market. 

 

Today, I’ll lay out what we can expect from the market in the FOMC meeting next week and beyond.

 

Sell the Rumor Buy the Fact

 

The crosswinds of uncertainty are howling right now. That is why there has been so much put buying. 

 

Here is a breakdown of options positioning by strike price. Notice the bars above and below the x axis. The bars above show the positive effect options will have on the spot price while bars below show the negative impact options will have on price.

 

Notice the 430 level standing out as the most heavily traded strike. This offers value in knowing that once price builds momentum below that level, you can expect the down trade to pick up momentum as dealers adjust their hedges by selling stock. 

 

That is exactly what happened yesterday, and it may well continue into next week barring any positive news on the Russian invasion. 

 

The 420 strike also has sizable open interest and will pressure the market lower. So, we could see a capitulation trade prior to the Fed FOMC meeting next week. 

 

However, the week after – with the Fed meeting and monthly option expiration (OPEX) – we could see a lift of the option pressure and a possible snapback in the market. 

 

The Volatility Impact on the Market

 

Volatility in the bond and oil market has been even wilder than in the stock market. This is not common, but it is usually a signal that can give you some insight on what to expect. 

 

It makes sense that bond vol is so high right now since the Fed rate policy changes directly impact bond prices. 

 

Here is a chart of the volatility trends for the three markets …

 

 

We had a similar pattern in November when the bond vol spiked higher, followed by oil vol and finally stock volatility caught up. 

 

We may be in a similar situation now as the VIX grinds higher and could spike in the next few trading sessions prior to the FOMC meeting. 

 

The S&P Volatility Index (Ticker: VIX)

 

Another helpful indicator input for trading ideas is the seasonality chart on futures or stocks. The charts below highlight the seasonal patterns for the VIX.

 

The chart on the left is the average monthly performance of the VIX between 2019-2022. I separated out 2018 because that was the year the Fed also switched to a rising interest rate cycle.

 

 

The key takeaway is that April in both years was a month that the vix traded down. So, this gives you another piece of the puzzle that indicates a possible stock rally post the Fed meeting. 

 

Bring It Home

 

For this week I will continue to sell rallies and look for the SPY to trade down to the 400 level. 

 

I stacked some nice profits in the past couple of weeks because I knew from my past experiences that the equity market does not like when the Fed is draining liquidity from the market. 

 

For months, I have been saying we are heading into a bear market and Imade sure I stayed short since the beginning of the year. 

 

You don’t have to risk a lot of capital to make a lot of money … Check out my last few trades

 

 

When you have a gameplan based on the macro drivers of the market, including the Fed, growth and inflation … trading can be easy, because our policymakers look to past data to make future decisions. 

 

I look at the rates of change on current data to get out in front of the market. Now everyone is bearish just as I am seeing the potential for a nice bear market rally in the weeks ahead. 

 

Join me on Thursday at 8 p.m. for a no-cost event and I’ll show you how to capitalize. 

 

Live and Trade With Passion My Friend,

Griff

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