THE MELTDOWN REPORT 7/29/2022

Many new traders wonder why the market would be up in a week when there is a triple rate hike AND confirmed recession. When traders buy weekly put options on the anticipation of bad news then the market makers on the other side of the trade hedge their long put position by shorting the market. This causes the market to dip ahead of the bearish event. However, once the event passes, then a combination of time decay and price movement causes those expiring options to lose value. Market makers reduce their hedges by buying back stock. This creates a feedback loop towards the end of the week as the stock buying pushes more of the put options out of the money. Ironically, bearish option traders create the rally.

However, it's not a long-term phenomenon. It has its greatest effect during central bank meetings, monthly opex (third week), and of course the end of the month during window dressing.

As we see, this three month pattern is very similar to the one ending in March. That was a bull trap, and I suspect this is a bull trap as well. When the March rally ended, the market fell -20% in six weeks. 

If the cycle repeats then the market will be in confirmed bear market territory.

For all of the fake excitement over Amazon earnings, that stock has the same form it had the last time it imploded.

This week, despite Fed tightening, yields broke to new lows:

The global Dow, fourth lower high:

Metals and mining stocks, a very similar bounce, this time off of key support:

No sign of capitulation

March and July are the only two up months for the Nasdaq in 2022. 

The summer rally is very likely over. Now comes the month that has seen the biggest crashes since 2008 (pandemic aside).

In summary, the U.S. is in confirmed recession ahead of Europe, China and the rest of the world.

Which means that hot money will now exit U.S. markets at the speed of yield collapse.

What comes in too fast, goes out too fast.