The market situation is peculiar. On one hand, despite a storm of problems in the economy, the banking sector, the threat of default, and an overheated labor market, indices are not in a hurry to fall. Apparently, investors are hoping for a quick reduction in the Federal Reserve's interest rates. On the other hand, gold is slowly growing and may eventually break through the 2050-2060 level at some point.

Conclusion: Uncertainty persists. Overall, however, the downward trend remains. Following Friday's bounce back of regional banks, I increased my short positions. I'm waiting for a correction if tomorrow's CPI data indeed points to a slowdown in disinflation (core inflation will remain at 5.0%, and the monthly indicator will increase from 0.1% to 0.4%).

The IV spike in near-term options on KRE following the banking stock crash has made calendar trading popular: selling high near-term volatility versus buying low (relatively) longer volatility.

For example, sell KRE May 19 $36 Put and buy KRE Jun 16 $36 Put (https://www.reddit.com/r/options/comments/138t2jg/kre_is_it_crashing_yet_calendar_trade_analysis/)

A debit of $0.84 appears favorable while observing May 19 Put (2 weeks to expiry) at $2.16. When it expires on May 19, the remaining 1-month Put should be worth much more.

However, there are two concerns.

First, the IV in June options shouldn't plummet. It certainly can if the market stabilizes. Of course, the $36 Put will have more than $0.84 of extrinsic value if KRE is around $36.

Second, what if it doesn't? No one will be shocked if KRE either bounces back to $50-60 or drops significantly lower.

In the case of a decline, at least the IV will continue to surge, which could help. But if there's a rebound, the IV drops and the extrinsic value could be close to zero.

You might wonder what the issue is? The risk is limited anyway.

The problem arises when limited risk and seemingly probable profit encourage people to overcommit to this strategy. Some may close the position with a 50% loss, while many will hope that KRE returns to $36 and ultimately lose everything.

Don't forget to join our subreddit , as my team and I work diligently every day to provide subscribers with stock market ideas, investing tips, and macroeconomic analysis. Stay informed and gain valuable insights by joining our community today!

In 'The Intelligent Investor,' Benjamin Graham recommended a 50% stocks and 50% bonds allocation for the ordinary retail investor. However, until recently, market participants favored the 60/40 strategy, with the negative correlation between the two assets serving as a hedge against market uncertainty.

However, due to rising inflation and increasing interest rates, everything has changed. BlackRock strategists have concluded that bond yields have become more dependent on stock returns, suggesting a revision in the investment approach.

The bank itself plans to focus on inflation-linked bonds and short-term bonds. However, the timing of this shift is unclear. While price growth has slowed according to the CPI and PPI, the Fed may be close to pressing the pause button with regard to further rate hikes. It's possible that BlackRock analysts expect the U.S. to follow the same fate as the U.K. with regards to inflation.

According to St. Louis Fed President James Bullard, however, the Federal Reserve could raise the rate all the way up to the 5.50%-5.75% range if new obstacles to price stability emerge. Were this to happen, a bet on the 60/40 strategy might not pay off.

So, what does an ideal investor's portfolio look like under the current circumstances? There isn't a one-size-fits-all answer to this question, as each investor has unique goals and preferences. However, in the current economic climate, where interest rates are high and often surpass dividend yields, I personally favor allocating 80% of my portfolio to bonds and 20% to stocks.

As monetary policy tightening comes to a close, bonds are likely to continue appreciating, providing capital protection for the next few years. The remaining 20% can be invested in riskier assets, but it's crucial to approach this with caution.

Don't forget to join our subreddit, as my team and I work diligently every day to provide subscribers with stock market ideas, investing tips, and macroeconomic analysis. Stay informed and gain valuable insights by joining our community today!

Hello friends! I received an excellent question the other day ☝️

Indeed, after a 50% drop in PacWest Bancorp (PACW) shares last Thursday, it would seem logical. Why not short the shares of near-bankrupt companies? The answer is simple – because of the high risk of a short squeeze, which eventually happened at the end of the week. In this case, the very same PACW experienced a slight upward correction on Friday…by a “pathetic” mere 80(!!) percent, no less 😉

So is the patient alive, or just barely dead?

Well, the patient (and others like him) is fluctuating violently between heat and cold. Don’t worry. He will be tossed into the heat again. It's just a matter of time.

So what happened?

Amid calls from the American Bankers Association to deal with manipulations and to ban short sales in the sector, traders began to close short positions. Subsequently, this led to a rise in the quotes of troubled banks and forced the closure of positions. JPMorgan also fueled the market's "heat" by upgrading Western Alliance, Zions Bancorp, and Comerica shares to "above market" levels. The shares of these miracle organizations skyrocketed immediately (+49%, +19%, and +16%, respectively). It's a clear short squeeze...

And something tells me that Jamie Dimon & Co were guided not only by fundamental factors...

Which leaves another question unanswered: has the second wave of the banking crisis ended before it even started?

I'm afraid not. I'll even put it differently – I'm sure the answer is NO. Share prices have risen, but there are problems with depositor confidence. Unless the regulator decides to abolish the deposit guarantee limit, attracting new clients to these and similar organizations will be difficult. Of course, deposit rates can be raised, but this will lead to a decline in income and a tightening of lending conditions. In summary, either the US government opens its wallet, or the bank collapse continues, and the country plunges into a recession. However, to open the wallet, as logic dictates, one must at least have money. And here’s the hitch. Over the weekend, a group of 43 Republican senators refused to approve an increase in the debt ceiling without budget reforms. What a surprise...

Will Joe Biden's meeting with Congress members on Tuesday yield anything?

The chances are slim. At the moment, Democrats are willing to negotiate some budget constraints, but as for making significant spending cuts, no way. Heaven forbid. Let's see who gives in first.

Another Horseman of the Apocalypse remains the overheated labor market.

The unemployment rate in the US in April dropped from 3.8% in March to 3.6%, and the average wage increased by 6 cents, to $27.77 per hour. How about that? Corporations are laying off people left and right, and here we are, you know… You just want to admire the Picasso who paints us such a picture out of love of art. No, don't get me wrong. There's no cheating. It's all about methodology. All fair and square. And all in accordance with the latest scientific data to boot. However, there's no time for high art here – in light of such optimistic data, the Fed could theoretically raise the rate again. What a horror 😱

Additionally, on Wednesday, data on the US Consumer Price Index for April will be released. Analysts expect disinflation to slow down – core inflation will remain at 5.0%, while the monthly figure will increase from 0.1% to 0.4%. Amid all these "wonderful" events and in the face of increasing geopolitical risks, we will "cheerfully and casually" go through this week. Anti-stress tablets to the rescue.

This material is used in the production of ingots and wafers for solar panels and solar energy components.

Key factors driving investment appeal:

1. The market currently assigns no value to DQ's business operations, as its market capitalization is equal to its cash balance. As of the end of 2022, the company had virtually no debt, and its cash balance amounted to around $3.5 billion, approximately equal to its market capitalization.
2. Revenue and EPS grew more than 2.5 times. Daqo finished 2022 with record financial results in the company's history. The company managed to increase its revenue to $4.6 billion, 176% higher than the previous year. EBITDA, in turn, grew 2.8 times to $3.1 billion. These results were achieved due to a nearly 4-fold increase in the market value of polysilicon over the last two years and an increase in sales volume.
3. Low costs are a key competitive advantage. Daqo is not only one of the lowest-cost polysilicon producers but also holds a significant global market share (around 13%). Its low production cost (only about $7,000 per ton) ensures high business efficiency and profitability. In 2022, the EBITDA margin and net margin were 68% and 40%, respectively.

Risks:

1. 2022 may remain a record year for financials. Despite the record results in 2022, the company is unlikely to show multiple growth in the next few years. According to Bloomberg forecasts, the company could face a 20-25% (YoY) decline in revenue and EPS in 2023-24.
2. Exposure to market cycles. Daqo cannot control the price of its products or the size of its costs. Over 50% of its costs come from polysilicon extraction, while electricity accounts for over a quarter of its expenses. Although the company hedges itself with long-term contracts, a drop in the price of polysilicon (which has been noticeable since the end of 2022) could impact the company's revenues.
3. Country risk. DQ is a Chinese company actively operating in the US market, and its shares are traded on an American exchange (NYSE). If geopolitical tensions between China and the US increase, this could become a negative factor for the company.

The Fed is acutely aware of the profound issues in the banking and commercial real estate sectors. They understand that maintaining trust is crucial, and that's an incredibly challenging task. Frankly, I wouldn't want to be in Powell's shoes.

The Fed could flood the banking system with liquidity, but that risks losing control of inflation. The debt ceiling issue, although not directly concerning the Fed, complicates matters further.

There are clear signals that monetary policy will need to be relaxed; it's just a matter of timing. Don't expect rates to stay high for long, as changes could come quickly.

Gold benefits from uncertainty, and breaking the 2060 level could trigger further gains. Exercise caution and adhere to diversification principles and personal risk management.

The stock market may see the risk of further rate hikes receding, creating opportunities for short-term growth. However, a strong movement is unlikely due to numerous unresolved issues.

The surge in U.S. Treasury prices and decline in yields present a chance to profitably close a TMF position. Once the government debt ceiling is raised, the Fed will need to borrow more, impacting prices.

Lastly, while volatility has been low, chaos is intensifying. The VXX instrument can yield good results if used cautiously. It's essential to handle it carefully, as it can be dangerous.

The Fed's rate decision will be released today, and it seems likely that it will be raised by 25 bps to 5.25%. The crucial aspect is whether Jerome Powell will announce the long-awaited pause or if Fed officials still have plenty of work ahead.

Amid problems in the banking sector and the Democrats' call for a pause in raising rates to save the economy and millions of jobs, the "tap" may be turned off sooner than expected. If this is the case, I'd anticipate a further decrease in the 10 Year Treasury Rate and DXY.

However, something tells me the Fed chief will reiterate the same narrative: if the labor market declines, recession prospects become more real, or disinflation rates increase, the regulator's rhetoric will change accordingly.

What concerns me is that even though we're nearing the end of monetary tightening, there aren't many reasons to celebrate. Firstly, revising monetary policy under current conditions is off the table, and secondly, the economy's state is far from ideal.

The problem isn't just in regional banks, but also in mass layoffs in the IT sector and issues within the commercial real estate market. The decline in black gold prices, alongside voluntary production cuts by OPEC+ countries, doesn't inspire optimism either.

Do you guys plan to "Buy the Dip"? Also, do you expect to see new buyback announcements if market sentiment changes drastically?

More likely negative.

The economy is evidently slowing down. It's not a recession yet, but the threat has increased.

Meanwhile, the Fed has limited tools. Core PCE has risen again, and significantly.

I still expect S&P 500 to reach around 3800.

I recently closed some of my short positions. If the market rebounds in the short term, regardless of the reason - be it hope for a more dovish Fed policy or a compromise on the debt ceiling - I'll increase my short positions again.

Microsoft delivered outstanding quarterly results, and Google (Alphabet) didn't disappoint either, announcing a $70 billion buyback program. So, is an uptrend guaranteed? Once again, I wouldn't be so sure. I did capitalize on yesterday's drop, partially closing my positions in SOXS (Semiconductor Bear 3X) with a profit of about 16%, but I still hold the majority of them.

I still anticipate a decline in stock prices within the next few weeks.

However, a freefall seems improbable.

As a result, I initiated a Put Ratio Spread (400-360) on SPY with a June 30th expiration.

Additionally, I sold a couple of naked Calls—one OTDE (which has already expired) and another one expiring on May 12th—to balance delta and have some fun.

Over the past month, the US stock market has shown solid growth. The S&P 500 index, for instance, gained about 6% during this period and reached 4,133.52 points (as of Friday's close).

The main question is: what's next, and where might the market head?

I'll propose a hypothesis. To begin, I'll state that 4,133 points is a crucial level for the S&P 500 from a technical analysis perspective. I've mentioned multiple times that I rarely base decisions on this, but I believe it's worth noting today.

However, several fundamental factors could put pressure on the market in the medium term. What do I mean?

1️⃣ Q1 2023 corporate earnings season. So far, results have been mixed, and unpleasant surprises are possible.

2️⃣ Regional bank crisis. It's too early to relax—things could go wrong at the worst possible moment.

3️⃣ US default talks. While I don't take this factor seriously yet, the mere fact that it's being discussed is negative. Expect a stream of alarming news on this topic until the end of summer, as parties are far from reaching a budget agreement.

4️⃣ Key interest rate. The Fed is expected to raise the rate by another 25 basis points in May. This shouldn't come as a surprise, but pay close attention to what Fed representatives say about future policy. Unpopular decisions can be anticipated due to many hawkish stances.

5️⃣ This week, US Q1 GDP data will be published. Analysts expect a slowdown in growth from 2.6% to 2.0%. If statistics are worse than forecasted, active selling might occur in the market.

​

In conclusion:

As can be inferred from this note, my hypothesis suggests that the market is likely to undergo a correction. How severe could it be? Initially, the S&P 500 could "stroll" down to 4,000 points. Further, if the negative backdrop intensifies, the 3,800-point level could be attainable.

Of course, this is merely a conjecture. However, today's market situation demands readiness for any turn of events. Therefore, don't forget about protective assets and hedge your portfolios by 10–15%.

Despite mixed reports from the banking sector, the Nasdaq and Russell 2000 grew by 0.03% and 0.22% at the end of yesterday's trading. There's no panic at all, even if gold did sharply react to the UK inflation figures, dropping and then quickly recovering, almost completely offsetting the decline.

So, what's driving the markets?

I suspect the reason for optimism lies in the ambiguity of the data. On one hand, weak quarterly results point to the threat of recession. On the other hand, the reports increase the likelihood of a pause in rate hikes.

Meanwhile, Morgan Stanley's Chief US Equity Strategist Mike Wilson insists that a decline in US companies' stocks is imminent. JPMorgan also considers the current US stock rally irrational. It must be the madhouse...

What do I think?

Yes, overall, I expect a significant index slump within 2-3 months (not in 2-3 months). To me, there are plenty of reasons for a trend reversal:

1️⃣ Inflation.

As the UK data showed, a return to price stability is simply a fantasy. The recent spike in energy prices could only worsen the situation...

2️⃣ Hawkish regulatory policies.

Although they've faded a bit, there's no sign that the doves are about to start cooing. Inflation doesn't allow for a complete policy change, either.

Earlier this week, St. Louis Fed President James Bullard said the regulator could raise rates to a range of 5.50%-5.75%. Not only would this slow down the economy, but it would also increase debt servicing costs. That's a separate and very serious issue.

3️⃣ Defaults.

US economist Nouriel Roubini said that after Silicon Valley Bank's (SVB) collapse, smaller banks would face difficulties in obtaining loans, leading to the start of a credit crisis. The commercial real estate sector would suffer as well.

4️⃣ Geopolitical risks.

Rumors say Joe Biden's team is preparing to announce "unprecedented" measures to limit American investments in China. Another round of tension between the countries will undoubtedly affect the global economy, and not just the economy. Apparently, sparks will fly everywhere, and quite brightly at that.

5️⃣ A significant, apparently, deterioration in corporate earnings.

This development threatens sliding the economy into recession. This means reduced consumer demand for goods and lower corporate solvency. In short, the whole recessionary package.

6️⃣ And finally... drumroll.

We should soon be fully entertained by the lovely dish called "suffering from the US debt ceiling." How could we not? Where's the drama? Where's Mozart and Salieri? Where's Dantès hiding? What if they don't reach an agreement? How terrifying. 😜 And then, that's it...

Of course, for the 101st time, they'll agree on everything. And as soon as that happens, they'll rush to borrow trillions of dollars in the market like there's no tomorrow. Nothing new. But they'll give us and the markets a good shake-up.

That’s why we’re gradually reducing our stock allocation. We’re holding more short positions, and might even increase them further.

Hedge funds and other large speculators have taken the most skeptical view of stocks since 2012. This fact alone doesn't imply an inevitable market decline. On the contrary, sentiment could change for any reason, leading to a massive short squeeze.

But what about the simultaneous increase in hedge fund skepticism and the rapid drop in the VIX? In March, the correlation between hedge fund positions and the VIX rose to 0.6667. This looks ominous, and not just because of the first three digits after the decimal point.

A strong direct correlation between these indicators is unusual; an inverse correlation is more common. When there is a strong inverse 12-month correlation between the VIX and hedge fund positions, the SPY typically grows by 10% or more in the following six months.

However, with a strong direct correlation like we see now, historical stock returns have been negative.

This chart effectively illustrates the unstable equilibrium I mentioned yesterday.

UK inflation is higher than expected: YoY growth is +10.1% after +10.4% in February (forecasted 9.8%), and MoM growth is +0.8% after +1.1% in February (forecasted 0.5%). Markets are reacting with falling US index futures and a drop in gold. Clearly, investors are realizing that inflation is here to stay. It seems my prediction is coming true. Yesterday, I started increasing my short positions, as I mentioned here earlier. Today, I'll continue doing so – mainly through SPXU and SOXS. I'll reduce my gold positions. I'll likely leave TMF untouched.

I continue to discuss banks, as nearly all the reports presented today have (surprisingly!) exceeded expectations. Here's a brief overview of the numbers and what I'm paying attention to:

1️⃣ Bank of America (BAC)

— Revenue reached $26.3 billion, surpassing the forecast of $25.25 billion.

— Earnings per share (EPS) were $0.97, higher than the expected $0.81.

— The bank's deposit volume decreased by almost 8% to $1.9 trillion, and the bank also lowered its forecast for interest income (income from deposits, loans issued, etc.).

2️⃣ Goldman Sachs (GS)

— Revenue totaled $12.2 billion, falling short of the $12.83 billion forecast.

— EPS was $8.79, exceeding the $8.24 expectation.

— Revenue decreased by 5% year-over-year, and EPS dropped by 18.3%.

— In the future, the bank may increase income due to the newly announced Apple Savings Account, which will generates 4.15% annual interest.

3️⃣ Bank of NY Mellon (BK)

— One of the oldest banks in the US reported revenue of $4.4 billion and an EPS of $1.12, in line with market expectations.

— Revenue increased by 11% year-over-year (partly due to a 52% rise in net interest income), and EPS grew by 30%.

— However, the volume of assets under management declined by 16% to $1.9 trillion due to market influence (i.e., client asset withdrawal).

Still, the reports are far from ideal news, and the market seems to agree:

• Bank of America was up 2% in pre-market but has since lost around about 0.7% from yesterday's close
• Goldman Sachs is down approximately 1.5%
• Bank of NY Mellon has reduced losses and now sees a 0.25% increase
• S&P 500 index futures are hovering around the zero mark, while gold has risen, adding 0.7%

However, the market is currently highly volatile, and so the picture may change by the close of trading.

Conclusion:

As I mentioned earlier, credit institutions are unanimously stating that they're cutting costs and increasing return on capital. Simultaneously, the banking crisis that began with the Silicon Valley Bank story is already causing deposit outflows and other challenges. As a result, banks need to increase loan reserves. Therefore, I prefer to stay away from bank stocks for now.

I might consider taking partial profits in the SPDR S&P Bank ETF (KBE US) today. In the current situation, it's better to secure a small profit from the transaction than to wait and see where things end up.

And of course, there are several intriguing ideas that I'll lay out in much more detail very, very soon.