Option Professor-Stock Market- Bull Market Or Reversion to Mean? Rates & Dollar Peak? Read It
November 12 2022 Option Professor Opinions & Observations
WOW! The last week has seen prices move in a parabolic fashion and the reasons were outlined in OUR QUICK ALERTS so make sure you get them and read them! For YEARS we’ve ENCOURAGED you to get our PDF Report on PROTECTING portfolios from DECLINES AND UPSIDE SURPRISES. You should get this file.
We have said we think INFLATION did peak in May at about 9% and that frothy things like durable goods, apparel, air fares and used cars would be the first to drop. Other areas may slow a bit like shelter, health care, owner equivalent rents, new car prices, food prices AND Fuel Oil was UP 19.8% & winter’s here NOW BOTTOM LINE- The CPI report is pointing in the right direction & getting UNDER 5%-6% may= Recession EARNINGS for Q3 suggest a slower trajectory if you take out ENERGY and their obscene profits. Despite a spike in prices this week; for the year the Dow is down 7% (more value stocks), S&P is down 16% and the Nasdaq is down 28% so we get a relief before the holidays & New Year reinvestment of pension plans ect.
We have TOLD YOU 3 THINGS that have come home to roost. #1 the SPX was VERY OVERSOLD in the month of October basis our moving averages when the VIX was around 35 and the capitulation to SPX 3500. #2. We told you the DOLLAR INDEX was VERY OVERBOUGHT basis our moving averages above 110-115. #3. We told you that the 2 YEAR TREASURY YIELD was VERY OVERBOUGHT at 4.75% basis our moving averages AND a 3.75% Fed Funds rate. NOW ALL OF THEM ARE REVERTING TO THE MEAN.
RIGHT NOW. On a short term basis WE COULD see (like we did in JUNE) a 10 Year TREASURY YIELD REVERSION toward 3.7%-3.50% best case 3% & then a resumption of higher rates. WE COULD see a SPX REVERSION to 4100-4175 or best case 4350 (August highs) and then a fade as EARNINGS fade-P/E’s slump. WE COULD see a DOLLAR INDEX REVERSION to 105-103 best case 97 and then a return upward
CONCLUSION! The Federal Reserve meets on December 14th and then NOT again until Jan 31-Feb1…that is a LONG Time between meetings. Should they go 50 basis points and we get another slight fade in CPI; we stand to see a REPEAT of after the JULY meeting (Jackson Hole gave them the month off) and their RETURN in SEPTEMBER. We saw YIELDS tank from 3.50% to 2.50% and SPX go from 3650 to 4350 and the DOLLAR INDEX went from 109 to 104. REMEMBER when they returned in SEPTEMBER all that REVERSED!!
QUESTION? Does the Fed want to play that game again? Does that help their mandate of stable prices? OUR GUESS is we are looking at an opportunity to DERISK lousy stocks & Covered Calls/Collars on others
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The Option Professor
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