Tom’s Weekly Newsletter April 20th, 2022

Originally published on April 13th, 2022. Subscribe for early access!

The Markets Broke a Three-day Losing Streak Today

Today was the first day in the past few trading days where the markets did NOT sell off the last hour of trade.

This was the first trading day in the past three the markets (the S&P 500 and the NASDAQ) ended up closing higher.

The PPI report came in at a record 11.2% in March. The monthly gain of 1.4% topped the 1.1% estimate.

The PPI was reported today after the CPI came in yesterday showing an 8.5% surge in March.

These reports didn’t really do anything to waylay the concerns of tighter monetary policy to come from the Federal Reserve.

The Markets Started Off on a Negative Note

The markets opened flat from yesterday’s close but climbed higher the rest of the day closing at or near its highs of the day. That is a bullish sign, at least for the day, but there are still risks to the downside.

The catalyst for the day was the mostly positive earnings reports that came in.

Airlines Saw a Lift Today

Delta Airlines, Inc. (NYSE: DAL) posted better than expected earnings and the CEO said they expect to be back to profitability this quarter.

Consider running your bullish scans on airline stocks. If you see any of them come up in your scan results research option opportunities from there.

—Tom Gentile
C1P: Chief 1-Percenter

Four Corners of the Market

Bond yields are still going up as the price of bonds are still under a ton of pricing pressure.

There doesn’t seem to be any near-term reprieve coming for bonds.

TLT broke support and had two more bearish trading days (out of the last three).

The last three trading days have traded flat versus sliding down any farther.

There may be some more basing to come, but even if we get it, right now I would expect it to continue to slide even after the basing occurs.

I need to see a technical reversal pattern and or hear something that gives indication investors are willing to put their money to work in bonds, but I don’t see that happening any time soon. 

A bearish reversal at a top/peak in UUP may signal a bottom of the pull back in price in equities.

USO went from looking like it was breaking down from the triangle pattern last week to showing the prospects of a break out this week.

Realize a one-day breakout doesn’t make for a sustained breakout.

It needs to hold above the resistance line/area of the pattern for 2 or 3 days for more conviction (at least for a more conservative approach. More aggressive traders jump on the first day of a breakout, but risk suffering a false breakout).

Here comes the education on triangle patterns again.

To project and expected price move after a triangle pattern breakout, take the widest width of the triangle pattern prices, add that amount to the price of the breakout for the target price.

The reason one would add it to the price of the breakout is because the anticipated price move is to the upside. 

Price support on GLD at 177 has held.

I am long a bunch of GLD. I have no intention to change my view long-term on it either.

From a trading perspective, I want to monitor the price of GLD since the equities markets had a bullish reversal day today.

I would watch to see if equities continue to increase in price and if that is at the expense of GLD; is money going to come out of GLD since they (equities and Gold) tend to trade inversely to each other.

The price support drawn in on the chart image above and that I’ve written about is in the 177 price ball park.

I wouldn’t feel like the price of GLD is suspect of trading lower until or if it breaks support. 

From the Desk of a CMT – QE Now versus Financial Crisis QE

(+ Case Study Updates and Crypto Correlation)

Following on the concept of secular bulls and secular bears, I want to introduce the impacts of quantitative easing (QE) from the Fed, particularly given the prospect of quantitative tightening (QT) that may happen faster now than in the early 2010’s.

Here’s some data that pulls in last week’s secular information along with market behavior during QE activities through May 2013.

During that time, the Fed’s actions dampened volatility and limited both upside and downside daily changes (held in a tight range between -2.6% to +2.5%). With normal markets experiencing fat tails (outliers) and negative tails being a little longer, QE post-financial crisis was very favorable for the stock market. 

Post-Covid, QE impact was different. First the re-hash:

Market Return Characteristics

A quantitative assessment of the impact of QE on the stock market begins with a view of the market returns during different environments. To provide a meaningful base, the comparison periods look back to the start of the secular bull market in the stock market in 1982.

• Secular Bull Period:  1/4/1982 – 12/31/1999

• Secular Bear Period:  1/3/2000 – 8/18/2010

• POMO Period:  8/19/2010 – 5/17/2013

• QE Days Only: 11/25/2009–3/31/2010, 8/19/2010–6/30/2011, & 1/2/2013–5/17/2013

The POMO Period represents all days after the Fed’s initial response, including QE2, QE3 and Operation Twist. QE Days Only includes all three QE periods and excludes market returns during Operation Twist and periods when a QE policy was not in effect. Return data for the entire period (1/4/1982 – 5/17/2013) is also provided.

Table 1 provides summary daily return data for the period along with some descriptive statistics.

There are three items that quickly grab attention during the QE Only sample period:

1. The low volatility of returns as observed by both the Standard Deviation & Return Range
2. The relatively high Mean & Median Return values
3. A higher value for % Up Days

Here’s some summary data for SPY (versus DJIA) from 1/2/2020 through 4/12/2022.

The Adjusted Close, which accounts for dividends, was downloaded from Yahoo Finance. Table 2 provides summary stats for daily returns during the period and Figure 1, a histogram of returns. Cleary, this QE was not as impactful for the markets.

What might that mean for QT?

The reason I’m harping on this issue is that our current market environment is changing.

Granted, trading through early covid days provided significant volatility, but that stretch was relatively short-lived before lots of spending and Fed activities returned us to upward drift as an overall theme for stocks.

The Fed is in a bad spot right now with the global economy possibly uncovering some vulnerabilities. It needs to act to put some tools back in its arsenal.

Think about your go to strategies and identify those that may need some adjustments given persistent volatility. Explore some bearish strategies that suit your style and conditions.

Have a plan that includes money management and risk management and follow the plan. 

Next time, we’ll identify some objective tools to keep conditions in perspective.

WMB Case Study Update

Tracking exits:

1. $500 max risk, $1.15 per spread
2. Timed exit 30 days prior to expiration
3. Exit for a profit, 80% of max gain, $2.28 per spread ($1,140)

Figure 2 displays the WMB bull call spread case study back test data and Figure 3 the daily bar chart for WMB with the >90-day at the money (ATM) implied volatility (IV) line as an overlay.

Note earnings are estimated to occur in 20 days. Although longer-term ATM IV’s do not seem to experience the same rise and crush as shorter-term IV’s you should monitor conditions prior to the earnings announcement (estimated on May 2nd).

Minimally consider some partial profit-taking.

DISH Case Study Update

Following a similar rhythm, here’s the information for DISH. Tracking exits:

1. $500 max risk, exit for a loss at $0.23 per spread
2. Timed exit 30 days prior to expiration
3. Exit for a profit, 80% of max gain, $1.02 per spread ($510)

DISH continues to hang in there, and this case study is experiencing losses. RSI and MACD are both strengthening, so consider an exit prior to the 30-days timed exit.

With earnings estimated in 16 days (4/28/22), rising IV into earnings should be tracked for an opportunity to exit prior to any crush that could push the position quickly beyond max risk.

If you want to wait until we are closer to the earnings date, be sure to identify the earnings announcement timing – the company’s investor relations section of their website should provide this information. 

Figure 4 displays the DISH bear put spread case study back test data and Figure 5 the daily bar chart for DISH with the 30-60-day ATM IV line as an overlay.

Crypto Correlation – Back to 5-Year Forward

Figure 6 provides the 5-Year, 5-Year Forward Inflation Expectation (T5YIFR) with Bitcoin prices from Coinbase (CBBTCUSD) on Tuesday, 4/12/2022 to help us determine if we should seek quantitative information about the relationship – does T5YIFR lead Bitcoin?

Another strong move up in inflation expectations provides an opportunity to assess this relationship again.

Regards,
Clare White

Thanks, Clare!

—Tom Gentile
C1P (Chief 1-percenter)