Hey There Income Hunter,
Monday’s trade had a feel of real money liquidation, as if guys got a tap on the shoulder to get out.
Yesterday’s trade probed the downside but held around this monster S&P 500 4,000 level. (The 4,000 level is by far the largest open interest strike across all strikes.)
Now, real money selling could plow through it, creating a crash scenario … However, in the shortest time frame the market is nearly fully protected, so you would need a serious flush below 4,000 to fuel a new distribution down.
As we move closer to the May 20 expiry, the probability for a relief rally increases because the 4,000 puts will expire, causing market makers that are short the puts and short stock will need to cover stock and will look to delta hedge the position.
In March we had a similar trade that was good for a 10% move higher but I don’t think that type of move is in the cards this time around …
Today we will look at the reasons why the bear may take a nap for a couple of days but he will be back …
Bullish View
I only see two bullish scenarios for the market …
One is a significantly lower inflation report (CPI) today. A .4% core month-on-month number is expected after a .3% core was reported last month. The number would have to be .2% to get anyone excited but even a .3% could keep a bid in the market at these levels.
The other catalyst for a rally is real. That is the option expiry on May 20 – and the May expiration is loaded with expiring puts that will trigger market maker stock buying to close their delta hedged positions.
Bearish View
We know there are plenty of negative forces at work, including geopolitical risk, financial conditions, recession and China lockdowns.
For now, most are priced in
New issues that the market has to think about are some really bad earnings and guidance … How about Shopify? They are a must-have for small businesses and they missed by 68% to reach a drop of 82% from the high.
Also, the Bank of England has come out saying they are forecasting a recession in 2023, telegraphing the inevitable for most western nations.
The US yield curve is signaling a major turn in sentiment with short rates dropping recently while long rates were grinding higher. This is an important one because it shows smart money realized that the Fed is much further behind the curve fighting inflation than the central bank are willing to admit.
Finally, there’s the Biden administration’s move to announce buying back the oil they supplied to the market just weeks ago. This was a great example of selling low and buying high … not a great strategy.
So, the bottom line is the technicals of option flow and expiration signal the potential for a short-term rally from the SPY 400 area. Then the economic data and inflation news will take center stage.
If you are looking to play for the relief rally, one option is to purchase a couple of the real value stocks that have been clobbered and, on the rally, sell a put spread in SPY. Then sit with the trade while boosting returns
Here are a few ticker’s to consider … DIS, CCJ, GDX, PBR.
Bring It Home
The biggest wild card I see in the market is China’s lockdown and devaluing of the yuan. This is bad news for global growth and demand for commodities in the short run.
They will eventually reopen and the pent-up demand will ignite renewed interest in the commodity sector, which no doubt is a screaming buy at these levels.
We are inching ever closer to the consensus narrative shifting to a Fed that will shortly pull back on tightening and I think that could happen by the end of June.
Until then keep your eye on the ball and hit a couple of singles and doubles … the home run is inching ever closer.
As always …
Live and Trade With Passion My Friend,
Griff