I SPY-ed A Snapback

Hey There Income Hunters,


In my Macro Monday show yesterday morning, we went through the normal signals of imminent trouble in markets.


The good news? There are none to be found. (The bad news for some is that Macro Monday — and many other features — are exclusive to Trading Legion and pro members. If you’re missing out, call our Customer Care team at 1-888-872-3301 to see what works for you.)


No signs of trouble in the funding markets or corporate credit spreads. Even leveraged loan defaults are below pre-Covid levels


One thing did stand out, however, and it was the jump in the implied volatility premium to 10 points above historical. This, along with the highest put volume in 18 months, told the story of yesterday’s trade.


The equity markets may ultimately correct 20% or more next year but there is way too much money flowing for that to happen now.


Today I’ll show you the supporting data and the stock I think offers the best value right now.


A Crowded SPY Trade Whipsaw


The market continues to whip back and forth … I don’t think we have seen the real money flows enter the market yet and yesterday’s  option internals showed that.


The chart below shows the price, volume and volatility stats for SPDR S&P 500 (Ticker: SPY)


Notice the massive spike in put volume, along with the spike in the implied vol premium over historical vol: 


A screenshot of a graph Description automatically generated with medium confidence


Now this may not be anything but a one day snapback, but it was a classic whipsaw … 

Back Up


Let’s take a look at the data that tells me the market is going back up …


First, is the money supply, which is bank deposits held at the banks, along with reserves held at the Fed on behalf of banks.


Both trends continue on a steep slope higher, and for more than 20-months they have told the bullish story for the markets … 


Chart, line chart Description automatically generated


Now, the markets are certainly nervous … There is the Delta variant, no new stimulus, the debt limit holdup and China’s well-documented equities collapse.


It all amounts to fear and uncertainty… 


The reality is the US has the lowest leveraged loan default rates going back many years. Corporate America is awash with cash and locked-in debt is at historically low rates:


Chart, line chart Description automatically generated


There is nothing to fear but fear itself!


The Most Likely Scenario for the Weeks Ahead


First, we have the Fed meeting on Wednesday, and this could open the door for money coming into the markets. It’s J-Pow’s turn to appear in control and a bit worried about inflation.


This tone would accomplish two things: 


      • It would calm the markets and attract flows into stocks and bonds.
      • It would also show Congress that they can’t count on the Fed for stimulus and apply pressure to pass the spending bills.


Next, Congress will get busy and produce:


      • An infrastructure bill that will make it through the House.
      • The budget resolution will pass, although scaled back to approximately $2 trillion.
      • Tax increases will come in smaller than advertised.
      • The debt ceiling will be raised avoiding a technical default.


China will also turn the corner. Beijing will loosen its monetary policy because Xi will be under pressure early in 2022.


They will need 6-months for changes to take effect so they must move soon. The Olympics begin in Feb 2022 and Xi’s political power reset runs from May–June … 


So, we can expect to see 


      • Credit contraction to reverse, improving economic conditions in China.
      • The People’s Republic of China (PBOC) to remain accommodative.
      • Easing of the regulatory tightening and discipline administered to Big Tech firms

Bring It Home 


I think the equity market most suited to rally in the short-term is … Germany.


The Germans have the smallest debt-to-GDP ratio of any developed economy, and they lead the world in the electric vehicle space.


Yesterday, I purchased an iShares Germany Fund ETF (Ticker: EWG) Oct. 15 33/34 call spread for $.51. It’s in the money and as the chart illustrates below, the market is oversold.


EWG held a key support level on Monday that was previously resistance and also the starting point for the major rally in March of this year:


Chart, histogram Description automatically generated


I have my eye on a few other good candidates so keep a look out for my ideas in the Option Pit Pri chat room on Tuesday. (Want in? Give our Customer Care team a call at 1-888-872-3301.)


Until then …


Live and Trade With Passion My Friends,



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