Hey There Income Hunter,
The market viewed yesterday’s Fed meeting minutes as more hawkish than expected.
Now we’re priced in for a greater-than-50% chance of a third .25% rate hike in June.
What’s more, markets are also pricing a 24% chance for a .50% hike in March!
A couple of hawkish quotes that came out of the minutes were this …
“A number of participants observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures.”
And this …
A few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting.
The question now is …
Is this enough to cause a market crash?
The Answer Is ..
My gut feeling is the market will not crash.
No matter what the Fed says, or even does, in the weeks ahead, it will not change the fact that they are near the end of their tightening cycle.
Plus recent positive economic news has been fueled by seasonal adjustments and methodology tweaks …
At this point I believe market participants will wait a couple of months before deciding to liquidate more stocks.
Option Positioning Is Key
The indexes are at critical levels right now.
There is a ton of open interest concentrated at the 4000 SPX strike and there is an “air pocket” devoid of puts below that level.
If SPX is able to solidly move below the 4000 strike, that may be enough to kickoff selling at lower levels.
Here is the scenario that may cause a test of 3900.
Market makers are short puts below 4000 and are short stock to hedge those short puts.
This delta-hedged position is long delta but short gamma. That means market makers lose money at an increasing pace as the market trades lower and volatility increases.
To rebalance their books, they need to sell stock into a falling market. This is what the flows look like …
Here’s a secret …
The way to monitor option flows for edge is to follow the net impact each day in open interest at the various strikes for the monthly options.
That’s especially true now that the VIX is making a move higher.
There is no truth to the rumor that the VIX is dead because of 0DTE options. To the contrary, VIX is as important as ever. It is just that a ton of cash on the sidelines … AND there is fear of missing out on a Fed pause in its tightening cycle.
Investors would now need to see a sharp rise in delinquencies and a widening of credit spreads to want to offset their long equity portfolios.
I do not see that happening until the second half of the year.
Don’t forget to join me tonight at 5:30pm for more detail on how to get out in front of major trends in the market and anticipate a potential melt-down …
Live and Trade With Passion My Friend,
Griff