Hey There Income Hunter,

One area of focus during the back-half-of-March stock rally was the outperformance of high short interest stocks.

Do you know what that means?

Retail is back pushing the “pain trade,” which is buying the stocks that have the highest percentage of short interest to squeeze the markets higher – think GameStop Corp. (Tocker: GME) and Blink Charging Co. (Ticker: BLNK). 

They have timed it perfectly as the general bias continues to be short stocks into the rally, while there is a lack of negative economic news to entice real sellers to liquidate positions.

Even as we are starting to see a shift towards some new downside hedging of the S&P 500 Index ETF (Ticker: SPY), the overall S&P 500 continues to hold support at 4,500 and grind higher towards upside resistance at 4,600.

Retail option flow may continue to squeeze the markets higher this week because the markets and the calendar are devoid of any fresh data or flows …

However, next week’s full slate of March economic data will reveal the negative impact of inflation, sanctions and higher rates on the economy, which should ignite fresh big money flows.

Let’s get ahead of those now.

Those Pesky Numbers

Well, to begin with we know that consumer spending accounts for at least 60% of GDP. That means as the consumer goes, so goes US GDP. 

This is where it gets tricky. Because with such high inflation, consumer costs are rising dramatically but wages are lagging. So consumers are seriously struggling.

One-year out consumer expectations are by far the worst we have seen in 40-years. 

These numbers are terrible and the sanctions may keep inflation high while the Fed pushes rates higher at the same time. 

This will be a double whammy as banks have to pass through higher credit card and mortgage rates to the consumer. 

Base Effects Will Not Help 

Base effects also have a major impact on economic data … In other words.all economic data is released as year-on-year (YoY) comparisons. So, we have to look back at Q1 ’21 to see how Q1 ’22 will compare ..

We all remember Q2 ’21 because it was one of the greatest quarters in history as $43 trillion in stimulus was being distributed in stimmy checks and injections of liquidity into the markets.

The chart below is a great illustration provided by Hedgeye showing the comparable levels of income to March ‘21. As you can see, the rate of change from March of last year will make an already challenging month look horrible by comparison. 

For example, March of last year per person income reached $5,000 versus an average of $1,500 most other months.

So, if March ‘22 personal income is reported at $1,500 the YoY rate of change will be a decrease of 70%. 

 

These reports will confirm that the strength in the economy in 2021 was purely due to Government stimulus …

Plus, the Fed is now taking back stimulus while inflation is pushing expenses higher than they have ever been for today’s American consumers ….

So, next week starting on Tuesday we have a barrage of data and bond supply that will also weigh on stock prices …

The consumer price index (CPI) comes out on Tuesday, followed by the producer price index (PPI) on Wednesday, with Retail sales on Thursday and industrial production on Friday …

They will all give us important insight into consumer spending (retail sales) and their cost of goods (CPI).

On top of that the Treasury will issue over $100 billion in new Treasury bonds that pay for all the spending they have done in years past. The interest rates that are locked in via the Treasury auction process provide insight into the cost of credit that consumers rely so heavily on. 

Bring It Home (With a Trade!)

This week is a good time to consider a bearish strategy on the SPDR Select Consumer Discretionary Sector ETF (Ticker: XLY) … 

XLY has been grinding higher and is approaching key resistance above. Look at the April 14 expiration and consider a put spread. I executed a 187/184 put spread and it is ideal for carrying through next week.

I believe we are in a period of serious slowdown and will let the economic numbers speak for themselves.

Live and Trade With Passion My Friend,

Griff