Update 76: How Can You Reel In A Huge Fish?

January 19,2020
Observations & Opinion
How Can You Reel In A Huge Fish?

Last Week/This Week.. The S&P 500 & Nasdaq made all time highs this week while the Dow Transports (DJTA) & the Russell (RUT)
made new 52 week highs despite Q4 numbers disappointing from TGT and some of the banks not doing nearly as well as JPM.
No denying the RUT & DJTA picking up steam but still have not breached the 2018 highs that they made. This market is going nuts on the upside with most all technical indicators reading very hot. As we said since the breakout above 3050-3100; the best bet is to ride it as long ass we continue to make new weekly highs and once that stops then you can entertain hedging or selling tactics with some price action of exhaustion (a high surrounded by lower highs creating a technical point to defend. The trade deal is in, the Fed has supplied liquidity, Q4 earnings are coming in, short interest has tanked, rates have dropped, tax cuts done and we almost hit 3400 S&P, 30K Dow over 9K Nasdaq. Some very smart people think the odds have shifted and you should have less exposure to stock allocation now than you did 3-5 years ago…the direct opposite of most forecasts. Speaking about smart people; The Davos Switzerland meetings of the minds happen this week…let’s have a listen to what risks are out there now that many dismiss.

Stock Market

Let it run has been the mantra from us since the breakout in November as we have not seen many weeks where the markets have not made new weekly highs and certainly we’ve seen continuing monthly highs. Anyone who has gone deep sea fishing for Marlin
and Sailfish know the importance of letting the big fish run itself until exhausted and then it is much easier to reel in so ditto that concept with our current melt up built not on boring things like earnings and fundamentals but rather liquidity and momentum.
As we approach 3400 S&P and then if breached 3700-3800; we will be monitoring the market for signs of a potential turn. We suspect causation may come from earnings and GDP shortfall, a geopolitical event and the FED suggesting that this FED balance sheet spike that traders have been drooling over may slowdown or an explanation of an exit may be forthcoming. Stay Tuned.
On our radar stock wise include UNP, INTC, CMCSA for transports, tech, and streaming plus pharma like LLY & BMY, TEVA. Green investing (Black Rock cited in a recent report-ESG investing) with stocks & debt dealing in sustainability could be worth a look.
After correcting; consumer driven companies like SBUX, MCD, and HD have been catching a bid lately. We saw a sample portfolio using ETF’s like ITOT (US Equities, AGG (US Debt), IEFA (International Equities), IEMG (Emerging Markets), GLD (Gold) to create a diversified approach could possibly have some value. Germany & France +2% & Italy & Hong Kong up 3% to start 2020.
Questions? contact us at [email protected]

Bond Market

The FED obviously wants to steepen the yield curve as they worry that an an inverted yield curve (short term rates higher than long term rates) which we had earlier brings up recession talk and hurts growth as it infers things will be slowing down considerably. The 2 ways they have changed the yield curve has been to buy tons of short term treasuries (reducing their yields) while now moving out the duration curve and selling 20 year Treasuries (bought by pension plans & insurance companies-supplies can weigh on markets and push yields higher). This has created an elevated value on asset prices that the FED (Kaplan-Dallas Fed) says they are aware of and keeping an eye on now. Also; there is a cost to expanding the balance sheet aggressively (Kaplan says NOT QE) and tapering that activity and communicating how balance sheet normalization may occur is something NOT factored into current prices. The risk of debt is being dismissed globally as examples include the run into CCC junk (high yield spreads near 10 yr lows-& some IG deals were sidelined due to earnings), Sovereign Debt (this week Italy $40 billion 30 yr & Spain $53 billion in 10 yr debt) despite bad economic numbers out of the UK (GDP & Inflation Numbers) and Germany (weakest growth in 6 years) sso how good could Italy & Spain be doing especially since Trump sending out “your next ” vibes for German cars & France’s tech digital tax woes.
One area to check out are “Green Bonds” some linked to the issuers to meet certain metrics or face higher yield consequences.
To keep it simple stupid (KISS theory)..we’re focused on TLT the proxy for the 20 yr Treasury…a break above 140-145 would tip the scales to lower yields (some see a 1.20% of less handle) while a move under 135-130 would indicate that all those who panicked into 10 yr Treasuries at 1.40% and looked for yields to go Japan & Euro on us will be very wrong and combined with a FED taper and inflation pick up-Dollar drop could increase volatility which in our view is the biggest bubble ever. Let’s see more cards.

US Dollar

The yield advantage of the USA to Japan & Europe and our economy relatively stronger continues to underpin the dollar.
We have said here for over a year that the range is ball-parked 99 and 95. They did peeked the market above 99 briefly (blow out stops of shorts & get short themselves) only to see a 300 basis point move to 96.50. We now sit with a 97 handle smack in the middle area of the range. What breaks us out? I suspect deficits, inflation and GDP-Earnings disappointments could send us lower
while growth surprises and a FED that backs away from the liquidity explosion could keep us stable to higher. Japan debt to GDP iss a joke and Germany has no current appetite for fiscal stimulus and who knows how Brexit plays out so for now the buck is ok.

Crude Oil

Crude popped to 66 area with the Iran skirmish but tanked back to 58 area when things calmed down and inventories rose a bit.
The 50 day and 200 day moving averages are inverted to the downside around 54-56 so the longer we stay above those levels the better for the bulls. Stocks such a s SLB & HAL have pulled back after good runs and some say high yielders like RDS.A, BP, XOM, CVX are worth a look as ARAMCO is alive and well and maybe prices could re-accelerate ass we go into the summer drivin season in the months ahead. CCC debt which has been performing well has lots of energy representation but these companies who issue that debt are very dependent on higher prices to make payment ass they do not generate a lot of free cash flow. Caveat Emptor


Our feeling on Gold has been that last year we broke out above 1350 and ran to 1580 which was the lows of 2012 and also was way way above its 200 day moving averages. So; the idea was pullback to some former resistance zones and burn off some excess fuel (1450-1400-1350). We got between the first 2 levels mentioned and then screamed to 1600 momentarily only to fade back toward a recent resistance zone at 1530. Silver has followed suit while Copper raced toward its resistance area near 3 bucks and 3.50 looks like a challenge as well looking at long term charts. If China picks up and infrastructure get passed in the USA; we would feel a lot better that sustainable moves are in our future. Right Now…the concerns for Gold is OUTFLOWS from the ETF’s this last week plus the dollar is firm and worldwide inflation looks dead and 1600 looks like a hurdle. So GDX, SLV, GDXJ GLD all are still all holding their 200 day moving averages but let’s see if we test 1520 (last months lows)& hold otherwise a cleansing may be in store.


The china deal is signed yet no big burst in prices so why not? Well the pork crisis and the fact the Brazilian currency hass been devalued plus a bumper soybean crop may actually lead China to buy that sstuff from South America and lead more Chinese purchased toward Wheat or other products..we’ll see. Sugar prices have been moving. Vanguard has a Commodity Strategy Fund
(VCDMX). Suitable investors could get a prospectus to determine if they feel the risk and sector makes sense for them

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 and advisor to determine what is suitable for you. Past performance is not necessarily indicative of future results, Use Risk Capital Only.


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