Market Malarkey 3/5-3/10
Weekly Market Updates
Rundown from last week (2/27-3/3):
The past trading week was rather interesting, with all of the major US equity indexes ending the week green with the NASDAQ (IXIC) leading the way. However, the 5Y (FVX) and 10Y (TNX) yields also ended the week green. The 30Y (TYX) did not follow its peers and ended the trading week slightly red as shown in Figure 1. Finally, we would like to touch on the decline in the VIX, while -13.6% might seem quite bad it is important to remember that the VIX is not a normal index. It measures the volatility of the S&P and with the S&P rallying on Thursday and Friday of last week, we believe this explains VIX losing -13.6%. (Figure 2)
Preview for this week:
This upcoming trading week is likely to be quite volatile due to FED Chairman Jerome Powell testifying in front of both the US Senate and the US Congress. Powell will testify in front of the Senate on Tuesday the 7th and will also testify in front of Congress the next day Wednesday the 8th. (Figure 3) As you can see in Figure 3 there is also a decent amount of Economic data also releasing during this week. (We did a small write up on the labor market, you can read it by clicking here)
This week has more earnings releases (ERs) we will not be closely watching any of these ERs. That being said Figure 4 has the expected ERs for this week.
US Treasuries:
As we always do we will be watching US treasury yields this week. From a technical analysis viewpoint, we believe the 5Y, 10Y, & 30Y are in an interesting place. First, we will take a look at the 5Y yield.
The 5Y yield (FVX) once again tested our trendline last week with a rejection on Friday. We believe it is likely that FVX will once again test our trendline and more than likely get rejected again. After another likely rejection, we believe FVX will trade sideways during the week. In Figure 5 we also we would like to draw attention to a double bottom pattern. If the equity markets have a strong rally this week we believe it is possible the 5Y yield drops to around 3.9%. (Figure 5)
The 10Y yield (TNX) also tested our trendline last week and got rejected on Friday. The most likely outcome for TNX this week in our view is a choppy week, similar to the trading from mid-February until the gap up at the start of March. (Figure 6) If the equity markets rally there is a strong chance the 10Y will retest our support line (green) as shown in Figure 6.
Finally, the 30Y yield (TYX) appears to have ended the trading week at a decent support zone around 3.88%. (Figure 7) We see TYX trading around this level of support (3.88%-3.78%) during this week.
Possible trades & Follow ups:
Before diving into possible trades for this week we would like to review our previously recommended trades. First, we would like to highlight the big win of FSLR calls which we recommend in last week’s Market Malarkey and the one before that. With FSLR rising around 34% after reporting earnings, we consider this a big win. As for the other trades we highlighted last week 1-3 played out well at the start of the week however by Thursday due to an equity market rally these trades would have been trashed. (Figure 8) The lesson take profit when possible. Finally, for the fourth trade idea from last week we think the current price is not a bad entry for a swing trade.
VIX Calls- This trade is a high risk, however with the VIX within $2 of its 52W low we believe the risk to return is worth it. We recommend a strike of 20c and an expiration of 3/22/23. As seen in Figure 9 from a historical point of view VIX option buying implies an expected upside. (Figure 9)
Figure 9 via TheDailyShot
Marco Overview & Our View:
For this weeks marco overview we would like to focus first on the FED Funds forecast. (Figure 10) Along with forecasted tightening of the Overnight Rate. (Figure 11)
It is our view that this historic tightening forecasted by Morgan Stanley in Figure 11 is likely to result in a hard landing.
AI looks like it will be this years Web3/metaverse, as shown in Figure 13 the mentions of AI on Q1 2023 earning calls exploded. It is our view AI will be this years buzzword resulting in the overvaluation of AI related stock, along with every company telling investors they are looking for ways to include AI in their business.
DISCLAIMER: We are not Financial Advisors, and all information presented is for educational purposes ONLY. Financial markets can be extremely volatile, as such using good risk management is a must.