Hey There Income Hunter,

Usually this time of year, you start humming songs like It’s Beginning to Look a Lot Like Christmas.”

But as a trader, after the incredible week we had,it could be It’s beginning to look alot like August.

And we are getting all the familiar good tidings including:

• A VIX crush that had gone from 34 down to 20 in August – and we’ll get there this week

• A decline in bond volatility (MOVE index) similar to what we saw in August

• The percentage gain in SPX that we saw in August (actually 3% away, but will probably get there next week)

Another 3% next week will get us just above $4,100, which would match the August move, just in time for Nov. 18 option expiration

$4,100ish and OpEx is right where and when this rally will fizzle out.

Today we’ll take a close look and look at a watchlist of trades to consider.

Deja Vu All Over Again

I love that Yogi Berra line … Check out the symmetry of the August and November rallies.

All we need is another 3% move higher in SPX and a further 2-point drop in the VIX and we are there. That would give us two 18%-plus moves higher this year, which is pretty incredible when you think about this year being the worst on record for stocks and bonds combined. 

Every other decent rally this year reversed quickly and crashed hard. The difference being in both August and November a good amount of positive gamma has been built up.

On Thursday, a massive move on CPI put valuations got crushed and calls were purchased. When calls are purchased, dealer counterparts on the trades sell the calls and buy stock to delta hedge the positions.  

We could see a bit more FOMO next week as the drop in CPI has created a sense of euphoria about a Fed pivot. However, these rallies actually ease financial conditions, so if anything they push any change in policy out further. 

But don’t worry there is a big seller coming next week …

OpEx the Big Seller

When you have rallies like this into a monthly OpEx, there is much positive gamma, which provided a source of support for SPX.

However, the Nov. 18 OpEx will wipe out much of that positive Gamma. So, unless new buyers come in and buy calls or customers reset their call,  then dealers will have to sell the stock that was hedging their short call position. 

Notice in the chart above how the selling pressure that started the day of the August OpEx and continued to the end of September. There were twice as many red candles as green post-Aug. OpEx and the VIX went right back up to 34.  

The Watchlist to Sell

Once again, the market is getting ahead of itself.

The Fed will start talking tough again because higher stocks ease financial conditions and turn inflation right back up. 

Sell the sector that was getting crushed before the CPI print, which is Tech … Meta Platforms Inc. (Ticker: META) is up 30% in 5-days, Microsoft Corp. (Ticker: MSFT) is still way overvalued and also Invesco QQQ Trust (Ticker: QQQ) at 290 is a great candidate.

Bring It Home

Just keep telling yourself … This is just another bear market rally.

We have yet to see the next leg of the economic downturn. I agree CPI rolling over is a great thing – but it is still at 7.7%.

The November and December data is not going to be good and we may see more situations like the FTX exchange, which is now heading to bankruptcy court.

I want to see the rally to $4,100 hundred next week. If we do, get ready to sell.

And if you feel a bit of FOMO take a cold shower. The real pivot is still some months away.

Until then …

Live and Trade With Passion My Friend,

Griff