Early 2022 Should Continue A Melt-Up Trend In January/February

A very late Santa Rally appears to have been set up in the US markets as we close in on the end of 2021. The US markets have already started a melt-up trend – which is what I expected to happen prior to the bout of volatility over the past 30+ days.

A Very Late Santa Rally Could Prompt A Powerful Move Upward

A very late positive shift in the US major indexes may prompt a powerful upward price trend in early 2022. I expect that Q4:2021 earnings and revenues will continue to impress traders while the US Dollar strengthens above 95. This combination of a strong US economy with a stronger US Dollar will continue to attract foreign capital investment in US equities in early 2022.

Traders won’t want to miss the potential for a Q1 and Q2 rally phase in the US markets IF the US Fed stays moderately inactive throughout the first half of 2022.

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Traders were concerned that the US Fed and Inflation would prompt a sudden shift by the US Fed. Still, I believe the new Omicron COVID virus and the shift away from hyper-inflationary trends may alter how the Fed sees the global economy in 2022. The US markets may be strengthening simply because of the additional stimulus and strong US consumer activity from the recovery/reflation trade momentum (late 2020 and almost all o 2021). The early 2022 trends may carry momentum into the first two Quarters of 2022 with slowly diminishing strength overall.

Please take a minute to review our ADL Price Predictions for 2022 in this research article: The Technical Traders

S&P 500 Rallying To New All-Time Highs To Close Out 2021

The S&P 500 recently rallied to new all-time highs just days before the end of 2021. This move suggests traders are shifting away from broader market concerns and starting to pay attention to the pending Q4:2021 earnings and revenue data and the 2021 Annual Data that will hit over the next 30 to 60+ days.

Even though the markets are looking for any reason to spike the VIX (volatility), I believe the momentum behind this rally phase is going to continue to drive the S&P 500 up towards 5000 – or higher. My expectations are that we will see a fairly strong 5% to 8% rally in early 2022 from the 2021 end-of-year price levels. I believe the US market is attracting lots of foreign market capital as long as the US Fed does not do anything to topple the current market dynamics.

NASDAQ Is Struggling To Reach New All-Time Highs, But Could Explode Higher In Early 2022

Even though the NASDAQ appears to be more volatile than the S&P500 and Dow Jones, it stands a very good chance of exploding higher in early 2022 as Q4:2021 earnings are announced, and end-of-year revenues and US economic data are presented in January/February. I expect that technology will continue to dominate trends related to how US consumers spend their time/money in 2022 – especially if we continue to go through more COVID virus waves.

The sectors I’m watching in 2022 are Housing, Technology, Healthcare, Consumer Staples/Discretionary, Metals/Mining, and Retail. If there are any signs of concern in the US/Global markets, I expect to see these concerns appear in the strongest sectors right now (Consumer, Retail, Metals, Housing, and Technology). The US Fed will probably not take any severe actions in Q1:2022 and maybe talk about raising rates in Q2:2022. This means the US markets will continue to attract foreign capital, and traders need to prepare for a potentially explosive upside price trend in the NASDAQ before March 2022.

I continue to believe the US markets have been transitioning throughout all of 2021 and will continue to transition into a more stable and opportunistic market in 2022. This means the highest-flying hot sectors may stall out a bit if market dynamics shift, but it also means we may see a resurgence of bullish momentum in early 2022 for sectors that have languished over the past 6 to 8+ months. One sector that I’m watching is the Cannabis sector and Metals/Miners. I believe both of these sectors may start to move dramatically higher in 2022 as capital seeks out opportunities in undervalued asset classes.

I wrote many years ago about how capital acts like a living-breathing entity – always seeking opportunity, safe environments, profits, and avoiding danger/risks. As the markets continue to transition in 2022, watch for the strongest sectors in 2021 to continue higher in early 2022. But also watch how the markets transition and look for new opportunities after February/March 2022. This is when to plan for a shift in market trends – when the markets start to focus on undervalued market sectors for 2022.

Want to prepare yourself for trading and investing in 2022?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

Please take a minute to visit www.TheTechnicalTraders.com to learn about our Total ETF Portfolio (TEP) technology and how it can help you identify and trade better sector setups. We’ve built this technology to help us identify the strongest and best trade setups in any market sector. Every day, we deliver these setups to our subscribers along with the TEP system trades. You owe it to yourself to see how simple it is to trade 30% to 40% of the time to generate incredible results.

Have a great day!

Chris Vermeulen
Chief Market Strategist

Predictive Modeling Suggests 7~10% Rally In SPY/QQQ Before April 2022

Has the Santa Rally arrived late this year? Are traders trying to position for a Q4:2021 earnings blowout before the end of 2021? Let’s take a look at what predictive modeling can help us understand.

The recent rotation in the SPY/QQQ has shaken some traders’ confidence in the ability of any potential rally – blowing up expectations of a Santa Rally. Yet, here we are with only five trading days before the end of 2021, and the US major indexes are nearing all-time highs again.

Predictive Modeling Shows A Continued Melt-Up Trend Through Jan/Feb 2022

Our Adaptive Dynamic Learning (ADL) Predictive Modeling system may hold the answers you are looking for. Let’s look at a few charts to prepare for what may unfold over the next 60+ days.

First, this SPY Weekly ADL chart highlights the range of potential outcomes going forward into March/April 2022. The further out we attempt to predict using this technique, the more opportunity exists for outlier events (unusual price trends/activity). Yet, the SPY ADL predictive modeling system suggests a very strong upward price trend in January/February 2022, with a possible narrowing of price in late February – just before another big move higher in March/April 2022.

There is an outlier trend that appears below the current price trend. So far, this outlier trend has not aligned with price action over the past 5+ weeks and shows an alternate support level near $430.

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The ADL predictive modeling system suggests a broad market uptrend is likely in the SPY, with an initial target near $490 possibly being reached by early February. If Q4:2021 earnings come in strong and revenues continue to impress the markets, we may see a rally above the $490 level before the end of February 2022.

After the tightening of price near the end of February 2022, it appears the SPY will consolidate near $480, then enter another rally phase and attempt to rally above $500. This type of price action aligns with solid Q4:2021 expectations and continued Q1:2022 economic growth.

ADL Predicts QQQ Will Rally Above $430 By March/April 2022

This Weekly QQQ ADL Chart highlights a similar type of price trend compared to the SPY. The QQQ appears to have a more consistent upward trend bias with a fairly solid upward price channel trending through the first four months of 2022. It appears the QQQ will rally to levels above $420 by mid-February 2022, then stall for a few weeks, then resume a rally trend through most of March 2022 and into early April 2022. After mid-April 2022, it appears the QQQ will consolidate, again, near the $420~$425 level.

This ADL prediction suggests Technology, Healthcare, Consumer stables/discretionary, Real Estate, and other sectors will continue to do well in Q1:2022 and beyond. A rally of 7% to 10% in the first few months of 2022 may send the US markets dramatically higher throughout the rest of 2022 if economic growth stays strong.

The ADL predictive modeling system has proven to be a valuable tool in understanding what lies ahead for the markets. Not only does it show a range of potential outcomes and price targets, but it also helps us understand if and when price breaks beyond these ADL predictive ranges (which translates into a unique price anomaly).

Price anomalies happen. The COVID-19 price collapse represented a unique price anomaly in 2020. This event, somewhat like a Black Swan event, hit the markets hard and quickly sent prices tumbling. It is important to understand that these events can still happen in the future and can dramatically disrupt expected price trends.

Still, if the ADL predictive price trends continue to be accurate, it looks like Q1:2022 and Q2:2022 may continue to see moderate upward price trends with bouts of sideways volatility taking place. The range of the ADL predictive levels (the MAGENTA LINES) shows the type or expected volatility in the markets for Q1 and Q2. It appears volatility will stay elevated over the next 6+ months – so get ready for some big, explosive price trends.

Watch for the markets to continue to melt higher over the next few weeks as traders prepare for Q4:2021 earnings to start hitting in early January 2022. We may see the US markets start another big upside price trend – possibly breaking to new all-time highs soon enough.

Want to learn more about predictive modeling?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

Please take a minute to visit www.TheTechnicalTraders.com to learn about our Total ETF Portfolio (TEP) technology and how it can help you identify and trade better sector setups. We’ve built this technology to help us identify the strongest and best trade setups in any market sector. Every day, we deliver these setups to our subscribers along with the TEP system trades. You owe it to yourself to see how simple it is to trade 30% to 40% of the time to generate incredible results.

Have a great day!

Chris Vermeulen
Chief Market Strategist

Commodities: Gold, Miners, Silver, TSX – Video Tip Of The Week

Chris Vermeulen of The Technical Traders talks about what is going on with the markets. Are we in the late stages of a bull market for stocks? An indication of this is when commodities typically start to come to life and eventually outperform all other sectors and indexes.

Taking a look at the DBC, a commodity index tracking fund, the chart is rebounding after putting in a major bottom. On the Toronto Stock Exchange (TSX) chart, which is commodity-heavy, we are now on the verge of coming out of a double bottom that has occurred over the last few weeks. Looking at GDXJ, which is the Gold Miners, it appears that they are trying to put in a significant market bottom before breaking through the neckline. SILJ, the Silver Miners, have similar price action on their chart.

With these indicators of growth potential, the question remains – during the late-stage bull market for stocks, will commodities continue to strengthen and then take off to the upside over the next few months?

TO LEARN MORE ABOUT commodities – WATCH THE VIDEO

Subscribers: Please let us know what you would like to learn and we will add it to the roster of our weekly Technical Trader Tips!

Non-subscribers: Please enjoy these micro-lessons as a way to further your education and understanding of how a technical trader…well…trades!

TO EXPLORE THE TOTAL ETF PORTFOLIO, PLEASE VISIT US AT THE TEHCNICAL TRADERS. YOU’VE GOT MORE TO GAIN THAN TO LOSE WHEN SEEKING INFORMATION!

Disclaimer: None of this material is meant to be construed as investment advice. It is for education and entertainment purposes only. The video is accurate as of the posting date but may not be accurate in the future.

Fear May Drive Silver More Than 60% Higher In 2022

As the US and global markets rattle around over the past 60+ days, many traders have failed to identify an incredible opportunity setting up in both Gold and Silver. Historically, Silver is extremely undervalued compared to Gold right now. In fact, Gold has continued to stay above $1675 over the past 12+ months while Silver has collapsed from highs near $30 to a current price low near $22 – a -26% decline.

Many traders use the Gold/Silver Ratio as a measure of price comparison between these two metals. Both Gold and Silver act as a hedge at times when market fear rises. But Gold is typically a better long-term store of value compared to Silver. Silver often reacts more aggressively at times of great fear or uncertainty in the global markets and often rises much faster than Gold in percentage terms when fear peaks.

Understanding the Gold/Silver ratio

The Gold/Silver ratio is simply the price of Gold divided by the price of Silver. This creates a ratio of the price action (like a spread) that allows us to measure if Gold is holding its value better than Silver or not. If the ratio falls, then the price of Silver is advancing faster than the price of Gold. If the ratio rises, then the price of Gold is advancing faster than the price of Silver.

Right now, the Gold/Silver ratio is above 0.80 – well above a historically normal level, which is usually closer to 0.64. I believe the current ratio level suggests both Gold and Silver are poised for a fairly big upward price trend in 2022 and beyond. This may become an exaggerated upward price trend if the global market deleveraging and revaluation events rattle the markets in early 2022.

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I expect to see the Gold/Silver ratio fall to levels below 0.75 before July/August 2022 as both Gold and Silver begin to move higher in Q1:2022. Some event will likely shake investor confidence in early 2022, causing precious metals to move 15% to 25% higher initially. After that initial move is complete, further fallout related to the deleveraging throughout the globe, post-COVID, may prompt an even bigger move in metals later on in 2022 and into 2023.

COVID Disrupted The 8~9 Year Appreciation/Depreciation Cycle Trends

In May 2021, I published an article suggesting the US Dollar may slip below 90 while the US and global markets shift into a Deflationary cycle that lasts until 2028~29 (Source: The Technical Traders). I still believe the markets will enter this longer-term cycle and shift away from the broad reflation trade that has taken place over the past 24+ months – it is just a matter of time.

If my research is correct, the disruption created by the COVID virus may result in a violent reversion event that could alter how the global markets react to the deleveraging and revaluation process that is likely to take place. I suggest the COVID virus event may have disrupted global market trends because the excess capital poured into the global markets prompted a very strong rise in price levels throughout the world in real estate, commodities, food, technology, and many other everyday products. The opposite type of trend would have likely happened if the COVID event had taken place without the excessive capital deployed into the global markets.

Demand would have diminished. Price levels would have fallen. Demand for commodities and other technology would have fallen too. That didn’t happen. The opposite type of global market trend took place, and prices rose faster than anyone expected.

Markets Tend To Revert After Extreme Events

As much as we may want to see these trends continue forever, any trader knows that markets tend to revert after extreme market trends or events. In fact, there are a whole set of traders that focus on these “reversion events.” They wait for extreme events to occur, then attempt to trade the “reversion to a mean” event in price action.

My research suggests the COVID virus event may have created a hyper-cycle event between early 2020 and December 2021 (roughly 24 months). My research also suggests a global market deleveraging/revaluation event may be starting in early 2022. If my research is correct, the recent lows in Gold and Silver will continue to be tested in early 2022, but Gold and Silver will start to move much higher as fear and concern start to rattle the markets.

As asset prices revert and continue to search for proper valuation levels, Gold and Silver may continue to rally in various phases through 2028~2030.

Initially, I expect a 50% to 60% rally in Silver, targeting the $33.50 to $36.00 price level. For SILJ, Junior Silver Miners, I expect an initial move above $20 (representing a 60%+ rally), followed by a follow-through rally targeting the $25.00 level (more than 215% from recent lows).

I believe the lack of focus on precious metals over the past 12+ months may have created a very unusual and efficient dislocation in the price for Silver compared to Gold. This setup may present very real opportunities for Silver to rally much faster than Gold over the next 24+ months – possibly longer. If my research is correct, the Junior Silver Miners ETF, SILJ, presents a very good opportunity for profits.

Want to learn more about the movements of Gold, Silver, and their Miners?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

If you need technically proven trading and investing strategies using ETFs to profit during market rallies and to avoid/profit from market declines, be sure to join me at TEP – Total ETF Portfolio.

Pay particular attention to what is quickly becoming my favorite strategy for income, growth, and retirement – The Technical Index & Bond Trader.

Have a great day!

Chris Vermeulen
Chief Market Strategist

Downside in Precious Metals is Gone – Video

Chris sits down with Kerry Lutz from Financial Survivor Network to discuss the latest moves of Precious Metals as well as other sectors subject to the effects of inflation and market trends. We’re at an inflection point with the metals, and the whole sector has been out of favor for a year now. In the midst of the late stages of a stock market top, the precious metals start to out-perform other sectors.

What else is going on – well we haven’t seen a huge crisis yet in cyber-security on a global scale. Oil recently broke to the downside, bonds could hold up pretty well, and the US dollar has been holding up exceptionally well as when there is fear, people move to the US dollar.

TO LEARN MORE ABOUT THE LATEST MOVES OF PRECIOUS METALS – WATCH THE VIDEO

Subscribers: Please let us know what you would like to learn and we will add it to the roster of our weekly Technical Trader Tips!

Non-subscribers: Please enjoy these micro-lessons as a way to further your education and understanding of how a technical trader…well…trades!

TO EXPLORE THE DIFFERENT TRADING STRATEGIES CHRIS OFFERS, PLEASE VISIT US AT THE TECHNICAL TRADERS. YOU’VE GOT MORE TO GAIN THAN TO LOSE WHEN SEEKING INFORMATION!

Disclaimer: None of this material is meant to be construed as investment advice. It is for education and entertainment purposes only. The video is accurate as of the posting date but may not be accurate in the future.

Market Bottom/Reversal Today? – Trader Tip Video Analysis

Market Bottom/Reversal trader tip: Chris Vermeulen of The Technical Traders talks about what is going on with the markets. We’ve seen a strong rally off the Fed followed by some all times highs in the S&P500. Now we have dropped back down to make some lower lows in the markets. The S&P 500 is still holding up from the lows we saw a few weeks ago. Based on the Fibonacci theory, the market always searches for a lower low or a higher high which is what can create the market bottoms.

Looking at the daily charts, we can see a pretty good move off the FOMC meeting to the upside. Overall, the Nasdaq trades sharply lower this morning, poking to some nominal new lows.

Join Chris as he discusses the put and call ratio and what this means for the markets. He also talks us through the triple witching trading day that occurred this past Friday, Dec 17th – traditionally the most consistently volatile trading days of the year.

TO LEARN MORE ABOUT MARKET BOTTOM/REVERSAL TODAY – WATCH THE VIDEO

Subscribers: Please let us know what you would like to learn and we will add it to the roster of our weekly Technical Trader Tips!

Non-subscribers: Please enjoy these micro-lessons as a way to further your education and understanding of how a technical trader…well…trades!

TO EXPLORE THE DIFFERENT TRADING STRATEGIES CHRIS OFFERS, PLEASE VISIT US AT THE TECHNICAL TRADERS. YOU’VE GOT MORE TO GAIN THAN TO LOSE WHEN SEEKING INFORMATION!

Disclaimer: None of this material is meant to be construed as investment advice. It is for education and entertainment purposes only. The video is accurate as of the posting date but may not be accurate in the future.

US Federal Reserve Actions 1999 to Present – What’s Next? Part III

In Part I and Part II of this research article, I shared my research into the state of past and current US and global economy, Rest Of World Debt, DGP Implicit Price Deflator, Fed Funds Rates, and other technical data charts. The purpose of this article is to share with you two key components of the current US and global market trends; higher inflationary trends and a potentially trapped US Federal Reserve.

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I will share more data/charts, and my proprietary US economy/Fed modeling systems results in Part III. My objective is to share my belief that the US Federal Reserve still has room to adjust interest rates (within reason) and how the US/global economy is starting to trend into the highest inflationary levels since 1975~1985. These levels could frighten traders/investors, but given the global economic constraints of the COVID lock-downs, I consider the current economic trends a symptom of the stimulus/solution – not necessarily an inherent economic trend. Allow me to explain my thinking in more detail.

Consumer Price Index (Less Food & Energy) Climbs To Highest Levels Since 2007-08

This Consumer Price Index (Less Food & Energy) paints a powerful picture. As you are well aware, the Energy sector (Oil and Natural Gas) has rallied more than 300% over the past 18+ months. Food, in particular Beef and other staple products, have rallied more than 80% over the past 18+ months. So this Consumer Price Index chart that is excluding two of the highest inflationary consumer components should already be well above the 1999-2000 levels if we consider real consumer price factors.

Take a minute to review all of these charts and consider the current US and global economic environment and where you think these trends may continue into early 2022.

(Source: Fred Economic Data)

The extreme US and Global market debt levels, which have risen more than 500% over the past 15+ years, complicate the process of combating inflationary trends. The Fed, and many global central banks, risk a broad wave of defaults if they attempt to raise lending rates too fast. They want an orderly deleveraging process to occur, which will prompt a moderate deflationary trend in assets.

Consumer Price Indexes rallying to levels not seen since the 1970s or 1980s when the US Federal Reserve continues stimulus programs and keeps the FFR levels near ZERO seems counterproductive. But what if the US Federal Reserve is trapped behind a wall of debt and a very keen understanding that any aggressive moves may topple the global growth phase we’ve experienced over the past 8+ years? What if the US Fed knows they should be raising interest rates right now but is frightened to take this action because of what may happen to the rest of the world?

Proprietary Modeling Of The US Economy/Fed

Many years ago, I completed some prototype research related to the US debt levels as it related to GDP, Population, and economic activity. At that time, I attempted to model different outcomes over the next 20 to 25+ years. I tested various hypothetical outcomes to see how my modeling system would allow the US Fed to raise or lower rates within an “optimum range.” I’ve organized the results of my theoretical modeling into a table (below).

I believe this data, and all the charts I’ve shared with you in the whole of this research article, suggests the US Fed is trapped in a very strenuous position right now. The inflationary data suggests the US Fed should be aggressively raising rates. The global markets and the fragility of the global economy based on years of stimulus and easy money policy may prompt a shattering of market trends if the Fed acts too aggressively. What is the Fed most likely to do over the next 4 to 12+ months?

Maybe the US Federal Reserve is willing to push the envelope by:

  • keeping rates low
  • allowing foreign markets to deleverage and devalue in an orderly process
  • allowing the markets to divest of the excess liabilities/debts

At the same time, they continue to support the US economy with easy money policies – thus allowing the foreign markets to shake off the liabilities and debt levels on their own.

Telegraphing The Long-Term, Slow-Motion, Fed Actions Going Forward

It makes sense that the US Federal Reserve may attempt to raise interest rates very slowly in 2022, possibly moving 1/8% or 1/4% at a time while keeping the FFR lending rate below 1.0% to 1.25%. Remember, my research suggests any aggressive moves by the UF Fed could topple the US and global markets fairly quickly at these extended inflationary and consumer price trends.

A prolonged and properly telegraphed US rate rise moving the US interest rates up above 0.50% would be a suitable solution, in my opinion, to attempt to eliminate the excessive leverage that has taken place throughout the developing world. As we see in China, Asia, Africa, the US, and other places, economic functions tend to have a natural process of handling extreme excesses.

My opinion is the world is experiencing and seeing the symptoms of excessive stimulus, extended easy monetary policy, COVID lock-down supply issues, and the effects of manufacturing globalization through the process of a virus/pandemic event. Almost like a perfect storm, the global markets before COVID in February 2020 were uniquely positioned to be highly dependent on China/Asia for certain medical, chip, and other manufacturing components while shipping and supply trends collapsed. For the first 4 to 6+ months, the US worked through existing inventory/supplies. But after those supplies were exhausted, the US economy became dependent on new shipments to replenish inventory and to supply much-needed manufacturing components. This perpetual supply-side shortage has continued to prompt higher inflationary trends worldwide.

Slowly changing direction

I expect the US Federal Reserve to very clearly telegraph next year’s expectations with an evident intent to move away from extended stimulus and support programs slowly. A very slow rate increase, possibly moving rates above 0.50% before August 2022, could be in the works. The US Federal Reserve will want to adjust rates and policy to assist the global economy in efficiently transitioning through the current inflationary, deleveraging, and deflating the excessive price trends – not breaking the markets.

Expect the US Federal Reserve to announce very clear longer-term “intentions” and to telegraph their expectations related to inflation and supply issues. Here are my expectations in a nutshell:

  • Potentially cut the bond-buying rates by another 15% to 45% in early 2022 (Q1:2022 through Q3:2022).
  • Announce intentions to raise rates very slowly in late Q1:2022 or late Q2:2022 (possibly raising in tiny increments over many months).
  • Announce the US Fed is watching the global markets and credit markets quite intently – attempting to identify subtle shifts in trends and activity while adjusting future actions/expectations.

The US Federal Reserve has room to raise rates 0.50% or a bit higher. It also has many other tactics to tighten (bond-buying, liquidity features, financial stress-based requirements). I believe the Fed will make very clear “baby steps” known – but not take any immediate actions.

Want to learn more about how I will navigate through what’s to come?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

In fact, I recently talked about how, if I could trade only one strategy for income, growth, and retirement, this is the one I would choose – The Technical Index & Bond Trader.

If you need technically proven trading and investing strategies using ETFs to profit during market rallies and to avoid/profit from market declines, be sure to join me at TEP – Total ETF Portfolio.

Have a great day!

Chris Vermeulen
Chief Market Strategist

Are You an Options Buyer or an Options Seller?

Options are an increasingly popular financial product that gives traders numerous ways to manage risk while significantly leveraging capital. They are a powerful trading “tool” that can be bought, sold, and combined in a seemingly limitless number of ways to achieve a specific objective.

One of the bigger questions for new — and even experienced traders — is whether to be an options buyer or seller. Or both.  

QUICK REVIEW

The price of an option is the sum of intrinsic and extrinsic (time) values. Intrinsic value is the mathematical difference between the option strike price and the price of the underlying.  Extrinsic value is variably priced based on the expected volatility of the underlying and remaining time before the option expires. 

Let’s go through some of the pros and cons of buying versus selling options.

BUYING OPTIONS

Buying options seems like a simple enough strategy. The trader picks a bullish or bearish direction and goes long (buys) a put or a call corresponding to the stock’s anticipated directional move. Be sure not to confuse being long an option and being long underlying. For example, if a trader is long a put, due to inverse correlation that is akin to being short the underlying.

But being long an option is not as simple or easy as it appears. The first challenge with a long option is being right about the direction of the stock. The underlying has to move in the expected direction for the option to go up in value and possibly generate a profit. 

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The option buyer also has to be correct about the magnitude of the underlying move. If a trader buys an option and the amount of the move is not greater than what was spent for the time value, the option won’t be profitable. For example, if $2 is spent for options time value, but the stock only moves $1, it is quite possible to be right about direction but still not profitable. 

Time Value

The time value in options is a wasting asset as it will always approach $0 at expiration, so that works in favor of option sellers and against option buyers. Think of time value like an ice cube, melting away slowly at first and then more rapidly.

Since all options have a fixed time when they expire, duration is a significant consideration. A trader could be right about the direction and magnitude of the underlying move, but perhaps that doesn’t materialize sufficiently during the option’s lifetime. So enough time value has to be purchased for the move to happen. And more time value, of course, costs more money.

Implied Volatility (IV)

There’s also the effect of volatility. The time value portion of an option is priced according to the underlying’s anticipated (Implied) volatility. If an option is bought when volatility is low, and there is an increase in volatility, that makes the remaining time value portion of the option price more valuable. That can work in the option buyer’s favor. But there’s also the opposite situation; when an option is purchased when volatility is high, and there is a contraction in volatility.

It’s important to be able to gauge if option premium is underpriced, overpriced, or “average” priced. Technical tools to do that include charting implied volatility itself and some version of IV Rank where current IV is evaluated as a percentile of the range of IV over some time period, typically one year.

So the inherent disadvantages of a long option are the necessity to be correct about direction, magnitude, duration, and possibly implied volatility. These considerations can make the probability of profit with a long option relatively low, often far below 50%.

So why buy an option?

Simple – unlimited profit potential! Long options can generate outsized profits when the trader is right about direction, magnitude, and duration.

When does it make sense to use a long option?

  • When a significant move in a stock is expected.
  • When there’s a trend.
  • When there’s a reversal in a range.
  • When there’s a breakout (up or down).

Solid technical analysis and a keen sense of the specific market are key success factors.

SELLING OPTIONS

For every buyer of an option, there is a seller (counterparty). Option sellers take on an obligation to either buy or sell and stock in return for collecting a premium. 

There are a couple of disadvantages to selling options. The premium collected is the maximum profit possible. Selling an option also comes with a possibly substantial obligation to buy or provide stock. There are ways to reduce and manage that obligation risk, such as structuring trades as either vertical or calendar spreads, and these and others will be the subject of many future posts.

So why sell an option?

Probability of profit! Depending on how an option selling trade is structured, it’s possible to have a very high probability of success, sometimes 80% or more. It can be quite a bit easier to generate consistent, albeit smaller, profits with selling options.

So, in summary, buying options come with an inherently low probability of an unlimited profit. Selling options come with a relatively high probability of a modest profit. 

What do I do?

Both. But I tend to be an option seller much more often than an option buyer. That better suits my personal style in trying to generate consistent profits for income. Other traders and investors with different objectives may find a different approach works best for them.

Want to learn more about Options Trading?

Every day on Options Trading Signals, we do defined risk trades that protect us from black swan events 24/7. Many may think that is what stop losses are for. Well, remember the markets are only open about 1/3 of the hours in a day. Therefore, a stop loss only protects you for 1/3 of each day. Stocks can gap up or down. With options, you are always protected because we do defined risk in a spread. We cover with multiple legs, which are always on once you own.   

If you are new to trading or have been trading stock but are interested in options, you can find more information at The Technical Traders – Options Trading Signals Service. The head Options Trading Specialist Brian Benson, who has been trading options for almost 20 years, sends out real live trade alerts on actual trades, such as TSLA and NVDA, with real money. Ready to check it out, click here: TheTechnicalTraders.com.

Enjoy your day!

Chris Vermeulen
Founder & Chief Market Strategist
TheTechnicalTraders.com

US Fed Actions 1999 to Present – What’s Next? Part II

Let’s continue to explore the past 20 years of US Fed actions. I believe the US Fed has created a global expansion of both economies and debts/liabilities that may become somewhat painful for foreign nations – and possibly the US.

Reading The Data & What To Expect in 2022 And Beyond

In the first part of this research article, I highlighted the past 25 years of US Fed actions related to the DOT COM bubble, the 9/11 terrorist attack, the 2008-09 US Housing/Credit crisis, and the recent COVID-19 virus event. Each time, the US Federal reserve had attempted to raise interest rates before these crisis events – only to be forced to lower interest rates as the US economy contracted with each unique disruption. The US Fed was taking what it believed were necessary steps to protect the US economy and support the global economy into a recovery period.

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The following few charts highlight the results of the US Fed’s actions to keep interest rates extremely low for most of the past 20 years. I want to highlight what I believe is an excessive credit/debt growth process that has taken place throughout most of the developing world (China, Asia, Africa, Europe, South America, and other nations). At the same time, the US has struggled to regain a functioning growth-based economy absent of US Federal Reserve ZERO interest policies and stimulus.

Extreme Growth Of World Debt (excluding the US)

This Rest Of The World; Debt Securities & Loans; Liabilities chart highlights the extreme, almost parabolic, growth in debt and liabilities that have accumulated since 2005-06. If you look closely at this chart, the real increase in debt and leverage related to global growth started to trend higher in 2004-05. During this time, the US housing market was on fire, which likely pushed foreign investors and foreign housing markets to take advantage of this growing trend in US and foreign real estate. This rally in speculative investments, infrastructure, and personal/corporate debt created a huge liability issue throughout many developing nations. Personal and Corporate debt levels are at their highest levels in decades. A recent Reuters article suggests global debt levels have risen in tandem with real estate price levels and is closing in on $300 Trillion in total debt.

(Source: fred.stlouisfed.org)

GDP Implicit Price Deflator Rallies To Levels Not Seen Since 1982~83

The rally in the US markets and the incredible rise of inflation over the past 24 months have moved the consumer price levels higher faster than anything we’ve seen over the past 50+ years. We’ve only seen price levels rise at this pace in the 1970s and the early 1980s. These periods reflected a stagflation-like economic period, shortly after the US Fed ended the Gold Standard. This was also a time when the US Federal Reserve moved the Fed Funds Rate up into the 12% to 16% range to combat inflationary trends.

If the GDP Implicit Price Deflator moves above 5.5% over the next few months, the US Fed may be forced to take stronger action to combat these pricing issues and inflationary trends. They have to be cautious not to burst the growth phase of the markets in the process – which could lead to a very large deflationary/deleveraging price trend.

(Source: fred.stlouisfed.org)

We need to focus on how the markets are reacting to these extreme debt/liability trends and extreme price trends. The markets have a natural way of addressing imbalances in supply/demand/pricing functions. The COVID-19 virus event certainly amplified many of these issues throughout the globe by disrupting labor, supply, shipping, and manufacturing for a little more than 12+ months.

The future decisions of the US Federal Reserve will either lead to a much more orderly deleveraging/devaluation process for the US and global markets – supporting the natural economic functions that help to process and remove these excesses. Or, the US Federal Reserve will push interest rates too high, too fast, and topple the fragile balance that is struggling to process the excesses throughout the global markets.

What does this mean?

I believe this data, and all the charts I’ve shared with you in this research article, suggest the US Fed is trapped in a very strenuous position right now. I’ll share more information with you regarding my predictions for December 2021 and 2022 in the third part of this article.

I will also share my proprietary Fed Rate Modeling System’s results in Part III of this article and tell you what I expect from the US Federal Reserve and US stock markets.

WANT TO LEARN MORE ABOUT HOW I TRADE AND INVEST IN THE MARKETS?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

If you need technically proven trading and investing strategies using ETFs to profit during market rallies and to avoid/profit from market declines, be sure to join me at TEP – Total ETF Portfolio.

Have a great day!

Chris Vermeulen
Chief Market Strategist

US Fed Actions 1999 to Present – What’s Next?

I find it interesting that so much speculation related to the US Federal Reserve drives investor concern and trends. In my opinion, the US Federal Reserve has been much more accommodating for the global economy after the 2008-09 US Housing Market crash. The new US Bank Stress Tests and Capital Requirements have allowed the US to move away from risk factors that may currently plague the global markets. What do I mean by this statement?

US Fed Continues To Maintain Extremely Accommodative Monetary Policy

Over the past 12+ years, after the 2008-09 US Housing Market collapse, the US Federal Reserve has acted to support the US and global economy while the US Congress and US Federal Reserve have acted to build a stronger foundation for US banking and financial institutions. The most important aspect of this is the Capital Requirements that require an operating US bank to hold a minimum amount of reserve capital (Source: Federal Reserve). The US Federal Reserve installed this program to prevent US banks from over-leveraging their liabilities based on the 2008-09 Housing Market Crisis lessons.

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There are still risks associated with a complete global economic collapse – where consumers, banking institutions, and economic activity grinds to a halt because of some external or unknown factor. Yet, the risks of a US-based collapse based on excessive Banking or other financial institution liabilities are somewhat limited in today’s US Economy. Although, globally, the risks have accelerated over the past 12+ years while the US Federal Reserve maintained a very accommodative monetary policy.

Historical US Federal Reserve Actions

Let’s review some of the most significant US Federal Reserve actions over the past 25 years.

  • Early/Mid-1990s: The Fed raised the FFR from 3.0% to 6.5% to 7.0% as the DOT COM Rally continued to build strength.
  • 1998/1999: The Fed dropped the FFR to 4.0% as the DOT COM bubble became frothy and started to fracture/burst.
  • Early 2000: The Fed raised the FFR from 4.0% to 6.86% over just five months, pushing the cost of borrowing above 7.5%~8.5% in the open market.
  • Late 2000/Early 2001: The September 2001 Terrorist Attack on the US pushed the Fed to lower the FFR to 1.0% by December 2002. Before the 9/11 attack, the Fed lowered the FFR after the DOT COM bubble burst rattled the US economy and output.
  • 2004/2006: The Fed raised the FFR from 1.0% to 5.5% (more than 550%) while the US Housing Market boom cycle pushed the US economy into overdrive. This was the biggest FFR rate increase since the 1958-1960 rate increase (from 0.25% to 4.0% – more than 1600%) or the 1961-1969 rate increase (from 0.50% to 9.75% – more than 1950%).
  • 2007/2008: The Fed decreased the FFR from 5.5% to 0.05 (Dec 2009), effectively setting up a 0% interest rate while the US attempted to recover from the 2008-09 Housing Market Crisis.
  • 2015/2020: the Fed attempted to raise the FFR from 0.08% to 2.40% as the US economy transitioned into a strong bullish breakout trend. When the US markets collapsed in early 2020 because of the COVID-19 virus, the Fed moved interest rates back to near 0% and have kept them there ever since.

The deep FFR discounts/rates that started after the 1999/2000 DOT COM/9-11 events pushed foreign markets to borrow cheap US Dollars as a disconnect of capital costs and a growing foreign market economy allowed certain economic functions to continue. Borrowing cheap US Dollars while deploying that capital in foreign economies returning 4x to 10x profits allowed many foreign companies, individuals, and governments to build extremely dangerous debt levels – very quickly.

(Source: ST Louis FED)

Now, let’s get down to the core differences between pre-1990 and post-1990 US Fed actions and global economy functions.

US Fed Added Rocket Fuel To An Already Accelerating Global Economy

Before 1985, foreign markets were struggling to gain their footing in the global economy. Larger global economies, like the US, Japan, Europe, and Canada, could outsource manufacturing, supplies, and labor into foreign nations that provided a strategic cost advantage.

After 1994 or so, after the Asian Currency Crisis settled, the growth of manufacturing and labor in China/Asia started booming at an exponential rate. This prompted a 2x to 5x growth factor in many Asian nations over 10+ years. The 9-11 terrorist attacks briefly disrupted this trend, but it restarted quickly after 1994~1995.

This high-speed growth phase in China/Asia after 1999 created a massive demand for credit and expansion as Asian consumers and economies grew at exponential rates from 1997 to now. The US Fed inadvertently promoted a global growth phase that resulted in the fastest global economic increase in history. Multiple foreign nations were able to take advantage of cheap US Dollars. At the same time, the US Fed acted to support the recovery of the US economy after 9-11 and the 2008-09 Housing/Credit crisis. Those cheap US Dollars continued after the COVID-19 turmoil in early 2020 and likely pushed already at-risk debtors over the edge as bond rates have started to price extensive risk factors.

The result of these crisis events and the US Federal Reserve’s continued easy monetary policy has been the fastest growth of assets the planet has seen in over 80 years. Not only have global economies grown in a parabolic phase, but the US stock market has also moved higher and higher after the 2010 bottom and the 2015-2016 shift towards higher US corporation earnings/revenues.

Once the COVID-19 virus event hit in early 2020, the US Fed moved rates back to near 0% – supplying a nearly unlimited amount of rocket fuel for the global markets (again).

The problem this time was the global COVID shutdowns essentially took the spark away from the fuel (capital).

Now, we are waiting for the US Fed statements to close out 2021. I’ll offer this simple hint to help you prepare for what’s next – more volatility, more big trends, and more deleveraging throughout the global markets. In Part II of this research article, I’ll share my thoughts on what I expect from the US Fed and what I hope for in 2022 and beyond.

Want to learn more about how I trade and invest in the markets?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

If you need technically proven trading and investing strategies using ETFs to profit during market rallies and to avoid/profit from market declines, be sure to join me at TEP – Total ETF Portfolio.

Have a great day!

Chris Vermeulen
Chief Market Strategist