After dumping my collection of TQQQ puts on September 21 for over 100% returns, I sat out the market for just over a month, unconvinced the bears or bulls had real momentum. That means I missed an opportunity to profit on the rally following the sharp 5.5% reversal after October’s CPI release - but who really thought that made sense at the time. It’s just been a harder climate to read than we had this summer.
I’ve been quite busy but here’s some quick thoughts on what’s been happening and a few trades I entered.
Money supply shrank again, but not much. Inflation remains elevated, but has no serious upward or downward momentum. We are about to lap higher monthly increases (red arrow) from last year, so the YoY rates will decline. Monthly rates won’t necessarily go down, and short term trading will be more focused on whether October keeps moving in the wrong direction - was the summer just a fluke? Estimates for CPI and core CPI are currently for 0.1% drops in monthly numbers.
The Fed stayed the course and rose rates another 75bps Wednesday, and in their initial statement confirmed a “soft pivot” light is indeed at the end of the tunnel. Yet Chair Powell proceeded in the conference to undermine that message and emphasize that the tunnel is longer than the market thinks. Stocks reversed gains and ended some 3% lower in the last 90 minutes. Odds have increased for another 75bps in December.
I’m certainly tired of the pivot talk but there’s a lot more coming as hungover bulls desperately search for another drink at the fed’s bar. Powell identified 3 kinds of pivots on the horizon: When to slow, when to stop, and how long to hold there. Echoing the tone of his Jackson Hole speech in August, Powell doubled down on his hawkishness especially after a reporter mentioned markets had reacted positively to the FOMC announcements so far. For him, there’s simply no rally allowed right now. He wants to risk over-tightening before stepping back early and having inflation blow up again.
The risk of a financial accident, or something breaking, increases overtime. The dollar is strengthening at a spectacular rate as a result of the Fed’s actions and it’s causing problems overseas, causing impairments that show up in corporate earnings, and pushing gold down. Bond yields are inverted in every way possible. This is part of a healthy cleansing of economic malinvestment caused by a decade of absurdly cheap money, but it’s not likely the government can manage a wind down well at all (for starters, they waited far too long to begin).
Bulls are constantly trotting out new data points to pump the markets. I understand, statistically, bear markets tend not to last much longer than this, but we’re dealing with major 40 year trends being completely broken following one of the great economic disruptions of the century (global economic lockdowns + massive money printing). After three negative quarters, you almost never see a 4th, yes. When the market is down 25%, 67% of the time it is higher a year later. The Fed put is just around the corner. It never ends. Every time, their pivot story gets smacked down with more bad inflation data or more strong employment and economic activity data. This is followed by disappointment that the Fed again does exactly what it said it would do all year.
Bulls are simply violating the most basic rule of investing: don’t fight the Fed. It’s not fun, but we have to wait till the data trends change. The greater risk is to the downside because Powell wants to err in the direction of overtightening. The insurance policy that continues to appeal to me is buying puts against leveraged 3x Bull ETF’s. If held over a long enough time, historical data shows they will turn at least small profit even if I’m wrong about the direction of the markets. With the VIX falling further, it’s becoming a better time to start buying.
I took several trades with longer expirations than last time and am eyeing more:
TQQQ $21 PUT exp. 6/16/23 - Bought 10/24, sold 11/4, profit: 18.5%
SPXL $63 PUT exp. 4/23/23 - Bought 10/24, sold 11/4, profit: 3.1%
FCX $33 CALL exp. 12/16/22 - Sold 10/26
UDOW $53 PUT exp. 6/16/23 - Bought 11/4
The FCX covered call is to start lowering my cost basis - a long term holding that’s been frustrating as it went from very green to red in my portfolio. It’s still a good commodities play in the long run, but it’s tracking more with the rest of the market and the risk is to the downside. If I’m wrong, as today’s price move sure would like to tell me, I’m guaranteed to close the position with profit anyway. I’ll then be able to sell a cash-secured put to get back in or farm more premium. This is also known as “The Wheel” strategy.
Next week brings elections and CPI two days later. In between might be a good time to load the next put, especially if markets pop on confirmation of strong gridlock news. I want to buy much further out dates (2025) for longer holdings soon.