In our last posting on general markets trends [LINK] for 2022, I wrote; we are walking into the new year with stocks in the stratosphere — be wary of the earnings season, and it looks like that advice would have done you well if you had headed it.
Stocks are having their worst January since 2008 writes Nicholas Jasinski from Barron's | LINK
No kidding and Barron's describes the pain many long term investors are feeling all too well — It's been a challenging week for US Equities with earnings in Tesla and forward guidance resulting in an 11% pullback [LINK] on the stock. Then we endured an FOMC meeting that didn't add too much clarity to what is already an ugly inflation backdrop, but there were plenty of warning bombs dropped [LINK] in the Fed Chair's speech that did feed concern.
The balance sheet is larger than it needs to be and there’s a substantial amount of shrinkage to be done.
Fed Chairman Jerome Powell | US Federal Reserve
All would have been lost without a record-breaking quarter for Apple [LINK], a scary thought indeed that the three trillion ton entity is the most significant thing propping up the Nasdaq, but luckily for us, Apple came through with the goods, saved the index, and we finished up in the green as the week drew to a close.
| I am talking tongue in cheek in respects to Tim Cook being our savior, but it does genuinely feel like the best news in what has been a bearish week |
All of this sounds utterly terrible, but if you know how to play these types of market uncertainties, you can not only make good out of a cloudy day; you can turn this price action volatility into a profitable opportunity. In fact, I know plenty of traders who go storm chasing these situational points in time, so in this brief positing we'll take a look at a couple of these equity opportunities.
The FOMC Play
FOMC days are a systemic event, and all traders, whether you are in bonds, equities or FX need to keep an eye open for sudden and wild price volatility during the meeting. What's frustrating is the lead up to the actual speech can often be slow, and price movement on many stocks may even be muted.
Nonetheless, watch out, and I was talking to a few traders on Wednesday in one of our trading rooms that were plodding along with their earnings plays in complete oblivion.
Martin, the market has gone very quiet ... no it's the calm before the storm ... what storm? ... are you serious guys, don't you lot check the news?
Everyday each week you need to be on top of economic news because it can have a major impact on the equities indexes by amplifying, reducing or even obliterating your setups. Make it a ritual to check the weather as I say before you go to sea, and the Forex Factory News site [LINK] publishes a wonderful summary of what's happening each day.
Martin's VWAP Tactical Design
In the Candle Chart above, I have noted the VWAP Entry & Exit points for a Risk Defined successful play on the QQQ Nasdaq ETF. This trading approach has been designed for a stock trader who will need to be ready to go long and short.
When it comes to these FOMC shock event opportunities, I usually play them short term, very short on the equities indexes rather than picking a single stock. There are many reasons for this asset selection but I find the indexes are liquid, they have a deep options chain, tight bid ask spreads, and all of this allows us to be nimble.
So here are a couple of strategy ramblings [don't get bogged down in my ramblings] that could be used to exploit the price action behaviour you see in the diagram above.
TACTIC 1 | Go long on an Index Option Strangle during the calm before the FED meeting storm kicks off. You will be holding both calls and puts long, slightly out of the money (around the delta 35 zone). We select slightly out of the money options because they will decay less if the market doesn't yank.
When the yank comes, close the winning trade leg that goes In The Money first, and add to the other position during this capitulation for a lower cost. When the index mean reverts, pull the entire trade-off after the reversion past the FMOC opening price point. If the index doesn't move, which is highly unlikely, but if it doesn't move, you simply close out the entire option strangle for a small loss.
There are other options strategies that take in a slightly longer perspective by using Condors (Iron, Fly or Traditional) which are only for the patient.
You can do well selling these option strangles (yes the reverse of what we have done above) but that's for another discussion and the dynamics work completely differently.
TACTIC 2 | Simply use active trader on the stock position by carefully watching the price action against your VWAP baseline. Make adjustments as the price signal / candles develop across the moving average support levels. As you are on the active trader order system, you can leverage in and out of your position rapidly for fast pace trade action ... it can be a little hairy and a bit daunting for some, but remember to select a position size that accommodates your risk appetite.
Amazingly, our second tactic has been working well for us, but it is a high-risk approach I admit, and it is also threatened if you lose access to the trading platform because of a technical failure or some kind of network outage.
Martin, I hear a lot of people say ... we don't want to trade like this, is there a longer opportunity we could explore going out from this point in time?
Sure, how about a small bounce trade on some of the assets that are looking really oversold. Names like PYPL, AMD, NVDA, assets in the IWM Index (Russell 2000) or even ARK have probably fallen too far, too fast in the near term.
Let's have a look at ARK and give poor Cathie a bit of a plug.
Cathie's ARK
Cathie Wood [LINK] has been taking a bit of hammering from the investment community at large and the media [LINK] on her double down strategy that world-shaking technologies from High Growth Companies would be legendary for investors.
The big issue with Growth Companies is that they don't generally do so well in inflation led tapering markets, and many big wealth managers argue that investors would be better off building a portfolio of Value Stocks that produce earnings rather than toying around with the hype of high PE ratios.
Cathie's ARK fund sunk with the sector rotation reverse reflation massive inflation tapering storm that is going on right now and ... a FED that's apparently looking for its balance sheet ~ we living in amazing times !!!
Martin Davies on a posting | LinkedIn
If we take a look at the last six to nine months of ARK's performance, it's pretty clear that the Reverse Reflation Sector Rotation dynamic has been punishing ARK for a long time now, but after this week, there may be hope and a little bit of reprieve ... .. . but only a little bit pleasure. Don't go in heavy on this trade and don't plan to hold the position for six months kind of thinking. This is a mean revert bounce opportunity, and we're fragile at the moment; it may be too early.
Friday finished up with a huge inflow of funds onto the ARK portfolio and a double bottom on the price pullback that's been carrying on since November, yes November ... we may see ARK bounce back to 80 dollars as the small Mean Reversion price structure plays out.
TACTIC 1 | Simply buy the ARKK ETF and sell covered calls if it drops
TACTIC 2 | If there is a small pullback Sell Puts for a negative gamma play
TACTIC 3 | Buy 35 DTE in the money Call Options
TACTIC 4 | Mixture of vertical funded butterflies with center pinning around the 92 on pricing
To spark curiosity in ARK, it needed to hold it's lower support level on Friday, do the five day double bottom, all of which it has done. So given this, it may be due for a bounce in the next fortnight, revert back to the 50 day moving average kind of narrative.
Closing the week up
What a crazy week, volatile month that leaves some traders beaten up over January and very much in drawdown territory. There are others that have been nimble on VWAP strategies and doing quite well.
Hang in there; the indexes on Friday did very much that, and let's see how the next fortnight of earnings playout.
So, for now, January is done; the FOMC meeting is behind us until the next time.
Traders and investors need to be wary of a repeat of the last fortnight throughout the year ahead — We have a truckload of challenges to overcome and on multiple fronts, taking in; inflation, tapering, a constipated supply chain, an impending liquidity crunch [LINK], a geopolitical cold war, a resurgence of a Covid broken New Normal that's likely to take businesses out this time round ... .. . 2022 could be very volatile.
If anything peps you up, the infamous Nouriel Roubini is back on the trail with his agenda of doom and gloom [LINK] that there is a longstanding negative correlation between stock and bond prices, an artefact of a low-inflation environment, apparently something we have become accustom to seeing and for the last thirty years no less. Guess what ... .. . it's also a dynamic that's about to flip!
CAVEAT EMPTOR | None of the text published here should be construed as any kind of investment advice ... you trade the market entirely at your own risk.
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