Despite the US Federal Reserve had promised to keep the interest rate at near zero for a prolonged period and maintain its monthly QE, we think this is not sustainable.

 

This chart shows the amount of the Overnight Reverse Repurchase Agreement (ONRRP). ONRRP happens when a bank has too much money in its balance sheet and has no way to either lend it out or to invest in it. The sudden surge in ONRRP volume means the US financial system can no longer accommodate the influx of liquidity anymore and resorted to parking their money with Federal Reserve at a 0.05% interest rate.

 

The program has almost no customers in early April but daily demand in recent weeks has shot up dramatically. The chart shows the spike in reverse repo demand over the past year. The high demand is a sign that adding liquidity to the market does not work anymore.

 

This situation is detrimental to the US financial system and also the US Dollar dominance. Hence, the Federal Reserve needs to take some action to curb this chaos. The only way to curb it is to stop its QE or even to start tightening its monetary policy. Either way, it’s going to cause the market to experience a huge plunge.

 

The speed of idle cash piling up is so fast and we believe the FED will start to take some action in a very short time. In short, we think the market is going to undergo a correction very soon. 

 

In order to profit from it, you can purchase a put option, sell a call option, or short the market. (US tech stocks are the most overvalued sector currently)