QVMS - Making Sense Of No Sense: Why The Market Reacted The Way It Did To CPI This Week
Summary
- Let's for a moment abandon the pretense that securities pricing has any relationship to earnings, GDP growth, or any other number exogenous to securities themselves.
- With the blinkers off we can now consider the question of - what the Dickens just happened?
- We explain all below. Want the punchline? As always - try to be more like Big Money and less like Chad.
DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
The View Askew
If you step outside in the Great Outdoors, beyond the light pollution from cities, airports, industrial estates, hotels, roads, whatever, and you wait for night to fall, a curious thing happens. Some stars and other celestial bodies (mainly discarded Russian rocket bodies that remain in a decadent orbit) are most easily seen by looking directly at them. With the naked eye or with optical assistance. But some stars and constellations and nebulae - they're most easily observed by looking away from them. This is called averted vision. It's a learnable, repeatable skill and it involves using a specific area of the retina to absorb signals from far-off objects. This part of the retina can process low-light signals much more effectively than the usual part you use to watch TV, look for chips at the bottom of the bag, etc. It's a much more sophisticated setup altogether.
Averted vision is what you must use when considering securities analysis.
Your central retina loves Jim Cramer and his buddies on TV. Now, you know to filter him out, but the less cartoonish talking heads that pop up on CNBC, Bloomberg TV, etc, they can be hard to ignore, because your central retina loves the bright light, the shock and awe, the frisson that emanates from these Gods in the Machine. Ooh! ... goes your eye. Bill Ackman! Wow that guy is important. If he says something it is surely worth me hearing.
Pshaw. Switch the TV off, close down all the financial news sites you use, shut down the lights, calm and slow your breathing and just consider the low-light signals coming from a galaxy far, far away.
Now you're in the right frame of mind.
Here's what happened yesterday and today.
The market arrived at CPI day in a state of prolonged depression, a result of the controlled demolition carried out so effectively by large account players over the course of the year. The weaponization of S&P 500 puts to drag down the index in an orderly manner so as not to spike the Vix and reward Chad (who learned in 2020 that UVXY was a thing) has been a thing of great beauty. We salute you, JPMorgan (JPM), particularly as your own pantomime villain has been on TV doing his best to decry everything as doomed, the better to cause you to sell, before rolling out and down those puts still further.
Why does this matter? Because all year, options have dragged the market around, and when we say around, we mean, down. Heavy put loads mean that market makers who have sold puts (thus going long the market) have thus had to short the underlying stocks in order to remain delta-neutral. The market goes lower; sentiment falls and folks buy more puts; rinse and repeat.
Coming into Thursday, there was a "put wall" in SPY around the $350 level. This means that $350 was the strike price at which there was the highest rate of change of put value for any change in the underlying price of SPY. Put walls are where bears congregate hoping to catch a lot of salmon. Sadly for the bears, the salmon farmers - the market makers - like to point to the tasty salmon on offer, only to spirit them away at feeding time. Put walls often act as support, because if that support breaks, put buyers make money and put sellers do not. That's against the laws of nature, and so very often, the market makers win out.
OK. Hold that thought.
Next. Crypto. Don't click away. Doesn't matter whether you still dream of YOLOing Shibu Inu or whether you've considered crypto a criminal ponzi enterprise since 2012 and feel no different today. Crypto has one very useful function in securities analysis and that is as a risk canary. One, it has no fundamentals whatsoever so it trades solely on risk sentiment. And two, it trades 24x7. Even futures all the way through the Globex session can't match crypto for traded hours. Want to get a continuous read on risk appetite? Watch the BTCUSD cross and the ETHUSD cross. Load 'em up on your watchlist and use your averted vision to watch them at all times. We can tell you it's useful. Every day in our premarket update note that we send our subscribers, we report on BTCUSD and ETHUSD overnight. We don't care about crypto one way or the other. But we do like to get a little advance notice of whether fear or greed is on deck that day.
OK. Hold that thought too.
Now, here's what happened Thursday. As you know, CPI prints at 0830.
At 0500 Eastern, crypto vomited. Aha, said we. Good chance CPI runs hot. Prepare to add to short positions.
The index futures didn't notice. (Because not everyone watches crypto. Some people are too busy decrying Bah Humbug to work out how to actually use it. You don't have to be a meme jockey to make money from crypto. You don't have to own any crypto to make money from crypto. You can use it as an advance indicator). Futures kept moving up because everyone was so bearish coming into CPI, the indices couldn't help but rise in the cash session. Right?
We added to our short positions in staff personal accounts - having first flagged the opportunity in our Growth Investor Pro service - using [[SQQQ]], [[SPXU]] and [[SOXS]] to gain exposure to the downside.
CPI came in hot, as we noted yesterday .
And the market just doused itself in fracking byproducts and lit the match. Three and a half hours after crypto told you it was going to. How did the World Kings of Crypto know? We don't know. Ask the SEC. Maybe they know.
So now fear is running in the streets.
But not enough fear to make put owners big money. Here's what [[SPY]] did. ( You can open a full page chart, here ).
It thought briefly about limbo-ing under the put wall, then decided against it.
Reader, we dumped our shorts at this point. Because in our world, our motto is, be more like Big Money and less like Chad. Chad in this case had been YOLOing those $350 strike SPY puts. And Big Money had been selling Chad all the puts Chad could stuff in his account. So you knew what was going to happen next.
Puts getting sold, pronto. Smart money saying, $350 isn't coming back, dump 'em. Chad saying, but CPI is hot! Of course it will go below $350! (Chad, you see, still thinks that reality matters to stock prices.)
Cue short-covering rally. Puts sold; dealers having to buy the underlying index to remain delta-neutral. Nitrous-injected rally because of the sheer weight of puts and the rate at which they were getting dumped.
Then the YOLO crowd jumped in - quick! - we're missing out on the ups! - BUY!
Reader, we added to our shorts once more. After, of course, flagging the opportunity ahead of time to our subscribers.
As the day closed yesterday we moved into a net short position in our index ETF holdings and subscriber coverage. And then as the market swooned once more today (profit taking and more Chad-skewering) we have sold a good portion of those short ETFs to pocket gains - and indeed rolled some of the hard-earned filthy lucre into beaten-up long ETF positions. Again - all flagged upfront to our real-time members.
Today looks like a terrible day but actually it wasn't. The day closed at a potentially bullish 1-2 setup, like this:
It's not a coincidence that SPY closed today at the 0.618 retracement of the move up from the premarket lows yesterday to the regular trading hours high yesterday. That's a textbook Wave 2 down off of a Wave 1 high. And whilst of course anything can happen Monday, there's every chance SPY heads up to the $380 zip code, a typical Wave 3 100% extension of Wave 1. You could play this with a tight stop under the 0.786 retrace level (below $353) if you wanted to.
So if you got up early Thursday, you knew to watch crypto, you stopped your brain from wondering who exactly at Bitcoin HQ got the CPI numbers early, you watched index futures, you knew where the SPY put wall was, and you knew Chad would YOLO the rally then get faded? You had a pretty good couple days.
And with that we shall bid you a great weekend, ready for the next instalment of the Great Video Game known as The Market, Monday.
Cestrian Capital Research, Inc - 14 October 2022.
For further details see:
Making Sense Of No Sense: Why The Market Reacted The Way It Did To CPI This Week