As usual, the market is moving where it can deliver the most pain while shorts are getting gored. It went from extreme sensitivity to headline risk to seemingly immune. In the past few days, gains came in the face of Ukraine’s escalating destruction, as rising interest rates were fueled by increasingly hawkish Fed comments with inflation remaining a bugaboo.  And of course, the cloud of Covid continues hanging in the background. 

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But apparently, stocks, especially tech, didn’t get the memo that an inverted yield curve and commodity spike aren’t supposed to be bullish; the Nasdaq 100 (QQQ) has ripped up some 11% and SPDR S&P 500 (SPY) is up 9% over the past six trading sessions. It’s been a veritable melt-up with nary a downtick, making long position additions a bit uncomfortable. This morning, I wrote up three bullish Options360 Alerts. By the time I was ready, the stocks had already moved away from where I was comfortable getting long.  A fourth Alert recommending a Morgan Stanley (MS) position did get sent to Options360 members and a new position was established.  

But, it’s no secret I’m hesitant to embrace the potential for a renewed bull market believing rallies, however vicious, were mere oversold counter moves within the longer-term downtrend.  But now the SPY and QQQ have sliced through key resistance levels. I need to reassess my view.  While many people try finding an analog for the current market from World War II to the 2018 taper tantrum, we’ve never had this combo of inflation, with Fed tightening and balance sheet reduction, a growing war in Europe, and rolling pandemic related restrictions. There’s no historical model. Just a lot of guesstimating about how it plays out.

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What’s helped me stay flexible and navigate this market is the mantra I shared last week that opinions don’t need to manifest into positions and it’s possible to hold a position opposite of one’s opinion.

In fact, Options360 is holding four bullish positions vs. one bearish. Granted, it took until yesterday for two Plug Power (PLUG) and Lithium America (LAC), which we’ve been in for some three weeks, to make a meaningful move higher — allowing us to take some money off the table. Penn Gaming (PENN), one we’ve also been long on for about three weeks, remains the wrong horse to ride as the stock languished. But, I’ll continue to hold and make rolls to collect income. Last Friday, Options360 established a SPY bearish butterfly believing that some of last week’s rally was fueled by the unwinding of large hedges into the quarterly options expiration. Clearly, that was wrong. But, the position, which had a very high reward to risk, I described as ‘putting a chip down.” It was low cost – just $110– which I’m willing to accept as a sacrificial pawn to the trading gods. 

Also, helping me maintain some upside exposure, is that we’ve slowly been ticking off a few items I said we needed to see to turn bullish.  Among them, a cessation of commodity prices parabolic move higher.  While oil and wheat etc. remain at elevated levels, they’re not making new highs. Secondly, we got through the ‘big bad event’ of the first rate hike and Powell seems determined to maintain a path towards normalizing monetary policy. Third, the VIX dropped back below 25, suggesting a shift towards a higher risk appetite. What I’m not sure we saw was a full-fledged investor capitulation. But, that usually doesn’t come into the final leg of a protracted bear market. 

As always, patience and risk management will take priority as we strive to deliver consistent returns no matter how widely the market bucks. 

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