Update 117: Stock Market-Red October-Falling Knife-Read More..

October 31 2020 Option Professor Opinions & Observations

Happy Halloween & A Scary Week It Was!!…..Well our readers are well aware of what this Sept Oct Nov time frame could bring because we told them in AUGUST to get prepared….HIGHS in SEPT SP 3580 & Nasdaq 12,400 followed by sharp drops…followed in OCT with FAILED rally at SP 3550 & Nasdaq 12,200 followed by this drop….we told you of ways to PROTECT your portfolios using among other things COLLARS (sell calls/buy puts)… plus MARRIED PUTS (rights to SELL) and REPLACEMENT TRADES (limited risk calls/call spreads). We now have no STIMULUS–Q4 GDP CUTS–SELLS on great earnings reports (we told you about BUY Rumor-SELL Fact) & Spiking COVID Cases (500k RECORD last week). We see the 60-40 portfolios aren’t helping as BONDS fell with STOCKS last week–double whammy. This may change if STOCKS go down further as the DOLLAR & BONDS may be a safety trade temporarily if investors DITCH Stocks & Gold in November-Dec. Lots of people on UNEMPLOYMENT & Claims numbers while improving are PERSISTENTLY high. More layoffs coming at Raytheon-Schwab ect & wages-benefits are sluggish. Households overall are said to be in good shape but renters and homeowners in the millions say in NOV they are uncertain about making their payments. The yield curve is steepening and tax rates on capital gains may rise…both NOT welcome news to HIGH valuation tech & Mega cap growth….and pulled forward demand is a risk into year end. AMZN said their shipping costs EXCEEDED revenue growth and less user growth was problematic to others. Without BUYBACKS some stocks like AAPL have a harder time as I-phone sales haven’t been great and China seems to be waiting (-29%) to see the value of I-12. With EARNINGS on SP at $1.60 a 20X valuation is 3250 (this weeks lows)…..should expectations SLIP or Valuations CONTRACT….this is how the other shoe drops. THIS WEEK the FED & Powell will talk & we have a JOBS Report.. maybe see a snap rally???? The BIGGER QUESTION is WHERE DO WE GO FROM HERE??….READERS know OUR OPINION and it remains the same since AUGUST…..the SEPT OCT NOV time frame (maybe a little into Dec on some markets) you see a LARGE DECLINE in STOCKS-GOLD ect to CORRECT the OVERBOUGHT conditions (LT Moving Averages-REVERSION). No Stimulus-Virus Spikes- Q4 Slower GDP & the Election will be blamed. Many talk of the SIDELINE money but we have spoke of the OVERCROWDED trades and VALUATIONS that are ABUNDANT. We don’t know if SP 3200 will hold thru the year end…we have our DOUBTS but we DON’T FIGHT THE TAPE nor THE FED (but their job of stabilizing DEBT markets is mature). Let’s face it most investors are in STOCKS & GOLD and are HOPEFUL but we feel you respecting the POTENTIAL of a DEEPER Q4 DECLINE closer to their 200 day moving averages makes sense which is where the BARGAINS may BEGIN for 2021 as STOCKS-GOLD-VALUE-OIL may APPRECIATE handsomely from STIMULUS-VACCINES/THERAPEUTICS-WEAKER DOLLAR-STEEPENING YIELD CURVE-INFLATION & T.I.N.A ect. & a much more pervasive re-opening of WORLDWIDE economies. We SHOULD see a SUBSTANTIAL RALLY but FROM WHAT LEVEL?? RIGHT NOW it looks like TWO THINGS we suggested HEDGES & DRY POWDER are still Working.

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Stock Market

It was a BUY the Rumor SELL the Fact for the most part last week which is EXACTLY what we suggested last week in the Update. Investors got real comfortable at HIGH ALTITUDES and forgot where the long term moving averages are in most markets (AMD didn’t f orget as they and others are using found money (their stock prices) to finance acquisitions (never happens at the lows). News abounds as the CDC gave an OK to cruise ships (CCL) which also helped some airlines. Fisker came out.. got a poo and then fade. Pinterest went from 50 to 70 then faded to 60 while the double TOP in biotech (IBB at 145) got more proof as we saw a fade and GILD lost steam. As we told you…higher yields is not helpful to the red hot housing market LEN ITB ect so they have seen a fade lately. Banks also seem to like the steepening yield curve as JPM/KRE popped but need more price proof. CAT turned around nicely but after it fills the gap around 160..will it have legs. YUM & GE are trying to turn while China stocks (BABA KWEB) pulled back & some wonder if Europe & the USA are seeing a second wave–China next? This week we’ll see if SBUX MCD CMG CRM ZM ($130 bucks off highs) ect. can regain footing. After such a big drop we could see a snap back rally as the VIX is near 40 suggesting almost 3% volatility…..we told you the VIX inability to get UNDER 20-25 for any length of time was a WARNING signal; as when we were at SP 3400 highs early this year.. the was VIX near 14-more normal. The next 2 weeks-SP 3400 & 3475 GAPS above…filled?? Our position is that not enough PRICE PROOF so premature for Table-Slamming

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Bond Market

Yields rose (Prices Fell) and Stocks Fell…not exactly what your friendly financial planner said would happen….as we told you MONTHS ago..we may have seen a historic turn in Yields in March-April as investors see the joke rate they earn and the risk of duration in a printing press world. Well we continued to see an exodus this week but we caution in the short term a further decline in stocks by year end could see a safety trade send money into bonds temporarily (yields back off)…..but sometime in 2021 we expect deficits/stimulus-reopening/supply demand imbalances/dollar weakness to be problematic for duration as the yield curve steepens further. TLT had a blow off top at 180 and fell to 155 area…a pop out of this neighborhood is not off the table. We favor Short Term IG corporate–LMT Munis for now. The risk of EM debt reared its ugly head but maybe a slight bounce coming.

We follow Fixed Income-Got Questions? email [email protected]

US Dollar-International Markets

European markets had a tough month across the board as their Leaders consider more strict curbs on activity to quell the spike-our leaders seem oblivious to our 500K spike last week (of course they have doctors with REMDESIVIR on speed dial & the poor souls in attendance use Nyquil). Lagarde says Dec 10 they will reassess ECB policy but admit the data is eroding. China’s % of global GDP is soaring as they march on despite USA rhetoric & ANT raises something like $2.5 Trillion and smash all records. Japan which is on our Radar List had factory production up the most since 1973….also the last time we dunked a basketball…in other words a long time & the labor market is showing signs of bottoming out….The US Dollar is still holdin the 90-92 level and if we see a further decline in stocks by year end a temporary rally as a safe have still on the table-bad for Gold & Euro. China is trying to get more transparent on the yuan while the Yen & Can $ still unable to break downtrends…Auusie $ still languishing but holding 68-70.

Got FX-International Stock Questions? email [email protected]

Crude Oil Natural Gas

More trouble for oil this week as DEMAND abates with Virus spike & stockpiles increase-a double whammy short term. XOM is cutting jobs in an attempt to preserve the dividend (which keeps people holding on). We will maintain our view that $30 area will be aided next year by more increased DEMAND (re-opening/jet fuel) and going into the 40-55 area in 2021 could occur if no external forces hijack the market (OPEC-Virus). CVX KMI SLB COP XLE are decent places to look after lows established-nice yields too. Natural Gas spiked to 3.50 (we got bullish at breakout point of 2.00) but Caveat Emptor as this is a thin volatile beast and LNG still can’t return to 52 and FCG hasn’t broke above $7 despite the fireworks in the underlying???

Gold Silver Copper Bitcoin

These are the hedges against INFLATION & a WEAKER DOLLAR (Copper of course has tight supplies & an Infrastructure-housing play). Well the Dollar stopped being weak since AUGUST which coincided EXACTLY with OUR CALL that Stocks would peak Gold peaked at $2100 & Silver peaked at $30 bucks in the SHORT TERM. Early this year & frankly for a while before we liked GDX GDXJ SIL SILJ & many more but the BLOW OFF short term move and the PANIC to buy had us lean to pullback & correction…not any price evidence yet to change our view…in fact a Gold Council this week said Q3 Gold stats showed DEMAND declining as high prices hurt jewelry sales BUT investor DEMAND was up & coin & bar DEMAND rose 49% (good salesman) BUT this hit us..Central Banks were NET SELLERS in the quarter…..we look for a better potential prices later this year for traders and an up move 2021 FCX has been our call for Copper but warned that short term overbought and 13-14 would be monitored for add ons (we entered in single digits) Bitcoin remains a long term potential-GBTC the vehicle we use if above 10.

Soybeans Sugar Coffee

We told you last week that our bull market in Soybeans (we got positive in the $8 area) could see a pullback as it would not be immune from an across the board hit in financial markets and indeed we shave 30 cents off last weeks highs-50-200 day MA’s are at about 10 & 9 so stay tuned…..Sugar prices (which we told you turned positive at 12.30) got hit this week for the first time in 5 weeks (nice run) but failed to get above 16–breakout point. Coffee we told you is one of the few commodities with a surplus (that is one of the reason commodities have a bright future potentially VCMDX)..still holding 100-15 but above 108-115 needed to get the flow more northenly.

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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