Don’t Short a Quiet Market?
The quiet we have seen in the market over the course of the past week has come across as incredibly out of character for 2022. The VIX has finally fallen below 25, which, by the way, is the first time it’s seen a level that low since April 22nd, 2022. The SPX has stayed within a relatively tight range of around 150 points. That is truly saying something, as previously we’d easily see 150 point moves in the S&P before lunch.
This kind of trade is typical for June. Generally, as children get out of school for the summer and people head out on much-needed vacations, we will see the volume drop out of the stock market along with the volatility. Now, even though this is typical for the June trade, I can’t say I was placing a large bet on that occurring this year, especially in light of what we have seen from January until now. While this kind of quiet is ‘normal’ for this time of year, I’m having a hard time believing that volatility is just going to cozy up and go to bed for the summer.
If it was any other year, I’d be shifting over into premium selling, time-sucking option strategies. I’d look at options like selling wide premiums in the SPX, to bet on the index staying within a range. I’d consider simply just selling put credit spreads along with the trend, which used to be up! But this year seems different.
Which is why I’m not getting neutral. I think this market is going to break out in a big way. Maybe not with as much gusto as the past few months. After all, it is still a low-volume time frame. But, I cannot imagine this market staying quiet for that much longer.
I am still slanted to the short side, but with the phrase, ‘Don’t short a quiet market,’ in my head, along with several upcoming news-related catalysts, I’m leaning towards the cautious side right now.
Intuition or Technical Setup?
I always hate to use the words, “I feel like…” because I know, Mr. Market does not care whatsoever about me or my feelings. But, at the same time, I can’t shake the feeling that a big move is coming. As such, getting neutral is the last thing I want to do.
As the indexes stick within this range, there is consolidation happening all over the place. The S&P, the Nasdaq, the semiconductors (SMH), technology stocks (XLK), communications (XLC) home construction (XHB), and more are ALL consolidating as we speak, into my favorite setup known as the squeeze. Generally, once a catalyst hits – the squeeze is going to fire, and an explosive move will occur.
“Which direction will the squeeze fire?” is always the next question.
Well, I can tell you that if I knew the answer for 100% fact I would be coming to you from my private island in Belize, but since that is in fact not the case, I will tell you what I do know.
The squeeze, far more often than not, fires in the direction of the trend. That trend, is down, on every single index and sector I listed above. Sometimes, we will get countertrend catalysts that cause that momentum to go in the opposite direction. It can happen. But, not usually. In any case, it’s generally a catalyst, particularly a news-related macro catalyst, that causes price action to finally break out.
Macro Factors & Major Catalysts
So, what could that catalyst be? There are a number of events coming up on the calendar.
First, we have CPI data coming on Friday. CPI data has been highly in focus as of late because one of the primary macro factors weighing down the economy and stock market is persistent inflation. Traders everywhere will be watching this data closely for any possible sign that inflation is in fact waning. Waning inflation would be arguably the best news we could get, and could easily serve as a positive catalyst to the upside.
Next week, there will be the major June FOMC meeting. The Federal Reserve, along with inflation, is highly in focus at this moment in time. Now, the market expects the Fed to raise rates by .50, so this would be expected and not a major market mover. However, their additional commentary, especially in light of the CPI data on Friday, could be a big catalyst. Which direction? It’s tough to call. I suspect inflation isn’t waning and the Fed will continue along with its aggressive, quantitative tightening schedule. But, I’d be happy (and my portfolio) would be happy if I end up being wrong.
Even though the macro situation is bleak, I’m not ruling out the possibility of the indexes trading higher here, even though I am bearish and have been bearish for some time. Due to the fact that sentiment is so negative, the major catalyst for the market that could be very bullish would be a big surprise. At this point, it’s almost as though the bad news is expected and known, leaving the door open for a surprise, explosive move to the upside.
So, where do we go from here?
Well, we trade the market like we always have. Taking it from one decision to the next.
A breakout to the upside, above 4200 in the SPX, could certainly lead to a big rally for the bulls. But, conversely, a breakdown below 4100, and then 4000, would certainly lead us back into new lows.
As the primary market-moving catalysts are news-related events coming up on the calendar, the uncertainty of it all must be taken into consideration. Technical setups are critical, but in a news-driven market like this, these events cannot be understated.
Right now, I’m in a bit of ‘hurry up and wait mode.’ That means that I’m largely sitting on my hands (okay, fine, I do have a few positions on…short the QQQ’s, short SMH, short SBUX to name a few), and waiting for a more clear signal. Sometimes, holding onto your money is the best choice you can make, especially during the summertime lull!
Mark my words, I highly doubt this lull lasts much longer. After all, even though we have mostly wrapped up earnings season, pre-earnings momentum for July/August earnings is coming up sooner than you think! Starting next week, several key names will be entering the Hot Zone – the pre-earnings momentum timeframe where stocks begin making moves in anticipation of earnings. And, this quarter, I cannot imagine these moves will be to the upside. Either way, I’ll be here, walking you through exactly what I see, when I see it!