Hey There Income Hunters,
As predicted, we have gotten a heck of a bounce from the lows.
This was enough to wipe out the nearly 100% of the SPDR S&P 500 ETF Trust (SPY) implied volatility (IV) premium that signaled the potential for a sharp bounceback.
Keeping an eye on the IV premium over historical vol can give you an edge on whether the selling is real liquidation of longs or hedges and outright speculation from retail.
This is especially important this month as we head into the most important Fed meeting of the year on Dec. 14-15.
I believe the Fed will accelerate the QE taper and it could take us back to high volatility levels we saw at the end of last week.
Today, I’ll explain why and the best short to capture the next leg down.
The Fed’s Lips Are Sealed Until FOMC
The Fed is officially in a quiet period until next Wednesday’s FOMC. That means no more mind games or he said/she said from various Fed governors.
The Fed already made their point load and clear …
They are now in fight inflation mode and want to get aggressive by doubling up on the taper so they complete the process by the end of Q1 and can raise rates if needed beyond that.
However, the past couple of weeks have been fraught with volatility, made even more complicated by the end-of-year tax loss selling to offset +22% in S&P 500 gains as of yesterday.
This Rally Will Be Short-Lived
It has been a wild ride for the past two weeks with last week’s selloff driven by mostly shorts and hedging.
I reported on the spike in implied volatility premiums that flagged the massive put buying and right behind it was the largest inflow of client buying of single stocks and ETFs since 2017.
Here is the punch line:
The buyback bid was expected, and does account for the buying in the past few days, however, it could be set to end as soon as this Friday.
Sell Stocks Until Powell Reverses His “Whip Inflation Now” Rhetoric
Powell has really boxed himself into a corner.
The “transitory” theme is now dead. That means the Fed put and the market plunge protection team are now history.
So, speculators can shift to being sellers of stocks and test how serious Powell is about sucking the wind out of the sails of inflation.
This is his next move …
Powell needs the stock market to go down to dampen spending on higher priced goods so inflation subsides.
It’s a VERY tricky maneuver and my guess is that it triggers a sharp down move followed by a flip/flop back to a money printing Fed and US government spending spree.
When you know the Fed’s move, the blueprint to profits is clear: sell stocks until Powell cries uncle.
Powell wants stocks to go down. Now that we’ve had the rally and SPY implied vol has corrected … let’s give him what he wants!
Buy Put Spreads on the iShares Russell 200 ETF (Ticker: IWM)
We may get one more move higher allowing you to put on a bearish strategy on IWM near the 50-day moving average.
Notice all the selling volume on the way down with a gap to fill up around 228.50 right near the 50 DMA. That would be an ideal area to enter into the trade.
Bring It Home
I am pumped for this next trade.
Fed and US government policy has shifted and that should be, by far, the most important signpost for profits.
Trading teams will now review the probabilities for market direction under a committed inflation fighting Fed.
My bet is they will shift to selling equity rallies as opposed to buying the dip.
Live and Trade With Passion My Friends,
Griff