Too many people on reddit dont really know what is going on in the market, so I will break it down for you. I will analyze and give you some food for though as to how to move foward and also what the big traders are doing.
Im going to break this down into 4 parts to make this easy to understand:
- rate hike easement (market expectation) banks/ yields/bonds
- technicals (oversold conditions on RSI, double bottom)
- VIX and TNX
- What the whales are doing
You might be asking why the market rallied when Russia just invaded Ukraine. The simple answer is, bad news is good news for the market and good news is bad for the market. With geo political escalation the vix shot up and the market dropped. VIX otherwise known as the fear index shot up to insane levels on the news of escalation, but on the day of the invasion the stock rose. The reason is simple, first there was fear and the vix shot up, the algos and daytraders pick up on this and trade accordingly.
Now lets look at the reasons why it rallied, as that is what most of you dont understand. Like I said, bad news is good news for the market. If we have war, there will be a easing of the rate hikes. Instead of 50 basis points, we could be looking at 25. Also we are trading expectations. Or in this case we are pricing in a smaller rate hike.
This is part of the reason why banks also dropped today. Expectations of less then 50 basis point hike lessened and algos follow the TNX when trading bank stocks.
Also what was one of the biggest fears in the market, which is the sanctions which will not only hurt them but really hurt our own economy. Think Oil, paladium, wheat, etc. The sanctions were basically weaksauce. This was probably one of the biggest fears going into this geo political escalation. its also why there was so much bullish calls on Oil, fertilizer, wheat, paladium, etc. And why you see oil drop back. Commodities like wheat had other factors helping it so it didnt tank like oil did.
Now lets look at it from a technical stand point. I predicted this rally and posted it 24 hours before the rally today, as to why we had a good shot at rallying on my discord. What we experienced today was a combination of rate easing expecations and also from extreme oversold conditions.
How does oversold conditions play into this you might ask. From a trading stand point. As someone who is shorting, you want to exit right before or at RSI levels of 30 or lower. This is what we call profit taking. In order to profit take on a short, you have to buy back the shares you borrowed, creating buying pressure. So when the shorts cover by profit taking and dip buyers appearing on oversold conditions and a easing of rate hike, that is going to lead to a extreme rally.
This happens in every bearish market and is known as a bearish rally. Normally we get a pop for a couple days and then back to the downward trend.
A big part of the equation to the rally is stock rotation (transitory/temporary). This means we found a tradeable bottom. What we did today was SELLING THE WINNERS AND BUYING THE LOSERS. If you look at the heatmap, you will notice the stocks that performed the best were the ones who were sold off the most.
The last and final part of the rally is the VIX topping and TNX moving down. When yields fall, growth stock does well, especially when they are sold off to extreme levels. VIX moving down also pushes the market higher, we will still be trading above the 20, so still in fear territory, but we moved down from the peak of 38. You see both of these macro indicators moving down, its a good case for a bullish market movement, especially when you consider all the other things I listed above. You combine them and this is what you get.
As you can see from option activity, this is going to be a short term rally. The whales are shorting SPY, QQQ, and real estate for expiration dates in april and may (rate hikes negatively affect this sector and is a proxy for yields in a way). So basically they are fading the top. We will probably see more of this tommorow if the market has continuation.
They are going long Emerging markets (EMM) and seems to be the party favorite right now. The other is to go long value stock that has pricing power. Think transportation stocks like union pacific, fed ex, etc. Any company that has sound fundamentals, cash flow, and a monopoly.
The other long position is in commodities, such as oil, metals, agricultural. This is basically the best hedge vs rising inflation and stagflation.
Leave a Reply