Discussion
Cem Karsan beautifully articulated the path ahead for equities. It’s almost the exact path I’ve projected all year long, but have failed miserably to capitalize on.
I can’t improve on his outlook. It’s perfect. The bottom line fact is that Yellen will not allow SPOOZ to correct more than -2.54% from any given point from now until Election Day.
The only reason SPX corrected -7% in April was Israel-Iran. That was initially outside of policymakers’ control, but once that situation was resolved the Yellen put kicked back into gear.
What makes the outlook for stocks even more compelling from 5300 today than it was in late March from 5200 is that we now see the full power of the FEDeral Government Put. Policymakers are in full control here, and with geopolitical risk contained, the long end of the UST market on a controlled path higher (speed matters more than level for equities in the NT), and realized inflation likely to take a number of months to show a true acceleration higher, equities have a wide open field to run substantially higher into year-end with little to no downside.
Special Ops
My plan for Special Ops is to focus on buying 2-week ATM SPY calls into dips, as from now until call it August I think there will be 8-11 opportunities to generate 2x+ returns from micro dips. As Karsan articulated, there could be a short set up in August for a pre-election pullback into September, setting up a major run into year-end. So, with that in mind, here’s the path as I see it today:
SPX likely goes vertical into May 31 on the back of EOM/BOM flows + NVDA earnings + residual disbelief in this rally. Special Ops is currently positioned for this with May 31 SPY $532c. I think SPY closes the month above $540, but between now and May 31 I think there will be 2 maybe 3 opportunities for 2x returns in 2-week calls by aggressively buying micro dips.
FOMC is June 12. With markets up, the Fed will likely want to lean hawkish heading into that meeting, so I think SPX pulls back to the 20dma into mid-June, setting up an excellent opportunity to buy ahead of a rally into mid-July. A June-July rally should provide 3-4 opportunities for 2x+ returns from 2-week calls.
If SPX is going to tactically peak in August, there’s probably a heads-up pullback in late July before a final divergent rally into mid-late-August. That final divergent rally into an August peak should provide another 3-4 opportunities, bringing the total opportunity set to 8-11 opportunities between now and August for 2x+ returns.
If SPX is circa 5700 in August with bearish divergences building, I will look to get short ahead of a 5-10% pre-election pullback. That pullback will provide a big opportunity for a 5-7x return from a ladder of 4-8 week ATM puts. Likewise…
A nice low into September will provide a big opportunity for a 5-10x return from a ladder of 4-8 week ATM and OTM calls.
60/40 & Long/Short
The market is too overbought to get comfortably OW equities with a margin of safety here, so I’ll look to get OW in 60/40 and Long/Short on a pullback to moving averages in mid-June.