Here’s Exactly How to Play the Current Market Rally

I love this market. As Kenny and I discussed [on Wednesday’s] Money Morning LIVE’s morning show… the S&P 500 was on pace to blow through 4,200.

Now, there’s a clear path to the 4,300 level. We’ll likely test the 200-day moving average. The S&P 500 experienced zero selling pressure for about an hour [on Thursday]. This is still a short-covering market, and we’re starting to see the Euphoria kick in once again. Jim Cramer is bragging that inflation has likely peaked and that “Nirvana” is coming for stocks.

Oh. My. Goodness. Inject this nonsense directly into my veins… people.

I want this market to continue to chug higher. As you know, I trade on momentum. The SPY is now at 70 on the Relative Strength Index (RSI) its highest since its peak in April.

Money is SCREAMING off the sidelines.

The World’s Biggest Trade portfolio continues to produce double-digit gains on just stocks… and the options are running higher.

And the VIX is UNDER 20.

What are we preparing for? The Mother of All Shorts is coming.

Oh Boy… Keep Going!
Keep going. SPY 430. SPY 440. SPY 480. I don’t care. I’m currently long this market thanks to the silliness of this squeeze. You have talking heads saying that the Bear Market is over. Some people think that we had “zero” inflation in July because no one in the White House studied economics.

This Euphoria is what I love to trade. Hudson Bay Minerals (NYSE: HBM) – which we bought on Monday – has jumped 18% in three days. Energy stocks – my favorite sector – are rocking once again. The dollar is falling.

My second leg of Crescent Energy (NYSE: CRGY) has popped on earnings – putting this position up 28%. That’s just the stock… We’ve got put spreads on multiple energy plays that are up 50%, 60%, even 99%.

So… I’ll remain short-term bullish. I might even allow the epic squeeze of Beyond Meat (NASDAQ: BYND) to enter my trading vision.

But make NO mistake. When all the shorts are out… and all the Euphoria has kicked in… and all the retail and institutions have chased… This entire market will crap out. And it’s lining up to be the Mother of All Shorts.

I don’t know what the hell people are thinking. The CPI and PPI numbers both showed that energy prices are down in the short term. But – you have to understand WHY they are down.

Demand has been CRUSHED by higher prices. We have less gasoline demand today than we did during the height of COVID. China’s demand is squashed because they have COVID lockdowns. We have a supply problem in storage, as we’re at our lowest levels since 2008… and the White House MUST stop selling crude from our Strategic Petroleum Reserve.

I’ve asked 15 people to tell me the numbers of what they see on gas station pumps. Today I’ve heard, $7.00, $5.00, $5.00, $8.00, and $10.00. This morning I saw $12.00 and $3.00. THREE DOLLARS.

This is not a healthy economy. And if you really dig into the numbers, you’ll find that consumer demand is getting pummeled. If the credit card bubble accelerates, you will have a debt-driven recession. And from there, the S&P 500 hits 3,400 by the end of Q1 2023. With the VIX now under 20, now is the time to buy VERY cheap insurance. The MOTHER of all shorts is coming.

The Atlanta Fed projects that Q3 GDP will come in at 2.5%.

It’s not that I “Refuse” to see that possibility. It’s that the data just doesn’t support it. The drop in gasoline prices distorted this morning’s PPI number.

Core PPI was still UP 0.2% month over month. While everyone is focused on gasoline, food increased 1.0%. Gasoline can’t offset those costs.

Consumers are taking it on the chin incredibly hard right now, and it’s clear that Ivory Tower professors don’t see this. Heck, not even journalists seem to understand what any of these numbers mean.

The PPI is not a measurement of “wholesale prices.” It’s an entirely different metric at the front of the supply chain. It hasn’t even done so since 1978. And PPI tends to rise and fall… largely thanks to up and down oil prices.

Nearly every single category on the PPI had double-digit gains year-over-year – and that’s at the front of the supply chain.

Personal consumption less foods fell to -4.3%. This tells me that there is a fundamental problem in the economy.

Economic expansion is driven by cyclicals and housing.

This is an economy where the consumer is squeezing by on “consumer staples.”

We are not getting by because of increased production but because of a crushing of aggregate demand. As demand softens, prices may fall. But we cannot and will not get out of an inflationary cycle if demand increases and supply remains stagnant. It’s so crystal clear to me, that I’m waiting for the day to come…

Eventually, this will all come home to roost.

The next time that momentum turns Red, it will be the Mother of All Shorts.

Today’s Momentum Reading

Recap: Momentum is Green. For an hour today, there was ZERO selling pressure in this market. The SPY has given up a little bit of early gains, short-covering will continue, and the Euphoria is kicking in. Listen, if you’re not with me on the World’s Biggest Trade, you’re not going to know the next time that momentum turns red “WHEN” it turns red. The very moment to short. So, what are you doing? Get in there with me, learn to trade momentum, and let’s take aim at the incredible opportunity on the other side of this market.

Three Things I’m Watching

  • Speculate, Don’t Accumulate: As I noted earlier, momentum will swing in the opposite direction. We’re trading higher on data that makes little sense until you factor in the election in three months. Up is down, left is right, and always “twirling, twirling, twirling toward freedom.” Don’t put much faith into anything coming from the Fed during its Jackson Hole meeting, but remember that next Friday is Options Expiration for the month of August. If we get any volatility this month, it will likely come then.
  • Tariff Timing: It’s clear that the White House understands that inflation wasn’t actually “zero” in July, right? Food prices were up 13.1% in July, the highest jump since 1979. Rising prices may be a reason why there is chatter that the Biden Administration may move to lift certain tariffs on Chinese goods in the coming weeks. In addition, the Biden administration is bending over backward to deescalate tensions in the wake of Speaker Nancy Pelosi’s visit to Taiwan.
  • Unemployment Line: Don’t look now, but jobless claims hit their highest level in 2022. The number of Americans seeking unemployment benefits is now at its top level since November. It appears that hiring will likely slow down in the coming months. We just saw another round of hiring freezes and layoffs from companies like Alphabet’s Google, Walmart, Apple, Meta and Microsoft.

Hot Long Shot
I find it a little silly that we aren’t focused on the coming energy problems across Europe and the shortages that we face globally. Meanwhile, commodity prices will anchor higher if the dollar cools for in the next 20-30 days ahead of the Fed meeting. So, let’s speculate on a real long shot here. For a reason I can’t comprehend, the October 16, 2022 $1.50 call on Denison Mines is under $0.10. Literally… TEN cents. And I’m looking for a breakout on the nuclear power side after Europe’s heatwave breaks and France can start to use its water again.

— Garrett Baldwin

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Source: Money Morning