May 2, 2020 Option Professor OPINION & OBSERVATIONS
The Wild Ride continues and it should be of no surprise to our readers as we’ve said many times that when the VIX is above 30 (last 10 weeks) you must EXPECT volatility. For newcomers; let’s review our opinion on stocks since Jan 1. Our view was that the move toward 3400 S&P was on very shaky ground (VIX was low (complacency), the advance decline line (market breadth) failed to confirm new highs as well as the failure of the Transports & Russell to failure to make new highs. Additionally GDP #’s, revenues & earnings coming out of 2019 were not great & a turn wasn’t expected until late this year & the S&P was about 3-400 points above 200 day M/A….This where you consider HEDGING (Collars-Covered Calls-Married Puts & Stock Calls Replacement Trades). If you don’t know what these mean…you can simply…EMAIL us @ [email protected] Once we broke 3200 then the 200 day then the 50 day M/A and the VIX jumped thru 20….the fallout picked up steam..we warned you of ETF’s masquerading as liquid investments was going to cause a liquidity vacuum when passive investors all want out which explains the speed & size of the drop. The FED had to come in as the BID as no broker or dealer was going to buy into that sell volume. When the VIX BREAKS 80 March 16-20…you know the FED is coming..and they did…there to give liquidity & relief to the system….not to stimulate…the Fed Act 1913 has them buying Treasuries now they are into Mortgages, Commercial Paper, Munis, Corporate & Junk Bonds & IG ETF’s…it is TEMPORARILY EXPEDIENT NOT a L.T. GROWTH STRATEGY. After the drop; we indicated how oversold we were and; along with Quant guys like Kolanovic & others, believed the rebalancing of portfolios could give us a rebound rally. We gave you 3 levels where the rebound could take us (#1 2640-38.2% of the drop…..#2 2790-50% retrace…..#3 2930-2975 3020 61.8%/1yr M/A & 200 day M/A). We had a record DECLINE in March & a RECORD rise in April. On Friday…we failed at LEVEL 3…this where we are. WHAT’S NEXT???…we use many things in our analysis…one of which are MOVING AVERAGES as they are based on TIME & PRICE not predictions. We have a 20 yr S&P chart with the 1 yr, 2yr and 3yr moving averages…they come in at 2978…2878…2789….we closed about 2830 after spending only ONE month under the 3 yr M/A……and the averages have NOT CROSSED ….we see this is as VERY GOOD….BUT the Jury is still OUT….Why??….because in ’08 & ’01 the Averages CROSSED DOWN & it took YEARS to cross back up BUT in 2016 & 2018 the averages were BREACHED but never crossed and it was mere MONTHS before the uptrend RESUMED. So IF we can stay ABOVE these averages and proceed to get above LEVEL 3….then BE BULLISH….. HOWEVER….IF May thru Sept keep us UNDER the averages & the 1 yr & 2 yr averages CROSS DOWN UNDER the 3 yr averages and ALL 3 averages POINT DOWN….you may get your year end/Jan Effect rallies BUT they may come from lower levels and the timeline of economic recovery will be extended. Keep it simple stupid (KISS)….30 Million+ Unemployed…3.8 million borrowers in forbearance (no pay up to a year)…GDP -4.8% Consumer spending -7.5%..Business spending -10.5% BEFORE May 1….The big five this week (AAPL AMZN MSFT FB GOOG) basically see deterioration occurring and Apple not forecasting or guiding in Q2 while Buffet’s BRK.b lost over $50 Billion (worst ever) and said they cannot reliably predict when business activity will normalize or how these events will alter future consumption patterns of the consumer and businesses. So if sharp guys like these DON’T KNOW how the Restart & Return to NORMALCY plays out….WHO DOES?….For those of you sitting on the edge of your chairs to see what Buffet did during the March CRASH with all that $128 Billion CASH he has been holding..ANSWER…not much..now @ $137 Billion!
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Record rise in prices month in April…mostly compared to other post CRASH period (1987/1930’s). From housing to retail to oil to banks to travel/ hotels/ rental car/cruises all had their bounce this week catching up to the rally in tech & semis. As we said last week…the stocks still way under their 200 day averages could play catch up and we outlined the sectors..exactly what happened. BUT…now we see Q1 business spending DOWN 10.5% and Cloud revenue to MSFT not bad @ +59% but AWS below forecast @ +33%. Well if we DROPPED 10.5% in Q1….what do you think business spending will be in Q2…up?? Therein explains the rollover in tech & semis which are not priced for revenue cutbacks. These sectors were some of the only ones that did NOT take out he Dec 2018 lows and if the DO THAT…you have the recipe for giving back this rally and worse if the unwind is greater than anticipated. The BIG FIVE are $5.1 Trillion market cap and if Mega Cap sells off…unlikely Transports-Airlines/ Energy/Financials/Materials/Value/ Industrials/ Comm/ Consumer Discretionary/ Health Care (largest number of unemployed after restaurants) can support this market. The 5G-infrastructure , Semis, Cloud Computing/Edge, Cyber Security trends need companies to INVEST and Q1 they indicated they are pulling back….To us…this dynamic is NOT BULLISH. The high beta portfolio that treated us so well after the crash is in jeopardy of rolling over and the laggards that rallied may lose their legs as well. HOWEVER…follow the 1-2-3yr averages and if we maintain S&P 2775 or better & climb above Level 3 then a RISING TIDE may lift all boats. QUESTIONS…Will elective surgeries return?…SYK MEDT BSX…Will unsold clothing get bought by discounters? TJX ROST Will RIG CUTS & renewed demand help small Texas banks? TCBI IBTX CFI..Will reliable dividend plays work? CSCO INTC PFE, JPM JNJ VZ KO ect. Will air travel return? JBLU
AAL UAL DAL LUV Will gasoline usage jump? CVX MPC HES ect Can the banks make money with this yield curve ect? BAC WFC JPM C..Is the Bio tech boom over & What about Health Care? AMGN BIIB IBB or UNH CI HUM Is Gold going to make new highs? GDX GDXJ….Lots of questions…Lots of Risk We have many stocks & sectors on our radar such as Ai, Robotics, Precision Medicine, Big Data, Block Chain, IoT, Europe Asia Emerging Markets and more as well as Hedging Tactics Protecting Values Against Market Drops.
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The FED started out injecting $75 Billion a day!! but for the week ahead the number is $8 Billion so that’s quite a pullback. As we said the Fed..ECB & Bank of Japan met this week and our “Open Bar” analogy seems pretty close. The “We’re Here to Support Without Limits ” mantra remains with the only questions being what effect it will be short term & long term. Well the rush to issue Junk is on ($38 Billion almost 5X more than the previous month). Delays in downgrades and debt covenants being changed to liquidity levels and Europe changing Debt Ratios all sound like life support to us. The Fed is encouraging companies like Boeing (lots of problems) to issue JUNK DEBT (let some other fool lend them money) rather than issue EQUITY (sell shares =dilute stock) is a scheme to do a bail out without the Fed spending money. The scheme includes the belief that the FED will be their for Junk so it’s really not that risky…so they buy them up….also investors plowed INTO Junk ETF’s while LEAVING Municipal Bond ETF’s to the tune of $1.3 Billion. New York, Houston Illinois Dayton and pretty much everywhere are broke and that’s the next shoe to drop. Mortgages & many questionable companies debt have been bid up FRONT-RUNNING the Fed’s announced commitments…if you want to play Santa..people expect gifts. Some say there is value in the Securitized Debt area…albeit with risk. The Big News to us was the idea floating that Trump was thinking of absconding with the $Trillion that China holds in treasuries (5% of our national debt). WOW…that can’t make the other countries ($6 Trill) or the public ($18 Trill) feel to good. We said running up RECORD Deficits & Debt with employees that are temporary & risk takers (Trump-Mnuchin_Powell-Kudlow) could result in a slow growth & low valuation long term like Japan & Europe. We still have a need for income and Treasuries rival money in your mattress. There are a number of income producing avenues on our radar.
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US Dollar/International Markets
The Dollar Index started to slip this week under 100 level and closed with a 98 handle which was close to the low of the week and a new low for the last 30 days. Our Readers know…..We’ve been watching the Yen & the Euro for a possible turn as the 50 day & 200 day M/A/’s are converging and the market prices have been just below. So let’s see where we are…..the Yen closed at 106.93 and the averages are at 107.92 & 108.28 so NO SALE there and they’re inverted to the DOWNSIDE…the Euro was a bit better closing almost at 1.11 up 1%+ on Friday…with the averages at 1.09 & 1.10….. there is an attempt at a turn but needs more TIME & PRICE to confirm the turn….if Trump goes with Tariffs or retaliation & we our “Service-Debt-Consumer Driven” economy implodes in May….we could have a catalyst for a Dollar turn….. For Now..the Dollar remains the one eyed man in the valley of the blind. International Markets saw the candles get blown out last week as the GDP showed a drop of 15% in Imports..not good for China & Japan who without us buying are troubled….car sales stink…not good news for Deutschland. We follow a number of international ETF’s on our radar for regional exposure.
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Another one of the big bouncers we brought to your attention weeks ago with CVX HAL XOM COP OXY SLB HES PSX WPX ECT all zooming off their lows as Rig counts collapse and demand is expected to be robust as lower gas prices historically has brought out the mooch in all of us. There was a rollover at week’s end and we may give back as the June contract expires and volatility raises its head. Cutbacks, furloughs, job cuts, defaults, bankruptcies doesn’t sound like a recipe for a bull market BUT our view is that supplies will get worked off (L shaped) & Demand will increase over time as lower prices and mobility could move price toward 25-35 by year end & up substantially by 2021…as we said if DEMAND stays in then abyss…all bets off…PBR & the DEBT of WPX & OXY (reports May 5-Buffet & Ichan Involved) are areas of interest but need a better hold of outcomes.
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Well…GDX GDXJ are still flirting with the highs but $ 1800 Gold still yet to be seen. Replacement trades wherein one replaces some or all of their position with limited risk bullish option positions are being considered by some to try to reduce cash risk but has specific pros & cons & not right for everyone. Good News for Gold is that the Dollar is potentially at a turning point and retaliation tactics floated by Trump against China is unnerving. Gold Prices trading above the 1-2-3 yr moving averages all pointing up. NOTSO Good News…..failure to take out 1800-1900 highs…$135 OVER spot on Gold Coins…LAGGING Gold miners vs. last time up here…and OVERBOUGHT versus the 2 & 3 yr moving averages….end of the calendar year beginning of the new year sometimes BEST for Gold..maybe a Summer of Discontent?? We have been right on with the Silver as he failed at 16.50 200 day M/A resistance and now has traded with a 14 handle. Watch SSIL SILJ PAAS ect Copper still in the 2.00 to 2.50 range as restarts worldwide still in jeopardy BUT if we get going in China & US New Construction…Watch for FCX & SCCO
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Grains still can’t seem to muster a rally with sturdy legs but the levels of $8 Beans $3 corn and $5 Wheat & 10 Sugar have held so far so if Summer can bring increased DEMAND along with supply chain shifts (weather/yield) then maybe something might give…deflation vibe in ags has been sticky. Some say the future could be brighter in commodities…so far not so.
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