Low Winter Sunset

As the sun sets on the early new year bullish seasonality, it paves the way for some of the harshest seasonality of the year coming up pretty much from after MLK Day next week through mid-March. Of course, seasonality is not a crystal ball, and the market need not run smoothly consistent with seasonal trends or anything close to it. 

However, it is certainly some serious food for thought, especially given the one-way tape we saw in 2021 and indeed since March 2020. In other words, playing for some long overdue reversion, especially with all of the inflation and pandemic hangover uncertainty, among other issues like economic growth, makes sense. Indeed, quite a few newcomers to markets since March 2020 have never really even experiences a prolonged broad market correction. 

On that note, it is also hard to believe (but maybe not so much now) that the small caps in the Russell 2000 Index are essentially trading in the same spot they were a full year ago. The head-fake higher in November 2021 received little hype after the fact, since I saw a plethora of chest-pounding from market veterans and seasoned statisticians who conveniently swept the failed breakout under the rug ever since.

But I think it is a mistake to overlook the fake-out.

Instead, it may be valuable information from the market. Indeed, from failed moves in one direction often come aggressive moves the other way. And gauging the IWM (Russell's ETF) zoomed-out daily chart, updated below, a breach of 12-13 month support below $208 opens the door for an outidzded move lower which may surprise some folks in terms of its velocity. I say that because of how many times buyers have defended that support for over a year now--Should it fail, I expect it to fail spectacularly. This all leads to a favorable risk/reward ratio for small size (key!) deep out of the money puts. I like the idea of hedging that with small cap oils and some of the best small cap commodity and financials/insurers which have done well of late.