“Buy the rumor, sell the news.”
The market is trading on the hope that a fiscal deal is set to go through. It’s not about Fed policy, it’s not about the election, it’s about stimulus provided by the US government. And today Powell came out and basically said that it’s better to overshoot than undershoot on the number, and that the Fed is comfortable carrying it on its UST balance sheet.
So we’re not rallying on the news. We’re not even rallying on anticipation of the news. We are rallying as traders bet that the market will rally into the event.
It’s a reflexive nightmare.
As it stands, it’s the same playbook from what we saw in June. Bond yields are spiking, smallcaps are outperforming tech, and banks are running hard back to the August/September highs.
Question is, what now?
I think that bonds are overreaching a bit, and we can look to a fade. We can also consider a fade in smallcaps– at the right price.
For our trading, it starts to get a little tricky. Most of our trades will start to include election risk– and so far, the premiums are high enough to justify putting on that risk. On top of that, earnings season snuck up on us and we try to avoid most of the earnings moves. We’ll be focusing on indexes and stocks that have a good enough cushion to hold through earnings events.
Trade #1: IWM
Smallcaps are having a good run. Over the past 8 days it’s up 11%. To put that in context, during the rallies this year they peaked out at about 13-15%, so it wouldn’t be unreasonable to start looking for a fade.
We want to be VERY SELECTIVE about this trade. Don’t force your way in, and look for one more exhaustion gap higher to start playing it to the short side.
Note the expiration on these– we are using end of month options to avoid election risk.
Trade Setup
Expected Price: 163.3
Sell to Open IWM 30Oct20 170/172.5 Call Spread
Tier 1: Enter at 0.58, Exit at 0.25
Tier 2: Enter at 0.812, Exit at 0.472
Tier 3: Enter at 1.044, Exit at 0.634
Stop Out If Close Over 171.89
Trade #2: TLT
Yields got pummeled as the anticipation of a fiscal deal gets done. Scaling into put spread sales makes sense here.
Trade Setup
Expected Price: 159.3
Sell to Open IWM 20Nov20 154/151 Put Spread
Tier 1: Enter at 0.72, Exit at 0.33
Tier 2: Enter at 1.008, Exit at 0.61
Tier 3: Enter at 1.296, Exit at 0.82
Stop Out If Close Under 153.89
Trade #3: DDOG
Strong runner, looking for the first pullback to play for an entry.
Trade Setup
Expected Price: 100.77
Sell to Open DDOG 20Nov20 85/80 Put Spread
Tier 1: Enter at 1.15, Exit at 0.49
Tier 2: Enter at 1.61, Exit at 0.93
Tier 3: Enter at 2.07, Exit at 1.24
Stop Out If Close Under 84.89