On The Verge: $MSFT Resurgence

The first Fed decision of 2024 is in the books! While earnings and Fed talk dominated the week, I was eager to try out some new strategies I was recently introduced to. Last week, I mentioned my journey to Jacksonville for a business conference, and now that I'm back, I'm excited to share the developments and insights that emerged during my time there.

While attending conferences may sometimes feel like a daunting task, the returns on investment in terms of new ideas and strengthened relationships are truly remarkable. This time around, Jacksonville's Atlantic Beach area not only offered a backdrop of beautiful landscapes but also served as a breeding ground for fruitful discussions and invaluable connections.

My wife joined me for the conference, her first ever, and the experience highlighted a crucial aspect of compounding investments – not just in finance but also in the realm of human relationships. It was a testament to the belief that every connection, much like every idea, has the potential to grow and flourish over time.

Throughout the conference, I engaged with numerous colleagues and companies, exchanging ideas on how to enhance trading and marketing strategies. The latest developments in the financial world, particularly regarding Vanna and Charm Dealer flows, caught my attention. I stumbled upon the power of these flows, realizing how a single piece of information could propel our trading endeavors to new heights.

Understanding option flows is pivotal in decoding market behavior during crucial periods, highlighting the profound impact of option dynamics on the stock market. In the world of market makers, liquidity and market depth are foundational for effective delta hedging and risk management in options trading. Inadequate or one-sided liquidity can turn a moderate order into a market-moving force, causing heightened realized volatility and subsequently elevated implied volatility.

Delta hedging activities not only impact individual trades but also cast meaningful and frequent influences on the broader market, underscoring the interconnectedness of trading actions and their collective repercussions.

The intricate relationship of market flows revolves around changes in the underlying price, implied volatility, and the relentless passage of time—measured by gamma, Vanna, and charm. As out-of-the-money options become more accessible and their deltas approach zero near expiry, traders may readjust their hedge by repurchasing some short positions. Just take a look at the following graphic which helped us execute a successful trade with AMD:

Vanna and Charm flows resonate most during the second and third weeks of the month, orchestrating a gradual ascent in the S&P index as options expiration nears. These weeks witness the subtle yet powerful effects of these flows, contributing to a slow grind higher in the index.

Understanding these concepts has become a game-changer, influencing the way we structure our option and stock trades. Just take a look at some of the work we’ve done in our latest live trading room sessions:

Live Trading Room Recordings

An excellent example of our recent success using these strategies is our AMD trade this week, detailed in the live trading room. I invite you to witness the application of these strategies in our day-to-day trading. In the live trading room, we discussed how we leverage dealer flows to determine support and resistance levels for stocks and options, ultimately aiding in predicting possible outcomes of earnings. And then executed that exact trade!

As we embark on this journey of shared insights and discoveries, let's trade with renewed energy and enthusiasm. Here's to compounding investments, not just in the markets but in the bonds we build with each other.

Recent Trade Review

In our ongoing pursuit of strategic trading, we're delighted to shed light on a recent success story involving Eli Lilly and Company (LLY), a trade that unfolded under the watchful eye of our proprietary Dynamic Power Trader model and the insightful services provided by DPT Services.

As highlighted in last week's discussion and showcased in our Tuesday live trading room recording, our DPT model identified $LLY as a promising opportunity. What sets our premium DPT Services apart is the invaluable SMS alerts that accompany our paid offerings. These real-time notifications empower you to seize optimal entry and exit points promptly, ensuring that you stay ahead of the curve in the fast-paced world of trading.

Now, the $LLY trade, which we've been tracking, has come full circle this week. The position has been fully closed post-earnings, allowing our traders to capitalize on the envisioned opportunity and lock in gains.

For those who may have missed the live action or are eager to revisit the details, you can catch the full recording of the live trading room session here. It's an excellent opportunity to witness firsthand how our strategies unfold in real time and to gain insights into the decision-making process that led to a successful trade closure.

CURRENT TRADING LANDSCAPE 

The past week unfolded with a multifaceted interplay of economic indicators, corporate earnings, and a pivotal Federal Reserve decision, setting the stage for significant market shifts. Let's traverse through the key developments chronologically.

As I reassess my market stance, I'm shifting towards a market-neutral position, influenced by economic data indicating a low probability of recession. My perspective aligns with the consensus, foreseeing the SPY rally capped at $470-500 levels. Despite anticipating patterns of higher highs and higher lows in the coming weeks, I maintain a cautious outlook, suggesting short support levels in the range of 440-460 for the next few months. While the market surged to all-time highs at the beginning of the week, with the S&P 500 nearing the 500 level, I believe the pinnacle of this rally may have already unfolded. For reference, the SPY Seasonal Chart is shown below:

The week commenced with U.S. stocks showing minor fluctuations, laying the groundwork for a flurry of corporate earnings releases and the Federal Reserve’s monetary policy decision. Tech behemoths like Microsoft and Apple set a positive market sentiment. The spotlight then shifted to major players, including AMD, Google-parent Alphabet, Microsoft, Apple, and Amazon, whose earnings collectively constituted 28% of the S&P 500 index.

Wednesday witnessed a pivotal moment as the Federal Reserve, in a unanimous decision, chose to maintain interest rates at 5.25%-5.50%. During the post-meeting press conference, Fed Chair Jerome Powell reiterated concerns about persistently high inflation, firmly ruling out a rate cut in March. Powell's statements triggered a strengthening of the dollar and a dip in the 10-year yield to 3.95%. The market, in response, recalibrated expectations for future rate cuts, resulting in the implied probability dropping to 35%, the lowest in over two months, as reported by Deutsche Bank. Investors are now closely monitoring the Fed’s forward guidance for insights into the central bank’s strategy amid economic uncertainties. The prevailing consensus among market participants suggests a belief that the Fed has concluded its rate-hiking cycle for the current year and the next.

Post the Fed decision, the market displayed recovery as investors digested Powell’s comments. Despite short-term pullbacks, the pattern of higher highs and higher lows was anticipated to persist into the next year. Attention then turned to major tech companies like Apple, Amazon.com, and Meta Platforms.

The earnings season kicked off with a focus on major tech players, contributing to 28% of the S&P 500 index. Tech giants like Microsoft and Apple set a positive tone for the market, but the week unfolded with a mixed bag of earnings results. Notable beats came from Pfizer in the pharmaceutical sector, while General Motors posted solid results. Conversely, tech giants like Microsoft and Alphabet disappointed with their earnings reports, triggering a Wednesday market plunge. Meta Platforms' remarkable earnings performance on Friday, driving the single biggest one-day gain in market value by any U.S. company, provided a dramatic close to the week.

Amidst the corporate earnings and the Fed decision, the Institute for Supply Management’s Purchasing Managers Index (PMI) for January came in at 49.1, surpassing the December reading of 47.1 and beating economists’ expectations of 47.2. While this indicated an improvement, it also highlighted that the U.S. manufacturing sector had contracted for 15 consecutive months. The data suggested a slower rate of contraction, with more orders flowing into the manufacturing industry, offering a measure of comfort to investors.

On Friday, the S&P 500 and Nasdaq rallied on the back of solid earnings from Big Tech. Meta Platforms witnessed the single biggest one-day gain in market value by any U.S. company, driven by its blockbuster earnings report. The Dow experienced fluctuations following stronger-than-expected jobs data, with the U.S. adding 353,000 jobs in January. This figure surpassed more modest expectations, defying earlier predictions and instilling confidence in the economic recovery.

Despite the impressive job additions, the unemployment rate held steady, defying expectations for a slight increase. This resilience in the face of significant job growth suggests a labor market that is absorbing new opportunities without a substantial shift in overall employment figures.

Noteworthy global developments included a substantial drop in inflation in Europe, signaling a cooling economy. European stocks exhibited fluctuations after robust U.S. jobs data diminished expectations of an early Federal Reserve interest-rate cut.

SECTOR SPOTLIGHT

In the ever-evolving landscape of the financial markets, strategic sector investments can be a game-changer. This week, our attention is keenly focused on a sector that stands at the forefront of innovation and market influence. As we set our sights on trading this particular sector, the anticipation builds for a well-timed move that aligns with the prevailing market dynamics.