What could go wrong?
Hey everyone,
Last week was a complete mess, but we made it out okay! It’s totally normal for markets to ricochet like that, completely healthy and normal.
I’ll start off this week’s edition by sharing a graph shared by @NewRiverInvest on Twitter:
You can see here precisely how the market has changed through the lens of options trading. Unlike your father’s market (shout out perhaps to the early-00s tech boom), the options volume has steadily grown in dominance this year, which makes it much more fun to trade and begets increased volatility through NOPE-ly processes.
But hey, it’s a good thing! I can warn you guys about corrections because of it.
On another hand…
Last week’s ominous warning of the NOPE was clustered with two more high NOPE end-of-day values, which is historically a fantastic sign for bulls (Narrator: it was not a fantastic sign). The flavor of the month is the bond tantrum going on, which, if you want some more color on, check out DC’s Chartbook Substack. Simply put, our father who art in Washington D.C. told the world during the FOMC last week—inflation is a-ok! From the first talk, we saw TIPS do a little dance up with our friend gold, but apparently that become less en vogue the next day.
Does the market care about inflation? Maybe, except then on Thursday our dirty little secret commodity oil decided to take a swan dive, perhaps marking the end of the weird inflation meme.
/CL is drilling for oil!
Let’s recap the week as usual. I’m going to start off with GME & the memes this time.
GME
Unlike my rosy predictions of an ape-filled future last week, GME aimed to disappoint. From Monday onwards it crashed about 28% by the end of the week, which in retrospect actually is probably like a normal week for GME.
As expected from my last prediction, GME hates important dates, and 3/19 was no exception. Despite the murmurings of the monthly OPEX or the DD on WSB where every single line somehow is incorrect, including the “Hello”: nada.
That said, this week is special. If you don’t follow the Gamestonk saga religiously, this week is GME’s earnings, which is traditionally a special gathering for traders to lose a lot of money to overpriced options for no reason. Based on the trajectory of the Chewy folk hero Ryan Cohen, lots of folks are eyeing earnings as Gamestop’s announcement of a digital future with Dog Jesus at the helm. We’ll see if it happens. Last earnings Gamestop was in the mid-teens, and managed to crash a good 15% when people realized it was a dying brick-and-mortar retailer selling video game consoles in-person in the middle of a pandemic.
Will keep an eye on the Gamestop earnings, specifically to see if there’s any tasty selling options plays. I’d only ever look to sell on the downside (e.g. to sell puts) given many a clever Sally has blown out trying to short the stock we all like.
Bitcoin
Bitcoin survived! Interestingly, Bitcoin doesn’t seem to be minding the current market volatility, probably because people realized it doesn’t have any real value anyway so why should it track the market or dollar or anything else? Just kidding. The spiel here is that in an inflated future, Bitcoin unlike the silly old dollar is immune to Jerome’s money printer, and therefore is a good store of value or something. So unlike usual, where investors are risk-off across assets, just real assets are being hammered hard by the yields creep, sensible fundamental investments like Tesla and $ARKK (for the more conservative investor, compared to *gasp* Bitcoin).
What’s more interesting though is the tremors we observed on Thursday and Friday, where the thesis of inflation was roundhouse kicked in the face. This can be briefly summed up by looking at NASDAQ vs DJIA:
If this is the case, Bitcoin should still continue rallying since it’s also tech and also inflation-proof or something. I don’t really know, I got nothing. Just continue to buy it I guess until it collapses or something.
SPACs and the Meme Complex (TSLA, ARKK)
The fate of all the above seems to be more or less tied to the 10-year yield, currently being decided by a game of Duck Duck Goose in the bonds market. In essence, reaffirming my recommendation to acquire good SPACs. That said, a lot of troubles in the SPACland, as *gasp* we learned another EV SPAC has about as much chance of releasing an EV car as I do.
My favorite line, worth repeating:
In January 2021, Lordstown’s first street road test resulted in the vehicle bursting into flames 10 minutes into the test drive. We share copies of the 911 call and a police report we received through FOIA requests.
Literally cannot make this up.
Be careful acquiring ARKK and Tesla at this point! If I had to pick a side, I think we see a continued climb in the yields, and a continued but perhaps stair-step down descent of the ARKK and TSLA complex. The EV complex especially moves as a basket (similar to the weed run of 2018), and the Lordstown saga may represent a turning point against the non-stop factory of off-brand Tesla clones that print free money on calls.
I do think the market has materially changed, and SPACs may represent a less attractive investment going forward. However, I do not expect the meme regime has died yet, and I do simply expect the same rules of the road (time is a flat circle, the Merton risk model of equity pricing, etc.) to continue to hold in this brave, new macro-dominated world.
NOPE and the SPY
Last week was particularly anomalous because my model, the NOPE, lit up not only on Friday (giving the warning of short delta this past week), but also on Monday and Wednesday. Historically, this clustering has not been a good sign, and usually occurs near times of correction. However, usual in this case means in the past 2-3 years; high NOPE values were historically rare until Robinhood was invented by Volmageddon in 2018 (the free options trading part, mainly).
The major caution here is the relationship of high positive NOPE values to lowered 14- and 30- day returns. While many know of NOPE simply as a “what color is tomorrow going to be?” indicator, the whole original purpose of our favorite mean reversion indicator was to predict periods of corrections. In general, high positive end-of-day NOPE, especially occurring in rapid succession is correlated with worse future looking returns. We observed this similarly on 2/8/2021 and 2/12/2021 (in January this occurred a bit more gapped, between January 8th, 2021 and January 20, 2021).
That said, my crystal ball is in the shop, and it seems like it might be broken. While every historical indicator/data source tells me we’re in for chop if not a bit of a slide, I hate to be the girl who cries crash. Even though I’m fairly good at it since I started (as far as I observed, NOPE has only once falsely warned of a correction period since I started using it — in November 2020), the payoff for being the girl who cries crash tends to be worse than the cost of being wrong.
Final Thoughts
This week looks to be interesting. Bond yields are making a descent, but it will be largely dominated by the multiple talks held by the Federal Reserve this coming week.
My plan for this week currently is as followed:
I expect us to bounce tomorrow, both due to the descent of bond yields overnight, some level of calm preceding Jerome Powell’s talks, and volatility being bid into close on Friday and fizzling.
I expect a stair step down this week, but I do not expect a crashy crash.
Recommendation is long gamma, short delta for now, but the latter could change dramatically due to the macro.
In all honest, feel fairly weak this week on predicting direction due to macro events.
Stay safe, and stay frosty.