QVMS - Keys To The Market
Summary
- We have been on a market roller-coaster. Why the violent ups and downs? We are still in negative gamma.
- The options market is controlling the stock market. There is a lack of liquidity in the market, and the positions in the options market are now very short-term.
- There are some important dates coming up. Earnings are flooding in from corporations. Will they disappoint?
This is without a doubt my favorite time of the year in Georgia. The weather here has been nothing short of spectacular. Next week is expected to see an Arctic blast with temps 10-20 degrees below normal. Hopefully, it doesn’t last long. The early cold blast has us thinking that we will see a weak La Nina, which, in the south, usually provides us with a dry cold winter. I hope not. Maybe we should be buying natural gas. Either way, we think commodities/energy costs are not done going up. This could be a decade-long trade.
That has been some roller-coaster we have been on. Why the violent ups and downs? We are still in negative gamma. The options market is controlling the stock market. It is a bit like the tail wagging the dog. There is a lack of liquidity in the market. The positions in the options market are now very short-term. Almost 50% of options are expiring within days. That is not the way that market is supposed to work. That just reinforces volatility. It is just gambling. So, there is still a very speculative element to this market. It has just changed hands from the GameStops and Best Buys of the world to ETFs in the options market. We are not out of the woods yet. It’s still a bear market.
A year ago, we told you that we would see higher inflation. One of the clues we saw was hidden in the way that they calculate the inflation data. Owners' Equivalent Rent (OER) is 44% of the inflation calculation. The government was not including the large raises in rent into their calculations. They were basically spoon-feeding it into the data. The worm has turned. They are now calculating too much inflation into their data. For the next 4-6 months, we see inflation running higher in the government data than in the real world. In Q1 2023, the cool-off we are seeing in rent payments will begin to show up in the official data. That will have an impact on the market.
Our mentor Arthur Cashin was always fond of saying, “When you find the keys to the market, they change the locks.” One rule we have for investing is to find the hot hand. The key for us is reading everything we can get our hands on and finding/following the hot hands logic. Who has found the keys? One is our options research analyst that we have been following for some time. The other two research analysts are Mike Wilson from Morgan Stanley and Mike Hartnett form Bank of America. They have both nailed this market. There are some important dates coming up. Earnings are flooding in from corporations. Will they disappoint? The corporate buybacks are in blackout and will not start back up in earnest until October 28 th . Hartnett says short stocks until Halloween. The G-20 conference is on November 16 th . That should begin the turnaround in bonds and the US dollar. The end of the year brings funding challenges. The short story is we either begin to head higher in the next 3 weeks or the bears continue to push into the end of the year. Quite frankly, the end of the year might be painful, but it is easier. It would be a lot like 2018, when we bought on Christmas Eve. The more difficult journey has us headed higher for the next couple of months into the beginning of 2023. We are nimble but looking to nibble more on stocks.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Keys To The Market