Update 90: Stock Market- It’s Crunch Time for S&P–Big 5 & BRK.B
OPTION PROFESSOR APRIL 25, 2020 OPINION & OBSERVATIONS
OK…We had our Crash & Our Fed Injection Obscuring Real Values & our TINA (there is no alternative)…..for those of you unfamiliar with the racetrack….a SUPERFECTA Winner is when all 4 horses you pick in order come in…THIS WEEK..we have 4 very important events occurring starting with the S&P 500….moving thru toward EARNINGS….ending with Q1 results from Buffett’s BRK.A….the cherry on top are 3 Major Central Banks (Japan-Fed-Eurozone) announce monetary policy. LAST WEEK..we had UNEMPLOYMENT jumped to 27 MILLION unemployed. We also saw SERVICES PMI’s at 27!…anything under 50 is CONTRACTION… common words are now DELINQUENCIES & FORBEARANCE…4 MAJOR banks have 18+BILLION set aside for loan LOSSES….some Companies have skipped LOC’s and gone right to issuing JUNK BONDS which have sold like hotcakes we assume because managers need to hit their 5%-7% Targets plus the mantra circulating that a 2nd half REBOUND & a Fed PUT is CERTAINTY. CEO’s posted Earnings this week/most suspended GUIDANCE-NO VISIBILITY. NOW…Looking FORWARD to the 4 EVENTS—#1 S&P 500 MOVING AVERAGES are a VERY Important Part of the work we do…..we are FOCUSED today on the 1 year/2 Year/3 Year numbers….we believe TIME & PRICE can smooth out aberrations and help IDENTIFY Trends….they are factual ALBEIT in a HISTORICAL perspective. We have a 20 Year Historical Chart (available to you via [email protected]) that show all 3 averages since 2000. Only during the DotCom Crash of 2001-02 & the Great Recession of 2008-09 did all 3 Averages CROSS & head lower. During 2016 & 20118 they were all BREACHED but NEVER Crossed…..ALSO in 2001 & 2008; it was 2-3 YEARS est. until they crossed back UP…in 2016 & 2018 it was only a couple of MONTHS before getting back ABOVE the averages and resuming the UPTREND. Where are we at RIGHT NOW?….the NUMBERS are about 2965 and 2870 and 2775. This THURSDAY is EOM for April…..our view is that IF S&P 500 can close above 2775 and stay ABOVE it in the months to come…then a case can be made that the FED FLOOD of liquidity WORKED AGAIN….if NOT and these MOVING AVERAGES INVERT to the downside then these sharp rallies will be no more than REVERSION rallies that roll over. OK..let’s go to #2…THE BIG FIVE EARNINGS-FB AMZN GOOG AAPL MSFT-ALL coming out this week for ONLY 3rd TIME in collective histories. The CONCENTRATION of 5 companies in the INDEX has ONE parallel in 2000’s when CSCO-GE-MSFT-XOM-INTC had slightly higher dominance (interesting to note XOM has essentially gone full circle & GE lost 90%). The Fab 5 have a market cap of $5.1 Trillion or about the value of all ex-US stocks & more than the bottom 350 stocks in S&P 500. What could KEEP YOU UP @ night? Well….is it impossible that AD Spending….CLOUD & Enterprise Software spending & 5G-I-phones-Services spending could be REDUCED? Could MARGINS be PINCHED & Costs RISE? If so; these Stocks are MIS-PRICED. These are GREAT companies with GREAT ideas They NEED CONSUMERS. In 2015 & 2018 the aftermath of these guys all announcing the same week was NOT so ROSY so CAVEAT EMPTOR. Other sectors announcing this week are Health Care–Ci HUM PFE ABBV ….Energy–XOM CVX PSX COP Comm.– T Charter, Comcast Restaurants YUM MCD SBUX ….Brands Kellogg’s PEP Colgate Addidas Kraft Heinz…Industrials HON BA IP CAT GE URI..Transports UPS…Tech TWTR TSLA QCOM…..#3….We believe this is the BIG ONE…..BRK.B which reports EARNINGS late this week & 13-D filings May 15th. What could we LEARN?….Well…earnings will tell us more about the $128 Billion they had in cash….did they spend it in March? On May 15 we will learn positioning as of March 31 which includes the CRASH in PRICES……and therein may be the TRUTH….We saw an interview with Charlie Munger which may reveal their thinking in that he essentially indicated we have just been thru a TYPHOON & it would be nice to come out the other side with a comfortable amount of LIQUIDITY. If CEO’s have no Confidence in EARNINGS VISIBILITY…..the the second part of P/E….the EARNINGS Part is hard to quantify…..which Means a CHEAP PRICE but you Don’t Know What VALUE you are getting…..that would mean a Heavy Emphasis on GAMBLING and that has NOT been their forte….Buffett’s got a lot of one liners like When it Rains Gold Bring a Bucket Not a Thimble….but the one we like is Be Greedy when Others are Fearful & Fearful When Others are Greedy…well A Reminder that he does NOT say Be GREEDY when Others are being STUPID! IF the Earnings & 13-D show Cash Remains HIGH… we’ll take it as plowing into stocks because PRICES CHEAP without P/E VALUATION is GAMBLING. The final event #4…is Central Bankers meet and will come out with plans for recovery…..let’s face it…it’s an open bar with monetary policy….Japan & Europe buy everything in sight and now the US is onboard with only stocks off the table…but since stocks are only one level lower than Junk Bonds in the capital structure we would not bet that they are off the table. The trick is set up a program with Treasury (Mnuchin will go for anything) to comply with legal restrictions and call it BAIL OUT UNDERACHIEVING TRADERS (BOUT)….McConnell says don’t bail out states/cities/counties….well either he’s found religion after BLOWING UP the National Debt & Fiscal DEFICITS or he’s playing a game of not being on board to save face with DONORS while knowing Full Well his state of KENTUCKY is fiscally upside down and can’t wait for all that FREE MONEY to fix their financial & pension shortfalls
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Stock Market
As we have said…the upper band of Level 3 RESISTANCE ball park is 2930 & 3030 (61.8% retrace & 200 day) which we tried to approach but the air got thin around 2880-2900. The high beta ETF’s on our radar VGT VCR MGK SMH & VYM all finished the weak strong & the tech ones are ABOVE their 200 day moving averages…..with the huge OUTPERFORM (since 2001)of the Nasdaq to the Dow….we see 2 distinct outcomes…..the rally is for real and we stay above 2775 SP at such time a rotation to undervalued sectors begins or this iss a Reversion Fugazi rally (like 3000 to 3393 SP) and we roll over from Level 3 resistance. Well if you believe scenario 2…you would fade AMZN/AAPL/FB/GOOG/QQQ into whatever big rally into earnings this week or you might look for sectors still TRADING SUBSTANTIALLY UNDER their 200 day moving averages like Financials (WFC C BAC JPM 25-42% under 200 day M/A’s)….Energy (XOM CVX COP SLB PSX all about 25-50% under M/A’s) Industrials (VIS 20% under) Small Caps (IWM almost 20% under) Materials (VAW 14% under) Retail (XRT 17% under) Value (VTV 22% under) Homebuilders (ITB 20% under) are some EXAMPLES. For those NOT on the bandwagon that a 2nd Half recovery is a certainty…this rally toward 3000 SP is a chance to adjust asset allocations. Stocks on the radar this week TCBI ZM INO INTC BYNF PTON IBB Canadian Banks ADC AVGO BAX OXY GDX DIS VIAC NFLX TDOC PLUS in the Big Data Robotics IoT AI & Precison Medicine. Also; HSIC XRAY GILD KMB CMG EEM EWZ ULTA & Boston Scientific to boot.
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Bond Market
The Big 3 Central bankers meet this week and if I had one warning it would be that if the Stock Market rally has legs….the Fed in May could temper the printing presses and that is NOT what the yields (Tsunami of DEBT from Govt-Corporations-Public-Soon States) are discounting HOWEVER if they elect to go to YCC (Yield Curve Control) then rates could dive lower and maybe under extremes break the buck in some funds (remember oil last week). Economic numbers (Unemployment-PMI’s-GDP’s- Balance Sheet Damage) are being dismissed as this MOTTO of we are CERTAIN to get a rebound in the 2nd Half could be dangerous IF the restart is low & the Virus return sin the fall. Who knows…we know we have 27 Million+ Unemployed and PMI & GDP numbers tanking…our President is a self proclaimed cheerleader all over the place on restarts & cures (disinfectant injections??)….We have never seen these kind of numbers before with delinquencies & forbearance the norm….Sharp Guys are raising Billions to buy DISTRESSED DEBT so be careful of JUNK & Sovereign JUNK & some commercial mortgages look like a dice roll only a FED hand out will cure….Also McConnell says to hell with the states…let them go bankrupt….reassuring to gray haired muni holders?? Some states like Colorado & Alabama can’t run up debt so it’s a moot point. For those of you who like extra shots of Sherry in your Lobster Bisque…maybe High Yield in OXY WPX & single asset/single borrower in high quality Hotels & Resort. So what are we focused on in the near term until we see CLARITY over TIME… Our focus is relatively short term & relative quality (VUSFX VFSUX VMBS)
Any Questions??? email us @ option [email protected].
US Dollar
As we have said..the Dollar is the one eyed man in the valley of the blind…as the entire world is running up so much DEBT on top of DEBT with no GDP that who knows what this paper is worth? Volatility has left the building in FX this week as we are basically right around the 100 the price equilibrium of the last 3 months. What is the Yen & Euro doing..both of which have been on the ledge of their converging 50 day & 200 day moving averages? The Yen is 107.46 with the averages BOTH at about 108.32 so we would view a break OVER those levels as NEWSWORTHY while the Euro is priced @ 198.21 with averages around 109.50 & 110.50 so moves above those levels would get us to take notice…the commodity based currencies of Canada & Australia are holding their rebounds but all of this begs the question..What are the waiting for?…Central Banks meet this week & Economic Numbers are rolling out…our guess..that’s exactly what they are waiting to see.
Crude Oil
What a difference a week makes after the historical negative pricing on the May expiring contract (minus 40 bucks!). We would not discount another rendezvous with price weakness ass June expires but -40 does sound like capitulation to us…..if DEMAND return which has been true before with excessive low prices then we still have a fair chance at a rebound by year end and a set up for better things in 2021….IF NOT bar the door Katie as defaults & bankruptcies will engulf the US Oil business. Trump says he’ll be helpful, Buffett took OXY stock in lieu of cash for $200 mill payment do & Carl Icahn said he thinks assets look good the risk reward looks OK…add it up and it seems to us as constructive behavior….but they could be wrong. The refineries could have pretty good margins so we focus on those cos.
Gold Silver Copper
Well we got our new highs on GDX (now you DO NOT want it under 30) but now Gold has now twice faded off 1800 and Bank of America is calling for $3,000 and the Gold Coins continue to command HUGE premiums over spot. There is so much room between the 30’s and the former highs near 70 that seeing if we can maintain above 32 and a break of 1800 BEFORE adding to core positions from lower levels seems prudent….in a bull market they say buy PULL BACKS…Silver as we said has 50-200 day moving average resistance in the area of 16-16.50….SILJ has rebounded but not above its 200 day M/A at about 10 so the jury remains out…Copper still meandering between 2.00 and 2.50 nad FCX cut spending & projects to shore up their balance sheet and prepare for making it thru to the other side of this thing. On our radar…GDX GDXJ FSAGX KL KGC NSTG AEM AUY SBSW AGT Pluss PAAS SIL SILJ NEM WPM SCCO and others.
Do you have questions???…email us @ option [email protected]
Soybeans Ect
Well a big story is the meat plants & the jump in Beyond Meat stock (some say if you didn’t like fake meat before you won’t now and 130 area-Feb highs-could conclude a panic run into the stock of the last week and month-lots of short interest….dangerous game…only time will tell)…..Corn & Sugar got pressured during this oil fiasco as ethanol usage /supplies are out of whack or perceived to be…..Coffee has faded away a lot of recent gains ass deflation vibe still running around…for how long? As we said our gut feels that Soybeans could go 9-10-11 under the right circumstances (China-Weather?) but need moves about 8.80/9.30/10 to get that ball rolling and we’ve rolled the other way….Gut is not price evidence…so we wait…..
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