Wait for the look thru trade. Period!
Options strategies to make until then
Wait for the look thru trade. Period.
Yep, everyone wanted this CPI report to be the inflection. Show it’s the peak. Well, it wasn’t. Total CPI up 8.6% year over year and 6.0% core ex food and energy. We loved a tweet from Dillon Evans on Thursday night: “the bull case is CPI below 8.3%, the bear case is CPI above 8.5% and the Fed’s target is 2%”. In hindsite, it was very unlikely a smidge better was going to change the market narrative that the Fed needs to crush demand with rate hikes to get inflation to drop. Harsh reality made worse by the ECB dramatically changed course to match the Fed’s hawkishness. There are some good signs or green shoots for inflation with lumber on its lows, container ship rates tanking, fertilizer prices down 30% from their highs and Target $TGT price cuts to move product. But, its not enough to change the narrative or #s thus far. We need to wait for the look thru trade! When investors ignore the current with confidence (sometimes false confidence) the future looks better (and/or less worse).
Our guess, the market has another 10% potential downside before the look thru trade begins. We have been espousing waiting for 2Q earnings (with more dour outlooks for the 2H, reduced expectations) and get past the two 50 bps rate hikes. That view has not changed. What’s good now is presumed to get worse. What’s bad now is bad and gets sold unless the valuation is obscenely low ($DKS as example). Yes, investors with long term horizons should not be shaken by 2022, albeit it sucks. However, you can trade, cushion your losses or make absolute returns during this period of high volatility. We will review several stocks and how we set up our trading portfolio to try and make 1-2% per week as a goal, realizing some weeks our options strategies will break-even or even incur slight losses in a straight up or down market. So let’s discuss below what to do during this waiting period and how to make money while you stay patient!