Inner Circle Morning Gameplan For June 15, 2022

[View this email in your browser]( ** this is the email I have sent to my Inner Circle members today I cannot tell if it's just because the market has been volatile this year, but I feel like every few weeks now there is a major market-moving announcement. To think that the global financial markets will live and die based on one or two sentences from Chairman Powell today is quite shocking in itself, but this is the reality we live in now. Today at 2 pm eastern, the Fed will come out with their latest monetary policy outlook followed by a 2:30 pm press conference. As you know, the 2:30 press conference is what really moves the market. So where do we stand? Here is what the market is currently pricing in: - 100% chance of a 75 basis point hike today - 90% chance of a 75 basis point hike in July - 65% chance of a 50 basis point hike in September (with a 35% chance of a 75 basis point hike) - 88% chance of a 50 basis point hike in November Of course, when we all ate lunch on Monday, these numbers were completely different, but after the Wall Street Journal, JP Morgan, and Goldman Sachs all came out within a 10 minute period of one another on Monday afternoon to let the market know a 75 basis point hike was coming this week, the market quickly had to re-price its rate expectations. Here is how I view the situation based on my personal experience. The market is like a very tightly coiled spring right now. We have a monthly/quarterly expiration this Friday which is in the historical 99th percentile in terms of the ratio of puts to calls. This really coils the spring as it sets the market up for a potential big move. In my opinion, there are two outcomes from today. The first of those outcomes would be the market is forced to re-price interest rates higher similar to what we saw on Monday. This would likely be the outcome of the Fed speaking more aggressively today than what is currently priced into the market. If this happens, if the market is forced to re-price rates as it did on Monday, the market is set up for a big move and we likely see a big move lower. The $3700 level in SPX and $370 in SPY is currently a very large level of support, however, a major re-pricing like we saw on Monday would likely make that $3700 level irrelevant. The market is positioned for a big move and specifically a big move lower, and if it is forced to act similarly to the way it did on Monday, odds favor the market making that large move lower. Below $3700, there is some support at $3600 and growing support at $3500. Now the second outcome. The second possible outcome today based on my opinion would be the market is not forced to re-price rates. This outcome is more or less the Fed coming out and saying that is already priced in. This one will take some more time to unpack. We have a huge put heavy (99th percentile) expiration happening this Friday. Let's assume you are a put owner going into this Friday's expiration. What do you need to have happen for you to make more of a profit compared to what you already have? You need price to lower at a similar pace to what has happened over the past few days. Yesterday was a great example of this. Directionally, put owners were right yesterday with the S&P 500 closing down $14.15. While the direction was 'correct', the 'pace' was not. The pace was not correct as we did not continue lower with the pace set by the previous few sessions. Because of this, the VIX actually was down 4.82%. What this means is, that all put owners lost money on those puts yesterday even when the market went lower. This is where it becomes interesting. The direction was right but because the pace was not, put owners lost money. Now how does that play into today? Well, if the market does not have to re-price rates higher like it did on Monday, then would the market likely sell off at the same pace of Thursday, Friday, and Monday? Unlikely. And if the market does not continue lower at a similar pace (pace is key here) then it is likely put owners will have to cover those puts. When puts are covered, that is bullish. And when puts are covered, market makers also cover their short futures which is bullish too. And since all of these puts are owned in an expiration which expired in 72 hours, gamma is through the roof meaning the value of an option is very sensitive to price change. Basically, if the market does not careen lower, put owners are going to have to cover in my opinion. Hence I believe the market is a coiled spring. A forced re-pricing of rates higher sets up for a big move lower. Anything other than that happening favors a short covering rally. Okay, I get it. If the market re-prices rates higher, stocks go lower led by Nasdaq names. If the market doesn't have to do that, stocks go higher probably also led by Nasdaq. The Nasdaq names are the most sensitive to interest rate changes so this isn't overly surprising. But, what do we look at to determine what is happening in real time? If we look back on Monday, what really made stocks go down big and the dollar up big was the increase in the 2 year note. In fact, just on Monday, the 2 year yield was up 60 basis points. To put that into perspective, at this time last year, the 2 year note was yielding 0.16%. On Monday, not only did it move higher by 0.60%, but it is now sitting at 3.30%! And yes, the move higher on Monday in the 2 year note was only seen one other time in history, the week Lehman Brother's declared bankruptcy in October 2008. If the 2 year yield is rising after the 2:30 est press conference, that is a sign that the market is needing to re-price interest rate expectations higher. This would be the scenario where the Nasdaq would probably take the market lower. If that same 2 year yield is not rising or dare I say even falling (imagine that!), I would expect to see stocks ripping higher led by the Nasdaq. On Thinkorswim, the symbol for the 2 year note is /ZT. The way notes and bonds work is when the value of the note or bond increases, the yield goes lower. When the value of the note or bond decreases, the yield goes higher. So during/after the press conference, is /ZT is going up or sideways, I'd almost bet anything stocks are up led by Nasdaq. If /ZT is going lower, that means the market has to reprice rates again for the second time in 48 hours, and stocks probably head lower led by the Nasdaq. Now here's the thing. None of us are required to place trades based on this information. What is important is, and the purpose of this email today is to educate you on what the market is looking at, what the market is thinking, and how the market may react. Rates and specifically short term rates have been the largest drivers of equity movement so far this year and based on the events from just this week, that likely remain until it doesn't. Personally, I never place trades on FOMC day. Placing trades based on one or two sentences from one person just seems a little weird to me. If I miss the next trend by a day, so be it. 2022 is not about being aggressive to make oodles and oodles of money. 2022 is about being more conservative, being more selective, raising the standard for the trades you place, and ultimately, making sure you are still around when the market gets easier. Today, I see support at $3700, which is currently the largest level of support in the market (it was the low yesterday), $3620, and $3600. I see resistance today at $3800, $3850, and $3900. While these daily listed levels of support and resistance are normally about 90% accurate, it is my experience that they are less accurate on FOMC days, similar to how most systems and strategies also underperform their averages on FOMC days as well. Stay safe. Don't chase. Don't do something today that deep down you know you should not be doing. Don't fight an uphill battle. Double check what you are doing before you do it. There is always tomorrow, but it is also very valuable to educate yourself further and understand the mechanics of the market. Stay small and win more trades, Steven STONY BROOK SECURITIES LLC IS A PUBLISHER AND DOES NOT OFFER TRADING ADVICE OR RECOMMENDATIONS. ALL INFORMATION IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY AND NOT AN OFFER OR A RECOMMENDATION TO TRADE FUTURES CONTRACTS, STOCKS, OPTIONS OR FOREX. GOVERNMENT REGULATIONS REQUIRE DISCLOSURE OF THE FACT THAT WHILE THE TRADING IDEAS AND TRADING METHODS SHOWN ON THIS WEBSITE MAY HAVE WORKED IN THE PAST; BUT PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. WHILE THERE IS A POTENTIAL FOR PROFITS THERE IS ALSO A HUGE RISK OF LOSS. A LOSS INCURRED IN CONNECTION WITH TRADING FUTURES CONTRACTS, STOCKS, OPTIONS OR FOREX CAN BE SIGNIFICANT. 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