When the June CPI data was released one hour before the US market opened on 13 July 22 (Wednesday), I feared a huge selloff. So, I camped in front of my computer, logged on to my IBKR brokerage account and waited for the market to open, so that I can sell some covered call contracts against the stocks that I owned.
Essentially, what I was hoping to achieve was to get in before the share prices crashed. When I sell a covered call contract, I receive a premium. When the share price drops, the premium price also drops, so the difference in premium prices (between now and then) becomes my instant profit, if I decide to close the option contract.
As it turned out, the market opened in the red and I sold covered call contracts on AMD, Palantir and Pinterest. Details are as follow:
However, the stock market did not sell off and rose instead. After some price fluctuations, most stocks closed on a slight decline or in the green.
My tech-heavy stock watchlist was not crashing as feared initially. Meta, which had experienced a huge sell-off in recent months and is down more than 50% from its all-time high on Nov 21, closed in the green as well.
Why Am I Feeling Optimistic?
The 40-year high June CPI data should give the Federal Reserves the justification they need to raise the interest rate by 75 basis points (0.75%) or even 100 basis points (100%), which should cause the market to go down further.
However, it is actually a good move to curb inflation. With rising interest rates that hit the growth and profits of even the biggest companies, which can create repercussions such as retrenchments, as well as the fears of recession looming over everyone, it is likely that consumers will cut down on their spending and thus cause inflation to go down (demand drops).
When inflation drops, the Federal Reserves may ease on the raising of interest rates, which will then reverse the fortunes of the stock market now. When the interest rate hike peaks and stocks are all in the undervalued territory, investors will rush in to buy the dip and create the next bull run.
As CPI data is usually outdated, we could only start to see the effects of the higher interest rate hikes happening over the next few months. The upcoming interest rate hike in July should further help in bringing inflation.
I am optimistic that in the coming months, the fears of recession, rising interest rates and inflation itself, will lead to consumers wanting to spend less and thus, bringing down inflation, which will, in turn, leads to the Federal Reserves stopping the interest rate hikes.
Market Pricing In Bad News
Judging from the stock market showing yesterday, it seems that the market has priced in the high CPI data and upcoming interest rate hike, though there is also a possibility that the sell-off is delayed by a day. We will have to see what happens on 14th July to confirm that.
Another reason that the market did not sell off could be that the stock prices of fundamentally good companies have reached somewhere near the bottom and that most speculators have sold off due to fears and we are left with long-term investors who are not willing to sell at such low prices.
It is like buying a Tesla Model Y at 150k. While other Tesla car owners are selling off their Tesla due to fears of inflation and the current market price has fallen to 75k. The long-term investors still believe it will go up back to 150k and beyond. Thus, they are not going to sell at the current price and there will be few sellers at 75k or lower.
What I Will Be Doing Next
With the earning season and FOMC meeting upcoming, the stock market could still swing up and down. So, it is important to be prepared for both scenarios.
To prepare for the downside, I have sold covered call contracts which should help earn profits in premium when the market goes down.
If I am now starting from scratch, I will slowly be accumulating shares of my high conviction companies to 100 units in the future to sell covered call contracts. However, as I am in a situation where I have a failing 464k LEAPS CALL portfolio, I will instead be buying LEAPS CALL along the way to average down on my previous positions. I am looking to buy using a small capital on the contracts expiring in Jan 2024, which makes up almost 50% of my LEAPS Portfolio and has the highest chance of recovery due to the longer contract expiry dates.
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