Stock Market- Out of the Woods & The Lows Are In? Not So Fast-Read Our Take!

February 26 2020 Option Professor Opinions & Observations

This week we saw about as much whipsaw action as you’re going to see with a war breaking out and a veiled cyber security threat from a country that could actually pull it off. We saw stocks dive and commodities (grains -gold-oil) have big spikes to the upside only to end the week with fading commodities and stocks having a short covering & algos rally that can come when the VIX hits the high 30’s….because if it breaks 40; you get a melt down and I am sure the plunge protection team is well aware of that…throw month end propping up of brokerage statements so Mom & Pop don’t get sticker shock and sell everything. So why the reversal by weeks end?…our take is word is getting out that some negotiations will take place and dial this thing down (grains dropped sharply Friday as fears of no grains abated). The heat is being turned up from all corners on Putin (Russians- NATO-China-Europe-USA) and the risk reward for this invasion may be turning in a settlements favor…we’ll see…we’ll hope for the sake of those innocent Ukrainian people.

Will this rally stick and have legs? We have inflation running at the HIGHEST level since 1983 and a lot of it is structural now (rents-wages-energy-food supplies ect). The Option Professor has been around for decades so this is not our first rodeo with volatility, inflation, valuation compression and geo political events. We told readers that 2022 was a REVERSION to the MEAN YEAR and the only question was to what degree. The minimal reversion has already been met and exceeded when we broke SPX 4400 which we tested around on Friday after testing SPX 4100 during the panic. A full reversion would be toward the SPX 3800-3550 area. OVERHEAD supply may come in SPX 4400-4500 & 4550-4600. Don’t FIGHT the FED ( removing accommodation) and Don’t FIGHT the TAPE (resistance #’s exceeded turns to support)

GOOD NEWS/BAD NEWS-We have great numbers continuing on consumer spending (70% of economic growth) and earnings by and large have been above estimates with at times foggy guidance. Despite the banter; the Fed has done nothing and even putting 100 points on fed funds by July (Bullard)…they are ridiculously behind the curve (2yr Treasury has discounted 6 hikes already!) By any measure; the Fed is still in a absurd accommodative policy versus the obvious GDP/inflation strong numbers. Do you really think a 2% Fed Funds rate will get inflation back to the Fed’s 2.5% target?? So; something has to give…either the Fed will be RAISING RATES much more OR INFLATION RATES are higher-longer. Stocks are supposed to be good during inflationary times they say BUT if wages are negative versus inflation (personal income is flat); the higher costs can drain reserves and curb consumption….both unwelcome for earnings/margins.

CONCLUSION- The Fed is removing accommodation (stimulus & balance sheet) and if they kick the can down the road (we can’t afford higher rates)….the consequences may also be unaffordable…PCE at 1983 HIGHS!). So we don’t fight the Fed….the tape has turned up but a BOUNCE is not a TREND….it is very important to UNDERSTAND RISK MANAGEMENT

The Option Professor has a PDF Report that is AVAILABLE to Educate you on PROTECTING PORTFOLIOS against drops. ALSO you can LEARN how to Hedge UPSIDE RISK-DOWNSIDE RISK using Limited Risk Replacement Strategies

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Jim Kenney

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