Hey There Income Hunter,

Another speech by Jerome Powell and another stock crush.

The trouble started early when the Philly Fed manufacturing survey plummeted to 17.6 versus 21.9 expectations. 

The barometer on new orders fell to 17.8 in April from 25.8 the prior month. And the shipments index dropped to 19.1 from 30.2.

These were indeed shocking numbers that, in spite of an excellent Tesla earnings report, brought out real money sellers. 

A 4% reversal was ignited by a bearish relative strength index divergence to a new high on the week. 

Then Powell spoke at the IMF conference and carried the Hawkish flag …

He spoke about how aggressive the Fed needs to be to get inflation down, although was never asked about the crash in manufacturing reported just hours earlier. The market traded down right into the close for a total reversal of 4.20% … 

Let’s take a deeper dive into what you should expect in the coming days and weeks ahead.

Now, the Market Can Start to Focus on the May 4 FOMC Meeting

Early May not only delivers a wide range of possibilities out of the Fed but also an additional wild card of volatility …

The second big event is a likely default by Russia, which paid holders of its bond denominated in dollars with Russian rubles.  

This would ultimately be one of the starkest consequences to date of Moscow’s exclusion from the Western financial system following Vladimir Putin’s invasion of Ukraine.

It would also be the first major default on foreign bonds since the 1917 Bolshevik Revolution. 

The Kremlin, of course, says the West is forcing a default by imposing crippling sanctions.

Russia was given a 30-day grace period to rectify its ruble decision and that ends on May 4 …

And this adds to the uncertainty and risk hanging over the market. However there is just not enough risk premium built into the stock market … 

Stock Volatility (VIX) Is Priced Too Low

I have been pounding the table on this for a while and yesterday the market finally woke up. 

Just check out the graph below showing how stocks have ignored the up trend in volatility priced into bonds and foreign exchange. 

Yesterday’s trade showed the vulnerability of the market to bad economic numbers and the upcoming downturn may feed on itself as we get closer to May 4.

A Repeat of Early March

Buy-and-hold stock funds will now have to decide whether they should start buying put protection for their portfolios before the market tanks any further. 

This is a big reason why Andrew Giovinazzi and I did a live event on Thursday and gave our Power Gains subscribers a bullish option spread in the VIX.

Take a look at the S&P market action leading up to the March 16 Fed FOMC meeting …

Notice the sharp downtrend, the rise in volume and the spike in volatility right up to the March 16 meeting. 

The VIX rose a solid $10 on that move and I think we will see that again heading into May 4.

Bring It Home

I bought a VIX May 18 21/26 call spread for $.60 and by the end of the day the position was up 66%.

I think we will see a VIX in the upper 20’s over the next couple of weeks …

Then we’ll see if the Fed will put its money where its mouth has been for the past few weeks …

Stay tuned, have an awesome trading day and as always  …

Live and Trade With Passion My Friend,

Griff