Update 104: Stock Market- Be Ready For Unwind Trade-Read More
July 31, 2020 Option Professor Opinions & Observations
Welcome!…Before we start…we have provided you with ideas for Tech & Mega Growth in March & April….we provided you with ideas for Value & Cyclicals in May & June….and we provided you with ideas on Gold-Silver-Copper & Euro in June & July…Not Bad….we ask that you direct all the investors/traders you know to our website @ optionprofessor.com and input their emails & they too will receive our Free Weekly Updates..Thanks!
OK..What’s going on now and more importantly what’s happening next? We saw the Big Tech boys blow out earnings this week…AMZN…over $5 billion profits..revenues soared….AAPL…new all time highs-big expectations on a reload of I-Phone users to go to #12 & 5G capability for data & connectivity. Big sales of I=Pads to the schools and almost $200 Bill cash & a 4 to 1 split. Dow Transports had a big reversal (UPS) late Fri. as did much of the market. On a more sobering front Q2 GDP was -33% & unemployment is up ticking. We told you a long time ago that OPERATING LEVERAGE and RIGHT SIZING COMPANIES was the future 3 months ago and that companies would return to peak earnings much faster (less employees & less real estate).Washington better smell the coffee (Fed extended programs thru year end) as Bernacke Yellen & others said we need LOTS of MANY MONTHS support as LOTS of people can’t go back to jobs that don’t exist. Thirty Million people lost benefits today & maybe the rally at the end is a bet a deal will be reached. Revenue growth at GOOG has been slowing since 2017….USA initial pop in the economy has faded and Japan’s NIKKEI has rolled under some MA”s as they depend of export demand which is waning and the TOPIX Machinery Index looks like it threw in the towel. SP earnings decline worst in 12 yrs.
So…..What’s going to happen NEXT and where is the puck GOING….cause that’s our PREPARATION? No Crystal Balls here….Markets are TRANSITORY. HERE’S OUR VIEW…….YES..we are in a BULL Market….YES..with post Covid no visibility the Tech-Mega Cap Growth-Momentum trade has soared big time…..YES…the P/E ratio on the 10 yr Treasury is 180-1 and Investment Grade is 40-1 so by comparative valuation..creates REAL flows of money from pension plans to hit long term requirement…..stocks are cheap… ..YES…POSITIONING suggests that there is a ton of money that has yet to re-enter due to HIGH VOLATILITY but the VIX has slid under 25….. .HOWEVER… YES…..the Nasdaq Volatility Index (VXN) relationship to the Nasdaq Index (NDX) is extreme and corrects by volatility jumping or the NDX coming down or both….YES…the GROWTH valuation relative to VALUE also at historic spreads…..YES…there is a BINARY crowd-positive event on the horizon (vaccine)….YES…CAUTION is the fiber of this rally BUT rates of MORTALITY in NYC have plummeted. YES….We are looking for the UNWIND
OK So RIGHT NOW…..We are PREPARING for the UNWIND TRADE…which in the Stock Market is a DECELERATION of Tech & Mega Cap Growth and RISE in SECTORS such as Mega-Mid-Small Cap Value and Cyclicals-like Staples-Digital REITS, Transports, Russell, Banks, Energy Materials, Industrials, International, Gaming, Travel-Air & Hospitality…..it also includes GOLD & SILVER which hit our TARGETS (Gold above $2000/Silver 26.27/GDX 46) which have gone up 6 to 8 weeks in a row…a rare occurrence typically followed by 3-6-12 months declines….it also includes the US DOLLAR which we believe won’t get UNDER 91 nor the EURO above 120 (as you know we were BULLISH @ 110) & finally the negative yield curve (1st time since 2012) may correct but the FED is capable of intervening to alter that natural outcome but when we re-open..pent up DEMAND & our credit rating/ currency in jeopardy prevails. In CONCLUSION…more PRICE evidence needed to ENGAGE….BUFFETT added BAC not ZM….just like we liked the ODDS about Silver spiking IF ABOVE 19….We believe REPRICING will occur with a RAPID momentum SELL OFF & VALUE RALLY ….BE PREPARED.
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Stock Market
Wild ride Friday in the last 2 hours as the reality of 30 million workers trying to live on $1600 bucks a month & evictions about to soar may have entered the mind of Washington (like Pelosi said…we spent $Trillions on getting the Stock Market back up with FED BUYING JUNK but no $600 for the grunts?…..How do you go back to a hospitality job?…maybe better news. Some of the big stuff thiss week was in the semis ass TSM & ADM soared when INTC said they got big delays & they took over market share. Eastman Kodak went from about 2 bucks to 60 and closed the week at 21+….they got a loan from the Admin that was ridiculous to their company size…plus volume went into the millions & option contract exploded 100X normal BEFORE the announcement…so we think Inspector Clouseu-Maxwell Smart & Barney Fife should be called in or maybe just Phil Mickelson to sort it out. Big news on airlines as many are taking seats out and using the planes for CARGO as they need to make a buck while the wait for travel to return. CALLS activity this week in Dropbox, TEVA, JD.COM HSBC (earnings out this Monday) also EARNINGS from HLT SONY DIS BP BMY CVS HUM BKNG and Saturday…we hear from Berkshire Hathaway…no games no good for DKNG
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Bond Market
Ok..90% of advanced economies bonds yield less than 1% and our 5 yr & our 10 yr Treasuries closed at RECORD LOWS this week. We have BREAKEVEN yields ABOVE the Nominal yields for the first time since 2012. The aftermath (2013-2014) saw Stocks RISE 40+% and Gold DECLINE 40+% so let’s see how this plays out. The US Dollar has been hit hard/Gold Up. Our view is that in the near term what has been working still seems valid as the Fed says programs go on thru year end…so short term corporates, plus Investment grade, asset back and securitized debt seem to be the preferred. Munis saw a big jump in DEFAULTS but still saw a 20 Billion cash inflows. Overseas money needs a home so that demand with the Fed backstop enough…someone is going to get stuck in all this debt when they UNWIND.
US Dollar/International Markets
The EURO has been our horse since 110 but up here at 118-120 it looks like our horse may need a breather…a long way in a short time and Germany looks like they are out of steam. The Aus $ still hanging in there while the Can$ and Japanese Yen are lost some altitude…a big week for the Yen as they need us to buy from them ass their internal economy/demographics have no growth power & their stocks are on the ropes. EWJ may be a short if our S&P doesn’t take out 3300 soon…all the International ETF’s we follow like VEU VGK VPL VXUS were right up against the 1-2-3 yr MA’s..turned back There is a lot of UPSIDE if they can breakout but prices need more juice.
Crude Oil
We’re still in the 40’s but barely & the energy stocks had a lousy week as some companies announced terrible earnings (loss) reports and the XOM dividend (8%) is being debated by some as insecure..a little ridiculous in a world of negative rates. Our view has been suspicious of 40 Crude and a break under 38 would be a negative BUT next year and beyond…prices in the 50’s & beyond and some great values as our economy reopens-DEMAND may pause to refresh but don’t see R.I.P & Frackers/Rig Counts OPEC support
Gold Silver Copper
Last week we said a parabolic move Above $2000 Gold (possible squeeze on deliverable supplies) and $26 Silver may very well happen and it did. You know the story..we been singing this for months BUT what about now. Well it could just keep going but SHORT TERM we have seen 6 to 8 weeks UP and history says that is followed by DECLINES most of the time…the LT MA’s are WELL UNDER current prices and some pros like Gartman are on file saying the run up & sentiment feels like a crowded trade that needs a break PLUS our Target on GDX was 46 area and we hit it and backed off…..unless we run next week…better prices Sept-Nov..prices now..volatile & big bid ask spreads Copper saw big buyer in June out of China but this month as we told you last week is a dud…we couldn’t take out $3 and FCX failed at 14…powder dry
Soybeans, Sugar, Coffee
We’re not farmers or operate a silo but we have been following Soybean prices and have been BULLISH since $8 but not that much to show for it. If we clear 9.05 and the 9.50 and 10.00 we may have been patient for good reasons but if we take out 8.60/8.40 unfortunately you can stick a fork in it Sugar lost steam between 12-13 last month but HELD s support we last mentioned at 10-11 and now it’s right back in our face at 12.64 this week so now same question different time…Can we blow out 13 and accelerate? Momentum clearly has turned up and coming out of a recession some commodities can have good runs…so we remain faithful. Our new buddy Coffee which gave us GREAT up moves in July continue to ACCELERATE as we said a move ABOVE 105-110 could see a spike EXACTLY what occurred.
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