Momentum Turned Yellow. Be Cautious.

[Midday Momentum] Thursday, May 26, 2022 [A Momentum Switch Just Happened]( By Garrett {NAME} Dear Reader, We've seen strong gains in the market on the back of Wednesday's Federal Reserve minutes. Momentum on the S&P 500 turned green today for a short time, as the index rallied. Broader market momentum has also improved, largely thanks to a drop in the amount of selling. So what should we make of this? Well, today's rally is surprising on the surface. After all... - Volume was still light. - The first quarter U.S. GDP reading came in lower than expected. - Housing numbers are terrible. - The Fed's minutes yesterday suggested that the central bank may need to accelerate its interest rate hikes in the coming months. And we haven't even started quantitative tightening of the Fed's $9 trillion balance sheet yet. That process should start on June 1. Well, hang on for a moment. The Liquidity Problem and the Ghost of 2018 If you read the minutes closely (and I did), you might notice that the Fed is a little concerned about liquidity in the market. We measure this by the velocity of money in the economy - and we've seen a massive drop in that metric over the last few months, as traders and institutions have favored cash. When momentum turns deep red and selloffs ensure, the dollar is the purest safe haven. If the flow of money - or liquidity - is a grave concern, then the Fed could exacerbate this problem by tightening its balance sheet in June or continuing to raise interest rates. The Fed owns 25% of all Treasury bonds, so selling these bonds back into the market will drain capital from the economy. As a result, some shrewd traders think that the Fed won't commit to its process. The last time the Fed raised interest rates aggressively, it hiked nine times in 2018 and engaged in 12 months of tightening - from $4.5 trillion to $3.9 trillion. In response, the markets slumped nearly 20% in December 2018 at the close of this program. So far, the Fed has hiked interest rates... twice. And it hasn't even started to tighten its balance sheet. Even though Chair Jerome Powell has told the markets that we'll see two 50-point hikes during the June and July meetings, we're seeing the markets price in the possibility that the Fed doesn't do so at the latter meeting. There's a 6.2% probability that the Fed only increases rates by 25 basis points at that July meeting. That probability was zero on Tuesday. The Fed's credibility is on the line here. But if we have a severe liquidity problem, history shows that the Fed could crack. The entire thesis behind quantitative easing back in 2008 was to prevent another Great Depression. At the core of that sentiment, then-Chairman Ben Bernanke believed liquidity was the biggest problem that exacerbated the Depression, and moved to provide significant capital to the markets. But the market is now so dependent on the Fed's capital injections (and it is now so distorted by this capital), that the Fed has to make a very hard choice. Either: Tackle inflation and potentially sink the economy... Or: Hope that inflation solves itself - and provide more accommodation. We'll have a greater clue tomorrow when the PCE Inflation data emerges. MOMENTUM INDICATOR Broad Market: YELLOW S&P 500: GREEN Recap: S&P 500 momentum has turned positive and markets are off the ground. We've witnessed a dramatic bounce-back in the markets over the last 48 hours, and we're seeing stronger insider buying across the entire market. Because of insider buying across lower levels of the market (small cap and mid cap) and the reduction in firesales across the market, there appears to be a chance that momentum turns positive in the coming days and rallies into June. But all of this is going to be Fed-dependent. You can put some more money to work in positive sectors like energy and start to speculate a bit on big rallies in heavily-shorted stocks like Beyond Meat Inc. (BYND), Acrimoto Inc. (FUV), and Nikola Corp. (NKLA). But keep your bets VERY small and near-dated. THREE THINGS I'M WATCHING - CHRIS' MUSTACHE: Today, Trade the Close has finally arrived. And every trader at Money Morning LIVE! thinks that they have the top trade in the bag. It's not going to happen for them. Put your money on the blonde horse, and be sure to watch Voz's trades immediately. We've got momentum in our favor heading into Friday, and there are a score of cheap stocks ready for liftoff as we look for momentum to turn positive for the first time since April. [Are you ready to Trade the Close?]( - WATER WOES: The California Farm Water Coalition said California's agriculture industry and food supply is facing serious problems because of new regulations that restrict water supplies. The coalition warns that we could see shortages across the nation for fruits, nuts, and vegetables because new water restrictions will impact planting. Well, no kidding. This isn't a new problem, and the state has dallied on this issue for a decade. If you don't have a garden by now, get one. California has mismanaged its water supply forever, and without a real market that incentivizes conservation, the problems will persist. We need a U.S. water market badly. Markets are efficient. Government fiat is not. [Check out the "Hot Long Shot" here for my secret water stock](. - LET'S NOT EAT, I GUESS: I swear that people in Washington have no idea where their food comes from. Farming is already hard, and the more that the government steps on the necks of farmers, the sooner we're going to have a manmade Dust Bowl. The latest stupidity comes from the SEC, which wants to force small farmers to share "climate data" with large public companies or else the farms can't work with them. This is all part of an extremely absurd SEC proposal that will force companies to track all emissions across their supply chains. For all of the talk about saving the climate in 100 years, we might not have a functioning economy in five years if this crap continues. The end result is more small farmers getting squeezed. And with higher costs, they'll have to sell their farms to larger industrial farms. This drives me insane. All of this benefits companies like Microsoft Corp. (MSFT), which develops emissions-tracking software. It's just a matter of time before [they regulate the amount of breaths you take each day](. HOT LONG SHOT Momentum is yellow, and we're seeing some level of strength once again as we head into the weekend. I expect that the markets are looking at tomorrow's PCE inflation data as a clue into whether the Fed will commit to its plans on interest rates and tightening. With the junk squeeze continuing, we could see a bigger move in some stocks that have seen the biggest declines over the last week. That's especially true in the technology space. And it's especially true where we've seen ample short squeezes. You're betting on the long shots here, and you're betting that overall momentum switches to green early next week. I'm not convinced we're at the bottom just yet, but this market is completely unpredictable. The Apple Inc. (AAPL) $150 call for next Friday (June 3) is $0.60. You don't need it to get to $150 by then... you just need a lot of capital to come back into the S&P 500. You can buy this and set a stop on it. Probability of profit is 14%, so don't buy too much. WHAT YOU MISSED Last week, we held a full session on trading triple-leveraged ETFs with the VWAP as a tool to help define your risk and enable large rewards in short periods of time. As momentum improves, one of my favorite trades is the ProShares UltraPro QQQ (TQQQ) - a triple leveraged ETF that offers three times the return of the Invesco QQQ Trust (QQQ). As you can see, TQQQ broke the VWAP at around 9:33 and surged over the first hour of trading. The in-the-money $28 calls expiring tomorrow (May 27) opened at $0.90, and traded at roughly $1.00 as it crossed the VWAP. By 10:30, it traded at $2.05 - a 100% move on the option in less than an hour. If you want to learn how to trade these options and ETFs, be sure to watch my [Day 2 presentation from the]( Morning LIVE!]( last week](. Stay liquid, Garrett {NAME} You are receiving this e-mail at {EMAIL}, as part of your subscription to Midday Momentum. To remove your email from this list: [unsubscribe here](. 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