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July Gameplan

We had an awesome start to the month as we took home about $11,000 of profit this week. But what now? There are a lot of big events coming up over the next few weeks and I figured it'd be helpful to lay them out here and discuss how we plan to approach the rest of the month as we work to continue to outperform the market.

TLDR: Be as cautious as you have ever been.

Our strategy of scaling into trades has paid off beautifully over the last few months as we continue to generate profits despite a sinking market. SPY closed at 388.67 this afternoon. But where will it go from here? To begin to answer that question, there are 3 big events you need to be aware of that are happening before the end of the month.

Event One: CPI Report - Wednesday, June 13th at 8:30AM

Arguably the biggest driver behind the slide in the market has been the discussion around interest rate hikes to curb inflation. CPI is probably the single biggest indicator that the Fed relies on when making their decision. In short, if CPI indicates inflation is higher than expected, the Fed will likely combat that with a larger rate hike than expected. Rate hikes are bad news for the market. Here is what the current probabilities of the next rate hike look like:

There is a 93% chance that we see the target rate hiked to 225-250 basis points. With the current target rate at 150-175, that means there's a large chance we see a 75bps hike. However what is a little interesting here is that 7% chance of a 100bps hike. When the Fed first began talking through rate hikes this year they planned multiple 50 bps hikes. That then was shifted to 75bps after inflation refused to subside. If we get another high CPI reading, will 100bps be a part of the discussion? If so, the result in the market will not be pretty.

Over the past couple of months we have also seen a lot of "de-risking" (read: selling) before these events from people who want to reduce exposure to a volatile event. For that reason I'm pretty bearish on Monday and Tuesday of next week.

Event Two: Earnings - various dates

Just when things started to seem a little calmer and the market started to see a little relief, earnings are right around the corner ready to shake things up. Lots of bigger names start reporting over the next few weeks and I think the forecasts in particular will have some big impacts on the market. We've already seen some companies (such as UPST yesterday afternoon) issue poor preliminary guidance. The economy is slowing down a bit and I fully expect growth forecasts to be slashed. The big dip we saw over the front half of 2022 was related to multiple compression, or a decrease in the valuations people were paying for earnings. What may lurk around the corner is compression of those actual earnings themselves. If I had to make an educated guess I think we see some big names slash guidance off the bat and there's a ripple effect across the market.

Remember when Netflix released terrible numbers a quarter ago and growth stocks across the board felt the pain? I think this may be part 2 as the market comes to terms with current economic conditions.

For that reason I plan to play the first set of earnings relatively bearishly. Potentially buying some deep OTM puts and leaning towards bearish call credit spreads to play out this thesis.

Event Three: FOMC Meeting - Wednesday, July 27th

Relating to event one, the CPI report, this is the day the actual decision on the rate hike is released. So everything up until this point will be speculation. We've seen some insane moves after rate hikes so it's going to be incredibly important to make sure you limit your exposure headed into this event.

The plan:

As you can probably tell by this point, I'm not incredibly optimistic about the market over the next month. But I do believe that we should always be long on the market in some capacity. We've seen dips on good news and rallies on bad news before. Sometimes there is just no logic in the short term. The closest thing to a guarantee is that the market will go up over the long run.

So we'll continue our core strategy. Scaling in carefully to different position. What this means is that instead of opening a full position for 1% RoR, which we typically like to target, maybe start with 1/3 of your full position for a 3% RoR. It'll return the same $$$ while reducing your exposure. We are careful that once that initial position is set, we leave it alone until it touches the breakeven price. If that never happens, congratulations, you've made money.

A couple really good examples of this over the past couple of months have been with SOFI and OPEN, which both concluded today after we had to fight off some nasty moves against us. This is what it looks like:

SOFI dropped 33% on us over the course of 3 months, yet we walked away today with a profit of $720. We started small (10 contracts) and increased that position size as time passed. Look at the impact this approach had on our breakeven price:

And it's the same story with OPEN, where we're walking away with a $660 gain despite a 22% decrease in the stock over the past two months.

The ability to profit despite these nasty moves is what's going to help us find long term success and allow us to ride the waves of a volatile market.

Our SPX strategy, as previously outlined on our blog, has continued to find success as well, taking home about $2,000 of profit since the blog was posted.

The diversity of strategies and commitment to a conservative approach off the bat each week are the tools we plan to rely on. I would wager that SPX finishes July lower than where it is now so I anticipate a bumpy road ahead. We'll definitely have our fair share of losing weeks but it's important to remember that the game we're playing is against the market so we can still have successful red weeks. Hang in there and most importantly, trust the process.


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