Hey There Income Hunter,

Wll, the week got off to a good start with the S&P 400 up about 1% and possibilities of reaching the 4,200 level …

Then, all of sudden, the iShares 25+ Maturity Treasury Bond ETF (TLT) dropped like a stone from $116 down to $114 – and stock indexes followed that lead right back down.

For six days now, SPX has been whipping back and forth in a very tight range. The market is coiling tighter and tighter, building up energy for a sharp move.

The question is which way? 

Today, I’ll reveal insight as to where the next move in stocks may be and why.

The Fed Has Full Control

I hate to say it, but the market is at the mercy of the Fed FOMC meeting next week. The only number that can move markets before that comes on Friday when CPI for May is released.

Even then, I don’t see the market breaking much higher or lower than the current 4,100 to 4,200 range on SPX. 

Then we wait for the words that come out of Jerome Powell’s mouth a week from Wednesday. That is a huge wild card, especially after Powell met with Biden at the White House recently.

At their meeting Biden passed the buck on inflation to the Fed, no doubt in hopes of deflecting blame from himself as he heads towards the midterms. 

This was a smart move since the Fed is an independent entity responsible for creating and controlling inflation. Here is where Biden could end up throwing Powell under the bus …

Economy-wide price increases are always the result of the Federal Reserve’s easy money policies. The true definition of inflation is actually the creation of money by the central bank … the increase in prices is simply a symptom.

The Ball is Now in Powell’s Court

Even if the Fed follows through on all of its projected rate increases, rates will still be at historic lows and the central bank will fail at getting anywhere close to its 2% inflation target. . 

Both Powell and Treasury secretary Janet Yellen admitted they were wrong to double down on “transitory inflation.” That was one of many blunders the Fed has made in its history …

Those blunders have been the result of an insane tradeoff between high prices or high unemployment. So, all Powell can do is raise rates and execute quantitative tightening in hopes of bringing inflation down. 

Forecasts for Inflation the Rest of the Year

The forecast for year-on-year inflation (CPI) is to only drop to 5.5-to-6%. That will not do anything to help the average American. 

How to Play the Markets

The first hint of a slowdown in inflation will boost the market higher. That could be as soon as this Friday. Alternatively, any hint of the Fed pulling back on the extent of tightening due to a growth slowdown would also boost stock prices. 

So, the bottom line is, be aware of the potential for spikes higher … but keep selling rips higher because there is no easy way out for the Fed. 

June 17 Options Expiration Opportunity

A week after the CPI number comes a very large option expiration. This expiration will remove a large amount of put positions from the 4,000 and 4,001 strikes.

Notice the chart below showing the June 17 expiration ratio of positive option deltas versus negative. (For clarity, negative deltas are short call, long put positions and positive deltas are long call, short put positions.)

Upon expiration, option dealers and market makers net short the negative deltas – which are delta hedged with short stock positions – will be forced to cover their short stock delta hedges.

This could send the market higher before, after or on the day of expiration. This rally could take the SPX as high as 4300. And that would be the ideal spot to set up a short position. 

Bring It Home

To be a complete trader you need to be on top of the fundamentals, technicals and positioning of stock and option flows.

We are close to the large strikes that will be expiring a week from Friday. so for now you should be selling near 4,200 and buying near 4,100 at least into Friday.

I have covered my bearish stock trades and am trying to be patient for the chance to set a better long-term short. 

Powell and co. love to use words as a smokescreen, so the smart play is monitoring market internals to get an edge on the next big move.

Stay tuned and as always …

Live and Trade With Passion My Friend,

Griff