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July 30 2022 Option Professor Opinions & Observations
We told you 54% of the S&P was reporting this week and the Fed meets and GDP & PCE & ECI was coming out……so expecting smooth sailing was foolhardy….and WOW! did we get fireworks galore!
Our VIEW has been that SPX breaking ABOVE resistance at 3790-3850 set the stage for this HUGE rally COMBINED with the VIX breaking UNDER 24-22 which both occurred. We targeted SPX 4085-4150-4295 and 4400 as most likely points where the rally ends. –In fact; the VIX & AAPL may very well tell us when the coffee (FED) shows up at this drunks party. If we see the VIX (Volatility Index) sustaining ABOVE 25+ reading COMBINED with AAPL sustaining a price UNDER 159; the stampede we saw this week may fade.
There were TWO (2) MAJOR catalysts for this weeks rally & BOTH may be the fruit of MISCALCULATIONS.
- The Federal Reserve (Powell) announced a 75 basis point hike (2 in a row & most since Volker ‘s 1980’s). He followed up with a “pivot” in that the Fed will be meeting to meeting data dependent rather than aggressively raising rates and “at some point” they will pause. He said the Fed Funds rate is now at “Neutral” at 2.25%-2.50% which means it is NEITHER restrictive nor accommodative policy.
OUR VIEW- Powell made it CLEAR that INFLATION & the LABOR MARKET were TOO HIGH & TOO TIGHT. He said their MANDATE was to get INFLATION DOWN to 2% and that LABOR Rates must ease as they try to get “SLACK” in the economy by DEMAND DESTRUCTION. The median INCOME in the USA is 51K a year which means that those people and those BELOW the median are SQUEEZED by Gas-Food and Rents Ect. The Fed’s been TERRIBLE AT FORECASTING so they threw in the towel after their “TRANSITORY” debacle. Unfortunately; we feel their NEW TERRIBLE FORECAST is that 2.25%-2.50% on Fed Funds is NEUTRAL. The CPI (Consumer Price Index), ECI (Employment Cost Index), PCE Index (Personal Consumption Price Index) are ALL so far ABOVE 2.25%-2.5% that to call that number NEUTRAL is LAUGHABLE:) In Fact; the Fed’s favorite is PCE which rose 1% in June was 6.8% (up from prior month) is at a 40YEAR HIGH (1982)! The Fed Funds rate @ 2.25%-2.50% is ACCOMMODATIVE and the likelihood rates will go well ABOVE neutral is almost certainty. The Fed did NOT want to leave for 8 WEEKS with financial markets in a PANIC so they threw out the “at some point we will pause” line so investors getting wiped out in June have some hope & the long held belief by advisors that you should NEVER get out of your stocks would have plausibility. Of course; at some point they will pause….at some point the Knicks will win the NBA title…maybe sooner:)
2. EARNINGS are being touted as “surprising on the upside especially with AMZN & AAPL which is almost 20% of Nasdaq. OBVIOUSLY; at SPX 3600-3800, TOO MUCH WEAKNESS was discounted as consumers continue to spend (now using credit cards apparently). Stocks with high valuations (ROKU/ServiceNow) got clobbered. Margins were a problem for some (QCOM) and ad sales for others (SNAP META). As far as AMZN’s earnings operating cash flow DECREASED 40% for the trailing 12 months, free cash flow DECREASED for the trailing 12 months, while sales INCREASED which probably relates to HIKING prices. Finally; operating income DECREASED in Q2 vs, Q2 2021 and there was a NET LOSS was $2 Billion in Q2! AAPL’s revenue was UP 2% in Q2 COMPARED to 36% GROWTH in Q2 2021. Earnings per share (EPS) was DOWN 8% YOY, I-Phone & Services revenue was UP 3%/12% YOY but DOWN was revenue in other products, Mac, I-Pad. Growth is SLOWING at BOTH companies…they’re optimistic…does that make it so?
OUR VIEW is that last year 2021 was a banner year for cheap money, valuations, asset values and NOW we are faced with earnings and profits that are at best slowing which could be a prelude to declining IF the Fed is truthful to their MANDATE of inflation fighting and creating slack in the economy. If the Fed is NOT truthful…well we saw it this week…stocks will go thru the roof…commodities too…their dilemma is more like the 70’s stagflation where they never finished the antibiotic schedule and the illness returned.
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