Stock Market-Switch to Value Right Now? Read On….

July 17, 2020 Option Professor Opinions & Observations

Greetings Everybody! Another week of change in leadership for stocks as Value & Cyclical stocks OUTPERFORMED this week particularly in Materials, Transportation stocks & the Russell also known ass the LAGGARDS. The banks announced their earnings this week and on balanced were well received HOWEVER…their Q1 profits came off making money off the CRASH & Q2 profits came from the FED bidding up all their lousy securities…. TRANSLATION…..these two profit centers may not be REPEATABLE ergo a ton of money has been set aside for inevitable loan losses by business & consumers who can not sell JUNK bonds in the public market to raise capital to bridge their circumstances. Deposits were strong (B of A +21%) but PPP is depleted and the extra $600 UI rolls off next Sunday with the effect being 25+ million don’t get about 15+Billion per week and GDP could get dinged by 2.8% and this week claims were at 1.3 Million. Speaking of B of A; they did a survey of fund mangers and the mood was 72% bullish while the VIX is hovering in the area of 25…lowest we’ve seen since the crash……earnings next week & Mnuchin will be begging for more money while Trump tries to attach a payroll tax cut to the deal (budget deficit was a $Trillion+ BEFORE the crash….now an absolute joke). We’ll see if they do better than the EU who met on Friday and were miles apart on a $2 Trillion plus Recovery Fund. NFLX disappointed and traded almost 100 bucks off its recent highs….WED after the close MSFT announces and with a stock bid up like that the numbers better be good (trades 10% off highs). Most of the high flyers (AMZN ZM PTON TSLA TDOC DOCU ect) look like they may have had a short term blow off peak…….with nosebleed P/E ratios….the VALUE stocks got bid up in the last few weeks (ROTATION)…why not??…..the sequence has been tech/growth/stay at home stocks/disruptors/free cash flow won big and if the economy is on a return to regular activity coming (vaccine)…then the laggards could go back to their highs too…..maybe 20-40% higher then today. One investor was saying that rotating out of P/E’s in the 30-50-100+ area to single digit P/E’s was a no brainer…..even if it took time patient money can also be smart money….again not a lot of Buffet buying in TSLA @ $1800, Cloud computing has lost some steam with AMZN & ADBE which could be a tell for the sector……would a trading range at this point be a shocker? Moody’s list of financially troubled companies hit 414 at the end of June which was 42% HIGHER than after GFC in 2008. Delta was burning $100 million a day in March…now ONLY $ 27 Million…how ‘d that happen….job cuts and less routes….across the board…that’s how earnings will return to PEAK levels…no employees & no rents and revenue ultimately rising. Our view is and has been since the LOWS of MARCH the barbell approach…. tech-large cap growth-consumer discretionary combined with materials, industrials, energy, and financials. It’s been the right call so we stay with it. STAY TUNED…next week may be a DOOZY…earnings/stimulus/breakout?????

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Stock Market

As we said the LEADER BOARD saw some movements as stocks like CAT, JBHT, UNP, RUT, IYT VHT IBB all had strong bids while AZN is expecting news on MONDAY on the trials for their vaccine & MRNA was also bid up big time. This may be bad news for smaller bio techs as it looks like big pharma has a distinct edge in this race on a number of levels. Other ETF’s that had a good week was VALUE like VAW (best of breed) VIS while energy (China says they’re selling out of their stockpiles & OPEC is talking about easing supply restrictions)and Financials as well as maybe the reality of Jamie Dimon’s comment about a “Murky” future visibility & the loan loss provisions sobered up the bulls….and the transitory source of the profits. The DEFENSE contractors did well RTX GD LMT MLM ect so with all the rhetoric with China and an election coming..her’es hoping in addition to blowing up the DEFICIT to get asset prices to rise…..we don’t have a military situation as Barr Pompeo & Trump seem to be getting pre-election anxious. On alighter note…FORD is coming out with the BRONCO again…..first since 1996….word on the street OJ will be getting one for Al Cowlings:):) In the HOUSING sector; ITB & Lumber Liquidators (LL) was the play this week Other areas this week was cyber security FEYE HACK with the Twitter breach and Robin Hood says 40+K accounts involved with TSLA…..spec seems rampant & VIX near lows tells us either we take out 3250 or beware of a MSFT miss……we’ve not seen 3 consecutive down days in 91 sessions.

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Bond Market

The amount of DEBT worldwide is really off the charts. The IG debt issuance has been skyrocketing in part because the FED is viewed as as quasi underwriter and the search for yield has allowed sub prime companies to return to the debt market……the former FDIC Prez was saying some of these companies will not make it or will not grow into their debt liability…. the banking system will ultimately find these problems at their doorstep. Some say TREASURIES will move toward ZERO rates while GOLD marches to INFINITY…we think that’s a bit of a reach BUT we see potential VALUE in looking at TIPS as the rates on the long end may rise due to INFLATION (more dollars chasing fewer goods) while the short end drops (steepening yield curve) which also INFLATES asset prices ass it FORCES everyone on the the RISK dance floor….heaven forbid we save money in a risk free account. The Fed meets on July 29th…we should know a lot more about stimulus packages, more lending programs & other FED shenanigans. We’ll see if JUNK (HYG) Preferred (PFF) & Lev Loans (FFRHX) can clear hurdles. Short term corporates & tax frees are where we have parked mostly now.

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US Dollar/International Markets

It’s getting exciting in this neck of the woods…..the popular story has been the Dollar was in a SECULAR bear market and we were looking for more EVIDENCE that proved that case. This week we got a move to a 95 handle on DXY but closed above 96….we told you last week that the 3 yr MA was 95.50 and we were hesitant to get bearish at the bottom of the range (101-95)……HOWEVER…we have been BULLISH on the EURO since 110…and said the AUS $ had turned but the Can$ & Japanese Yen seemed stalled. The Euro has majority weight in the DXY and if we break ABOVE 115 EURO & Break DXY UNDER 95.5…then the scales would lean toward Dollar demise. Let’s see how this EU meeting goes over the weekend & the Fed Meeting July 29th to get clarity. We have some yield advantage & all Central Banks imploding. On the international front…as warned , China’s run had a pullback but BABA held 240 but the 270 seemed to reek of was 300. All other regions of EUROPE/JAPAN/PACIFIC SO KOREA EM close to breakout.

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Crude Oil

We have been suspicious of oil in the 40’s near term and reports that OPEC (Russia-Saudis ect) may relax supply restraints & China loaded up on oil at the lows and now may be dumping underscores our concerns HOWEVER there is a summer driving season among us and DEMAND could outstrip supplies but the oil stocks price blow off in JUNE still holds……longer term we remain bullish but maybe the oil market has gotten a bit complacent. Should we take out this month’s highs….we would go with the flow of $$$$.

Gold Silver Copper

Gold has made new highs this month but the follow thru so far not so great. The mining shares GDX & others are pressing 52 week highs but have a weaker RSI than before (short covering/volume exhaustion) & still are way UNDER levels of yesteryear. Impressive holding of the 1800 level has us still interested in ADDING but by EOM we should know a lot more. IF we see a Closing ABOVE 1820/1830…you can’t fight the tape. Big Support $1624. Silver had a great pop this week and as we told you when the Silver Gold Ratio is in the 100 neighborhood and the 1-2-3 yr MA’s are rising in the 16-18 areas so a jump ABOVE 20-22 could lead to ACCELERATION…SIL SILJ have been kind to us. Copper prices benefited the last month from Chile & Peru not coming back on line as fast as expected & China’s stock market resurgence. We have cleared the 1-2-3 yr MA’s so the next level is 3 bucks and if we do the OUTLOOK is good…FCX & SCCO we identified months ago.

Soybeans Sugar Coffee

Soybeans had a pull back and are mounting an assault of the 9.00-10.00 resistance zone…maybe a combination of weather & China buying could push us thru….time will tell…Sugar has been losing its legs since it was turned back at the resistance zone between 12-13….as long as we hold 10-11..we feel that later in the year it could resume an advance from historically low levels….Coffee is the new kid on the block….we think anything UNDER 100 is value and Friday we got a bang out of that area…still could get bouncy..IF we clear 105-110..sometimes it spikes..keep an eye on it.

REMEMBER …There is a substantial risk of loss in short term trading and options 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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