Hot inflation data expected Wednesday — short the market's tech-heavy winners
Thesis
When inflation runs hot, the Federal Reserve is forced to raise interest rates, which makes borrowing more expensive for companies and slows down the economy. Tech companies are especially sensitive to this because their future profits are valued based on today's borrowing costs. With inflation expected to top 4.2% and bond traders already predicting rate hikes, a bad inflation report on Wednesday could trigger a swift sell-off in tech stocks.
Strategy approach
Build a short volatility / bearish reversion strategy for the Nasdaq-100 (QQQ) on a daily timeframe. Enter a short position if QQQ gaps down more than 1.5% at the market open following a high-impact CPI inflation miss (actual CPI > consensus). Set a stop-loss at 2% above the opening gap price, and take profit at a 4% decline from the open.