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The equity markets are getting angsty amid the heart of earnings this year-end season with blue-chip profit pulling and crazy WallStreetBets (WSB) driven short squeezes. There is quite a bit of froth in the market today, with stir-crazy speculative retail traders driving volatility higher.
The Millennial and Gen Z driven Reddit message board, WallStreetBets, has created a 6+ million herd (up from less than 2 million 2 weeks ago) of small traders that decided they would use their extra vacation/stimulus cash to 'stick it to the man' (aka Wall Street hedge funds)...digitally. This new cohort of traders decided they would squeeze highly shorted names like GameStop (GME) 'to the moon,' bringing some short-selling hedge funds to their knees.
This cohort of retail traders combined with the help of opportunist prop trading firms and hedge funds have pushed many dying brick-and-mortar retailers way beyond their intrinsic value. It would appear that the short squeeze is coming to an end, with the largest short-sellers like Melvin Capital and Citron closing out their short positions.
Today's GME and broader short-squeeze rally appears to be catalyzed by FOMO buying, diamond hands from the retail traders (aka not selling), and short-sellers too scared to touch these equities. I see this as an opportune time to jump on a medium-term put option in the most heavily traded retail ETF.
SPDR's S&P retail ETF (XRT) has driven up over 80% since the beginning of November. A big recovery trade catalyzed this ripping rally from positive vaccine news. Then the big short-squeeze sent the XRT to the stratosphere this past month, with GME being its primary driver. Since the first day of trading in 2021, XRT has surged nearly 40%, and I think it's time this thing came back to earth.
From the candlestick chart below, you can see that XRT has been met with crazy volatility this week (catalyzed predominantly by the big short squeeze on GME). Its RSI (on the bottom of the chart) measuring overbought and oversold levels has set a new record high this week for the ETF, and XRT remains overbought.
As of close yesterday, GME made up over 12% of the ETF's holdings, and that has only grown with its massive rally today. Its other top holdings include numerous runup retailers that are just waiting to be corrected.
XRT doesn't rebalance until March 19th, so I purchased some puts expiring that day to capture every bit of the downside of this ETF's stretched holdings. GME alone will likely bring this ETF down close to 10% in the coming months, and with retail earnings approaching in February and early March, I expect to see some profit-pulling across the retail space.
XRT has a lot of volatility priced into its options right now because of its recent price action, making them a little more expensive than they otherwise would be. I judge that the higher risk is worth the potential reward of the GME sell-off and the correction from all the frothy names in XRT's holdings.
The equity markets look like they are ready to correct, and many analysts are anticipating a 10%+ pull back from its recent highs. Earnings profit-pulling is a good reason as any for a healthy market pause before heading higher.
I have been trading put protection across different sectors, primarily in big tech, utilizing Invesco's Nasdaq 100 ETF QQQ (QQQ). This space has the most room for a correction after a ripping rally from the March lows. The XRT put option trade represents an opportunity that is yet to come to fruition.
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
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