Hey There Income Hunter,
Jay Powell may have fooled some of the investors some of the time, but on Friday portfolio managers had enough and began liquidating truck loads of stock.
The net effect of earnings results last week were worse than expected – a prediction I made about Q2 2022 months ago – and finally the mighty are starting to fall.
Mega-cap names including Apple (Ticker: AAPL), Tesla (Ticker: TSLA), Meta Platforms Inc. (Ticker: FB), Amazon (Ticker: AMZN) and Microsoft (Ticker: MSFT) got hammered on huge stock and option volume.
In my Power Income letter on Thursday, I presented the case for buying equity volatility near the 20 level …
I showed how leading into the last FOMC meeting on March 16 the VIX went from 20 to 37 as put buying was constant for a couple of weeks …
I then made the case that economic conditions are substantially weaker now but the market has priced in even more rate hikes.
It just doesn’t make sense.
Today, I’ll show you why …
40 Years of Lower Highs Fed Funds Rate
Notice in the chart below that since 1980 each rate hiking cycle ended below the peak of the one prior.
So, think about that for a second … In Q4 2018 the Fed stopped raising rates when they reached 2.5%.
And right now, the market is priced for a peak in rates in mid-2023, around 3.5%, and an annualized pace of QT of $1.14 trillion per …
Today, the real economy is in far worse shape than it was in 2018.
Americans have suffered a tremendous decrease in their quality of life over the past 12 months as salaried workers suffered a 3.7% decline in their inflation-adjusted paychecks.
That is the largest drop since 1980 …
Elsewhere, European banks announced last week they will begin raising rates this summer after their inflation spiked in one-year from 1.3% to 7.5% and their bond yields are rising at the fastest rate in 20-years.
Look, I have called for an early-1980s recession for months now. I live – and traded successfully – through the last one … and it’s on our doorstep again, possibly this quarter.
China Woes Continue
Finally, the third event that has occurred since the last FOMC meeting is China’s complete lockdown of Shanghai.
Shanghai is one of the world’s busiest ports, and not just for exports. Many components and materials arrive by ship then leave again as finished products.
Normally, the ports are operating smoothly. Right now, it’s a total mess.
Chinese stocks have been beaten back to the lows and the economy is in danger of weakening further …
China made a big mistake in 2020 bragging about how great their zero-COVID policy was, but now leadership in Beijing must stay with it or risk losing credibility …
This is a must-watch situation that could speed up the process to a global recession and potential debt crisis in the West.
Bring It Home
The market has room to the downside.
Friday’s trades forced option market makers into negative gamma positions as they sold puts to fund managers who are buying put protection into the FOMC meeting.
When market makers sell puts, they hedge their market risk by selling a delta-hedged amount of underlying stock. However, being short options delta hedged with stock means when the market goes lower, market makers must sell more stock to rebalance their hedge.
This condition adds to volatility and aggravates a downtrend until the puts are sold back or they expire – but that will take time …
So, continue selling rips in the indexes and buy dips in the VIX this week …
Have a great week and as alway …
Live and Trade With Passion My Friend,
Griff