Hey There Income Hunter,

Keep an eye out this week …

The vicious bear market rally since March 15 may take a pause as fund managers rebalance 60/40 portfolios.

The S&P 500 is up nearly 10% in nine days and is sitting right on the Fibonacci .618 retracement of the move down from the all-time high of 4,818.62 . 

Last Thursday was an interesting day that saw the SPX +1% and within 6% of its record close, while NYSE new lows were greater than new highs.

And get this, the last time that happened was April 25, 2000, on the rebound from the initial break following the 2000 bubble peak.

This rally was heavily driven by short covering. Although, I get the feeling investors may think the buy-the-dip mentality is back, it is all a smokescreen …

Today I’ll show you why the timing is right to put the bear hat back on this week.

Implied Volatility Trading at a Discount to Actual Vol

Understanding the relationship between implied and actual volatility is extremely helpful in gaining an edge in the markets. 

The graph below illustrates the price, volume, actual vol (blue line), and implied vol (red line) of the SPDR S&P 500 Index ETF (Ticker: SPY).

Notice, the three instances above when implied vol is trading at a discount to actual (red line below the blue) … 

This is an important internal sign, which reveals that the previous rally was driven by long put positions being closed, out as opposed to actual buying of the underlying stock. 

Known as a short covering rally, this signal increases the probability that SPY will rollover and retrace the previous rally as the first and second instances did above.

The latest short covering rally over the past couple of weeks should follow the same script.

SPY 458  Provides Massive Resistance Above

Just above the current level of SPY is the .618 retracement of the down trade from 480.04 to 410.60. 

This all-important Fibonacci retracement comes in at 453.51 and historically it has been an area that is met with selling on a bear market rally and buying on a correction of an uptrend. 

Quarter-End Rebalancing

Finally, Q1 2022 has been a quarter where bond prices, as measured by the iShares 25+ Maturity Bond have traded straight down (-13%), while the S&P is only down 6%.

Now, at the end of the quarter, funds will rebalance their portfolios and sell stocks to buy bonds to rebalance. 

This rebalancing flow could be the impetus for stocks to regain their momentum to the down side. 

I believe the resumption of the downtrend is inevitable and the current set-up is advantageous for putting on a SPY low risk/high reward bear strategy early this week.

Bring It Home

I honestly don’t think we have seen the true damage the Russian invasion and subsequent sanctions have done to the financial system.

Liquidity greases the gears of the financial system and sanctions will have the same impact as throwing sand into those gears. 

On top of that, you have a Federal Reserve that is also throwing sand into the gears of the system by raising rates. 

The Fed and US government are playing a dangerous game, and I think investors will be surprised to see the extent of that damage. 

Capitalize on this bear market rally, have a great week and as always …

Live and Trade With Passion My Friend,

Griff