Ready Or Not, Here It Comes…
The yield curve just un-inverted, markets look like they’re in the process of a large double top formation, and the indices have all fallen back into negative gamma.
I don’t know about you - but the below charts don’t give me a warm and fuzzy feeling…
10yr-2yr Treasuries - Source: Federal Reserve Bank of St. Louis, fred.stlouisfed.org, Geeks of Finance
S&P 500 back in strongly negative gamma territory
These (and other) factors are causing an increase in market volatility once again.
So let’s start off by analyzing the existing market dynamics and then we’ll review a few political and economic factors that could also potentially affect traders in the coming weeks.
We’ll also discuss some trade ideas we’re exploring for next week as well.
SPY
The chart below shows the SPY consolidating between 555 - 564 for a period of 2 weeks between Aug 15 - Sep 3.
Last Thursday saw the market break down below the 550 strike which we had been watching as a first support level. On Friday, SPY touched the big 540 level, closing near the lows for the week.
The GEX data (highlighted above) shows us that if the 540 support zone fails, the next levels of support are in the 520-530 zone.
Below those levels, things start to look scary with large negative GEX still sitting at the 500 strike.
For months now, we’ve seen huge open interest at both the 500 and 5000 strikes on the SPY and S&P 500 respectively.
The market made an attempt in late July / early August towards those levels and the options market continues to hint at a rising probability that markets make another attempt back down to test that zone.
Political & Economic Calendar
The next few weeks are full of potential market moving events in the political/economic calendar, below are the main ones we’re watching in the coming week or so:
We just saw the big August jobs data released on Friday, which painted a bit of a mixed picture with lower jobs and a lower unemployment rate.
The major events that we’re watching for next week include the Presidential debate, Inflation Data, and Consumer Sentiment, and then the FOMC in the following week.
In regards to the presidential debate, both candidates have policy platforms which can shake up markets quite extensively. Trump has a seemingly aggressive foreign policy platform which includes increasing tariffs on China, while Harris has a more aggressive domestic platform which aims to increase the corporate tax rate.
The fact that so many swing states are up for grabs also adds to the potential uncertainty heading into the debate as well.
Source: 270towin.com
Several of the most competitive states, as sorted in the above, are neck and neck according to polling data.
So this debate could clarify each candidate’s positions in the minds of Americans and possibly push one candidate out into the lead - which could see an immediate follow-through impact on markets.
We’ll be discussing these impacts further in our Discord this week.
Yield Curve Un-inversion
Using history as a guide, we see that the majority of times where the yield curve un-inverts a recession follows soon after.
Source: Federal Reserve Bank of St. Louis, fred.stlouisfed.org, Geeks of Finance
There are a few instances of fake-outs (1989, 1998, 2006) where the curve inverted and un-inverted without an immediate recession ensuing, so that path is also a possibility.
But recession odds are certainly increasing when we consider the un-inversion along with a slowing economy, so we want to keep those probabilities in mind as we trade and invest, even in the short term.
But we also are factoring in a possible market rally scenario into year-end, which would still be the pain trade for many market participants.
Since we can’t predict the future with any certainty, our primary strategy is to utilize an asymmetric risk/reward approach - we aim to use a combination of premium generation, while targeting large GEX concentrations at OTM strikes, and then construct a risk profile that can profit in multiple market scenarios.
Check out our Geek University course here if you’re interested in learning more about our approach.
What we’re watching this week
UNH
The first trade idea we’ll discuss is a double calendar spread on UNH. With the uptick in volatility entering markets once again, market participants continue to rotate into higher-quality safety plays like healthcare and consumer non-durables.
UNH has been in a steady trend higher with a large GEX concentration at the 600 strike. In Discord last Friday we discussed our double calendar strategy in more depth - Essentially we are aiming for premium collection over the next 2 weeks and we think UNH has a decent probability to remain in the 590 - 610 range during that timeframe.
QQQ Hedges
Another important aspect of our strategy involves gaining exposure to outsized market moves through hedging on both the upside and the downside.
We consider these partial hedges as plays that will likely lose money while the rest of our portfolio does the heavy lifting, but when the market moves big they can potentially serve as loss buffers or even profit generators for the overall portfolio.
On 8/14 we added a relatively cheap 445/425 9/20 QQQ put debit spread into the portfolio (see our post here) and this past week we decided to add a 455/435 QQQ put debit spread in the same expiration.
Below is part of our data analysis from a post we made on 9/5.
The QQQs (and the market in general) are seeing some of the highest implied volatility readings we’ve seen in the previous 52 weeks along with negative GEX.
The QQQs in particular were still showing negative GEX concentrations down to the 440 level, so adding hedges in this zone made sense to us from a tactical standpoint.
WMT
Another name we’re watching this week is WMT. Like UNH, WMT is a big Dow component and often is a flight to safety name for investors during periods of market turbulence.
If the recent pickup in volatility continues in the market, WMT could see a continued lift in price. This is another slow mover typically, which can make for an interesting premium generation play in the options market.
We also are seeing large GEX concentrated at the 80 strike and a steady price uptrend.
We’ll continue to discuss these ideas and others in the coming week - We invite you to check out our community discord for our latest market conversations.
If you’re interested in learning more about our strategy approach, we address all of these topics in our Geek University course which is included in all memberships.
If you’re interested in accessing our tools and analytics, be sure to check out our website!
Thanks for being part of our community and know that we invite your feedback!
We have a variety of educational videos on YouTube as well!
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