larrycheung

August 16th Daily Market Note: The Next Big Move comes after Traders Decide on Rates Direction

Added 2023-08-16 14:53:43 +0000 UTC

Good morning Folks, hope everyone is doing well today!

Here is today's Daily Market Note for August 16th 2023

Title: Markets wait for FOMC commentary for clues on Rates and Monetary Policy

This is an early session note sent out as I have obligations to attend to in the afternoon.

Forward-looking Conclusions of this note:

Macro: Longer-term yields (20Y and 30Y) continue their drift higher, and this will pose problems for any recovery rally’s sustainability if yields don’t cool down.
U.S. Stock-Specific: TJX, discussed 30 days ago, is now back at all-time highs. While chasing is never a smart play, those who are in may want to keep holding as I see TJX breaking 90 in the foreseeable future. New tactical Sell Put setups are discussed below.
Bonds: Previous views on Bonds stay unchanged.
China: We are soon approaching levels where I will provide guidance on Selling Puts on the sector. Not there yet, but read below for more information.

Daily Market Note & Context

For today’s intraday session, the market will be closely watching the July FOMC Minutes on clues to see if the Fed is rate-hiking cycle. My opinion is that the Fed should be close to being finished with hikes but they will keep restating what they’ve said over the past 6 months: the higher for longer narrative.

My greatest concern for the intermediate-term is that the VIX continues to form a basing formation, which could be a prelude to rising implied volatility levels in the coming 4-6 weeks. To track the VIX’s behavior, I’m watching UVXY and VXX volatility products to understand the real-time sentiment of the VIX. Folks know that I have Long Puts on these products because the decay on them is insidious and generally speaking, with the right Duration and Strike Level, Puts on these products will generally work. However, with narratives of a China slowdown and Credit Event looming, as well as rates staying elevated (higher rates are the seeds to a higher VIX), I think for the near-term, any profits from betting against UVXY/VXX should be managed. The VIX is a side proxy for bankruptcy credit risk, and when it spikes, both Option Buyers and Sellers will see very unfavorable Bid-Ask spreads widening which increase the cost of transacting in the Options market.

The best defense against a rising VIX is judicious sector rotation and stock selection to target Selling Puts on areas that have less downside risk relative to the index. I do have a few more tactical setups to share (I’ve been in these trades since I’ve kept mentioning DG/DLTR/FIVE over the past 6 months, and I think they continue to work – with some choppiness in between of course):

January 2024 Sell Puts on Dollar General with Strike 135
January 2024 Sell Puts on Dollar Tree with Strike 115
January 2024 Sell Puts on FIVE Below with Strike 135
I would guide on Sell Puts on TJX, but the Stock has already run up.

The Macro environment is deteriorating, and this puts baseline value on Thrift Shop companies as consumers trade-down to them. Additionally, their valuation isn’t expensive, providing some margin for error. As always though, if we see 15-40% of the options decay, risk/profit management needs to come into the picture. I would be perfectly fine with assignment at those levels mentioned above. My DCF analysis of these companies conclude that the fair value is actually modestly above today’s prices, suggesting that if I get assigned at those levels, my Direct Share upside would be quite strong.

On China, if we see BABA get down to the 85 level (15% correction post-earnings), I’m looking to sell 78 Strike Puts with 45 Days Till Expiration. PDD and TCOM continue to be my best ideas for China since they have faster growth rates and better margins, which offer a stronger fight against Deflationary narratives.

Have a great day!

Larry

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