Break Out Money Guys

Category: Stories

  • SPY Recovers Despite Uncertainty

    There’s not much to say about tonight as SPY continues sprinting toward all-time highs. There has been only one day of selling since we bottomed, and I’m not sure what is needed for SPY to find some resistance. Technicals haven’t played too much of a role in this recovery, but I’m watching the 562 and 565 levels for potential opportunities to add to my short positions.

    Shorting NVDA

    Aside from SPY, I have been adding NVDA short shares incrementally. I’m thankful to have the opportunity to short near the top after the recent 30% drop. Even if NVDA marches higher, it doesn’t matter much to me, as I will continue to dollar cost average up.

    Regional banks: KRE

    I also added some short shares of KRE today (regional banks). Regionals have underperformed larger banks, as seen in comparing KRE to XLF, which tracks the financial sector and banks like Goldman Sachs, Bank of America, and Wells Fargo.

    Economic instability

    If I were worried about a secure rally from here, accumulating underperforming ETFs would be more appealing than their overvalued counterparts. Investors should always weigh their risk appetite and understand that some may have more than others. I’m staying away from leveraged ETFs this time around to avoid decay.

    That said, the market doesn’t seem to be pricing in a strong economic future. I plan to write more on this topic in the future, but I highly recommend researching the yield curve if you’re unfamiliar.

  • SPY Nears ATHs (Again)

    Testing the waters at 554

    After a substantial rally from recent lows, we’ll see if SPY continues toward all-time highs or finds resistance around 554, where we closed slightly above on Friday. It would be pretty amazing price action to see a recovery of the rising wedge after such a steep decline.

    Unstable foundations

    As we’ve seen since last November, it’s obvious that there are strong forces underneath this rally, none of which set up a strong foundation for continued higher prices. Whenever the switch flips—and it will—there won’t be any support base until SPY revisits around 450. Some traders with a strong track record claim that 500 will be the bottom on any correction, but I find it hard to understand the reasoning. Nevertheless, the 500 psychological level is one to keep in mind.

    Alarming growth

    It’s impossible to argue that over enough time, the S&P 500 has always rallied. What’s alarming about this recent action is how fast and aggressive the growth has been. The two-year decline we saw post-Covid looks minuscule compared to the last nine months. The only other time on the chart with such aggressive growth was after the initial Covid drop back in March of 2020. I would argue that even that recovery hasn’t seen its retest yet.

    Only time will tell, but until current economic headwinds are just a memory, I will err on the side of caution and wait for an opportunity to capitalize on investor fears.

  • SPY: Rate Cuts and Recession Fears

    This kind of price action is not very typical after a VIX spike to near all-time highs. In recent history, we’ve never seen fear subside as quickly as it did last week. As far as I’m concerned, any upside from here is an entry point for my short positions.

    VIX recovery

    The VIX gave us a strong reason to believe that we’d see a recovery from BOJ fears. After spiking to almost 66, it’s back below 16 in just a week’s time. We did not hold the breakout over the wedge and are seeing consistent downside. As long as this is the case, higher equity prices are possible.

    SPY historical context

    SPY has cut through all resistance levels from this recent pullback in a matter of nine trading days, rising over 8%. Keep in mind that the historical average year-over-year return for the S&P 500 is about 10%. We’re up 15% YTD and about 50% since January 1, 2023.

    In my opinion, this kind of growth, compared to historical growth, is setting the market up for multiple years of stagnation (at best) or a strong decline (at worst).

    Rate cuts and market implications

    According to the FedWatch tool, the market is currently pricing in a 70% chance of a 25 basis point rate cut. This can change as we get closer to the FOMC meeting, so I recommend checking it periodically.

    Since rate cuts historically precede recessions, it’s logical to assume that if the Fed is cutting rates, there are signs of decline in the economy, despite what I’ve read in recent articles. Even if the market continues to rally into next year, it seems like the rubber band is just stretching more and more.

  • SPY: New Highs or a Reversal?

    SPY recap

    After today’s unusual price action, SPY appears to be approaching its next resistance level at the trend line support from last night’s briefing. The price initially rejected 543 on CPI and at the open, surged past it by midday, and then sold off, dropping below 543. Despite the volatility, SPY managed to rally into the close.

    VIX influence

    A significant factor that prevented me from shorting SPY after the first half-hour was the VIX losing its wedge support after the CPI release. As the VIX trended downward, seller exhaustion allowed bulls to take control, with buyers stepping in during dips throughout the day.

    SPY’s resistance and support levels

    Looking ahead, I am interested to see where SPY will encounter resistance. I am watching the 543 level tomorrow for a strong open, and waiting to see whether bears will defend the 550 to 552 range into next week. Support levels to watch are 539 and 533.

  • SPY Continues Its Recovery

    The reaction to the Producer Price Index (PPI) this morning was muted, but premarket movement brought SPY above yesterday’s high. Markets continued to rally after the open, and SPY closed above my 539 level from last night’s briefing.

    VIX

    The VIX fell throughout the day and settled right at the wedge from the most recent breakout. Tomorrow, after the Consumer Price Index (CPI) is released, we’ll see if the VIX finds support or continues to fall. As I mentioned last night, I’d like to see the VIX stay above 17.50 if selling is going to continue. If not, a retest of the highs is a definite possibility.

    RRP: What it means for traders

    Interestingly, the Reverse Repurchase Agreements (RRP) saw a significant drain from August 1 through August 6, taking it below recent lows. I’ve noticed some traders relying on this information recently to predict market rallies or recoveries. I don’t choose to utilize RRP for trades, but it’s something worth being aware of.

    I’ll write a more detailed post on RRP in the future, but the important thing is that when RRP goes down, there’s more liquidity available to go into the market. You might hear this referred to as “shadow liquidity” in trading circles.

    SPY’s technical analysis

    Since the initial rally from November of last year, SPY has shed many technicals in favor of a continuous melt-up. For example, overbought conditions, particularly on the Money Flow Indicator (MFI), haven’t mattered. We saw this twice before the close: once at 1:50 pm EST and again at 3:25.

    On the one-hour chart, SPY hit overbought at 11:30 right at resistance but continued to melt up into the close.

    Challenging conditions

    These conditions make trading difficult, especially with a strong set of rules. It’s one of the reasons I’ve not been actively trading in the last few months. Historically, this is the time I start shorting hard, but with the nine-month rally we’ve recently experienced, I have learned to cut my losses quicker and look for a better entry. If the market continues melting up tomorrow, my next target will be a retest of the uptrend before trying to short again.

  • PPI, CPI, and Key Levels for SPY

    Today’s price action

    Price continued to fluctuate around the 533 level from last night’s briefing, barely closing above it at the end of the day. The market’s reaction to the Producer Price Index (PPI) tomorrow at 8:30 am EST and the Consumer Price Index (CPI) on Wednesday at the same time should clarify whether we continue recovering or move toward retesting recent lows.

    PPI and CPI

    The VIX saw more trending price action today than SPY, but it was not strong enough for me to gauge direction from here. If the PPI and CPI are positive for markets, it’s possible to see the VIX fall back into the wedge rapidly. From there, the market should resume its uptrend. Conversely, if the market responds negatively and the VIX starts spiking again, a major sell-off could occur sooner than many expect. I favor the first scenario, but it’s important to be aware of both sides.

    SPY: Support and resistance levels

    I am still looking for an opportunity to reenter short, so my ideal scenario would be a bullish response to the PPI and CPI over the next two days and a retest of the 539 or 555 resistance levels. On the flip side, SPY has short-term support around 529 and 522.

  • Market Recovery: SPY and VIX

    The market seems to have bounced back a bit after the drop following the Bank of Japan’s interest rate hike. We’re currently sitting around where we closed on August 2, filling that gap nicely.

    SPY resistance levels and targets

    If SPY opens up tomorrow or breaks through resistance at 533, I’ll be eyeing 539.43 as the next target, with a potential retest of the trend line around 550. This would be ideal since I wasn’t able to add full short positions during the recent dip.

    VIX trends

    I’ll be keeping a close eye on the VIX, especially after we saw a breakout over the wedge right before that big drop. Using the VIX for trades has made my trading much more accurate. It is a powerful tool that I highly recommend studying. I might do a dedicated post on it soon.

    If the VIX keeps trending down, SPY could melt up toward those target resistance levels. I’m particularly interested in a VIX retest of the wedge breakout around 17.50. If we drop back into the wedge, selling pressure will likely ease, giving us a shot at retesting the highs. On the flip side, if the VIX bottoms at that retest, that’s when I’ll start looking to add more short positions.

    Market crash?

    Nothing has changed with my thesis on a market crash. The cracks have been forming for the last couple of years, and as we’ve seen, market sentiment can shift quickly. Right now, my focus is on clearly identifying areas to enter short without getting swept up in another runaway market. That’s been a challenge for me over the past year, but I’ve learned from my mistakes. I’ll be putting together a post on risk management soon. 

  • Bank of Japan Raises Interest Rates: What It Means for Investors

    The Bank of Japan (BOJ) recently announced that it would be raising interest rates for the second time this year. Stocks fell on the news, but have showed signs of a slight recovery.

    What happened?

    On July 31, 2024, the BOJ announced that it would raise its short-term interest rate to 0.25%. It had already raised rates from -0.1% to 0%-0.1% in March 2024, signaling an end to the BOJ’s decades-long zero interest rate policy to encourage borrowing and spending.

    Why it matters

    The Bank of Japan’s decision to raise interest rates is significant because it carries substantial implications for U.S. stocks and bonds. A higher interest rate in Japan may lead to a stronger yen, which can influence investor behavior and capital flows.

    Carry trades

    This financial practice involves borrowing currency with low interest rates, like the yen, and investing in higher-yielding assets such as U.S. stocks and Treasury bills (T-bills). The total value of carry trades is estimated to be $1.1 trillion since the end of 2022, meaning that any unwinding of these trades could significantly impact various U.S. stocks.

    Treasury bills

    These short-term government securities have maturities ranging from a few weeks to one year. If investors pull borrowed yen and return it to Japan, demand for T-bills may decrease, leading to higher yields. Increased yields can affect borrowing costs for businesses and consumers, potentially slowing economic growth.

    Conclusion

    The recent pivot from the BOJ is likely to impact not only Japan’s economy but also global markets, particularly U.S. stocks and bonds. As investors adjust their strategies, it’s important to be aware of the potential volatility over the coming weeks and months. 

  • Market Outlook: Navigating Uncertainty and Anticipating Corrections

    I’ve been mostly silent for the last couple of months as the market has been slow to react to any external factors. With a newfound sense of uncertainty, I believe now is an opportune time to discuss my thoughts on where the market is headed in the coming year.

    Market resilience

    Ever since November of last year, the market has largely shrugged off any bad news. NVDA and other chip stocks have dominated the market cap, while non-tech-related companies have participated very little in the strong momentum. To be fair, IWM has seen a recent surge and is just now approaching its 2021 highs. In contrast, SPY and QQQ are well above those levels, both approximately 15% up, even after this most recent sell-off. Moreover, SPY is about 70% higher than pre-COVID levels in just four years.

    Anticipating a major correction

    I have no doubt that a major correction is coming. I’m uncertain whether we will see a sharp decline or if it will be more drawn out over the next one to two years (or longer). My primary concern is positioning, and I would prefer another run at highs before entering full position size again.

    What I’m planning

    I got caught this year shorting NVDA, which significantly impacted my P/L. However, I have been patiently waiting for the right opportunity to try again. I believe that the time is now, and I will begin building up positions over the next few weeks.

    I am particularly interested in the SPY 450 level. However, with the current market indifference, I believe we may see much lower prices over the next year or two as the momentum shifts.

    Final thoughts

    There have been no significant retests during this entire market rally since November, so I am hoping for a different outcome during the upcoming correction. Many investors have been lulled into a false sense of security during this rally and have been conditioned to “buy the dip.” I’m not sure this strategy will pay off for them.