Can the Feds be as agile as Suni Lee? It will take a delicate balancing act to avoid Stagflation.

You’ll get mixed up, of course, as you already know.
You’ll get mixed up with many strange birds as you go.
So be sure when you step, step with care and great tact
and remember that Life’s a Great Balancing Act.
Just never forget to be dexterous and deft.
And never mix up your right foot with your left.

— Dr. Seuss

What Is Stagflation

Suni Lee
Olympic Gold Medalist Gymnast 

The goal of this week’s commentary is to understand that out-of-control inflation (with the inevitable spike in interest rates) will likely change the course of the broader Markets – from growth to a risker sideways trajectory. I believe this will be a longer-than-expected cloud over the Markets. Therefore, should I adjust the Entry Rules for my Vertical Bull Put Credit Spreads?

Are We Heading Towards Stagflation

We haven’t seen Stagflation since the Jimmy Carter days.

Stagflation is when we have low employment, high inflation, and low economic growth. Stagflation was a prolonged and painful event during the 1970s where the wise government leaders tried to demonstrate that they could control free enterprise through policy blunders. The question is, are we making the same blunders today?

Pandemic Economy – Blunder 1

In early 2020, the nation went through a national lockdown that torpedoed our economy. As a result, the delicate balance between manufacturing supply and consumer demand that kept inflation in check shattered. Assets worth trillions of dollars were set aside, exploding inventory broke all storage capacity, and manufacturing supply chains shut down.

Whether or not we can call the national lockdown a blunder will be up to the historians.

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Pandemic Labor – Blunder 2

Because of the lockdowns, millions of U.S. low-skill and entry-level workers lost their income. As a result, the risk of foreclosure, eviction, bankruptcy, and the essential ability to feed our families became a crisis. The Federal government stepped up and did what they were supposed to do and came up with several relief bills.

But as crucial as these bills were to stabilize the American families, these bills also included what turned out to be an addictive and destructive unemployment compensation program that is causing a painful labor shortage today.

Federal Pandemic Unemployment Compensation (FPUC)

The FPUC was an emergency program designed to increase unemployment benefits for millions of Americans affected by the coronavirus pandemic. This “compassionate” program was established via the “Coronavirus Aid, Relief, and Economic Security Act” (CARES) of March 27, 2020.

Under the FPUC, eligible people collecting unemployment benefits in their home states would also receive an extra $600 each week from the government. However, Trump eventually replaced the program with a $300 a week federal bonus and extended its availability through March 14, 2021. Then finally, the American Rescue Plan Act (ARPA) of March 11, 2021, extended the $300 weekly bonus to Sept 2021.

The Siren Song of Free Money

The unintended (or perhaps the intended) consequence of the FPUC was to pay an unemployment bonus greater than the jobs lost by the lockdown. So now, as we rebuild from the shuttering, many open jobs are not being refilled. Workers who held those positions before the lockdown are now making more money from the most generous FPUC.

There is no lack of job openings but a lack of willing workers to return to the jobs they had. Today’s low employment is a self-inflicted blunder as our national policies are slow to end the FPUC.

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Pandemic Inflation – Blunder 3

Pandemic-related distortions have been showing up in all kinds of economic data over the past year. And the debate about whether or not this inflation is transitory or not is exacerbating the concerns of rising prices in most areas of our economy.

Out-of-control inflation caused by the unregenerated supply chains (blunder 1) and higher labor costs (blunder 2) lay the groundwork for long-term inflation (blunder 3).

Pandemic Low-Growth Recovery – Blunder 4

The U.S. GDP fell short of expectation this week as supply-chain disruptions and labor shortages have stunted the economic recovery. Signs of a lackluster recovery are beginning to emerge as we enter into a low-growth economy.

Will The $4.5 Trillion Spending Bills Cause or avoid Stagflation?

The proposed $4.5 trillion budget will either stimulate economic growth or exacerbate the labor shortage. How it pans out will be determined by what’s in the final bill and how it is executed.

Suppose the budget bill incentivizes Americans back to work and stokes economic growth. Then supply will quickly catch up to demand, and inflation will be muted.

But suppose the bill includes incentives for Americans to remain on the sidelines. Then, the economic growth these bills are hoping for will not happen, and Stagflation will become a part of the American way of life for several years.

Are our wise government leaders in Washington channeling the Carter Administration? Because they have a fragile balancing act that they must pull off to avoid Stagflation. I wish them good luck!

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This Week’s Market Sentiment

This Market Sentiment Section is typically completed by midday Monday morning. By the time this journal is published, it will be a week old.

(As of 07/18/2021)

In this section, I review five indicators: VIX, Put/Call Ratio, S&P 500, Consumer Sentiment Index, and Geopolitical events that could affect the market’s direction. I will use these indicators to help guide my trading decisions for this week.

Each of my five indicators will “vote” on a DEFCON (Damocles Options Trading Readiness Signal) level, exclusive to that indicator. Then, In the final sub-section “My sentiment for this coming week” below, I’ll compile the votes into a DEFCON level for the week.

Geopolitical Tree-Shakers (GTS):

Geopolitical events can be breaking news, political machinations, Federal Reserve musings, or even Twitter Trends. They are events that can abruptly change the dynamics of the current markets.

GTS is like a lit fuse to a bomb. The fuse can be fast or slow, and the bomb can easily be a dud. But I need to watch this closely as an indicator. The GTS can significantly disrupt all the other indicators at the drop of a hat.

  • Raising inflation is stoking fear that the Feds will consiter rasing Interest Rates sooner than projected
  • A $6 Trillion Federal Budget is throwing gas on the Inflation fear fire and stocking the fear of Stagflation
  • The Government and media are using scare tactics to modivate the unvaccinated

Regardless of the upcoming $4.5T budget deal, the inevitable increase in inflation and the acknowledgment that higher Interest rates will follow is casting a dark cloud over the broader markets. As a result, I expect several kneejerk Market reactions every time news about this deal pops up. 

COVID-19 is a severe and deadly virus and is rightly classified as a pandemic. But referencing my post “COVID-CON,” I fully believe that our click-crazed media fully overblew the national and worldwide consequences to garner more clicks on their news sites. Likewise, we must also take the rise of the Delta variant seriously, but we are back into using scare tactics to manipulate us unvaccinated sheeple to get vaccinated.

Corporate America is reporting substantial recoveries in their last quarter Earnings Reports. But inflation is going to take its toll sooner than we expect. 

The current geopolitical events are going to draw down stock prices as interests go up. This will have a real effect on the Markets trajectory.

GTS votes a DEFCON 3

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VIX: Broad Market Volatility

The VIX is an emotion-gauge for the general investing population. It is thought to be driven by the Marketeers’ current level of greed or fear. As one-month forward-looking volatility, it is not designed to tell us which direction the market will be going, but more of how fast it can get there.

A VIX of 15% is assumed to be a market at rest. Since the intrinsic nature of the Stock Market is to move up, a VIX close to 15% or below will have an innate tendency to rise.

ThinkorSwim/CBOE Market Volatility Index - 07/27/2021
ThinkorSwim/CBOE Market Volatility Index – 07/27/2021

The 1-month Regression Channel for the VIX took a significant rotation up from last week. The trajectory for the last two weeks is confirming a growing concern on the staying power of the current Bull Markets.

The VIX ended last week at 19.5%, up from 18.5% the week before, which was up from the week before that. The 9-Day SMA is now above the 50-Day SMA, and the current VIX has leap above the 9-Day. SMA.

The VIX has hovered in the 18% range for the past three months. This is not all that bad, but it does show an ongoing nervous nervousness over the recovery outlook.

The 1-month is still tracking down, albeit at a slower pace.

VIX votes a DEFCON 3

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Put/Call Ratio:

Put Options are frequently used as protection against existing investments falling. When the ratio between Put Options bought versus Call Options bought is above 1, then this is an indicator that the Marketeers are buying insurance to what they may see as declining Markets. Conversely, when the Put/Call Ratio falls below 1, then there is a general sense that the broader Markets will increase, and more investors are buying more than selling.

ThinkorSwim/S&P 500 Put/Call Ratio - as of 07/25/21
ThinkorSwim/S&P 500 Put/Call Ratio – as of 07/25/21

The Put/Call Ratio took a decisive jump above the 0.5 line and remained mostly up for the past two weeks. This jump seems to correlate to the continued talks of Inflation fears. There is a lot of gov-speak coming from the Federal Reserve, but those talking points are clashing with corporate America’s earnings report.

The 9-Day SMA is moving well above the 0.5 line while the 50-Day SMA is tracking just below 0.5. This indicator is agreeing with the GTS that there are a few general market concerns.

Put/Call Ration votes a DEFCON 3

Consumer Sentiment Index (CSI):

I’m searching for a new Consumer Sentiment Index (CSI) chart as provided by the University of Michigan.

A low CSI index is a general dissatisfaction with our current management of U.S. economic policies. This dissatisfaction will imply that something has to change. A high satisfaction rating suggests approval of the current policy management and implies market stability.

Consumer Sentiment Index as of 7/16/2021
Consumer Sentiment Index as of 7/16/2021

The CSI has not been updated from last week, but other related polls are showing a concerning rise in pessimism for the US economy.

From a year-to-year perspective, we are still moving in the right direction, but a year ago we were in the bowls of a national lockdown and an election day feeding frenzy. So I’m not convinced that being up this little is a positive.

CSI votes a DEFCON 3

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Market Indexes:

DOW (DJX) = 35,062 – Up 1.1% from 34,688 last week. (4 week deviation: 278 down from 438 last week)
S&P 500 (SPX) = 4,412 – Up 2.0% from 4,327 last week. (4 week deviation: 38.68 down from 52.54 week)

The S&P 500 is a stock market index that tracks the 500 largest companies in the U.S. This index represents about 80% of all the capitalization for the country. The S&P is widely considered the best indicator of how all the U.S. markets are performing.

ThinkorSwim/Daily S&P 500 Index - Four Months Trend (Updated 07/25/2021)
ThinkorSwim/Daily S&P 500 Index – Four Months Trend (Updated 07/25/2021)

Market Thrashing

4-Week Thrashing of DJX = +/- 278 points or 0.8% of the market’s volume is down from 1.3% last week.
4-Week Thrashing of SPX = +/- 38.68 points or 0.9% of the market’s volume is down from 1.3% last week.

Seems that the Marketeers let out a collective breath last week as the market thrashing dropped considerably.

The 4-month Trend Channel is maintaining a long-term Bullish bent, and the 4-week trajectory aligns.

The Market Thrashing is now below 1.0%. This might indicate a steady state market.

Market Index votes a DEFCON 5

My sentiment for this coming week:

Of the five indicators:

  • The GTS suggests that there are some sustainable issues on the horizon – BOO!
  • The VIX took a sharp turn to the worse – BOO!
  • The P/C Ratio shows a reaction that may continue to spill over to the comming weeks – BOO!
  • The CSI shows a consumer base getting excited about our economic future, but still well below 95% – BOO!
  • The Market Movement continue to defiantly inch bullish – YEAH!

There is a strong consensus toward the “BOOs” this week. But I do have a positive outlook that the BOOS will not last for eight weeks, and will not be “THAT” severe.

Trading Readiness Level for this week

DEFCON = 3

This week, I will focus on:

My short-term outlook for my Vertical Bull Put Credit Spreads is positive.

Last Friday, I had a QQQ Vertical Spread exit early due to a winning trade trigger. This closing transaction cost me $11.00. I will therefore go deeper in one of my spreads this week to make back that charge.

  • One 20 Strike-Wide Vertical Put Spreads < $2K risk) – as the Markets see fit
  • Spread term of 8-weeks or less
  • Probability of OTM > 85%

Note: my current dollars at risk is $14,053 out of $16,000 budgeted. I have no Spreads scheduled to expire this week. So, unless a current spread unexpectantly exits early this week, I will only enter into one Spread position.

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Profit and Loss Statement

(As of 07/30/2021)

Balance Sheet

Year
2021
Month
July
Week
#30
Beginning Account Balance$16,000.00$18,415.81$18,814.69
Deposits (Div. & Int.)$0.80$0.00$0.00
Withdraws (paycheck)-$2,100.00-$300.00-$300.00
Premiums on Open$5,248.01$724.00$111.00
Premiums on Close-$372.00-$21.00-$0.00
Fees Paid (total)-$78.18-$10.20-$1.02
Ending Account Balance$18,808.61$18,808.61$18,808.61
Total Gain/Loss$2,808.61$392.80-$190.02
ROR2.1%-1.0%
ROC17.6%

Progress Graph

YOD Vertical Options Spreads Running P&L – As of 07/30/21

(Note: the negative weekly results for weeks 4, 8, 12, 17, 21, 25, and 30 are when I withdrew $300 from the Trading Account for my paycheck.)

My Performance vs. SPY

Hypothetically, instead of depositing $16,000 in my Options Trading Account, could I have done better if I bought $16,000 of the ETF/SPY instead?

Options Trading
Account
SPY
(Fictional)
Initial Investment
(As of Jan 4, 2021)
$16,000
(Cash)
$16,000
(43.39 shares @ $368.55)
Funds Added$5,359.81
(Premiums)
0.31 shares
(Dividends Reinvested)
Funds Removed-$451.20
(Early Close & Fees)
$0
(Fractional Shares Sold)
Ending Balance$20,908.61
(Cash)
$19,280.91
(43.70 shares * $441.26 CV)
ROI+30.7%+20.5%
As of 7/29/2021
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Schedule for this Week

Goals for this week: (07/26/2021 – 07/30/2021) (Week #30)

  • Document lessons learned or new thoughts
  • Open one or two wide-strike spread
  • Update Trading Log as trades occurs

Monday:

  • Determine/update this week’s market sentiment section
  • Calculate/record Put/Call Ratios for all stocks on the watch list
  • Review/tweak Trend-Channels for all stocks in the watch list
  • Set target expiration dates for all Options as follows:
    • Bull Credit Spreads: Sep 17 (6-8 weeks)
      Note: If there are no Options Chains published for the 8-week expiration, then use the next Options Chain down from 8-weeks (7-weeks, 6-weeks). Beyond 4-week expirations, if only the monthly chains are available to trade.
  • Look up Ex-Dividend dates for positions in/approaching ITM (MarketWatch/Calendar)
  • Stage possible trades for all watch list stocks by 10:00 AM
  • NO TRADING BEFORE 10 AM. (Let the Market find its direction after the weekend.)
  • Watch one Webcast or take one online mini-course to be completed by Friday.

Tuesday – Thursday:

  • Review how yesterday’s staged trades moved. Adjust premiums to take advantage of movements.
  • Submit a couple of Spreads, but keep a close watch. If one is accepted, cancel the others (we want only one new active trade per day).
  • Be mindful of Entry Rules.

Friday:

  • Review the total technical dollars at risk for this week. If significantly below $500, then submit additional spreads if prudent.
  • Update and post weekly journal (this blog) with any lessons learned or strategy changes.
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This Week’s Trade Activity

(As of 07/30/2021)

Spread Count Summary:

Year
2021
Month
July
Week
#30
Vertical Bull Put Credit Spread5481
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Margin Interest100
Total5581

Current Dollars at Risk:

Year
2021
Month
July
Week
#30
Vertical Bull Put Credit Spread$15,942.$10,805.$1,889.
Vertical Bear Call Credit Spread$0.$0.$0.
Vertical Bull Put Debit Spread$0.$0.$0.
Vertical Bull Call Debit Spread$0.$0.$0.
Iron Condor$0.$0.$0.
Total Dollar Risk$15,942.$10,805.$1,889.
Max Risk Allowed$16,000.00$12,000$3,000.
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Vertical Spreads Opened This Week

(07/26/2021 – 07/30/2021)

SPY: 400p/380p  – Open 07/29/21 – Expires 09/17/21 – Max Gain = $1.11 – Open Price = $441.40
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.7%, Headroom=-9.4%, Max Loss=$1,889, AROR=42.5%

Vertical Bull Put Credit Spread – SPY – Short: 400 Put – Long: 380 Put
Vertical Bull Put Credit Spread – SPY – Short: 400 Put – Long: 380 Put

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($15,942)
  • Max dollar at risk this week < $3,750? Yes ($1,889)
  • Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (50 days)
  • Long-term trend (four months) bullish? Yes (see chart)
  • Short-term trajectory of the underlying bullish? Yes (see chart)
  • Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.1 down from 1.6)
  • Current price above 9-Day SMA?: Yes (see chart)
  • 9-Day SMA above 50-Day SMA?: Yes (see chart)
  • Short-strike < 1 SD below the current price? Yes (1SD=$413.21)
  • Short-strikes Prob-OTM > 85%? Yes (85.7%)
  • Short-Strike price below the trend channel at expiration?: Yes (see chart)
  • Current price within the bottom 1/2 of Trend Channel?: No (see chart)
  • Long-strike at maximum width (>= 10)? Yes (20 strike width)
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Vertical Spreads Currently Cooking

(As of 07/30/2021)

QQQ: 340p/320p  – Open 07/22/21 – Expires 08/13/21 – Max Gain = $84.00 – Open Price = $363.15
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.8%, Headroom=-6.3%, Max Loss=$1,916, AROR=71.9%

SPY: 410p/390p  – Open 07/21/21 – Expires 08/13/21 – Max Gain = $113.00 – Open Price = $433.20
(
Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.0%, Headroom=-5.3%, Max Loss=$1,887, AROR=94.2%

QQQ: 330p/315p  – Open 07/15/21 – Expires 08/27/21 – Max Gain = $102.00 – Open Price = $362.23
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.7%, Headroom=-8.9%, Max Loss=$1,398, AROR=61.3%
Now: Prob. OTM=87.8%, Headroom=-9.3%

SPY: 410p/395p  – Open 07/13/21 – Expires 08/27/21 – Max Gain = $109.00 – Open Price = $437.47
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.2%, Headroom=-6.3%, Max Loss=$1,391, AROR=63.0%
Now: Prob. OTM=81.4%, Headroom=-5.8%

IWM: 205p/185p  – Open 07/09/21 – Expires 08/27/21 – Max Gain = $135.00 – Open Price = $225.54
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.2%, Headroom=-9.1%, Max Loss=$1,865.00, AROR=53.5%
Now: Prob. OTM=76.2%, Headroom=-6.2%

DIA: 325p/320p  – Open 07/07/21 – Expires 08/20/21 – Max Gain = $82.00 – Open Price = $346.97
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.5%, Headroom=-6.3%, Max Loss=$918.00, AROR=72.3%
Now: Prob. OTM=86.7%, Headroom=-6.7%

IWM: 205p/195p  – Open 07/02/21 – Expires 08/20/21 – Max Gain = $56.00 – Open Price = $229.36
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=86.2%, Headroom=-10.6%, Max Loss=$944, AROR=43.4%
Now: Prob. OTM=79.0%, Headroom=-6.2%

QQQ: 325p/315p  – Open 07/01/21 – Expires 08/20/21 – Max Gain = $80.00 – Open Price = $354.06
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.3%, Headroom=-8.2%, Max Loss=$920, AROR=62.71%, 50d Dev = $10.21
Now: Prob. OTM=92.4%, Headroom=-10.7%

DIA: 325p/310p  – Open 07/07/21 – Expires 08/20/21 – Max Gain = $70.00 – Open Price = $344.22
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.0%, Headroom=-7.0%, Max Loss=$930, AROR=53.1%, 52d Dev = $3.20
Now: Prob. OTM=86.7%, Headroom=-6.7%

SPY: 400p/390p  – Open 06/29/21 – Expires 08/20/21 – Max Gain = $74.00 – Open Price = $428.20
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.9%, Headroom=-6.6%, Max Loss=$926, AROR=55.3%, 52d Dev = $5.00
Now: Prob. OTM=89.6%, Headroom=-8.1%

DIA: 320p/310p  – Open 06/24/21 – Expires 08/06/21 – Max Gain = $71.00 – Open Price = $341.52
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.2%, Headroom=-6.3%, Max Loss=$929, ROC 7.5%, 43d Dev = $1.56
Now: Prob. OTM=93.8%, Headroom=-8.1%

Vertical Spreads Closed This Week

(As of 07/30/2021)

No positions closed this week.

QQQ: 315p/295p  – Open 06/22/21 – Expires 07/30/21 – Max Gain = $101.00 – Open Price = $345.02
(Vertical Bull Put Credit Sprea
d)
At Open: Prob. OTM=85.1%, Headroom=-8.7%, Max Loss=$1,899, AROR 50.6%, 38d Dev = $6.89
At Close: Prob. OTM=98.0%, Head Room=-12.3%, AROR= 60%

Cost to open: $1.01 premium collected * 100 shares = $101.00
Cost to close: $0.10 premium paid * 100 shares = 10.00
Net Profit= $101.00 to open – $10.00 to close – $2.00 fees = $89.00
AROR= ($89.00 / 29 days in play) * 365 / $1,899 = 60%

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Conclusion

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Disclaimer

Even though I have tried to make it clear that this blog is my personal trading journal, it has been suggested by others that I, nevertheless, include a general disclaimer. So here goes…

“This blog and the information contained herein is not intended to be a source of advice or analysis concerning the material presented. The information and/or documents contained in the blog do not constitute investment advice.”

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