The U.S. stock market is closed on Monday in observance of President’s day
HEDGING STRATEGY EXPERIMENT CONTINUES…
Last week I mentioned that I am experimenting with a hedging strategy specifically designed to handle pre-planned binary events like CPI, PPI, PCE etc. I did put on the hedge for the CPI event. Since markets didn’t rally, my hedge was of no use. The goal of the hedge is to neutralize all your deltas before a binary event so you don’t suffer any major damage if markets turn against you.
eg. I am very bear heavy right now and so my CPI hedge was bullish. So, if markets had rallied after the last CPI event, the hedge should ideally generate enough profits to cancel out all the losses from my bear put spreads and leave me cash positive when all is said and done. Since markets did not rally after the last CPI, the hedge was not required. In a way it is like paying your auto insurance premium every month but never get into a wreck. Well, in that case your insurance cost should be bare minimum to justify your risk/reward. The experiment continues and my hedge position expires on 3/3 (Expiry date is also a variable that I need to get right, so I am taking my time with this)
My next hedge will be on Thursday in preparation for the PPI event. I did the first one on a 6 figure account, but this time I will try it with my tiny account that I reset back to $2500 in January.
After a tough January, Feb is finally beginning to shape up nicely. We still haven’t got that pullback that I have been expecting. But if markets do go into a pullback, I will be upping my allocation slightly (I have been trading at less than 12% so far and plan to ramp it up to 20%) so that my Feb/March wins are way more than any losses in January. Thanks to the little trick of tweaking allocation levels, you can achieve that result.
SPY 3Y weekly – The weakness continues
This is the 2nd week where we saw weakness in SPY and QQQ. Even if you want to think we are starting a bull market (I am maintaining my bearish thesis even after that January rally), a healthy pullback to somewhere between 385-390 is a reasonable downside target before we get a bounce.
Okay here is my bearish thesis for the short term.
- The recession hasn’t officially started yet (Check those GDP numbers)
- Mortgage rates are going back up just in time for spring (when housing market picks up). Guess what is going to happen to the real estate market next?
- White collar recession has already started. But the labor market is still strong. Retail sales are still strong. Guess what that means for the FED?
- CPI, PPI etc are pointing that the steady decline in inflation has ended. I will be very surprised if CORE PCE tells us any other story.
- Finally, a couple of Fed presidents are already saying that they are supporting a 50 basis point hike.
- I don’t know if these clues mean anything to you, but to me they mean – don’t go bullish or at least stay conservative
DIA 6M daily – Frustrating squeeze
DIA is about to explode any moment now. Look how tight those Bollinger Bands are inside the Keltner Channels. If it explodes to the downside, my guess is that QQQ and SPY will follow along as they are already showing signs of weakness. The downside target would be $320 in that case.
Nasdaq 6M daily – Change in pattern
The bullish pattern in Nasdaq has been over since Feb 6th. Nasdaq is under pressure and we are seeing lower highs, lower lows for 10 days now. The markets are also about to enter a seasonally weak period which usually starts around week 3 in February. Let us see what next week brings.
Market moving events next week
- WEDNESDAY: I don’t expect much from FOMC minutes as everybody pretty much knows that Fed has no plans to pivot anytime soon.
- THURSDAY: Jobless claims is always a market mover. Fed presidents is another wildcard. Although, at this stage almost all of them are pretty hawkish, so not sure how else can they surprise the markets. (An expectation of a 50 basis point hike maybe?)
- FRIDAY: Then comes that CORE PCE on Friday which is what the Fed pays attention to. This is going to be a big one and I will continue experimenting with my hedging technique.
Earnings will keep trickling in but except NVDA, I am not seeing any company having a major effect on the markets.
Macro Analysis ($DXY) –
Keep watching that $DXY. It has been creeping up (so have bond yields) which is a contrarian indicator for the equity market.