The boy who has been crying wolf for months may not be heard today.

The market may have already gotten the Fed beatdown this week … On Monday the Fed’s Jim Bullard again stated that rates will remain high until inflation gets back to their 2% target …

Are these guys kidding me? How many times can you repeat the same BS and think the market is going to react the same way over and over? 

Well, this time IS different … 

After Powell’s speech today more weak economic data is ahead plus the Fed enters its blackout period on Monday so the Hawks will be locked up until the FOMC meeting on Dec-14. 

Today we will look at what to expect from Powell and the follow-up data we will see in the days ahead 

No doubt the message will be hawkish … Powell will reiterate that even if it looks like inflation is falling, the Fed will keep rates high for longer to ensure inflation expectations come down to their 2% target. 

However, here is the key point in all of this … The market is already looking beyond the Fed. It doesn’t matter what Powell says right now.

Here is what matters and we will get all this information in the days ahead:

• Today – Real GDP, Job Openings/Quits data, Pending Home Sales and Powell speaks at the Brookings Institution.

• Thursday 12/01 – Initial Jobless claims, PCE price index

• Friday 12/02 – Payroll data

• Monday – Fed goes into a blackout period. No public announcements. 

In the meantime, we are entering the silly season, which is the illiquid, tax-selling, end-of-the-year, and illiquid trading month of December. 

Just days after the Powell speech, the Fed Blackout begins (Dec. 3) lasting ten days until the FOMC Dec 14 announcement. 

So, Powell’s speech today will be the last of the Fed’s verbal hawkish beatdown while a disappointing payrolls report is on the agenda for Friday, with another weak CPI on deck the day before the Dec FOMC.

Money Flows are Balanced

Believe me, I am extremely bearish as we enter Q1 ‘23  but the short-term technicals can swing bullish or bearish from here. Why, you ask? … 

Because the fair value for the S&P 500 index (Ticker: SPX) is 3950 – 4000 … The high volume price for the YEAR is right where SPX has been trading for a couple of weeks. 

So, we should see SPX trend away from this area into the year-end but my question is this … Is it too obvious to think it will be to the downside?  

Consider this … CTAs currently have about $4 billion of exposure to SPX. Goldman estimates that they have purchased over $8 bn over the past week and $23+ bn over the last month. 

This SPX demand has now flipped to supply as the CTA medium-term momentum indicator pivoted from positive to negative with SPX closing below 3969. 

This medium-term momentum indicator is the most followed trigger in terms of total CTA AUM.

The chart below illustrates this monster area of liquidity SPX resides …

On the bearish side, the fact that short-term volatility is so low could attract buyers of protection. 

Especially if we get a large negative shock from the Crypto fallout that shifts the momentum down and the CTAs become sellers instead of buyers … 

Below is the 9-day SPX Vol sitting near YTD lows and with the massive DEC16 OpEx ahead once momentum builds to the downside it could hit an air pocket.

It will not take much to build negative gamma into the options dealer’s delta-hedged positioning … 

As investors buy portfolio protection via buying puts, dealer counterparts are left short puts/short stock …

That is a negative gamma, rising volatility position … Dealers must sell more stock in a falling market, which accelerates the trend lower. 

Bring It Home

So, what’s the trade?

I was looking for a way to have exposure to the downside but pay for it with a call credit spread.

I came up with buying 2 Apple Inc (Ticker: AAPL) DEC16 130/135 put credit spreads for $1 credit then buying 2 VIX 23/25 call spreads for .70.

I think the trade makes sense and with a bit of luck and a flush down you could book the profit on the VIX spread and on a bounce book some nice coin on the AAPL credit spread also. 

I’ll do some more work on the trade and report back with new thoughts … Let me know what you think … email me at [email protected] or @Bill_Griffo on Twitter … 

Until then …

Live and Trade With passion My Friend,

Griff