October 23 2020 Option Professor Inc. Opinions & Observations
Welcome Back Everybody!…..There is a lot going on ( prez-debates-earnings-stimulus talks- virus uptick) but in truth the SP has been in about a 100 point range for the last 2 weeks with the VIX trading between 25 & 30. Something seems to be brewing and we’re here to tell what we see. First off…Claims came out down from last week BUT we are still at historic levels on the unemployment rate and ongoing unemployed (some just ran out of time on their benefits). Cash holdings are 5X normal at 12% of GDP globally & 17% of GDP in the USA with savings rates near 20% in some places. The winds of change are blowing in the YIELDS market (something we told you about for months). This STEEPENING if the yield curve has a number of ramifications including helping FINANCIALS-CYCLICALS which have been on a tear BUT it could dampen the extended TECH & other high valuation stocks that could be REVALUED in the weeks & months to come. Also future TAX RATES for capital gains (highest since 1922) may affect tech and mega cap growth as we see COMPRESSION of valuations-profits-margins and causes a long awaited REVERSION to the mean as anyone who has looked at long term charts & longer term MOVING AVERAGES has to see they are extended. Yields rising could cool off the red hot HOMEBUILDERS as we see a 10% drop off the highs in ITB LEN PHM ect ( a very crowded trade). So OUR VIEW NOW is the market remains BULLISH however a risk in the next 2-8 weeks is that a correction could occur of 5-10%+ and may start this week if when earnings come out on FB MSFT AAPL AMZN & others this week and we see a buy the rumor sell the fact outcome (like NFLX-Fastly). WATCH OUT if the SP 3400-3350 breaks along with the RSI under 50 & a VIX north of 30-35 as signals that a correction is unfolding. LONGER TERM.. we see a very ROBUST Q1 for a number of reasons including STIMULUS (remember April- May stampede after last stimulus) plus the earnings comparisons will be easy and blow out earnings expectations (beat 2019) as we ride the WAVE of sideline money looking for YIELD & GROWTH at reasonable VALUATIONS. This means the areas of the market that have not captured or exceeded yearly high may do so. Financials-Industrials-Materials-Epicenter stocks ect may outperform other areas of the market as the economy re-opens…we get therapeutics & vaccines and hopefully the cases that do increase see far less fatalities. Place that people congregate (Disney-Six Flags-Wynn-LV Sands) could be significant beneficiaries. Stocks that had valuations bid up thru the roof due to work at home & social distancing could be the casualties. FINALLY…a word on BitCoin which made 52 week highs this week appears to be in the FIRST inning of a very long game (like a early tech stock investor) as we see PYPL is now involved and some spec they will come up with their own digital coin…we saw Square make a sizeable investment…we view Silvergate (SI) as a play also as they are the bankers for crypto firms….. we know the block chain has been a secure system….and we know the next generation is a digital generation….we know the printing of fiat currency is off the rails (Fed ECB BOJ)…we have used GBTC to participate…we are pleased we did……we have other ideas too.
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We have earnings all next week and the list of companies is impressive. We will hear on Tuesday from MRK PFE CAT AMD MSFT MMM ect; we then on Wed. hear from GE BA AMGN Pinterest… but THURS is the big kahuna with AAPL GOOG AMZN FB and ad spending will be a key for some and cloud & pandemic business (shopping is the new entertainment) will be front and center. Expectations for FB includes a almost 12% jump in sales but a 11% decline in earnings ..at AMZN 92B in sales…at AAPL 64 B in the quarter as services will be a key driver but a 6.6% decline in earnings and GOOG sales at 42B new growth 5.6% but EPS -10.5% but a rise in cloud business. This week we saw misses on INTC (data center revenues) AXP (travel) and news that WFC may sell they money mgt division for 3B…..GILD bounce off 60 as FDA gave them a green light…hospitals & health care caught a bid (tenet HCA UNH PFE MRK)…. SNAP did well -Gap- JWN-TJX ROST try to come off the canvas……Covered calls & collars has been our call for the high flyers. Pot stocks are worth a look (MJ ect) and malls (SKI) Outlet Malls and remember we said look at 40 area for DKNG…well they’re here & others.
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Let’s cut to the chase…we told you for months that yields bottomed after the crash….maybe as historic as when they topped with Volker in the early 80’s. .This week we saw the spreads widen considerably (steepening of the yield curve) and should we see a stock drop maybe yields could back down a bit otherwise the landscape ahead includes huge funding needs by Treasury & a Dollar of unknown value and inflation fears…..and a robust recovery in 2021….money velocity needs a bigger yield curve..we’ve said that will occur. As usual we take refuge in limited term munis & short term corporates and AVOID duration for now…something we told you for months and continue.
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US Dollar/International Markets
The US Dollar remains in the trading range it has essentially been in since August (92-94) which came after a 10+% decline from March highs at 103+. The stability after the decline has kept assets like Gold-Silver-S&P-Euro in a trading range as well as they consolidate their gains. We have heard some say where can you go for a Dollar replacement.. Europe is a museum.. Japan is a Seniors Center & China is a jail…we’re the one-eyed man in the valley of the blind….one of the many reasons digital currency has a future. The dollar could either accelerate to the downside (our deficits-Fed printing) or if we see stocks correct…a safe haven moving toward the 200 day MA above 96 which would blow out the shorts and probably send the Gold-Silver-Euro into the tank (all crowded trades). A always go with the flow/don’t fight Mo. We see improvement and potential in the stocks of China-Japan- Pacific-Emerging Markets as well as Europe as the 50-200 day moving averages are inverted (Golden Cross) and are pointing north.. ETF’s offer diversification. South America looks weak as Brazil is stalled & Argentina’s money is a joke.
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Crude Oil-Natural Gas
Crude has been flat lining from 42-36 since June as demand picked up and the rig count tanked..fracking went belly up and OPEC has behaved BUT now Libya has supply coming out and demand is slowing by some people’s measures…that could lead to softer prices but not lower than our support zone around 30…next year we see a recovering economy and jet fuel demand so the 40-55 range is our call. COP bought Concho for 9.7 B in stock deal creating a Permian presence and a shale giant. Natural Gas has ripped higher and trade above 3.00 which is 50% higher than when we got bullish at 2.00 BUT LNG still can’t get above 52 and stay there so we wonder why??
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Gold Silver Copper
Copper prices made a 52 week high and then some when it hit 3.21 this week…no surprise to our readers who were told to get bullish long ago (supplies are tightening) and our baby FCX continues to deliver the goods making new 52 week highs at 18.68 this week…a long way from our entry. Gold and Silver are either renewing their uptrends or could see selloff if the Dollar fails to break down and we see a REVERSION to the mean which basis the moving averages is well under current levels….if they start to break down next week and their RSI’s break 50..we would anticipate that we could wipe out some longs prior to a robust year in 2021…tread lightly.
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Soybeans Sugar Coffee
We told you back in the $8 soybean area that getting BULLISH wass the way to go and breaks abobe 9.50 & 10 could set up a run toward 12…this week we made 52 week highs at 10.88 so we are getting there BUT we are near the highs of late 2018 so if all markets get hit going into the year end… Soybeans may not be immune….covered calls-collars-trimming considered. Sugar prices were told to you at 12.30 ass a BUY and now we are at the 14.50-15 zone (52 week high is 15.46)…getting above 16 seems is a key for acceleration again they are in an area of failure in 2018 & 2019. let’s see. Coffee supplies are apparently ample and so prices are having a hard time holding gains…we told you a bounce from 105 could be short lived and it was….IF we hold that 100-105 area and take out 108-112 on the upside then maybe the bull rides again….but lately this old Bull has lost its swagger
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