Update 75: Liquidity Rally or Short Squeeze?

January 10, 2020
Opinion & Observations

Welcome to 2020 and the new decade ahead……where are the potential big trends and will last decade’s winners be this decade’s winners…..history tells us that is not always the case. In the first 10 days of 2020; many stocks and stock indices ripped upward.
People tell me the fundamentals don’t matter and it’s a New World Order but decades of experience tells me otherwise.
In the decade ahead “the cloud” and “AI” are projected to be the huge growth stories so I will be looking into that genre of stocks.
This Week/Next Week…we saw jobs grew at 145K vs 165K estimate..wages slowed and total jobs created in 2019 was the lowest since 2011….more upward pressure and new highs all around….don’t fight the tape & don’t fight the FED….so the tape has been soaring and the FED has injected $400-$500 Billion into the system since summer with more expected on the way. All over the world Central Banks have been expanding their balance sheet like no tomorrow (in 2008 Central Bank balance sheets totaled $3 Trillion and now exceeds $16 Trillion) with buying your own securities and corporate securities common worldwide.
NEXT WEEK..we get bank earnings..China Deal signed…talk from US & Japan Central Bankers..China GDP..US Ind Prod./Retail Sales
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STOCK MARKET
…..Badmouthing the stock market is like badmouthing Santa Claus….it has been silly. However; our opinion is that if your in a an airplane or a Porche going at a blazing speed and it seems everything is OK…it’s probably not a bad idea to keep an eye on the gauges on the dashboard. With that in mind; let’s look at the gauges on the stock market. Relative Strength Indicators are running hot…the % of SP stocks above the 200 day moving average is 82% (high reading)…put/call ratio is at a low reading & the VIX has a 12 handle (complacency),,,short interest in SPY (S&P ETF) collapsed in the last 3 months (short covering) and stands at a historically low level…money flows into leveraged long funds jumping big time…earnings last year were flat (even Apple which is now over 40% above its 200 day moving average…over $1.3 Trillion market cap) and Buffett supposedly sitting on a ton of cash.
Valuations are in the 18-20 times forward earnings neighborhood which is historically high (2007 was 16)…so what’s to do??
Our opinion has been since the break above 3050 is to wait for a formation (the higher it goes maybe the bigger & sharper the drop)….maybe a weekly high on the S&P 500 with lower weekly highs surrounding it (not seen since the breakout Nov 1)may be something to trade against or consider option hedges-married puts and-or collars (learn all uses & risks-subsequent alternatives.
TJ Maxx & Ross have done well buying discounted merchandise for resale while FB has withstood a lot of heat…SBUX & HD are trying to turn…BABA, BIDU, JD>COM, TCEHY, KWEB, BILI, IQ, and TCOM all China stocks that have picked up interest…lots of all time highs MSFT, LAM, ADBE, ROST, and CHTR while newcomers like DDOG, CRWD, LYFT, UBER, and SNAP trying to gain footing. The laggards since DOW 28,000 include Walgreens, Boeing, HD, DOW, RUT, DJTA,and CHV while AMZN hass picked up but competition and valuation are now being whispered. DANGERS include earnings/GDP misses-inflation-FED stops liquidity high.

BOND MARKET
Yields on 10 year Treasuries appear stuck between 1.5% and 2% (some say this year is 2% across-GDP-Inflation-10 yr Yield)
Central Banks worldwide are cutting rates and injecting liquidity so every bum on then block can sell debt and caution has been thrown out the window (CCC junk debt has soared in the last 2 months and some touting it as the place to be…yikes!). The thirst for yield is creating strange bedfellows (income investors & bonds with bad covenants). European & Emerging market debt is flooding the market and for now there are plenty of takers but these instruments have lousy liquidity in times of stress so fear 2 words “redemption run”. Spreads are tight and the Fed is loose..we watch TLT proxy for 20 yr Treasuries…above 142..rates could fade big time (slow economy more Fed cuts) and below 135-130 maybe we overheat-inflation up and a rate rise to 2.5% +

US DOLLAR
Brexit happens and commodities (Gold-Oil) roll then the possibility of the Ausssie/Canadian as well as the Pound Sterling & Euro could rebound after years of demise pushing the dollar through that support 94=95…not yet as it is still in the middle or range.
Balance sheet going back or exceeding all time highs plus fiscal deficits exploding late cycle could be the recipe in 2020. We’ll see.

CRUDE OIL
the debt of the oil industry is back in favor despite no free cash flow and the dependence on higher prices to make their futures reasonable. Juicy yields area magnet to income hungry investors and if oil can trade 65-80 then all’s well that ends well however if we slip to 40-60 watch the default meter. Most oil stocks had a run but are pulling back & we’re monitoring some cheap ones now.
We broke under 60 crude this week on huge volume so a snap off 58 on lighter volume may play out (50 day M/A 53/200 day 55)

GOLD & SILVER

Our view has been that Gold broke out above 1350 last year and overdid itself at 1580 (lows of 2012) so the call was pullback consolidation (we saw 1450 area)…we broke out above 1525-1550 and rushed above 1600 and now it’s important to holds the breakout point…let’s see and remember if you believe it is a bull market..you buy dips…GDX is still holding above 200 day M/A

SOYBEANS/SOYBEAN MEAL
Well China is coming to sign the long awaited deal and the beans/bean oil had seen advances in the weeks leading up to this but beans have had trouble breaking and holding above the 950 area so we will see if this can be a catalyst or a buy the rumor sell the fact event…watch other things like the Bloomberg Commodity Index to keep up on the sector

REMEMBER…There is a substantial risk of loss in short term trading and options trading and it is not right for everyone. Ask you brokerage firm and broker about your own suitability. Past performance is not necessarily indicative of future results
Use Risk Capital Only.

OptionProfessor
 

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