What’s Going on Everybody?
Every time I get fired up about a CPI report, somebody in the chat asks me what’s wrong with me.
This morning I had a good reason.
Within 45 minutes of the September inflation numbers hitting, CME’s FedWatch tool (the market’s running tally of what traders expect the Fed to do) pushed the odds of a rate hike at the Oct. 27-28 meeting above 50%.
That makes it a live meeting.
For weeks, we figured nothing would happen until December, and now we get to trade the market’s fear in real time.
That’s what we dug into on I’d Trade That this morning.
Somewhere in the middle, I also gave my daughter the most uncomfortable “when a man meets a woman” talk of her life, except it was about a Cleveland bank that pays north of 7% and could be worth a lot more than it trades for.
This report sets the tone for the next two weeks, so I anchored a VWAP (the average price everyone’s paid since a specific moment, weighted by volume) to the minute it dropped.
I run it on the Qs because that’s where the leverage in this market lives, and it stays my line in the sand until the Fed meets.
Check out the replay below or read on for the wrap up:
Where the Selling Shows Up First
Remember, the purpose of the market is to sell. So I don’t check FNGU every morning. I check FNGD (FNGD), the 3x inverse version that rises when the biggest tech names fall, because I want to see fear.
Every two weeks, Americans blindly send a cartoonish amount of money into retirement funds that buy the same stuff over and over again. About eight cents of every dollar that goes into an S&P 500 fund lands in Nvidia. That’s more than the bottom 250 stocks in the index combined.
When buying gets that concentrated, the selling gets ugly fast. A big fund can own Apple, borrow against it, buy more Apple, then borrow against the new shares. You see where this is going, and when FNGD breaks out above its 20-day and 50-day moving averages, that’s the leverage unwinding.
Then there’s FAZ (FAZ), the triple-bear bank ETF, which tracks leverage leaving the banking system. Tax payments drain bank reserves (I paid my corporate taxes in September, so trust me, I felt it). Higher yields squeeze banks too, because they hold Treasuries as their capital base and lend against them.
That’s why the Fed started buying Treasury bills in December. It’s managing the system on purpose, and funny enough, that’s bullish for stocks.
Now look at the calendar. Tomorrow’s Oct. 15, when everyone who filed a tax extension pays up, and that should mark a short-term bottom in bank reserves right as we head into October expiration. Watch the regional bank ETF, KRE (KRE), because banks can start to rebound into the fourth quarter from here.
The Talk I Gave My Daughter
Which bank do I like? TFS Financial (TFSL), and I know a lot of you already know this one. I give this stock to my daughter, and this morning I tried explaining it to her live on the show. It started with “When a man meets a woman, they want to find a reliable place to put their money,” and it didn’t get less awkward from there.
TFSL owns Third Federal, a Cleveland community bank that lends on real estate and to small businesses. (Travis Kelce’s from Cleveland, which I didn’t know until yesterday.) A mutual holding company owns about 81% of the stock and waives its dividend, so the payout goes only to the 19% the public owns, and that’s how the yield gets north of 7%.
TFSL went through the first half of a thrift conversion (when a depositor-owned bank sells shares to the public) back in 2007. If it ever wants to sell itself or buy another bank, it has to finish the job with a second step. My math puts the stock between $26 and $32 if that happens, and it trades around $16 right now.
Odds are it’s not happening soon, and if it does, we’ll hear about it. In the meantime, I collect 7% to wait.
You don’t have to just buy it, though. TFSL’s option chain isn’t the most liquid, but it’s there, so go out to January and look at selling the 15/12.50 put spread (sell the $15 put, buy the $12.50 put as protection) at a limit of about 30 cents. If it fills, you’re putting up $220 to make $30, nearly double the yield on the stock.
If TFSL pulls back and you get assigned, great. You own a stock you wanted anyway, at a cheaper price and a higher yield.
You’ll see a wide bid-ask spread on this one. That’s okay, because when you sell spreads, you set the price, not the market. Somebody would buy the 1961 George Blanda card on my desk today for 60 cents on the dollar, but I don’t need the cash.
A Big, Fat, Sexy MFI
Bank of America (BAC) got dragged down with the rest of the banks, and people are sitting here going, “The whole banking system’s going to implode.” I promise you, Bank of America isn’t going out of business. So goes Bank of America, so goes America, and if you think for one moment BofA’s going to fail, I need you to go see a doctor today.
The setup sits at $50. I’m not doing anything until BAC gets back above it, and then you’ve got $2.50 of room. Buy the $50 call that expires Friday, sell the $52 or $52.50 call against it, and set limit orders.
For more conviction, check the five- and 15-minute charts. BAC’s money flow index (MFI, a momentum gauge that folds in volume) hit deeply oversold this morning, and that’s where the algos start stepping back in.
A guy here we call Burt and I love an old comic strip about the “big, fat, sexy news cycle,” so when that MFI hit oversold, all I could think was “big, fat, sexy MFI.” It might only be a 50-cent move, but you take it.
When Mark Sebastian jumped on at the end, he asked about tomorrow’s PPI report. People keep calling it wholesale inflation, and it hasn’t been that since 1978. Watch energy, because gasoline and diesel drove this morning’s report, and being long diesel and gasoline means being long interest rates.
We’re going to trade that Fed meeting live, like we do every time.
Until then…
I’d Trade That,
Garrett Baldwin