Update 103: Stock Market-End of Momentum?-Read More

July 24 2020 OPTION PROFESSOR OPINIONS & OBSERVATIONS

Good Day Everybody!…We had the winds of change hit this week as we double topped around the 10,850 area on Nasdaq. For those of you who contact us during the week; we were happy to tell you about the historic spread between volatility (VNX) and the Index (NDX)…..this was a great tell as this excessive spread is USUALLY resolved with a volatility spike and a DECLINE in the Index…EXACTLY what happened. Since almost half the index is made up of AAPL MSFT AMZN GOOG FB…no need to ask how those stocks did. Other things we noticed was the Jobless claims JUMPED which is exactly what we said would happen as the easy job gains are done (17-20 MIllion remain jobless and that’s not counting the airlines & PPP expiring). July 24 saw the Evictions moratorium run out which can’t be good and next week we could see reduced benefits (bye bye $600)…Sept 30 we end airline payroll supports & student loans must be paid (lawsuits galore on tuition). The value trade held up well in comparisons as the growth vs value differential is about 30% but shrinking in the last 2 weeks. The Big Five are up about 35% while the median stock is -19%..the 495 other stocks in SP -5% so if we lose the momentum trade and the VNX-NDX truly contracts…the decline toward SP 300-3100 not off the table in the month of AUGUST. Causation??….any delay or diminishing of the stimulus…Summers-Yellen-Bernacke all say that MORE is needed and not for weeks but many many months and note that lower earners tend to big spenders in the economy. The recovery is losing certainty and Ackman was using the word cautious near term….who wouldn’t if the Virus…China tensions and more responses like INTC (-16%) occur next week from AAPL AMZN & FB……like Pelosi said..the FED has done a good job bailing out the Stock Market….mayb now it’s time to help the other 99% of our citizens(the Banks have made a killing in the crash/rebound/getting their junk-corp-muni- bonds that they themselves refused to buy got refunded with OUR money and in refis plus all the big donors got their stock values refunded). You want to hear some GOOD NEWS? The Bullish consensus in some survey say only 26% Bulls & 46% Bears which for CONTRARIANS means that participation is not high….if you add the sideline cash ($5Trill) and hedge fund & other POSITIONING…some Quants believe the next 7% move in the market will be to the UPSIDE and see the value trade as short lived until a true corner is turned with the Virus. We say this is a NEWS rich time…follow the money.

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Stock Market

TSLA went in the toilet after earnings as while we are no experts on TSLA …here’s what we figured….at 1600-1800 the stocks was more than 250% above its 200 day moving average….they sold less cars (revenue drop YOY)…the earnings estimate was .03 and it came in 2.18…..also this was the last nail to qualify for inclusion into the S&P…but mostly what stood out was how much money they make off selling Regulatory Credits to car companies (F GM ect) who can not meet standards or make insufficient amounts of electric cars so they can be in compliance ($594 Mill in 2019). The Regulatory Credits are estimated to go up 80% per yr..this is revenue source with ZERO expense…an they’re expanding to Austin looking to sell 500K cars this year (YTD 180K sold)..good luck with that and with Musk’s Folly. In other sectors…the banks, oil, industrials, staples, mega-mid-small cap value/high dividend payers all seem to hang in there but if w test 3100-3000 in August..we doubt they will be immune. Last week; We said the markets across the board were about 10% above their 50 day moving averages and that may be an area to dust off the buy tickets…..by Thurs of this week better news could come out if not look to about Aug 7th for someone in Washington to scream Uncle. HEDGING is an interesting topic…we suggested investors consider selling out of the money calls BEFORE earnings come out and buy PUTS with the proceeds thus collaring their positions….for tose of you with FRACTIONAL tech shares in the big ones you could look at QQQ puts (400 shares/4 puts) to hedge 100 grand of tech…but ALWAYS consult your brokerage firm for help with suitability ect. Another roatation to keep an eye on is out of stretched areas like Cloud and into some semis that specialize in 5G & EV’s…wild ride for new issue JAMF as it was as low as about 35 bucks ran up to 51 then back toward 39. Unusual options activityy in ZM LRCX FEYE DKNG…let’ss see how they pan out next week. FINAL NOTE….while we like MSFT & others…we are targeting FB & GOOG during this drop for the following reasons…..we can use conventional metrics when valuating them…their multiples are not nosebleed…we have faith in the recovery so we believe ad spend will return big time….and best of all..when you own these stocks you get a lot of extra FREEBIES….like Instagram..What’s App…and about 50+ Google companies on the cutting edge…….these guys got great balance sheets…so when the dust settles…..

Want to know what’s on our radar list..email [email protected]

Bond Market

Yield continue to drop as the market has been taken hostage by Central Banks worldwide and they will decide whatever they want yields to be. We have negative real yields in both the 5 yr & 10 year Treasury markets so if you want to know why the US Dollar has dropped/Gold up…look no further. The issuance of DEBT is 4X normal and no way could it be bought without the Fed check book…OUR money to bid up DEBT that benefits all the way OVERLEVERAGED businesses & investors who should have been forced to have some losses…for heaven’s sake…there’s a risk when you loan money. Here’s our view….we’re looking at a Junk default rate of 10% or put another way 90% will not default and if you combine it with all the Investment grade bonds the overall percentage may drop to 1-2% default…..under that scenario one might find value in high yield to diversify from the extreme low yielding remainder……if we get risk off stocks in August…Treasuryy yields could drop lower BUT the traditional 60-40 stock portfolio may not work in the years ahead as the Bond % may act more like a stable money market account doing little to offset the risk of a stock drop which may mean a 80-20 or 90-10 will be the standard & adding risk is the new norm.

Our Radar List of Fixed Income? email [email protected]

US Dollar/International Markets

The US Dollar accelerated to the downside and our vcall on the EURO has been spot on since we turned BULLISH @ 110….it has been our currency of choice and it did not disappoint….hitting 52 week HIGHS @ 1.1659 and closely within shouting distance. Obviously; the FED has engineered this by collapsing YIELDS & loaning money to every stumble bum who knocks on their door. Europe had a monumental monetary agreement this week that put gasoline on the flame with a 750 Billion deal ( Recovery Fund) and if they follow it up with FISCAL coordination…..the EURO could fly along with their Bonds & Stocks. We have a Golden Cross on Aus$ as they benefit from the Metals run while Can$ & more importantly the Japanese Yen are in a struggle to hold sea level. We told you International Markets (EWJ VEU VPL VGK VXUS ect) were all close to a breakout…this week turned away…I guess the USA is like what Reggie Jackson said about himself “the Straw that Stirs the Drink”….you have to wonder if Billy Martin were alive if he would use his old line that he used to describe Reggie & Steinbrenner on Trump & Roger Stone….One’s a Born Liar & the Other is a Convicted Liar.

Crude Oil

We have been suspicious of oil in the 40’s as we thought it would rest after its run but DEMAND has been good and even with a build in inventories this week price remain comfortably above 40 bucks. HOWEVER; there was a gap on the charts around 43 which has been filled so if we BREAK under 38 this week it could be a weak August as RSI has NOT confirmed the new short term high…stays above 38 and then 43…follow the money…the ETF VDE & the usual suspects are trying to get back to the June highs…if they can we could see a heckuva catch up trade…and get a juicy yield to boot.

Gold Silver Copper

We’re not always right..Who is??….but we NAILED the Silver market and readers who took notice must be VERY happy now as Silver went positive between 16-17 and ACCELERATED when it broke 19…EXACTLY as we did describe in prior updates. Gold broke 1900 the ounce …one is up 23% and the other 80%…not too shabby. Well as Elton John once sang…Where to Now St Peter?…..we see 2 probable outcomes…on Silver we have a high @ about 23.70 surrounded by lower highs….and a short term RSI & the distance from the Moving Averages at a Stretch point…it either holds those highs 7 corrects or it goes parabolic toward 26. On the Gold..a similar story in that we have a high of 1905 and a RSI stretched or unconfirmed and a healthy distance from the Moving Averages….so pullback or parabolic to 2 grand area. The Mining shares GDX GDXJ SIL SILJ lost some steam but regained their footing on Fri….we did some trimming near last weeks highs but are willing to reenter if we see what we like…the GLOBAL MONETARY BASE is exploding and we have negative yields & a declining currency..Enough Said. Copper prices didn’t like the air at $3 bucks nor the saber rattling between the USA & China which took our buddy FCX down a bit with it. USA cos. Construction & big plans from China still should backstop prices …let’s see.

Soybeans Sugar Coffee

Soybeans are sneaking their way up toward 9 bucks but so far can’t knock that door down…we need to take out 950 and 10 to open up the door to substantial upside not unlike Silver had to bust 19….will Soybeans do it? They will need some fundamental news (crop progress/weather/China buys) to generate that commercial & fund manager interest. Sugar went into the fade mode off the 12-13 area but has held the 10-11 area..so stay tuned. Coffee is coming off a lower area and we told you anything under 100 was a gift in our view…had another good week..spike above 110?? Many commodities have had a good time of it hisstorically in the years after a recession so we see metals & oil are off and running……others to follow??

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, 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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