Biden proposed to double the tax rate for the wealthy, sending FUD throughout the market last week
Under Biden’s proposal, capital gains tax could get as high as 43.4% according to Bloomberg. currently, investors pay a 23.8% top rate on long-term capital gains. Under current law, long-term capital gains are taxed favorably with respect to wages. The wealthy pay a top 37% rate on wage income, for example. The new plan would instead tax capital gains as ordinary income, at a top proposed rate of 39.6%, which would only apply to those with more than $1 million in annual income.
The thing is, with all the money printing that has been going on lately, and the likelihood of increased inflation in the next months/years, people will have no choice but to put their wealth stocks and other assets. Interest rates are very low, which doesn’t leave many choices to fructify your investments.
Into Friday close: Small caps, Tech and the S&P 500
The way things are shaping up, it looks like if we are green Monday, $IWM should head to All-Time Highs. It wicked over the correction top trendline today and closed right at it, along with wicking out of the RSI channel. Small caps are looking good here if it breaks out Monday.
On the other hand, $QQQ is looking weak with a close below the RSI channel and below trendlines. Depending on how big tech earnings go, which are plenty next week, it might be a rotation out of tech equities (QQQ) and into small caps (IWM). This is what I would be watching for.
SPX/SPY held the RSI channel/trendline, but still, the RSI is diverging a bit. We hit a new ATH today and the RSI is noticeably lower than just last week. We are also in a tight 1.5% range from the top of the longer-term trendline and the newer one. Things aren’t looking too bullish here IMO, looking ripe for a break of the RSI channel and a test of the 20dma (the middle Bollinger) and potentially the next trendline.
Monday if we are up about .5%, look for PUTS due to that being the top of the trendline. If we are down about 1%, look for CALLS due to being at the bottom of the new trendline.
In the end, big tech will likely decide the fate of the market. Last October we bottomed out when big tech had earnings, January we topped when big tech had earnings.
April do we top when big tech has earnings? I think it is likely.
Big earnings ahead; $TSLA play
Q1 2021 earnings season continues, with 10 DOW stocks reporting, including MRK, AAPL, MSFT, MMM, V, and others. 30% of the S&P 500 will report this week.
The Fed makes its rate announcement, and Fed Chief Powell holds a press conference, on Wednesday. An estimate for Q1 GDP comes out on Thursday. Consumer Spending and Personal Income reports are due out on Friday.
If you were thinking of playing Tesla’s earnings, I suggest otherwise.
The average ER move on TSLA is about 7.38% and options are pricing in about a 9.7% move, so IV crush will be a big concern on TSLA. If you were wanting to play TSLA earnings, there are a couple of ways, and they involve spreads. If you are just bullish and want to play the upside, you could try the 4/30 750c/760c (Or whatever has the long call +20 and the call +30 OTM by the time you enter.) The debit is about 3.75, so max profit of 10-3.75 is 6.25, which is really decent, and for the short leg, the 760c, to go ITM, you just need a 6.3% move, which is less than the average move and less than the implied move by 30%.
Of course, you could tighten that spread or widen it as you could just do a 750c/752.5c for about .98 debit, max profit of 2.5-.98 is 1.52 if it expires ITM, and you only need a 5.65% move to be ITM. If you are more uncertain but expect a decently sized move there are a couple of ways you can play it. You can do an inverse iron condor, but this would be if you are expecting a bigger move because you will need to go further out in strikes to have a chance at a higher profit. If you are expecting a big move, the 780c/785c 4/30 and 680c/675p 4/30 would be a good fit @2.32 debit, with a max profit of 5-2.32, still can get a 100% return if it expires ITM and to get there is about an 8.9% move, which is less than the implied move. If you want a safer bet on that method, you can try the 695p/690p 765c/770c 4/30 for 3.02 debit, which is 5-3.02 which is 1.98 max profit. You need a 7.3% move to hit max profit, not a bad bet, I’ll profit get some, or whatever has the long legs of the spreads +/- 35 OTM and short leg +/- 40 OTM.