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Markets Smacked Down to Start 2022

January 9th, 2022
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Market Update for the Week Ahead

Welcome back to the Juice! We hope you all survived the first week of the year as we transitioned from holiday cheer to inflation demise in 5 trading days. The consensus is that the bull market is over, the FED will increase interest rates at the fastest rate in history (because of...you know...dot plots and meeting minutes) and crypto is going to die. Sure. Let's dive into the markets and see what is happening!

 

What happened last week?

The first day of trading of 2022 was exciting and full of hope. Many traders and investors had the mindset that we were finally off to a good start. Last Monday saw many growth stocks rise 3-5% higher, but by Friday most those same names had sold off, including big tech, with the Russell 2000 (IWM) leading the reversal to the downside. Here are some growth names and their recent 1-week performance.

  • Celsius (CELH): -27%
  • Udemy (UDMY): -25%
  • Monday (MNDY): -23%
  • Upstart (UPST): -23%
  • Roku (ROKU): -20%
  • Affirm (AFRM): -20%
  • Global-e (GLBE): -21%
  • Datadog (DDOG): -20%

Where is a meme when you need one...oh, here you go: 

With a plethora of other small-mid-cap stocks trading down 15%, yet again. Small caps and growth names are definitely transitioning into “value” territory as most are 60% off the highs.

 

Markets - Option Flows

Looking at option flow from Friday, which had a similar theme to most of the week, showed a big mix of sentiment among large option trades. Uncertainty is being seen in the SPX, SPY, and QQQ.

The pillars of the market (big-tech), continued with some bullish flow even through the downturn we saw last week. However, not dissimilar to what we’ve seen recently. Option premium flowing through market ETFs was telling us of a possible rotation into the financial and energy sectors. Let’s take a look.

 

Markets - Sector ETFs

XLE (energy) and XLF (financials) saw more flow than usual, which is consistent to what we’ve seen whenever the action in tech is hit to the downside. This is coming at a time when stocks like NVDA, AAPL, AMZN, and MSFT were near all-time-highs and carrying SPY to where it is now. Breadth has been incredible low through most rallies, which means only a handful of stocks are participating in any given rally. The increase in option premium for XLE and XLF has been a consistent trend over the last several weeks. Tech makes new highs and then sells off in classic mean-reversion with the rotation going into energy and financials, rinse and repeat.

 

Markets - What to watch for this week

There are some market moving events happening this week. Keep an eye on:

  • Tuesday 10am: Fed Chair Powell Testifies 
  • Wednesday 8:30am: Core CPI (Inflation Read) 
  • Friday 8:30am: Retail Sales

JPOW will be commenting on the economic outlook and recent monetary policy. We’ll get a better vision into what he’s seeing and the direction the Fed will go. Every time JPOW has spoken as of late we’ve almost always seen a down-turn in the market with increased volatility. The markets may just be over-reacting to 25 BPS increase in interest rates with these announced rate hikes, but what do we know.

 

Can’t Stop. Won’t Stop. Gamestop.

What happened with Gamestop on Friday? Shares traded higher by 30% in pre-market, but yet closed the day nearly flat. There can be a lot of speculation as to why shares tanked at the open. Were retail traders simply taking profit after an unexpected move? Or were there some evil actors making sure the share price was suppressed? We have no comment on this.

Let’s touch on Gamestop’s Gamma Exposure (GEX). The share price is currently in a zone of neutral/free flow buying pressure. Gamestop is a name that often follows the short-squeeze and retail flow, so it’s important to keep an eye on the open interest and which strikes of call and puts are trading in high volume.

From the GEX chart above, the zones we would keep an eye are the strikes on the way down at the $130, $120, and $100 levels. (currently $140). On the upside the largest GEX cliff is currently sitting at the $200 strike.

What we’ve been seeing with stocks that have such large zones of gamma exposure is that they are more volatile. We also see share price swing more frequently through areas of lower GEX and get stuck on areas of larger GEX strikes (as the $140 level right now).

 

Matrix Scan - Russell Fire Calls

Taking a gander at the Russell Fire Calls has us seeing a lot of Friday’s option flow running that went through GME. Plenty of unusual volume running through GME and AMC calls which may signal for a continuation of volatility and swings in price action going into next week.

 

High-Short Interest Names

Did the GME squeeze signal a potential rotation into other high short-interest stocks? Here’s my own custom scan of high-short-interest names and some of the option volume from Friday’s action. It’s impressive to note just how much premium was traded in GME and AMC compared the rest of the list. Even more notable is the fact that Beyond Meat (BYND) is pretty high on the list as well. 

When it comes to these short-interest names, like growth stocks, many are down 60-80% from the highs only 6 months ago. Keep an eye on the market action when Monday comes around to get a better feel for how these might perform.

 

Summary 

A great investor once said “buy when others are fearful, and sell when others are greedy. If that doesn’t work then play VIG games to reload your cash balance” -Someone, probably.

That’s all for today’s write-up, follow us for continued updates on where the options market is headed.

Don’t forget we’ve got new rounds of VIG cash games starting every day with real cash prizes up for grabs. Load up those watchlists and get started before the games fill up for your chance to win, they are free to enter so give them a go… “literally risk free money”.

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