Rippy Global Weekly Outlook - March 20 to March 24
March 20-March 24, 2023 by Adit Dayal for RIPPYGLOBAL.
Happy Sunday everyone and welcome back to the Rippy Global weekly outlook. Last week was full of volatility with an inflation number coming in in-line with expectations, a job report showing inflation cooling, and an outperformance of stocks in the tech index ($QQQ) versus the S&P 500.
Next week is going to be a huge week, with the Federal Reserve making its decision on interest rates at the meeting on Wednesday, which will also feature a conference from Chairman Jerome Powell.
Last week, we also saw a rise in commercial bank reserves from the Fed, which was necessary in order to keep the baking system stable.
As I mentioned in last weeks newsletter, the reason there is so much financial stress is because of how regional banks were over positioned in low yield bonds, which have now lost their value, so these banks are seeing withdrawals, causing a bank run.
In fact, Warren Buffet has been in talks with the Biden administration in order to invest into the regional banking sector. In 2008, Buffet invested $5B in Goldman Sachs, and the same amount in the Bank of America in 2011, so this is not something that is new to him. Both of those investments paid off in the end, so I’d watch for news on this.
The Mid-Sized Bank Coalition of America (MBCA) has sent letters to the FDIC requesting that all deposits be protected for the next two years as well. This would give stability to the banks that need it right now.
This all leads back to one main point - what is the Federal Reserve going to do in regards to policy?
Swaps are implying a 62% chance of a 25bps hike. I do think that the Federal Reserve needs to remember that inflation still needs to cool, especially as a lot of the economic data is skewed by a lagging real estate sector. In my opinion, the regional bank crisis is not going to be widespread and the Fed should continue its focus on cooling inflation instead of delaying further.
If you do not work for an intsitution, but you want to trade/hedge the Fed’s interest rate decisions you can do so via. Kalshi which I will link below:
Currently, a position betting that the Fed will raise rates above 4.75% costs 77 cents and will settle at $1 on Wednesday, yielding a 30% return. I believe this is the most likely outcome.
One more thing, UBS has agreed to buy out Credit Suisse for $3.25B in stock. Credit Suisse holders will get 1 share of UBS for every 22.48 shares of $CS. This means $CS should open roughly ~60% below Friday’s closing price.
Overall, this is very inflationary, as the Federal reserve continues to print money in order to bail out these banks instead of letting them fall. It will be interesting to see how this plays out!
The main catalyst this week is going to be on Wednesday from the Fed.
#1) Another light earnings week although Nike and Chewy will be interesting. Express is also a penny stock now, so it can pop on good earnings. Nike just got downgraded to a “sell” from Redburn.
#2) On Monday, NVDA is hosting its GTC event which will cover their latest developments, including AI and more.
#3) Wednesday is when the Federal Reserve releases their decision on interest rates at 2PM and Jerome Powell speaks at 2:30PM.
Here is the full economic calendar:
The S&P 500 ($SPX index) maintained the crucial $3800 level last week and closed with an inside day, showing consolidation and preparation for a bigger upcoming move. $SPX closed on Friday with the highest daily volume in the last 10 years which tells me the directional move post FOMC is what is going to carry this market until the Fall.
The most important levels on the dark pool tape are $390.14 and $394 on SPY.
My key breaks are $3926 for bulls and $3852 for bears although I’m mainly seeing what levels are holding AFTER our large economic releases.
The best ways to play the S&P 500 are via. SPY/SPX options or SPXL (3X Bull S&P 500 ETF.
Options Flow Reading
Here are the biggest options orders by size on Friday:
Absolutely massive trades as trader-hedge funds repositioned their portfolios on Friday which was options expiration day. The most interesting to me were the puts in big tech names like AAPL and MSFT.
INDIVIDUAL STOCKS & LEVELS
Let’s recap some of the levels of some popular names:
A few weeks ago I mentioned to sell the $TSLA 170P in order to buy the stock when it falls there and like predicted, it fell there and now has bounced back to $185. If you took that trade, you could have kept the premium as well as the 10% profits on the shares, but now I think that a bearish stance is more reasonable with this inverse cup and handle pattern with a stop loss right around $200.
As you can see in the TSLA flow, in the last hour of the day someone sold calls at the bid and bought puts above ask which is bearish.
I like AAPL out of all the tech names as it is looking to break out of this head and shoulders pattern and Evercore just recently that this premium is justified for this company and reiterated their price target of $190.
In terms of flow, the last hour of trading on Friday saw three huge >$1M call options orders at the ask or above the ask.
QQQ (the tech index) and SPY (the S&P 500) have diverged by nearly 10% recently. I believe one of these indexes is “lying” in a sense, as they nearly always converge back together.
This is known as statistical arbitrage and is a trading strategy used by hedge funds as shown below:
SPY flow was very bearish on Friday:
GTLB just reported earnings and it looks like that dip is getting bought up to the tune of $18M this week. The CEO of Charles Schwab also took this banking crisis opportunity to buy the dip on SCHW for around $2M at a price of $58.36.
Thanks for reading this weekend’s article, have a great week!
-Adit Dayal (https://twitter.com/tradelikehulk)