Who doesn’t love a rally? I certainly do, especially if I see it as a dead cat bounce.
Because the sarcastic guy I am thinks dead cat bounces are an opportunity to make money when the stocks come right back down.
Almost every short-term rally we’ve seen in this bear market have given way to lower prices. Just take a look at the chart below tracking the Nasdaq Composite and S&P 500 since the start of 2022.
Click To Enlarge
I certainly don’t. I think stocks still have lower to go before we see a true bottom – maybe 10%, 15%, or even 20% lower. That means yesterday’s rally is merely a great entry point to profit when stocks reverse and go lower.
06/22/2022 Take It to the Bank Wednesday Transcript
Hey everybody! Shah Gilani here coming to you on Wednesday with your Take It to the Bank Tuesday.
Due to the bank holiday on Monday, I’m coming to you a day later than usual. I’m recording this on Tuesday around midday. The markets are up nicely. The Nasdaq Composite is leading the way up by a bit more than 3%.
But don’t get excited. Look what happened last week. It was a pretty ugly week – a net loser week – except for Wednesday when the Fed announced they were going to raise the fed funds rate by 75 basis points. The market went up more than expected.
Just the week before, when the market expected a 50-basis-point hike, then Monday we got word it was gonna be 75, then comes Wednesday and 75 is the number and the markets rally like crazy.
Oh, then Thursday the markets boom right back down.
We’re seeing that pattern a lot, so I don’t think that this rally, this Tuesday rally on the heels of a very short and ugly week, is going to last. This is another dead cat bounce.
Call me sarcastic – you can, cuz I am. I think that’s all we are seeing. Every time we see a bounce, I’m considering it to be nothing more than a head fake, a dead cat bounce. Why? Because I think we are going lower.
There are no positive narratives out there. There’s no clear runway for markets to grab hold of and take off, start new bull market. More analysts are joining my camp saying we’ve got further to go on the downside. The range is between 10-25% lower. Some are claiming 35% lower.
What do you do when you bet the markets are going down? How do you wanna make money?
Again, it’s Tuesday when I’m recording this. Where we’ll close today is anybody’s guess, but we’ll find out soon. No matter where we end up, this is an opportunity to get in and make a profit from the markets coming back down.
I recommend Invesco QQQ Trust (QQQ). They’ve had a nice move higher and they, by the way, move the most percentage-wise because the QQQs, Nasdaq 100, Nasdaq Composite, and Nasdaq stocks are most vulnerable to rising rates. And what are we seeing? Rising rates.
So, I think this bounce will reverse and I think the way to play it is by betting against the QQQs rising. For your $100 today, I recommend you buy a put spread on the QQQs.
Now, a put spread simply means you’re gonna buy one higher-strike put and sell one lower-strike put. This kind of trade will appreciate as the QQQs depreciate in value, and I think they’re gonna come down 12%, 15%, or maybe even 20%. I think this dead cat bounce is going to fade. I could fade tomorrow, or the day after, or Friday. At some point, it’s going to fade right back down so I recommend you buy-to-open a QQQ August 19, 2022 $265/$264 Put Spread.
That means you’ll simultaneously be buy the QQQ August 19, 2022 $265 Put (QQQ220819P00265000) and sell the QQQ August 19, 2022 $264 Put (QQQ220819P00264000), which will cost you 28 cents per share or $28.00 for the whole contract.
Now, I’m not greedy. If I bought this spread and the QQQs come down and I get to a 100% profit, I’d ring the register all day long. I recommend that, if you see that market coming down (and you will), and you’re happy with a 100% profit, you should take it and exit the trade. This is a short-term trade.
The maximum value of this spread is $1.00 (the difference between the $265 and $264 strike prices), which means we’re risking $0.28 (or $28.00) to walk away with $1.00 (or $100.00).
Hopefully, by expiration in August, we’ll see those gains. Catch you guys next week.