Hey There Income Hunter,

All of sudden the Fed forecasts much lower inflation in the years ahead and the market is bullish? 

Isn’t this the same Fed that had a forecast of 2% inflation at the end of 2021 when it was actually 3.5%?

Investors want so badly for the Fed to be right. No one likes a bear market, but let’s face it … the market was definitely oversold but the economic news has been much worse than expected.

If you look at the honest projections for earnings and the priceto-earnings ratio, the market is not cheap. 

Today, I’ll lay out what the internals are showing and what S&P 500 fair value is using honest earnings forecasts.

Follow Internals not Economic Forecasts

Such a strong economy, strong consumer, hot labor market … blah, blah, blah

Check out how much real money investors are paying for counterparty credit risk protection on major US retailers …

Now, the retailers have had a miserable reporting season and there is no hope for any fiscal spending to change things. 

As a matter of fact, the economy is facing a trillion dollar fiscal drag and another 1.5% in rate hikes.

Short Interest Still Low

The bull market wiped out all shorts. The 2000 rally had a similar effect on the market as illustrated by the graph below. 

A real turn in the market will occur once we see a viscous capitulation of longs and short interest rises.

This rally is giving us a great opportunity to reset shorts in consumer discretionary stocks as well as retailers. You can also short the iShares High Yield Corporate Bond ETF (HYG).

Notice the rally over the past few days and the set-up below which offers an attractive risk/reward. 

I executed a 78.5/78 put spread at the close yesterday for $.16 to June17 expiry. Your maximum return is over 200%. This based on HYG closing below the $78 price at expiration.

You can expect a move of $2 from now until expiration based on the money strangle. So, the target is well within expectations.

Bring It Home

Today should be interesting with a holiday weekend ahead of us. 

I could see further upside if real money continues flowing into the market. If it does, 4,200 on the S&P 500 could be achievable.

However, I am doubtful that it will happen prior to the next FOMC meeting on June 15 and option expiration (June 17), and I think a bear strategy in HYG is a good way to fade this rally. 

Have a great weekend and as always …

Live and Trade With Passion My Friend,

Griff