It’s Just a Squeeze… “Squeeze Squeeze”

squeeze

Momentum is Red. Today, we saw a very low-volume rally on the back of short-covering and an emphasis on tomorrow’s panel discussion with Federal Reserve Jerome Powell. This low-volume rally is not typical of traditional “startup” runs on the market. Wednesday has been the strongest day of the year. But Thursday… has been the worst day of the year.

As I noted, the SPDR S&P 500 ETF (SPY) hit oversold territory on Tuesday. That helped fuel a short-term squeeze on Wednesday, setting up for an epic event on Thursday morning. Today, we had a low-volume rally, one fueled by a little-to-no shift in optimism in the market. On Thursday, Fed Chair Jerome Powell will speak at the annual CATO Monetary Conference, hosted by a libertarian think tank known for criticizing America’s monetary policy.

How do I know that this short-term rally likely won’t last? Because the odds of a 4% rate move in February have increased. Just six weeks ago, the odds of a 4% Fed funds rate for 2/23 was less than 0.5%. Today, the odds are 27.4%. 

Now, the odds of a rate hike to 4.25% sit at 0.7%. The markets are preparing for longer-term pain, as projected by Powell during the Fed’s market symposium in Jackson Hole last month. Tomorrow, we’ll probably see more of the same rhetoric. And the possibility of “protest” selling if Powell sounds a bit too hawkish. Now then…

F&Z Score Stocks

It’s September… and I still haven’t sent you the latest list of F&Z Score stocks. Well, the question is whether you want to buy anything right now. I look at three different metrics to help build a list of winning low-risk stocks, high-upside stocks, given their rock-solid balance sheets. This is the ultimate Do-It-Yourself lesson. Start right here to find perfect stocks: 

  • The Piotroski F-score 
  • The Altman Z-score
  • A valuation rank

Instead of just buying these stocks, you could consider a hedge on the portfolio. You could purchase the S&P 500 Short ETF (SH) as a hedge today. That will provide some protection in the event that you decide to deploy capital right now. 

As I’ve noted… Cash is your best friend right now. And I expect more pain in the months. I’ll offer that list on Monday. The reason: Jerome Powell speaks tomorrow. Plus… there’s this…

Funds Couldn’t Be More Bearish During This Squeeze

If you need more proof we’re in a negative momentum market, consider this chart. It’s a bit grainy. But this is a breakdown of the number of puts and hedges purchased by institutional investors. We’re looking at $8.1 billion in puts… a new record.

By comparison, funds only purchased $1.0 billion in calls. That’s an 8.1x leverage toward the downside. It’s almost so bearish that it’s bullish… a reminder of why a squeeze like today can happen. This panic “hedging” is three times more extreme than what happened in 2008. 

And it’s a reminder of why cash is your friend through this turbulence. Don’t force any trades right now. Instead, go for a walk. Enjoy your cash.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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