Updated Discussion with a few Corrections and Stops
General Discussion – You May Want to Skip to the Buys Below
This morning, traders have taken the S&P 500 below last night’s Globex low, ran the stops, and now brought it back the Weekly Expected Move (“WEM”) low. As you will recall, the WEM is where exchanges set the options expiration last Friday for today. No surprise in that, but I note that both last night and so far this morning, the bears don’t seem to be able to find sellers below recent lows – at least so far. I will allow for the possibility that the market makers are holding the market to the WEM low – but it was handily breached on the NASDAQ 100. So I will still carry the lack of sellers forward into next week.
Also, this is the last trading day of the month, so fund flows at the beginning of March next week have the potential to push prices higher, at least for the first few trading days.
Treasuries are rallying this morning – beating back interest rates. The bottom I had been expecting in the steep decline for bonds is forming. With bonds bottoming, 1.5% now establishes the upper resistance line for the 10-year treasury interest rate (bonds and rates move inversely to each other). Arguably, the 10-year rate is the most important in the system. Most loans key off this rate. We can stay bullish as long as the line holds.
In my view, 10-year yields tell you all you need to know as far as inflation, the economy, and interest rate pressures go. It is the simplest barometer you will find. For now, 10-year rates, and the pace at which they just rose, are thumbing their nose at the Biden economic policies. Both Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell will pay close attention to this rate. We get the next Fed meeting two weeks from now and more insight on the Fed’s plan for yield curve controls. Perhaps a rally into that meeting, even if we don’t experience new highs, is in order.
Given the potential stagflation scenario ahead, and even if it were not, I am still targeting the XLF and the XLE. The steepening yield curve (long-rates higher than short rates) will be a windfall to bank earnings. The XLE will continue to benefit from rising oil prices – even the rise we have experienced thus far. Oil is reacting to the weaker dollar and inflation pressures. Obviously, the two are related.
I always need to be comfortable with the stock market’s macro trend direction and our algorithms from a strategy perspective. While I was not expecting this retest, so far, we are putting in a solid low here – as far as the S&P 500 index goes. Some reverse rotation back into the NASDAQ 100 (QQQ) is presenting as well today following the very steep correction in technology we just experienced. Nothing has changed in the tech world – save some higher borrowing costs. It is nice to pick up some tech exposure when the stocks are on sale. That puts the XLK and QQQ also on my radar.
I have no difficulty executing on all of this with futures. We must make certain that we have enough runway ahead to swing trade options – without you having to live by your computer screens, micromanaging the positions. Options don’t permit you to set stops, or it would be easy. I feel like we are in more of a short-term trading market. As we saw this week, we did not have much runway for implementing a strategy with options. I am wondering how many of you are managing – without checking your emails every 15 minutes.
Buys
We bought a 10% futures position in the Founder’s Group in each S&P 500 index and the NASDAQ 100 index this morning. Our entry prices are 3801.50 and 12,762.50, respectively.
We are using micro-futures to get the lessened exposure rather than an entire mini-contract. We get more flexibility in scaling in and out with the micros.
We also took a 5% position in each of the XLF and XLE 16 April 21 calls. We did the 33 calls on the XLF and 49 calls on the XLE. If you are using SPY rather than S&P 500 futures, you can use the 384 calls, and if you are substituting QQQ calls for the Nasdaq 100 futures, you can buy the 318 calls. The same time series – 16 April 21 monthly calls – should be used on the SPY and QQQ similar to the XLE and XLF. Essentially, you are targeting the at-the-money calls on all of the instruments. I usually put in my orders between the bid and ask if the market is not moving too fast.
The new investments bring us to a 30% invested position, but these are all highly leveraged instruments. You expose a lot more than 30% of your capital when the leverage is taken into account. Be sure you understand this. Alternatively, you may want to buy the non-leveraged cash indexes using the QQQ, SPY, XLE, and XLF. Just buy the number of shares you find appropriate to your risk tolerance, defined as permitting you to sleep at night.
I hope that with this additional sell-off, we can hold these positions long enough to swing trade the options, but I cannot be sure. For the positives, I am focusing on Algo buy signals, a successful retest of Tuesday’s lows, a short-term peak in 10-year treasury rates, relative strength in the identified sectors, and the typical fund flows we get at the beginning of each month. As well, there may be a positive reaction to more stimulus passed by Congress over the weekend – at least for stocks.
Negatives remain lofty valuation, giddy sentiment, and rate velocity if and when the 1.5% resistance ceiling is penetrated.
As always, just because I am doing this does not mean you should. I am sharing my thoughts, but I am wrong from time to time. So do your own homework and draw your own conclusions.
I am following this write-up over the weekend with some housekeeping items that will discuss the opportunity to join the Founders Group and/or have us direct your trades when you cannot be by your computer. We have been programming the technology over the past four weeks and will be beta testing next week.
Stops on all of these instruments should be a few ticks under this morning’s lows for now.
Stay tuned.
A.F. Thornton