Update 107: Stock Market-Acceleration Ending Sept-Oct? Read More

August 21, 2020 Option Professor Opinions & Observations

Good Day Everybody!…..We made new highs in the Nasdaq & the S&P 500 this week so the band plays on…..not on new sheet music but rather the same old song that has played out since March…..TECH and MEGA CAP GROWTH and CONSUMER DISCRETIONARY and SEMIS and HOUSING. These are areas we brought to your attention as we made the turn months ago but have taken on a life of their own….yes some companies numbers have improved but not to this magnitude of this kind of price action. Also; we told you if we could get the VIX down to 20-25 by late Aug…the sideline big money may start to commit as the wild swings risks may have abated. The Big Question about the run up is WHY? Our answer is that it is as usual a combination of things. Never short sell the USA’s consumers willingness to spend money even if they shouldn’t be. Unable to travel or go out to eat or go to a ballgame/theatre/amusement park or even go to Vegas and gamble; they took to the stock market to gamble (record new accounts) ….to e-commerce to buy things….pizza/fast food to dine….and spent on housing ect.. They couldn’t go to the gym (Peleton)..They could see a doctor or sign documents (TDOC-DOCU)…They couldn’t go to the malls (AMZN-UPS)..They were stuck indoors (HD-LEN-ITB)….plus their kids were home (NVDA-ATVI) while their parents needed to do business (ZM) and other business “right sized” by going to the cloud (WCLD MSFT) and communicated with each other (FB 2+Bill monthly users). OK….BUT WHY ARE PRICES FLYING? Our take is because of THREE (3) main things all emanating from the FED & DEBT…..you see the FED & Treasury (Powell & Mnuchin) didn’t let an opportunity to lower rates to ZERO ob money market funds and backstop all debt by either buying it or threatening to do so. This led to the 3 outcomes of #1. T.I.N.A which we told you in March when we saw the plan and it means there is no alternative to stocks and bonds if you want or need to make money (tear gas for savers). #2. Free Cash flow VALUATIONS are screaming because as related to the Treasury alternative (UN-INVESTABLE) so you get P/E ratios into outer space but deemed acceptable to some. #3. Companies can borrow at ABSURD rates for DECADES out in the future and pay almost NOTHING as yields in the 2% area are accessible to many companies and the JUNK (non-investment grade) is VERY low and maybe getting lower (no pay for the risk). These companies can play the same stupid game as before…buy back their own stock….mergers & acquisitions and capital expenditures (probably the last thing on their mind). We told you that OPERATING LEVERAGE includes less employees & real estate would lead to a quicker return to peak earnings and it’s happening. WHAT ARE THE RISKS? In addition to the USA fiscal cliff on SEPT 30th…There are many but let’s talk about a few….In TSLA which is over 2 GRAND a share up 400% THIS YEAR….They’ve got Battery Day on Sept 22 followed by DELIVERIES Oct 1-5 and the RESULTS in late Oct early Nov….could any of those things disappoint?…..AAPL is supposed to have this new phone & 5G capabilities which they said will be delayed…for how long and will the price be acceptable (China sales are slipping big time)? HAS COVID PULLED FORWARD DEMAND? This has to do with the SPIKE in e-commerce, dining choices, housing buys & upgrades. tech buys, interest in tech innovation used up their buying power and will this demand naturally go in to a fade mode? Certainly; the Dow Jones Transports have risen nicely in the last month as UPS & FDX ect have had lots of activity & pricing power but still lie UNDER all time highs while Small Caps (Russell UNDER 1746) and VALUE & MOST S&P 500 stocks still UNDER 52 week highs. It’s either GROWTH or No Growth and SEPT_OCT_NOV we’ll have a clearer picture of UNEMPLOYMENT-EARNINGS-ELECTION all of which have NOT been put into the equation…..Not a bad time to LEARN about COLLARS & MARRIED PUTS…Be Prepared–Will we get a sell off AFTER LABOR DAY followed by a YEAR END RALLY…..let’s see the aftermath of all these splits..stay tuned….

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Stock Market

There were a lot of stocks making record and 52 week highs and clearly the sectors we have mentioned to you months ago still lead (VGT MGK VOOG SMH VCR ITB) have continued to be money maker since we highlighted them in March and in fact using a simple 50 day moving average would have allowed you to ride this wave virtually uninterrupted. The Value stocks (MGV VYM VOE VONV VBR) and the International stocks (VEU VT VGK VPL) have failed to get the octane needed to get on the horse and catch up to their faster sectors. We believe a true bull run that will be sustained will include these so either more time is needed or the Liquidity rally is on borrowed time and investors chasing this rally will have a rude awakening before year end. NEXT WEEK..look for more retail earnings BBY JWN GPS Dollar General and Dollar Store….with tech sale BBY should have good numbers..Other stocks seein action Uber & Lyft who can continue their business while they appeal California’s employment driver status. Some say trading GILD off this week’s lows makes sense…DE had an upside bang while WFC (cutting staff) is a hop skip and a jump from new lows it saw during the crash. RXT helps migrate data to the cloud for AWS & Azure so keep an eye out. Another one that had a lot of option action was OXY which some are betting has an upside surprise in its future. Mostly all the thematic ETF’s (cloud-cyber security-precison medicine-internet of things-robotics) along with tech mega cap growth continue to be where the $$ is..how long?

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Bond Market

Let’s keep it simple…the Fed controls the shorter end of the curve and Treasury yields on 1 yr thru 10 yr maturities are virtually un-investable for income or capital appreciation….they want you to take more risk and finance these companies out of your desperation for yield—-good long term plan??…since when is loaning money to companies for little or no interest with 30 Million people receiving unemployment benefits sound like a good idea?…the people playing this game Trump-Powell-Mnuchin may not be with us for long but these moves will be….everybody likes to see their bonds go up….but if inflation returns and people want out…who takes the other side?..We just saw what happens when everyone wants out..the dealers disappear…in hopes our Fed shows up with their printing press money…. will the currency used to pay back be jeopardized?….will GDP ever justify the debt loads?..The Fed’s balance sheet has about doubled and more to come and is LARGER than the USA annual budget…..this is no exact science and mistakes can be made….looks like the 10yr may trade @ .50% to .85% for the foreseeable future but the 30 yr may fall out of bed if inflation and the dollar break badly…hiding out in munis..short term corporates has worked but corporations ($1.4 Trillion Issues in 2020) can’t print currency and as we have seen in foreign nations that don’t issue debt in their own currency..it can get scary. Is there a reason MODERATION can’t be a policy so rather than dramatic swings UP & DOWN in stocks & bonds (life savings) some stability reigns?…..I hope these temporary employees know their stuff

US Dollar/International

The US Dollar has gotten whacked in the last 4 months as our YIELD ADVANTAGE had gone out the window & our budget & fiscal situations stink Having said that..we have believed that the DXY is OVERSOLD in the 90-92 range and a counter trend rally may ensue…so far that is EXACTLY what is happening. We were very BULLISH on the Euro at 110 and we got a great run toward 120 at which time we believed are horse was tired and in need of a rest and it would sell off from the 120 area…so far EXACTLY what has occurred……we saw the Canadian $ & Japanese Yen as rolling over unable to hold gains while the run in the Aus $$ is stalled with the price of Gold. So there you are…..our view as of now..we remain flexible as events emerge.

Cruse Oil/Natural Gas

If Crude price get any flatter we’ll change the name to pancakes….we have traded between about 39 and 43 for the last 2 months but if we break under 40-38 we could go after the stops underneath. Longer term…we see 50-60 as the rig counts..frackers..OPEC fundamentals (if sustained) is a solid backdrop to increasing demand (remember only a very small % of cars are electric) that should happen as we get closer to normalization HOWEVER a shock after Labor Day with stock prices could instigate a sell off IF we get back under to 50 day & 200 day MA’s which are both right around 39-40. Natural Gas had a great run which was beneficial to us and LNG also had a run and this week we made a new high for the move in NG but volume is slowing and we are technically overbought short term so the breakout point was 2.00 so trimming/hedging and re-entry on a dip seems reasonable.

Gold Silver Copper Platinum

We told you the Barrick Gold purchase by BRK.B was being overblown as a 1/10th of 1% position in anyone’s portfolio should not set off alarm bells. We got a great SHORT TERM SELL SIGNAL after Gold went from 2100 to 1875 and rebounded to 2025…Our signal said to sell @ 2015 and we saw a drop back toward 1920…an 80 buck drop quick..nice!! From here…respect the 1875-2025 range…we told you at 2100 the 50 day wass in the 1800’s and the 200 day is in the 1600’s…got to the former…..maybe see the latter soon??? Learn how Collars & Married puts are used to protect values and hedge risk. Silver to us was a great buy on the breakout of 19-21 and a good sell at 30 (50% retrace)…so now closes UNDER 24 opens up a potential pullback to the breakout area 20-23 and a break ABOVE 28-30 could open up 35-50….right now we feel reversion to the mean makes more sense…but we’re flexible. Copper is being helped by the HOUSING craze as LUMBER prices have more than doubled as inventories are low and demand soars HOWEVER getting and staying above 3.00 has been elusive and if our scenario is that after Labor Day investors will sober up…then a pullback is the risk…stay tuned. Platinum is 30X rarer than Gold and trading at a quadruple digit discount so if we get ABOVE 1000-1200…is it a horse that will go from canter to gallop??

Soybeans Coffee Sugar

Well let’s see how the Three Amigos did this week…starting with Soybeans..they broke out ABOVE 9.00 and ran to 9.20 only to retest the breakout area and close around 9.03-9.04…still stuck UNDER the bigger resistance around 9.50 so let’s see how the cards come out this next week… Sugar prices have been a little psycho lately…we broke out above 9-11 range and ran to 13…backed off to 12.50..blew out the highs and went to 13.25.. then rolled over to close this week at 12.81..see what we mean….so now our belief is that the first range was 9-11 followed by a range of 11-13 and as long as we stay ABOVE 12 we will remain a believer-prices up over time. Lat but not least COFFEE has traded pretty good technically…we felt UNDER 100 was a bargain (it was)…it would break 105-110 and run (it did) and it would retest the breakout area of 105-110 and resume its run (it has)….NOW it’s stuck in a range of 125-110 and so far has a lower high….so we wait and see.

REMEMBER There is a substantial risk of loss in short term trading and option trading and it is not right for everyone. Consult your brokerage firm, broker and advisor to determine your own suitability. Past performance is not necessarily indicative of future results. Use Risk Capital Only,

Jim Kenney
 

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