Sell The Rip When Scrooge Comes to Town In January

Hey There Income Hunters,

Now that is one hell of a Santa Claus Rally!

7%+ in six days classifies as a nice end-of-year rip higher.

Once again the rally was fueled by the handful of large-cap growth stocks. 

Now check out this stat from Monday …

The S&P 500 made an all-time new high with only 49% of the S&P stocks above the 200-day moving average..

In early November the number of stocks above the 200 DMA was 65%.

We basically have had two markets for the past couple of months.

We have had a serious correction in over half the S&P and the half-dozen that have remained near their highs of all time. 

This is NOT a rally you can trust.

We could see a swift reversal back down to new lows in January.

Today, we’ll take a look at the supporting data and volatility indicator showing which index to sell.

No QQQestion

The Invesco QQQ Trust (Ticker: QQQ) rallied back to the highs a lot faster than the correction below $380, that is for sure. 

But there were a couple of important signs telling us this rally was more about year-end window dressing, which is the term used for manipulating prices to get the best possible performance figures for 2021. 

• We always want to see a move higher in price validated with higher-than-average volume. This latest rally was on very low volume.

• We would also like to see implied volatility trading at a premium to historical, validating that leveraged players are jumping in. As you can see below, QQQ implied volatility is trading at a discount to historical. This is a signal that there is not a lot of depth to the buying and you can expect a reversal lower to narrow the differential. 

Higher Interest Rates Will Pressure QQQ

Starting next week the market focus will turn to tightening monetary policy around the world (except in China).

The Fed does not want to raise interest rates very high because that would risk triggering a default on $30 trillion in government debt payments. 

Using France as an indication for foreign interest rate trends, it appears we are in for a move higher in bond rates, which would be negative for QQQ stock valuations. 

Check out the trend of higher interest rates each time a new COVID variant cases roll over … 

So, the only way they can get inflation down without killing the real economy is to break the back of the market by talking tough and aggressively pulling back the QE stimulus. 

Today, the Power Income Trader Policy Gauge is flashing red and signalling a tightening monetary policy. This is a warning sign for stocks to go into a deeper correction.

Notice the Green boxes in the chart below. These are the periods when the Fed was tapering stimulus or removing previous QE that was injected into the banking system …

Each time the Fed was removing assets from its balance sheet the stock market suffered. I don’t think this time will be any different.

The probability of a QQQ reversal back down is high and it will be interesting to see how the Fed reacts to a significant 10%+ correction.

Just as the Fed could not control inflation, the central bank  will not be able to control disinflation, so they better be quick to reverse the taper if the correction turns into a market rout.

Bring It Home

Just as investors are not experienced in dealing with inflation, they may not be experienced in shorting the market.

However, there is more money to be made with bearish option strategies during corrections than bullish ones during rallies. 

The market goes down much faster than it goes up, so you get the added juice of rising volatility, as well as being right on the direction. You just have to be willing to go both ways.

Stay tuned to Power Income for any change to the internal indicators and gear up for a “Sell the Rip” mentality in 2022!

Until then …

Live and Trade With Passion My Friends,

Griff