Options traders are betting on the largest market crash since March 2020. Options traders are loading up on S&P put options and VIX call options. The reasons are a combination of the technicals and fundamentals. Over the past few months, the technicals have been extremely bullish while the fundamentals have remained bearish. But everything changed last week as the technicals came in line with the fundamentals and both turned bearish. With so much bearish confirmation occurring, options traders are poised to make a ton of money if the stock market continues to drop.
Last Week Recap
After taking a break for a federal holiday on Monday, the stock market got started with a big decline on Tuesday after Walmart and Home Depot both missed earnings and gave weak forward guidance. Because consumer spending is the largest part of the economy, and two of the biggest retailers just reported a decline in consumer spending combined with an outlook showing consumer spending is expected to decline further, this sent stocks crashing. Stocks then tried to rebound a little on Thursday before crashing again on Friday after a much hotter than expected PCE report. The core personal consumption expenditures price index (PCE) showed a 0.6% month over month increase and a 4.7% year over year increase. That was far higher than the market’s expectations of a 4.4% annual increase. Combined with a hotter than expected CPI and PPI report earlier in the month, and all signs indicate inflation is rising once again. That spooked the markets into finally believing the Federal Reserve’s hawkish stance that they are going to raise rates higher for longer, and not cut rates by the end of this year.
While the fear and greed index (https://www.cnn.com/markets/fear-and-greed) remains in the Greed stage, the amount of greed in the market dropped for the 2nd week in a row. Market momentum has dropped to Neutral, while a large rise in the number of options traders buying put options dropped the put/call ratio down to the Greed stage from Extreme Greed the week prior. Market volatility (measured by the VIX) also dropped down to Neutral. And junk bond demand (a measure of risk in the market) fell into the Fear category.
Most notably, the CBOE volatility index (VIX) closed at 21.67, which marks the 3rd week in a row the VIX has closed above 20. Further, the VIX weekly chart shows the MACD is about to form a golden cross. And the last 4 times the VIX weekly chart delivered a MACD golden cross, the VIX skyrocketed well above 30. When the VIX goes up, the market goes down. And the weekly technicals on the VIX are one reason why options traders loaded up on VIX calls this past week.
The daily charts show all 4 major indices well into bear territory, with death crosses on all four MACD indicators, all four RSI values below 50, and all of the candles below the 10 and 21 day EMA lines. Further, the DOW and S&P both have their 10 day EMA lines below the 21 day EMA lines, which is further confirmation of continued bearishness. The Russel 2000 is very close to that EMA crossover as well, while the NASDAQ is still a few days away from forming the EMA crossover. So the daily charts across all 4 major indices all point to continued declines in the stock market this week. One thing that might limit the losses though is the fact that the DOW and NASDAQ are both at Fibonacci Retracement levels, which could provide some support. The S&P and Russell however are not near any Fibonacci Retracement levels, and could fall quite a bit further before hitting any major support.
The weekly charts had remained 100% bullish for the past couple of months, but that all changed last week. While the NASDAQ and Russell both remain completely bullish, the DOW and S&P have started to fall apart. The S&P closed below the 10 week EMA, but did manage to hold just above the 21 week EMA. All other indicators on the S&P weekly chart are still bullish though, so while the drop below the 10 week EMA does cause some concern, there’s still a chance for a rebound to the upside.
The DOW on the other hand has completely flipped, and the weekly chart is now quite bearish. Last week’s weekly candle closed below both the 10 week and 21 week EMAs, the RSI fell below 50, and most notably, the weekly MACD formed a death cross. The extremely bearish DOW is another reason why options traders loaded up on market put options last week. And if the S&P has another red week this week, it could join the DOW in turning completely bearish on the weekly chart.
This is a much quieter week for the markets when it comes to market moving economic news. The biggest market mover we have this week is coming out on Tuesday, and that is the consumer confidence report being released at 10am EST, or about 30 minutes after the market opens.
We also have some other economic data coming out this week that will be important for the housing market, but not the stock market, including pending home sales on Monday, the S&P Case Shiller home price index on Tuesday, and construction spending on Wednesday. In addition, we have a number of Fed members speaking this week which could move the markets as well.
Here’s the full list of all of the economic news coming out this week as well as the time each report is being released: https://www.marketwatch.com/economy-politics/calendar
Here’s what time each Fed member is speaking this week: https://www.federalreserve.gov/newsevents/calendar.htm
Earnings season continues this week with retail stocks in focus. On Monday, we get Fubo TV and Zoom. Then Tuesday morning we get Target, which could move both the DOW and S&P, as well as Norwegian Cruise Lines, AutoZone, Advance Auto Parts, and Clover Health. Then Tuesday after the close we get Rivian and AMC. In the middle of the week on Wednesday, we get NIO, Lowes, Salesforce, and Snowflake. Then on Thursday we get Best Buy, Macy’s, Costco, and Chargepoint. There are also a lot of other stocks that are popular among retail traders reporting earnings this week, so review the chart below for all of the major earnings coming out this week.
Other Things to Know
If you want more details on why options traders are betting on a market crash, watch the video I uploaded Sunday night: https://youtu.be/_JcXP-Q49Qw.
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Wishing you the best of success trading this week,