Welcome to the latest edition of Power Trading Markets, your trusted source for all things finance! As the summer season kicks off here in Chicago, I couldn't help but reflect on a recent experience that perfectly encapsulates the importance of testing theories, checking sources, and looking at issues from all angles—a lesson that holds particular relevance in our current financial landscape.
As the days grew longer and the warm, sunny weather beckoned my friends and I decided to embrace an age-old tradition we love: the hot sauna followed by a plunge into a cold pool. The exhilarating sensation of the cold water enveloping our bodies prompted a thought-provoking question from one of our friends: "Is there any medical evidence to support the benefits of heat therapy?" As we’ve practiced in this tradition countless times, other than the passed down notion we all subscribe to that there are health benefits, do we really know if this practice is effective?
In our group, we have a friend who happens to be an orthopedic surgeon—a person who consistently challenges traditional medical approaches. As expected, his response was skeptical, asserting that there is no conclusive evidence to support the therapeutic effects of saunas, despite centuries of belief in their positive impact on cardiovascular health, blood pressure, arterial wall elasticity, and mental relaxation.
Inspired by this conversation, I proposed a new approach to settle our friendly debate. Instead of arguing without any prior research, I suggested forming a club where we select a topic, conduct thorough research using reputable sources like Google Scholar, and present our findings to each other. It was a wonderful opportunity to expand our knowledge and challenge our preconceived notions.
During our inaugural club meeting, each of my friends presented on the chosen topic, drawing from research papers and scientific studies. However, our skeptical surgeon friend remained unconvinced, suggesting that the studies could be manipulated by companies with vested interests. Despite our best efforts to persuade him otherwise, he remained steadfast in his belief that there was no substantial evidence of medical benefit. This amusing situation served as a stark reminder of the importance of critical thinking and as well as alternative perspectives.
In the realm of finance, similar lessons hold true. As we approach the looming deadline on the debt ceiling negotiation, we cannot simply assume that a certain outcome will happen or that all parties will reach an agreement on time. The concept of "default to truth" comes to mind—a notion we've explored in-depth with works like "Talking to Strangers” both in our book club and previous Power Trading Market articles. Just as my surgeon friend represents an extreme case on the skepticism spectrum, we must remain vigilant and skeptical when it comes to financial matters, avoiding blind faith in assumed outcomes.
This brings us to the current debt ceiling situation, which has a direct impact on the U.S. stock markets. As negotiations unfold and tensions rise, it is crucial for investors and individuals alike to remain informed, question assumptions, and consider the potential ramifications of a failure to reach an agreement. The financial landscape is often influenced by various factors and perspectives, and a comprehensive understanding is vital to make well-informed decisions.
In the following sections of this newsletter, we will delve deeper into the intricacies of the debt ceiling, explore its potential implications, and provide valuable insights to help us navigate this uncertain terrain. So sit back and embark on this financial journey with us, as we equip you with the knowledge and tools necessary to thrive amidst the ever-changing economic landscape.
Remember, just as we discovered through our sauna club experience, it is essential to challenge assumptions, seek diverse perspectives, and scrutinize the information we encounter. By doing so, we empower ourselves to make informed decisions and achieve financial success.
Stay tuned as we explore the intricacies of the debt ceiling issue and its potential impact on various aspects of the economy - as well as our latest symbol and sector of the week!
Recent Trade Review
Let's take a closer look at a recent trade that showcased the effectiveness of the Profit Accelerator Trader (PAT) services. Specifically, we'll delve into our trade involving $AVGO and how we were able to capitalize on elevated implied volatility to collect extra premium.
On Monday, the PAT model identified $AVGO as a promising opportunity to generate additional income by taking advantage of the heightened implied volatility. Implied volatility refers to the market's expectation of potential price swings in a stock, and when it is elevated, it often leads to higher option premiums.
To make the most of this opportunity, we initiated a position by purchasing $AVGO options. However, rather than simply holding the position, we employed a strategy known as selling out-of-the-money (OTM) premium. By selling OTM puts and call spreads, we aimed to collect premium and generate a return ranging from 0.5% to 1% by holding the position overnight.
It's worth noting that our preference for liquid names with weekly options available played a significant role in selecting $AVGO for this trade. Weekly options, with their short time to expiration (0 DTE options), tend to carry higher premiums due to the accelerated time decay. This presented an excellent opportunity for us to collect premium by selling options that were unlikely to be exercised by the expiration date.
Selling OTM puts and call spreads is widely recognized as one of the most popular strategies in a bear market. This strategy allows traders to benefit from the decline in stock prices, while simultaneously mitigating risk and capitalizing on the increased premiums associated with heightened volatility.
One of the key advantages of the Profit Accelerator Trader services, and YellowTunnel’s additional paid services, is the ability to receive timely alerts via SMS messages. These alerts ensure that traders are promptly notified when it is appropriate to enter or exit a position. This timely guidance allows for more efficient decision-making and enables traders to capture potential profits effectively.
To gain further insights into our live trading room and experience real-time action, I invite you to watch Tuesday's recording of our trading session by following this link: Live Trading Room Recordings.
The recent $AVGO trade serves as a testament to the effectiveness of our strategies and the value provided by the Profit Accelerator Trader services. By leveraging market opportunities and implementing proven trading techniques, we strive to help our members achieve their financial goals.
Stay tuned for more trade reviews and valuable insights in the upcoming editions of Financial Insights, where we continue to explore opportunities, analyze market trends, and equip you with the knowledge to navigate the ever-evolving financial landscape.
CURRENT TRADING LANDSCAPE
While major U.S. major indices were on track to finish in the red for most of the week, indices turned positive on Friday. Optimism surrounding the resolution of debt-ceiling discussions has fueled a sense of positivity among investors according to the latest reports. As the markets eagerly await updates on the ongoing negotiations, another significant factor has emerged: the Federal Reserve's preferred inflation gauge indicating a rise in prices during April. This unexpected uptick in inflation has reignited concerns about the need for further measures to curb high prices. Against this backdrop, U.S. stock futures witnessed an early rise on Friday, as market participants remained attuned to developments on the debt ceiling front and awaited the Federal Reserve's preferred inflation metric.
Going back to the start of the week, U.S. stocks had a mixed performance on Monday, with the S&P 500 and Nasdaq poised for gains while the Dow Jones lagged in negative territory. Investors eagerly awaited updates on the debt ceiling negotiations, setting the stage for a crucial week. Tech stocks, led by Nvidia's strong earnings, experienced significant gains as investors sought to capitalize on the momentum in the artificial intelligence sector.
President Biden's meeting with House Speaker McCarthy aimed to make progress on the debt ceiling talks as the June 1 deadline approached. Fed President James Bullard's announcement of two more interest rate hikes later in the year added to market focus, causing Treasury yields to rise.
Nvidia's impressive performance and positive revenue outlook boosted its stock price and had a spillover effect on other tech stocks, driving the Nasdaq index higher. However, Intel faced a decline as investors sold shares due to competitive concerns.
On Thursday, jobless claims slightly increased but came in lighter than expected. The first-quarter GDP growth rate was revised upward to 1.3%, surpassing economists' estimates and indicating stronger economic performance.
On Friday, markets opened with optimism regarding the resolution of debt-ceiling discussions. Tech companies continued to see shares rise as artificial intelligence fueled optimism within the sector. Broadcom, a semiconductor company, gained 8.8% after receiving a price target raise from analysts at Oppenheimer.
With this in mind, it is important to highlight that the VIX, often referred to as the "fear index," is currently trading around the $18 mark. This week, market sentiment will be influenced by the earnings reports of Lowe's Companies Inc., Zoom Video Communications Inc., and Nvidia Corporation. Traders are paying attention to both the resistance and support levels in the SPDR S&P 500 ETF, which can impact market dynamics. Given the potential for the market to exhibit a sideways trading pattern in the upcoming weeks, it is advisable to approach with caution and consider hedging strategies to protect positions. See the $SPY Seasonal Chart below:
In the midst of recent market activity, there were signs of moderate improvement in retail data, although the numbers remained high. Companies such as KSS and URBN exceeded expectations by effectively managing their inventories. On the other hand, the office real estate investment trust (REIT) sector experienced a fire sale, while weak data from China and declining commodities raised concerns in global markets, amplified by the strengthening DXY. LVMH's discounting of luxury goods in retail stores also contributed to the landscape.
While the prevailing narrative suggests a soft landing following China's reopening, the surge in the AI market, low unemployment rates, and strong consumer sentiment, uncertainties persist. The FXI, an exchange-traded fund tracking Chinese stocks, showed weakness, casting doubt on the pace of reopening in the region. Office REITs continued to face challenges, leading to fire sales. As volatility increases, it is expected to continue rising as we approach the summer season.
On the other hand, the AI market is experiencing a sugar rush, with notable impacts on companies like NVDA evident in their earnings calls. Volatility is finally on the rise and is likely to continue increasing as we head into the summer season. The market is currently going through a top-building process across all indexes, and a pullback has already begun. The upcoming earnings calls and forward-looking guidance will determine the pace of this pullback, and investors are eagerly awaiting potential triggers such as the debt ceiling issue.
Furthermore, the 2-year and 10-year yields have dropped below multi-month support, with a particular focus on the 10-year yield reaching 3.5%. If the yield does not hold between 3.2% and 3.5%, it is highly likely that we have seen the market top for the next few months. In such a scenario, it is advisable for users to sell into any further rallies.
During market sell-offs, investors tend to buy gold, silver, the dollar, and treasuries (TLT). The market is reflecting a new recession theme, and it is clear that the bear market has resumed. The top building process has commenced this month, and it is unlikely that we will see new market highs this year. This process typically takes a few weeks to unfold, and a pullback could start this summer.
Small caps, IWM, banks, and industrials have shown a marginal bounce back from the recent sell-off. However, it is important to note that the market is currently supported by the gains of only 20 out of 500 companies in the SPY, indicating narrow leadership. As we enter the summer season, the market outlook is bearish, and equity markets are expected to be volatile. The best-case scenario is that the market reaches its bottom in the first half of the year. A major reason for this outlook is the likelihood of downward revisions to SP500 revenue numbers, which are not yet factored into current market levels.
In summary, U.S. stock indices saw gains due to progress in debt ceiling negotiations and strong tech stocks following Nvidia's earnings report. Economic data showed a slight increase in jobless claims and an upward revision to first-quarter GDP growth. However, global markets faced volatility due to concerns over the debt ceiling and other economic factors. As it stands, there is one sector and symbol that are of keen interest to me in the coming weeks - and my A.I. arsenal agrees!
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Going into the month of June, we turn our attention to a sector that has been generating significant buzz and attracting considerable investor interest. With advancements in technology and the growing demand for innovative solutions, this sector has captured the attention of market participants. Today, we shine the spotlight on a rapidly evolving industry that encompasses companies at the forefront of cutting-edge developments. From groundbreaking research to disruptive applications, this sector has the potential to reshape our future.