Hey There Income Hunter,
For more than a month we have witnessed an incredible relief rally that was even called a new bull market by the Wall Street media …
Meanwhile, over the past couple of weeks I have been providing insights into what was actually driving the rally, including …
- A return to the massive squeeze of high short interest names
- Commodity traders association capitulation of short strategies.
- Daily retail selling of short-term call and put premium
Well, finally, on Friday, the great equalizer of the markets, monthly option expiration (OPEX) wiped the slate clean of the call buying that built up the past month.
Sure, enough the market failed on Friday at the key 4,300 level and yesterday took out the critical 4,200 level. That has now put the sellers in control.
Today, we’ll take a look at the internal indicators of option flows from yesterday and what to expect as we head to Jerome Powell’s Jackson Hole speech on Friday.
Key Signal
The key signal to start the week was the S&P 500 trading lower on the heels of a large options expiration …
The OPEX reset options positioning exposures from positive for stock prices to negative, due to a high amount of call positions expiring without new positions being created.
So, as stocks trade lower on an elevation of the energy crisis in Europe and more dismal economic numbers coming out of China US, fund managers were buying put protection yesterday.
Notice the gap lower and quick trade below the gamma pivot at 4175. This pivot represents the balance between positive/negative gamma …
As the market trades lower, negative gamma forces option dealers to sell additional stock at lower prices. This creates a high volatility environment, which will accelerate the down trend.
The QQQs are even more vulnerable to sharper down moves because interest rates are rising, which is a component of high-growth tech valuations.
The 310 support level in the QQQs is not strong, but the 300 level is the strike where the highest volume of puts are held. That would be the place to cover at least some shorts.
Bring It Home
The market narrative has shifted our way. I called the Fed’s bluff on a more dovish posture and now the market is moving in that direction.
I think Powell will hold the hawkish line at Jackson Hole on Friday, when he gives a speech at 10 a.m.
The market may reach the 4000 SPX and 300 QQQs before then, or after as we head into September with a 50/50 shot of the Fed raising rates another .50 or .75%.
The top shorts are QQQ and single stocks within the tech sector like AAPL and AMZN. I also like HYG & JNK due to fears of defaults in the sector.
Lastly, the iShares US Home Construction ETF (Ticker: ITB) is breaking down and has room to drop.
Watch for the 9:45 release of the S&P purchasing managers index (51.9 expected) and 10 a.m. New Home Sales (574,000 expected)
As always …
Live and Trade With Passion My Friend,
Griff