Another Call Option Wave

Stocks aren't giving the speculators enough juice.  They are reaching for lotto tickets in the form of call options. This is late cycle behavior, ala 1999, 2000.  That being said, unlike 1999 and 2000, the Fed is still adding liquidity into this party, not taking it away.  A big difference, and the main reason the top will be more extended than back then.

The volumes are well above average, and put/call ratios are well below average.  The only exception is TSLA, which for some reason, has fairly high put/call ratios for such a favored speculative stock.  The two that stick out above are AMD and F, which traded more options than both AAPL and TSLA. F seems to be catching the electric vehicle frenzy, and AMD has become a WSB favorite lately, as seen by message activity tracked by stockquant. 

AMD, TSLA, LCID, AMC, and NVDA are WSB stocks.  That's 5 of the top 10 options volume leaders for Monday driven by the Robinhood crowd.  Retail has been piling into their favorite stocks since the beginning of month. This is not necessarily a sell signal for the SPX, but its a long term sell signal for WSB stocks.  After the last time you had a retail trader frenzy in call options, you immediately saw those stocks top out, but the SPX just kept going higher.  Obviously, there is a huge difference between SPX at 3900 and SPX at 4700, and you can't extract too much info from a sample size of 1.  But with put/call ratios this low and volumes so high, the market usually has a difficult time squeezing even higher and usually chops and consolidates its gains for a few weeks.  That also matches with the typical pattern of break outs to a new all time high after a deep and extended pullback retesting the breakout point (SPX 4550) within 1 to 2 months.  

But with Powell regaining control of the bond market and repricing hiking odds for 2022 and 2023, the can has been kicked a little bit further down the road, giving investors more room to drive up stocks to even more insane levels after this speculative fervor cools down.  Powell is intent on not repeating the 2018 tantrum, taking a painfully slow turn for monetary policy, nurturing this bubble even more.  He's still not caving to the media pressure to take inflation more seriously and do quicker rate hikes.  His dovish backbone is like a ramrod, its not bending to the pressure put on by inflation hawks which are growing substantially in number.

His press conferences are basically Lagarde Light.  Full of nonsensical gibberish, cringeworthy rationalizations for reckless monetary policy.  And Wall Street loves him for it.  He's figured out the game and its not that complicated.  Be dovish when it matters.  The default setting is dovish.  Be hawkish every now and then when no important decisions are imminent so as to look "balanced".  Watch the stock market go up and be treated like a maestro and a great "manager" of the economy.  Much like how Greenspan was treated from 1987 to 2000.  

Tapering QE is not going to pop this bubble.  It has to be rate hikes, and the threat of more rate hikes that does it.  That gives this market at least another 6 months of runway, not necessarily to keep going up, but not to enter a downtrend.  It could go up or sideways till QE is finished, but I see almost no way SPX goes into a noticeable downtrend without a significant repricing of the yield curve to reflect a more hawkish Fed and more persistent inflation (8+ rate hikes priced in by 2024, 2% 10 year yields.).  It could happen, but I doubt it.  It would be betting on a massive underdog without getting good odds. 

Big picture, long term, we are getting more confirmation that this bubble is sucking in a lot of souls, and the payback will be immense (if the Fed doesn't come in with guns blazing with another bazooka QE to rescue it) on the other side.  When this bubble does pop, it will be a good thing for society.  A society built on speculation and perpetual bailouts and money spews is one that rots the system from the inside.  The side effects is a labor shortage because people are unwilling or don't need to work, instead speculating and living off their gains in meme stocks, call options, cryptos, etc.  It breeds more dependency on government handouts, when the bubble pops and the economy weakens.  It makes people lazy. 

I sold some of my SPX position yesterday, and will sell more this week and eventually look to sell it all by early next week.  It is still too early to make a high conviction bet on the short side, even though I expect a pullback after November 19.  Even at these overbought levels, the odds are still not good enough for shorts.  Its just not a good time of the year to make bearish bets, when fund managers are chasing performance and long term investors are loathe to take profits before year end and bring forward capital gains by 1 year.