Same Market, Different Day

Hey There Income Hunters,

 

Friday was another example of emotions, instead of real money flow, controlling price action.

 

Real money flow was signaling a very fragile market … This was clear from the declining number of S&P 500 Index (SPX) stocks trading over the 200-day moving average. 

 

Market internals don’t lie … they may take a while to impact price, but they tell the true money flow story.

 

The only changes I see from a third COVID variant are additional headwinds to real growth and additional aggressive monetary stimulus to offset the headwinds.

 

The reaction yesterday was a typical emotional grab of protection to withstand a breakdown that never materialized because of continued stimulus injected into the market by the Fed and US government.. 

 

Today, I’ll show you where the stimulus is going and what sectors to focus on into the year’s end. 

 

Invesco QQQ Trust (Ticker: QQQ)

 

Tech led the climb back on Monday with names including Nvidia Corp (Ticker: NVDA) and Applied Materials, Inc. (Ticker: AMAT) both up over 5%. 

 

You could see this one coming. QQQ implied volatility spiked versus historical and that is a signal that speculators were buying puts as opposed to real investors selling longs. 

 

Check out this graph, which funny enough occurred in September on the day the S&P melted down all morning, reversed in the afternoon and the market resumed the uptrend thereafter. 

 

 

The volatility of volatility is such a critical signpost for what the money flows are dictating. 

 

Actual vol is more associated with real money flows, while implied is the volatility priced into options, so it is more indicative of hedges and retail speculation. 

 

The Fed Is Playing By a Different Set of QE Rules

 

The Fed, being the Fed, can play games with the taper and it looks like they are basing it on their reporting of assets held on their balance sheet. 

 

The central bank reports those numbers weekly and they are good at masking their actual activity. However, the numbers show that they continue to be very supportive of the mortgage market.

 

Unless they are going to sell a bunch of mortgage bonds into the market today and tomorrow, they will report buying just as many securities this month as last. 

 

Here are the last three months of QE up to Friday …

 

 

This is the “real” money flow and as long as the Fed is pumping $120 billion-plus into the markets they will stay elevated. 

 

Bring It Home

 

In this environment, I continue to favor the old energy solutions that are demanded now but restricted from increased production because of the global net-zero policy. 

I had a quick flip on Monday on the Chicago Mercantile Exchange crude oil futures.

 

I bought a call spread on Friday and I haven’t traded futures much, but I thought they offered the best exposure. I unwound the one-day trade for a 20% return and l am ooking at a couple of coal stocks to carry into Q1 ‘22. 

 

I also continue to add to my natural resource miners portfolio on pullbacks. I don’t think we will see a big move unless we get an external event … like an announcement from President Biden appointing dovish Fed replacements for the three “empty” seats. 

 

I would rather add more at lower prices for now because I am confident in the Fed’s intentions and how they will get us there.

 

Stay tuned and as always …

 

Live and Trade With passion my Friends,

 

Griff

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