Update 74: End of Year 2019/New Year 2020
Option Professor Observations & Opinion
December 31, 2019
Happy New Year Everybody!!
This Year/Next Year……WOW..What a year 2019….Stocks started the year coming out of the tank and with no significant earnings and revenue growth managed to post banner returns December saw stocks have their best month since 2010. The Fed cut rates and provided liquidity (QE?) to drive up their balance sheet dramatically. Central banks around the world cut rates and the yield curve inverted (recession precursor) in Jan only to widen out dramatically by year end (classic pre-recession behavior to some analysts). The trade truce and the bottoming out of global markets & PMI’s had the bears running for the hills. The rising tid elifted most every boat even ones with holes in them (CCC debt had it’s best month in Dec since Jan). As we close out the decade; the biggest winners were ETF’s focused on biotechs & techs where many jumped over 400% in the last 10 years. We had changes happening when you look at Jan to Oct and Oct thru Dec where US Stocks saw 40% of its growth in the last 3 months of the year while Income ETF’s saw a dramatic decline after a huge influx in the beginning of 2019. Overall; ETF inflows were up over 7% for the year and up the 2nd most ever as total influx of capital. While US Stocks and International saw growth annually in inflows below average in the 5%+ range; Income ETF’s were 18% and Gold was up over 20%. SPY had its best year since 1997 NOW WHAT?…Good Question….The SPY short Interest has dropped to the lowest level since October 2018 and we all know the SPY itself has soared thru the roof so far peaking on Friday December 27th. The VIX hit its lows in April at 11 and retested that neighborhood in late November. After the Santa Claus rally which tends to bleed into Jan; we must ask ourselves a number of things like:was this a short squeeze year end buybacks by corporations that needed to do year end transactions? Will Earnings, revenues, and guidance support current valuations or expose them? Despite seemingly increased costs in our daily lives; will the enormous printing presses of the Central Banks come to cause inflation to move beyond targets? If the shorts are all blown out and the trade truce is priced in as well as many buybacks done…what will be the catalyst and who will be willing to bid up prices here? Questions? Contact us @ [email protected]
Stock Market Some of the areas that I will be focused on for 2020 are the areas that closed out e year pretty well such as Financials,Health Care,
Large Cap Pharma, Hospitals and many more. Also streaming companies like Apple TV, ViacomCBS, Comcast, Peacock & Disney who some call the king of all content. I will be careful of NFLX as increased competition skyrocketing costs of content creation may cause their valuation questioned much like what has occurred with AMZN in our view. Another cautionary tale could be TSLA at these levels should deliveries disappoint. A number of ETF’s that are interesting to monitor include BBUS, GSLC TTTN KWEB and OGIG for a number of reasons. BUT…in the short term we must consider the decline in short interest combined with the elevated levels of momentum indicators (RSI) should we fail to make new highs as we start the new year…traders with big profits may take a stab at shorting the market should 3250 area hold for the next week or so. The 50 day moving average is in the area of 3125 and the breakout point was about 3030 so if we get a reason to sell (earnings?)….those would be areas of interest for the bulls.
Bond Market In 2019; rates tanked as the Fed switched gears and went from reducing their balance sheet to having it soar back up blaming some liquidity crisis…could be they saw the yield curve inverting (recession) and said let’s flood the short end maturities which will spread out the curve tank money market rates and force people into spending their money on riskier assets to get their returns. If you love asset bubbles; it’s working pretty well plus it has extended the cycle which is one of the longest expansions on record without a recession. Unfortunately Goldilocks is a fairy tale and at some point something may give like the value of the currency or inflation or both. Right now predictions on interest rates run the gamut from a 10 yr Treasury going back up to 2.25% to 2.75% and you have some saying 1.2% or below. One would think that a recession would be necessary to see yields tank to those lows but since ink, paper and digital entries are cheap who knows? The whole world got long Treasuries in a panic in 2019 when yields dropped to 1.4% area on the 10 yr from above 3% and panic moves aren’t always smart ones. These positions have been losing money as yields have risen and should the bond market be hit with an ugly trifecta….Dollar Index breaks 95-94….Oil -and Commodities spike….and Inflation meets and beats the Fed’s target then the potential risk of a redemption run could expose those that have threw caution to the wind in the Junk Bonds (up 16 Sessions in a row & Triple C’s best month since Jan). We’ll see.
We’ve stated that the DXY was in a trading range of about 99 & 95 and we closed out about 96 1/2. Since the peak in October of 99+ we have seen lower highs and lower lows but have still remained in the range while the 50 & 200 day moving averages are both about 97.71. Obviously the longer we stay under those numbers the chance of inverting to the downside increases conversely getting back in the 98’s could avert that possibility. Those betting on Gold-Silver-Energy to a lesser degree are probably thinking we will invert to the downside this year and we will blow out the bottom…..unless things turn around…maybe they have a point. Should we see fiscal stimulus globally & PMI’s, Brexit & trade truces are real…..the odds may just favor what Trump wants.
Gold-Silver Copper Big year end rally in the metals and the bulls drumbeat getting louder. As we said last year; your breakout was above 1350 Gold and your run to 1580 ran into the 2012 lows and was too fast & furious so a pullback consolidation was the call. As sstated; if we are in a bull market in metals pullbacks are to be bought and we identified 3 areas of price support in 1450-1400 and the breakout point at 1350. Those who took advantage of the pullback enjoyed a nice bounce up ass well as GDX and GDXJ not to mention the SIL as the long term 200 day moving averages have held up pretty well so far. As stated previously; the Fed wants inflation up and the administration wants a weaker dollar for trade…the may both get their wish…we saw a 20% increase last year in ETF flows. Bloomberg Commodity Index seems to have increased interest and Vanguard established VCMDX last year so stay tuned.
Well the China deal was supposed to help the farmers and the soybean and soybean oil markets have been bid up a bit but I read that because of the pork issue over in China the emphasis may have switched to Wheat due to demand issues…let’s monitor that and whether or not some of the softs (Coffee-Sugar ect) can build on some of the advances they saw in 2019. Being aware of the Commitment of Traders reports can sometimes be helpful but like anything not always.
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