Last night, CBS's 60 Minutes reran a particularly timely feature.
It was about how the Federal Deposit Insurance Corporation (FDIC) takes over a failing bank under the cloak of darkness and reopens it.
Given the recent banking crisis, this was of particular interest to many.
In fact, my parents called me right after it was over - it spooked them. Their neighbors watched it as well, and I'm sure they called somebody, too.
These sorts of things have ripple effects.
Now, I'm not saying this is going to set a bank run into motion. But it does set an expectation for the market...
And right now, that expectation is not good.
Well, here's the thing: nobody is getting the full picture through news articles. All they have to trade off of are those expectations.
It's the same reason why strong banks with nothing to worry about on their balance sheets got lumped together with the others' failures. That's what expectations do for a market.
That guilt by association can spread out and lend credence to the idea that this is truly a global financial crisis.
Banks are set to give their earnings reports in the middle of April. I'm not being hyperbolic when I say this is the most important earnings season that I can recall.
That's because we're going to get a look at what these corporations are providing you as a fundamental view of their business.
In the absence of full-on transparency from these banks, though, expectations are going to drive the ship in banking.
But there are a few ways to get a read on how these expectations manifest themselves on the market.
One of my favorites is by looking into open interest changes.
What open interest tells you is where the activity has landed - or where interest has been opened - over the last week of trading.
By learning how the market's been positioning itself, you learn how different spokes of the financial wheel are viewed.
So, let's start with SPDR S&P Regional Banking ETF (KRE)...
Everything in blue is the open interest that was existing when this one-week period began - Friday, March 10.
The orange is what exists this morning.
That tells you the tectonic shift that we've seen in the financials.
We had all that activity in the KRE that was focused up around the 50, 52, and even up to the 60 strikes.
The KRE was trading up around the 60 level before this came to fruition. The blue tells you that. Nobody was really prepared for what came.
So, given that it's trading around 42 now, all of that stuff on the left is brand new - and it's the positioning of options traders.
When you look at the actual volume that's been going through, they've been large trades. So, these aren't just my parents making trades. These are big players.
So what those open options at the 40 mark tells me is they're trying to protect themselves.
My guess is we're going to continue seeing a lot of hammering at those 40 and 45 levels.
The next one we're going to look at it is an individual bank: Fifth Third Bancorp (FITB).
FITB is a company that's a big commercial lender that, yup, manages big bond portfolios.
This is one of the stocks our good pal Mark Sebastian dropped on our desks...
I mean, holy cow, just look at the activity we've seen here in the past week.
The stock trades right now at $26, as we saw a huge bounce today. But you can see, over the last week, after the stock broke below that $32 mark last week, we saw these put options put in.
Of course, standing out strong amongst the group is that $20 strike.
Those are people buying a hedge plan that, if FITB were to break below that $20, would start to make money on those options.
There's still another 21% or so that the stock has to fall before they're in the money.
But if $20 breaks, you're looking at a stock that's going to take itself down to $16.
Finally, let's look at the difference between these regionals and one of the Big Boys, JPMorgan Chase & Co (JPM)...
It's important to note the difference between JPM and every single regional bank I showed you.
The expectations for JPM have not gone out onto the wings of the bell curve - it is sticking right at home.
You had a lot of open interest on the put side at $120, $115, $110, $105, $100.
Now, to me, the thing that stands out the most is the volume of people that jumped aboard the $120.
The stock is currently trading at $125.
So, it gives you the mindset right now of the regionals, and if you look hard enough and think hard enough it's going to give you the trade.
This is the aftershock from that previous banking earthquake - people lowering their expectations.
So, while we may see some momentary bumps and small rallies from banks, the expectations are that they're going to go low again.
The number of people that are buying is going to thin out, and you'll find these volume vacuums that are going to pull the stock down.
So, how do you trade out of this?
First things first, stop looking at today and look further out.
I'm continuing to open up a little bit of exposure to the downside of the KRE. By choosing the KRE, I take a little bit of the headline risk out of the equation.
I'm going to collect some more data on FITB and likely open up some more exposure to the downside there.
But the thing I'm looking for on the long side is as follows...
We talked about crypto and its amazing run last week and how it has turned into a bit more of the safety trade. For what it's worth, I am still looking at Bitcoin (BTC) to make its way above that $30,000 level.
The easy trade here is the Grayscale Bitcoin Trust (BTC). It's currently trading at just under $16 - I'd like to see it pull back to $15 before I buy.
This has turned into the safety trade. MSFT, AAPL, all of these companies that have been all of a sudden shuffled into the safety trade spot, they were already crowded with investors before this happened.
A crowded trade is not a safe trade, especially with earnings season coming up. If someone says, "Boo!" there are more people to run out of that trade.
In a market that's full of landmines like this one, volatility can turn the safe trade dangerous quickly.
But that doesn't mean I'm not still looking out for other offshoot trades from all of this activity.
In fact, I found one that I am pretty fond of.
Even though this mayhem is primarily taking place in the banking sector, any widespread loss of faith in financial institutions will result in people tightening their pockets.
That's why I'm targeting the Consumer Discretionary Select Sector SPDR Fund (XLY) as people cut back on their discretionary spending.
So, the trade's as follows: XLY May 19, 2023 $140 Put
Now, speaking of XLY, don't worry, we're going to get to the second half of our four-part series later this week.
If you want to brush up on the previous two parts, you can find Part I on the industrial sector here and Part II on consumer discretionaries here.
The reason that we're pressing pause is that some exciting stuff popped up.
On tomorrow morning's show, former Goldman Sachs partner Michael Carr is going to join us to help make sense of everything that's happened.
And, with The Federal Open Market Commission set to meet Wednesday, we're opening up the Night Trader room for everybody - the session starts at 3:30 p.m. ET.
Missing either could cost you in the long run. Hope to see you there.
The post Don't fall victim to expectations - take control with these trades appeared first on Penny Hawk.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.