Update 109: Stock Market-Timber! Now What to Expect? Read More

September 4, 2020 Option Professor Opinions & Observations

Greetings All!…Last week we said this week would either be a Stampede or a Blow Off Top and who knew we got both in many markets! We told you that the VIX was RISING during the rally…not a good sign…and many other red flags and that you should have your HEDGING tactics at hand (such as covered writes/collars/married puts/replacement calls/trimming ect)….we also invited your emails for more information to take advantage of our decades of experience…those who emailed us were VERY glad they did. S&P price to sales ratio was at a record….46% of all S&P stocks haven’t gained in 2 yrs…ZOOM had a market cap of $130 Billion on 2 or 3 billion of revenues!! The Fed is playing a stupid game (Trump Powell Mnuchin) are private equity leverage guys and could care less about debt…..run it thru the roof…get every company in America hooked on borrowing…try to get the public hooked on borrowing (although the public is not so stupid ass loan demand stinks & money velocity is i the tank)…..hey maybe their plan is if we get asset prices soaring through VALUATION expansion we can all get re-elected on greed…if not our big donors get all their stock losses back and we’ll do business with them when we leave…..44% of GDP in QE this time when in the last crisis in 2008 it was QE 5% of GDP–9X More??……last time it took a number of years to get the S&P 500 back to the highs…this time a few months??…..what’s the rush to blow out the balance sheet & USA Debt? ..Corporations are leveraged to the hilt and some don’t have much equity not a good thing. Unemployment says it’s “down” to 8.4% but still almost 30 million receive some benefits….11 million still out of work..16-25 yr old jobless rate at 20%.. and cuts by airline and other companies are forthcoming. The Fed is saying rates low until inflation zooms back (with money velocity tanking that’s a reach)….so they are encouraging RISKY valuations/borrowing/investing…. some factors in the recent spike & fall was call option activity which went off the charts…in our view similar to 1987 “program trading” as investors (some say Softbank) bought stock and sold call or bought stock to hedge short calls which squeezed Tech in particular and then the last 2 days unwound those positions (sold stock bought back calls) …all very risky activities as liquidity is problematic (we told you last week that if we roll over the SELL volume would DWARF the BUY volume EXACTLY what occurred). Now we have a vaccine on the way Nov 1 or 2 days before the election…we sometimes think we’re watching a suspenseful TV show (Remember Dallas & Who Shot J.R.?)….but this VIRUS is not a TV show & our people are not actors. Our Trade Deficit is Soaring!! So WHAT’S OUR VIEW RIGHT NOW?….well the best case is that we go into a TRADING RANGE and we work off some of the EXCESSES such as distance from the MOVING AVERAGES/VALUATIONS/COMPLACENCY and settle the VIX down after it jumped about 60% this week topping at around 38…it shrank during the drop so as a contrary indicator could mean a further bounce (from Friday’s lows TSLA-AAPL-PTON-AMD rallied 7% to 13% but S&P & Nasdaq sold off a bit into the close. WE suspect and brought to your attention that sideline investors ($5 Trillion) may be more comfortable in Banks/Health Care/Industrials/Materials…..Value-Dividend payers than speculating about Work From Home/Cloud/5G/Semis that may have to catch up with their valuations…which could take time…..expect a rocky road… consider selling cash puts on VIX spikes like this week on stocks you want to own (big put option selling activity on AAPL & MSFT this week)….but as we told you for a while..SEPT-OCT-NOV….is a potentially VOLATILE time and may not be for the faint of heart….having HEDGES on that puts parameters on your equity seems reasonable….we expect rotations & reversions to the mean…..LT..The Fed says Unlimited QE & no return on mmkt….T.I.N.A lives

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Stock Market

Well it had to happen at some point..the stuff that had been running since March that we brought to your attention back then ..Tech-Mega Cap Growth Semis & Consumer Discretionary (VGT MGK SMH VCR) had to come back to earth at some point and this week they did this week…S&P 500 came back to it’s former highs at 3390 (actually traded thru it) and if Nasdaq is to do the same we have at least a further 10% drop ahead…the Fed has obscured the real value of many markets with their “intervention”…from Treasuries 180-1 P/E…Investment Grade 50-1 to reputable stocks (AAPL 40-1 LULU 86-1) so anything is possible….we could go back to the highs or a little beyond or test the 50 day on the S&P around 3080 or the 200 day around 2900 so our base case is wide trading range and heightened volatility. Some like money center banks & regionals (VFH & KRE)….a diversified basket of dividend paying stocks (MGV VYM SCHD)….while sectors like REITS Industrials-Small-Mid Cap Value-Materials gain some traction (VNQ_VIS VAW VBR VOE). Our understanding is Quatum Scape is coming to market in Q4 with Bill Gates & VW involved & Michael Jordan (who knows a thing or two about gambling) hooks up with DKNG….Buffett sold another 1/2 of his stake in WFC and may dump the rest (stock rose Friday)…the transports ( FDX UPS UNP) seem to be enjoying big volumes while QCOM & AVGO may be best bets in 5G right now NVDA got hit on overvaluation but on the horizon you’ve got console, cloud, data centers, bitcoin and best yet Sony Play Station is expected to be a rock star when it comes out not to mention business wit EA & Take Two…..Phase 3 Virus trials happening and PFE AZN MNRA are lead dogs…speaking of dogs..Data Dog DDOG hass been hit but some are looking for long term value soon….Biotech is also on the radar as IBB & BIIB are both at junctures as we said epicenter stocks are coming back (CCL just had a cruise to Italy) so Department stores (M KSS JWN) hotels (MAR) Borg Warner had caught a bid…and banks with heavy credit card exposure (C COF) have come back strong….QQQ broke a long term uptrend so we will see if that portends further corrective price action…if you’re long term bullish…selling cash puts on volatility spikes or sell puts/buy calls if you think we are near a turn are strategies to price out….ass we said last week…Caveat Emptor Sep thru Nov

Bond Market

The story here is the steepening of the yield curve despite the drop in stocks which could mean the drop in stocks is over soon or it could mean that the forecast is for economic boom to hit when we get the vaccine. It could also mean that the Fed iss losing control of the long end of yields. Some belive EM bonds offer good value and if you believe in the banks the preferred are worth a look. High Yield bonds lost some ground this week but truthfully; like we told yo last week…the debt market prices are extended and a reversion to the mean started last week. More QE in Sept…well if Powell is doing a reelection troll then expect it & maybe a stimulus package to boot.. .CHina’s talking about selling bonds which also add uncertainty…the 3-5 year duration appears anchored and as we told yyou for many months…limited/short term duration corporates & munis not a bad place to park…long term bonds on the other hand seem like a suckers bet..low yields Mortgages got better news on performance and rates down to 2.85%….low.

US Dollar/International Markets

The Dollar Index hit a 52 week low on Tues at 91.75 but turned around by weeks end to close at almost 93 after having pierced that level. In contrast..the Euro tried to break 120 and failed to sustain it so we went home at 1.18 area…another potential REVERSION TO THE MEAN trade as the 50 day MA is 1.16 area and the 200 day is 1.11 area (just above the 110 area we told you was bullish)…we got a bounce in the Japanese Yen but still under resistance while the Canadian $ remains weak and the Aus $ remains firm….in worldwide stocks (VEU VXUS) not going anywhere and Brazil (EWz) faded off its advance last week….Japan (EWJ) slipped as well…China slide down (FXI) despite good manufacturing news…and in Europe France Spain Germany all gave it back (EWT EWG EWQ)…emerging markets and their debt realtively stable (VWO VWOB)…stay tuned…volatility ahead

Crude Oil/Natural Gas

OK..we told you we were suspicious of Crude prices in the 40’s short term and that paranoia was deemed warranted this week ass we got a nice $5 dollar drop from 44-39….the catalyst was oil rigs counts rose and even a Hurricane couldn’t slow down the refineries but did shut down more than 80% of off shore production in the Gulf of Mexico…longer term into next year we are still constructive on the oil supply / demand dynamic. Natural Gas is a market we have told you about when it broke above 2.00 and has since continued up toward 2.75 (great move) but this week settled at 2.57 so it is extended and could have a pullback but seems like it may want to make a run at the 52 week high at 2.91…a break of 2.43 (weekly low) would hurt. On the stock side..the majors (XOM CVX COP) all got hit and need a good 3% to 10% rise to get going while LNG is at 52 with 50-200 day MA’s around 5o

Gold Silver Platinum Copper Bitcoin

A full slate of Dollar/Inflation Hedges here for you..we told you last week we are in trading ranges which often happens after parabolic moves (like stocks) Gold 2100-1900 Silver 30-24 Platinum 1100-800 and we remain in them albeit testing the lower boundaries. GDX GDXJ SIL SILJ are all on the defensive and we hope to be able to load up before years end at discounted prices to be set up for an advance next year….we’ll see how the cards come out….Copper got above 3.00 and sso far has maintaine it depite housing stocks taking a bit of a hit and lumber prices tanking from 934 to 781 before rebounding to 875…wild ride….Bitcoin has been volatile from around 13 grand to 10 grand and closing at 10600…look into GBTC for exposure.

Soybeans Sugar Coffee

OK!! Last week we told you are patience paid off in Beans ass the broke 9.50 and ran to 9.67…so this week we maintained and added a few cents…now the hard part 10.00…can we do it..we’ll see but so fat the move out of the 8 range has been welcome….now the patience for Sugar has NOT been rewarded as the fade off 13 has taken us under 12.50 (not good) and truthfully the land of milk & honey is on the other side of 13 so something feels wrong here unless we can regain upside momentum. Coffee ass we told you was a buy under 100 and then again on a pullback to 110…this week we saw a RUN up to the highs of 135..a real winner and while we are extended…right now no evidence of a turn down-let it ride on a short leash

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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