Episode #23: OptionProfessor Weekly Market Update

Recorded on Friday, December 21st, 12:30PM ET:

Read the full transcript here:

Okay, good day everybody. This is Jim Kenney for the weekly update for OptionProfessor.com, and a quick background on myself: I am a graduate of Boston College, and for those who haven’t been listening, I have been in the investment arena here for decades educating people on the uses and risks of options, doing hundreds of seminars for thousands of people nationwide, and basically today what I’m going to be doing is going over my views, my opinions on what I see out there in a wide variety of markets; hopefully give you some insight and some help on figuring out what is going on.

As always, I do tell you that it is a situation where past performance is not necessarily indicative of future results, and of course, short term trading and option trading do involve substantial risk of loss, so you’ve got to consult your trading advisor; you’ve got to consult your clearing firm, the guy you’re doing your buys and sells through, and also your good common sense to figure out what, if any, tactics of any type might be suitable for you.

Again, today is the 21st of December, 2018, four days before Christmas, and the markets have been under pressure. If you’ve been listening to my broadcast weekly, I have been bringing that to your attention ever since we started breaking down. I also brought to your attention that a move under 2600 on the S&P. We saw a long time moving average that I use that has been broken a couple of times in the last 10 years: once in 2011, and a couple times around 2015, 2016. In each incident, we went about 200 points underneath the moving average. That’s why I came up with the 2400 neighborhood on the S&P, where this thing could peter out. Keep an eye on that 2400 area; that could be an area where things have gotten back in line.

Abby Joseph Cohen has been speaking, and although she says she is not obviously indicating to buy right now or this month, or whatever, she is indicating that the overvaluation of stocks has been removed in large part, and that the valuations down here are much more reasonable. Of course, reasonable valuations and against fundamentals is very important.

Okay, now let’s take a quick look at what is going on with the indexes, and I’ll work around the investment arena and give you some different views on each thing.

The S&P 500, let’s get the chart up there. I’m sharing it with you now, so please take a look. You can see the S&P 500, the low today is 2434, so again, we are getting into that region around 2400. There is no exact science to it, so it’s neighborhood, not an exact price. But this is certainly a neighborhood between here and 2400, where the market may stabilize. You notice some of the major stocks have gone down significantly. The VIX hit 30 yesterday. That’s a good sign. The higher the VIX goes, the closer we are to capitulation.

Now, with regards to the low on the move down, it was happening today. We made a new low for the year. 52-week low here today, but it did snap up 20 points; it’s at 2455. Again, once this market started breaking under 2900, and once it started breaking under 2800, you could see that it was in a deteriorating fashion. What I suggest to people to investigate when the market is up and might be rolling over: to look at the collar strategy in the options arena, and married puts. Had you done that when we were up at 2900, you would be happier today, and it involves the selling of a call and the buying of a put. If you don’t understand the strategy, I am more than happy to explain it to you. Simply shoot me an email at [email protected]. I’ll be more than happy to respond. Give me your contact information; we could even talk over the telephone. I’ll try to give you more clarity on how hedging strategies work.

Believe me, hedging is a very good place to be when the market falls apart like it is now, because your equity is stable, as opposed to tanking. Of course, married puts cost money, so of course if you are wrong and the market rises, you do lose the put premium, but in this environment, those puts have been gold.

Anyway, that is what I’m trying to give you an idea on here, as far as the S&P. This 2400 area, plus or minus a little bit, may very well be an area where stability comes back into the market.

Looking at some of the major stocks, I’ll give you another one here: Apple, which many of you own, as I said, the market was rolling over after it broke under the 220, 210 area. You can see right there, after it broke under 210, it has been in a very significant down move. I thought that it might stop at 190; it did for a day. Once it broke under 190, you got another sell signal, and then I thought it might stop at 180, and then of course, it did stop and ran back above 180, but after it came back under 180, you got another sell signal there. Now we are trying to test that 150, which I told you would be a target if we kept going down.

This 150 area, which is the 52-week low, is right now in play, and you certainly would like to see it stop. But the PE ratio down to 12 is a heck of a lot better than it was at 223 or 230, right? That is where Abby Joseph Cohen is coming in, where the PE ratios are dropping substantially. If Powell is right that the economy is not falling off the bed, that these are going to be cheaper stocks. That’s where the 2400 lows might be, and that is where a little bit of a year-end rally may come from.

Year-end rally is running out of time, but if this market stabilizes this week and gets some kind of reason to move back up, obviously a lot of people have liquidated, and obviously a lot of people are going short. That does create an environment where buyers could come in, and the sellers, if they dry up, you could have an outnumbering order imbalance of buyers against sellers. Obviously, on the way down, it has been an order imbalance of sellers over the buyers, but things don’t go in one direction forever, as you found out when it rolled over in September, October.

Again, it has had a very big move down. $80 off the price. Again, only so much punishment is deserved if one of the reasons is they’re not going to tell you the sales of the iPhone every time. I think they have already punished the stock pretty good, so you want to be bearers, 230 is a good place to get bearers. You want to get bearers down at 150, that might not be phi beta kappa.

Again, some strategies to consider if you are a put trader, if you’re an option trader, selling puts, they are probably pretty fat down here. You can go out of the money, get paid a fat premium. If you get put to stock, you’ve got to buy it. If you don’t get put to stock, you keep the premium. If, in fact, you want to take the premium and buy a call with it, that’s another tactic. If you don’t understand all this stuff, I certainly do, so again, shoot me an email. I’m more than happy to give you some insight on these things.

Okay, let’s look at some of the other indicators that I watched: the transports and the rustle. They led us on the way up; they led us on the way down. Let’s see how they’re doing now. Okay. The transports are very close to their 52-week low. They went to 8949 today, as you can see, and the low is [inaudible 00:07:02]. So far, it hasn’t taken it out, but it’s hanging on by the skin of its teeth. It is currently at 9005.

Like I say, when we started taking off earlier this year to the high point (that was in the July/August time frame), it was a leader on the upside. Once it hit 11-5 and started to roll over, then what have you got? You’ve got it underneath 11000; that was the time for the sell signal. That’s the resistance. Came down sharply, rallied back up to 11. Look, couldn’t get above the resistance. See those lows in August? That was your resistance. You see the breakdown in October? That’s your resistance. Couldn’t get above it, went right into the tank.

Obviously, it’s getting into an overdone condition down here possibly, although you would like to see the volume spike up to get a real, real accurate low. There could be one more big flush, because the VIX, and we’ll get into that right now, has not really exploded on the upside. You would like to see that, ideally the VIX explode to the upside to call it a capitulation. Right now the VIX is at 29; you can see it hit 30 yesterday. That’s not really a capitulation, but it is a stretch point. Beautiful would be hitting the 35, 40. Then you [inaudible 00:08:12] real tradable low, and a real, identifiable low. Then of course, getting back above 2600 on the S&P would be quite important.

Lot of you guys own the tech stocks, so let’s take a look at the Nasdaq and see what’s going on. The Nasdaq is [inaudible 00:08:30], a two-week low today. 63, 64 on the Nasdaq. Obviously if it’s stocks that we are trading at high PE multiples have gotten smashed. Of course, a lot of the fluff is coming out of this thing big time. Where do you get your sell signal here? That’s called a double top. Right? Right there is the double top, right above 8000. Once it got underneath that point right there, which is about 78, 7900, that was your sell signal. Again, 7600 was support, so on the way back up, you see it can’t get above 76.

This thing is on the defensive, but if you want to get bearers on the Nasdaq, you get bearers at 8200. You want to get bearers at 6400, God bless you. Again, there could be very large put premiums out there on some of the stocks you might like. If you sell a put, you’re agreeing to buy the stock. Or, if you don’t get put in stock, you get the keep the premium, okay?

The thing is, is what? This is a time to investigate that side of the trade to see if it makes any sense. Again, if you had high PE stocks, they’ve lost their PE ratios, that’s why they are getting whacked more, on a percentage basis, than the other stocks: because the fluff has been taken out. They are normalizing interest rates, so that means they are going to be normalizing PE ratios. That means they are going to be normalizing the returns you generally get in stock. That’s the facts of life. You want to fight the tape? You’re going to lose a lot of money. The bottom line is, where we are right now? Start investigating the puts and see how big the premiums are, if you like the market for a rebound.

Again, you are catching the falling knife right now, so that is a dangerous thing to do, but my mathematics says somewhere around this 2400 S&P, could very well be a low point, so if we could get a nice big spike up in the VIX, and we get down towards 2400, plus or minus a bit, that could be the neighborhood where I would suggest you start looking at the long side, okay?

All right. Now let’s take a look at the bond market. The bond market. Okay. TNX, that is your 10-year note. Still hanging around; you see that tail? That tail might be telling you that the rates are going back up. That tail comes in at around 27.5, right? Now we are about 27-9 on the yield.

Now, how Hal believes the economy is still strong. I believe the economy is still strong. 3.7% unemployment, everyone is running around spending money; that doesn’t sound like a time for a collapse. All you’ve really done in the stock market is you took out the overvaluations and you’re normalizing the PEs, and you’re going to normalize the rate of returns, and we are getting to a stretch point, possibly, on stocks. Again, we’re at a stretch point here. It got very overbought.

The whole world was short the bond market. Why? Because the whole world knew rates were going to go up. When the whole world knows anything, you’ve got to worry about who is on the other side. In other words, when everybody was shorting these bonds, somebody was buying them. Or shorting these notes, right? And the moving averages don’t lie. Moving averages on this particular instrument were way up on the futures in the 122, 124 areas, and the futures went down 117, 119. That’s oversold, and now we’ve come back up, and now we’re not oversold, because we’ve come back down here to the 280, 270 area. Okay?

But the fundamentals are that wages are growing at 3% or better. Fed funds is around 2%. That is not a great relationship, and the prices index, because capacity is going at 60, that is a high number, and the tariffs are going to possibly make these companies raise their prices to offset the tariffs. So I think there is going to be price inflation surprise, and I think there is a wage inflation surprise, and so I am still a believer: rates are going back up. If you’re in fixed income and you’ve been holding bonds, obviously you got whacked very hard, and now they’re giving you some of your money back.

I personally would suggest that you look into keeping your maturities or your duration short: one year, two year, in that window. That is where you get most of the yield. You get 265 on a one-year; you get about 2.5 on a six month. You go out 10 years, you’re only getting 279, so why wouldn’t you keep it short until you have some evidence that rates are really going to go low, and I don’t think that evidence is here yet. So if you are a fixed income person, my belief is not to extend your duration too far just yet. Wait for more evidence that that 325 area on the 10-year is going to hold.

Again, if there is an inflation surprise, which I anticipate, then that would be a situation where these rates would go back up. And the fed is looking for one or two more hikes, possibly, and that is data dependent. What you can’t have happen if you are managing the fed, is you cannot have inflation on wages and prices going higher substantially than your fed funds rate, or else you can have some real problems.

Jake Powell knows that, because he has been in these markets for a long time, and he is not managing interest rates so that stock speculators and real estate speculators can make a lot of money; he’s doing it to have good employment, stable inflation, and a stable currency. That is his job. His job is not to try to get Amazon to 2500. His job is not to get your house to add another 200 grand on it. That’s not his job, and so when you get overvaluations and things normalize, obviously prices can pull back. That’s exactly what’s happening right now, okay?

All right. Now, the US dollar. Let’s take a look. My belief is that it is topping out in the 98 area. You see that 98 area? I think it’s topping out there. I could be wrong, right? But if we get under 96, that is going to be a yellow flag, or that is going to be a red flag. Is it possible that the dollar could roll over big time? Yes, it is. Particularly is he is slow on what? He is slow on raising interest rates, and I am correct that the inflation numbers may kick in.

I’m not setting up my whole life that if the inflation numbers don’t kick in, I’m going to be ruined, but I am respecting the idea that wages, when you are at 3.7% unemployment, wages can start getting heavy. With all these tax credits that they’ve got, and all they are doing is buying back their own stock, there is going to be a little bit of a groundswell to share some of that tax saving with the employees. At some point, right?

Also, again, people are going to demand more wage, because why? Because there is going to be a tight labor market, and if you want to keep your employees, you’ve got to pay them. That’s going to happen there, I think, on the wage front, because of the low unemployment, and I think you’re also going to see pass-through on this China tariff thing, because I think Trump is going to be stubborn, and I think China can see we are deteriorating, so what is the rush? Plus, maybe Trump has only got 24 months to go, so why make a deal with somebody who is not going to be there in 24 months? China is thinking in terms of decades, not 24 months.

Having said that, there is vulnerability possibly to the dollar, if we break under 96, then 94. If that in fact happens, then you are going to be looking at the possibility of gold having a much better environment, because gold does thrive when inflation kicks up above the interest rates. If you were there back in the early 80s when it went on that huge run, that was because inflation got way above the interest rate. Again, the GDX if the one that I have been focused on; it bottomed at 17. I have been thinking it might be worthwhile to accumulate between 17 and 20, but I also told you it’s got to clear 21, 25, to become a big investment. You see the 52-week high; if that gets taken out, then it opens the door for a much more substantial ride.

Let’s look at it on a 10-year basis. Changing your chart a number can help you get better perspective. You’re fishing around this thing; it used to be way up above 60 in this last decade. It used to be above 30 not all that long ago. In fact, the last time the stock market had big trouble, which was early 2016, look what this thing did. I think this thing is trying to creep up, and if it gets above the 23, 25 area, 30 looks like it could be in the cards, then outside chance of 40.

For part of a portfolio, it might not be that bad of a deal, because the popularity of this investment is very, very low, which means participation is probably very low, which means there could be a lot more people to come into the party. With Amazon at 2050, with Apple at 225, everyone is at the party, which means the most likely thing is people exiting the party. That is, again, just a little conceptual thing to think mentally. If everybody is into something, again, you could run out of buyers, or if the selling were to start, there is not a lot of liquidity on that side of the market. If people started wanting to buy this thing, and there is a good reason to buy it, who is going to sell it at the lowest price it’s been at in 10 years? Right? Right. Just keep an eye on that. It’s a sector that people aren’t talking about, and I think it is worthwhile to keep an eye on.

Let’s take … People are wondering, where could you have hid out and done okay in the last couple of three months? A couple of them were reach, so let me show you NLY, which is one that I follow called Annaleigh. You can see that in the last two months, where the market was taking … Let me go back and go to the one year graph. Get back to the one year graph so you can see here.

It pays 12% yield, which is a heck of a yield. PE ratio of 3.9, and you can see how it’s been doing in the last few months: it has been hanging in there between 950 and 10, so 994, and it is paying a heck of a yield. If you wanted to look at an ETF, Vangaurd has one. VNQ, and that will give you an idea of how that’s been doing. And this is a diversified read, so you’re looking at 5%, and you’re looking at a market that had come down, but it has been somewhat stable down here around 76. But it has come down. Annaleigh actually has been more stable.

The other one people have been hiding out is in utilities, and let’s see what that’s been doing. That’s been coming off lately, but over the last few months it has been fairly stable. Let’s take a look at that. It’s paying 334 on this particular ETF. There’s many of these. I’m just showing one as an example. As you can see, October, November, December, this thing has been between 120, 125, and it has been paying 334. It’s been pretty stable. So reach and utilities has not been a bad place to hide out during this period and get good income, or cash flow, off of the dividends.

Okay. Let’s look at some other ones out there, because I’m sure you’re into a lot of different things here. Let’s look at your energy. I’m going to look at some ETFs from Vanguard. There you go. In the [inaudible 00:19:31], and again, what makes this interesting to me? I’ll show you in a second.

I believe moving average [inaudible 00:19:37] time, not people’s opinions. People lie. Moving averages [inaudible 00:19:41] At any rate, you’re looking at getting 352 yield, according to the screen here. That’s not too shabby. You’re being priced at 7560, which is the 52-week low. You want to get bearers on energy, 109 is the 52-week high. You want to get bearers at 75, might be a little late. Let’s see how far underneath the moving averages it is, because if it is 20% or more, it’s time to start looking at the long side, in my view.

You’re at almost 100 on the 200 day average. That’s your 200 day moving average. It is inverted, so you’re downtrend, but the volume has been huge in the last 50 days, which means everyone is getting out, and you are now 25% underneath the 200 day average. Not today, while it’s making new 52-week lows, but I would be looking for chart formation: weekly low surrounded by higher weekly lows that would give me an indication that the selling is abating. If I get a significant situation like that, this would start being very interesting. But I would like a chart formation before I stick my head into a buzzsaw, because obviously people are getting out of this thing like somebody yelled out “Fire!” Of course, that is when people have a fire sale, right? Anyway, there is the ETF for the energy.

Next one here is health care. That was the place people were hiding out, but they started to nail that lately as well. Let’s take a look at the health care. You can see that; that was no place to hide out, right? 180 down to … but again, you are getting into a bit of an oversold category, and look at that selling, that volume. Way up there. You are looking at some heavy volume, some very discounted prices, and so again, health care is certainly not a situation where … There is price inflation in health care. There was, I think, a 4.8% annualized health care increase in the last report. That was a significant increase in health care costs, which should go into the drag companies like Pfzier [inaudible 00:21:32], etc., Bristol Meyer Squibb, and should also help United Health Care and other people like that. You’ve got a lot of different people there, and that has been whacked hard, and that would be a neighborhood to also keep an eye on as well.

It’s Christmastime, and so maybe the federal reserve is actually masquerading as Santa, because what they have done here is given you discounted prices on some very high quality companies. Maybe it is time to take advantage of Santa sometime in the next few weeks, or month, or whatever.

Next one here is going to be consumer discretionary. They were doing great as well. Here is an ETF on that, and I’m sure they have got whacked. Again, the consumer is still very much employed, so this is something to keep an eye on as well. It is down here making new 52-week lows of 143, and be up at 180. I’m sure the moving averages will indicate that you are getting a good 20% underneath the moving average. 144, 167, that gives me what? About 25. 25 divided into 167, I’m at 14, 15% underneath the moving average. Not extended tremendously, but certainly a little bit.

Everyone is talking about Nike today, so let’s give you a little Nike update here. Bouncing around. If you have a specific situation you want to talk about, I’m more than happy to give you my input. Again, you have to make your own decision. You have to make your own choices with your clearing firm, but if you wanted to use my information for informational purposes only, I’m certainly more than happy to help. [email protected].

Nike was up to 7429. It’s already lost a lot of that gain, and of course, Nike’s problem is just like everybody else: the market is in a downtrend. Let’s look where the moving averages are and see what the story is on Nike. The fact that it’s above 70, I think, is very good. If it cannot hold above 70, that is very bad. Here you go. You’re inverted at 72 and 74. Is there a reason why it stopped at 74? How about your 200-day average is right there? This thing starts trading back under 70, I would get the rain coat back out, because it looks like it could go and start raining on you again, but it did have a good earnings report, and the PE ratio is up at 57 now. You want to know the trouble of Nike? The valuation is not cheap. Right? Right. Not only do you have to have the right name, but you have to have the right valuation.

Let’s look at the financials, because everyone is getting bearers on those. Let’s look at City Group. City Group and some of the other ones that are international are getting whacked very hard, but they are getting into a situation where they are getting way off their 52-week highs. Look at the 52-week high. $80 on City Group. Where is it now? 50. Okay? Again, look at volume. They’re coming out huge. I would be looking down here for some type of capitulation where I see a low surrounded by higher lows, and then I might be thinking that the selling might be done.

Obviously the inversion of the yield curve is concerning to people, because why? Because they have to pay out depositors, and they’re lending long. If you’re lending long at less than you’re paying out your depositors, it’s hard to make money, and that’s why the inversion of the yield curve is whacking the banks pretty good.

People were touting these banks; every guy on TV touting and touting and touting, and it just was the worse advice you’d ever find. The thing’s gone from 80 to 50, and some of these people still won’t give up their blankie, meaning they still won’t give up their opinion that the banks are the place to be. I don’t know if they get quotes or not. Looking at that, how could you possibly be telling people that it’s been a great investment? At best you might be able to step in here and find some value at a very discounted level.

The tech sector, Microsoft is one that everybody owns, it seems like. Let’s take a look at some of the big guys and see what’s going on, and then I’ve got to sign off. Microsoft, 99. Where is it as far as CDP ratios? 41. It’s a high PE ratio. It’s a tough racket. We’re normalizing interest rates, which means we are probably going to normalize PEs, which means we are going to normalize the growth in stocks. Again, some of these companies with the high PEs are vulnerable, and this is one of them.

Obviously, we’re getting underneath 100. Can you see that’s not a good place to be? [inaudible 00:25:52] that Microsoft could accelerate to the down side. How can you do something? There are hedging tactics like collars, and hedging tactics like married puts. They have a use, and they have a risk. Don’t even think of using them until you understand the use and risk. If you need help on that, again, you can let me know.

All right. Another one that everybody seems to own is Apple. We already went over that. It’s trying to hit the 150 area. If it blows through that, then you’ve got more downside to come. With regards to Amazon, that was something that I was telling people on this broadcast, that if you are up in the 2050 area and your moving average is at 1500, you are going to roll over, and you better have some hedge on, or else you’re going to lose a lot of money. Can you see we have the double top up there? 2050? Let me get a better screen up for you. Top, you took out 1900, that was it. You’ve got to hedge yourself from time to time.

Again, another thing to consider if you can’t take the heat in the kitchen right now, you think there could be big more to go, you could consider using long term equity options like leads to replace stock positions. That gives you a position while we’re down here, and it also gives you limited risk when you go to bed. That could be very comforting to certain people. Again, long term equity options, replacing stock positions to reduce cash risk, is a consideration to some. If you don’t understand what I say, [email protected].

Again, for those of you who come regularly, it is good to talk to you. I wish you a merry Christmas and a happy new year, and also I encourage you to let friends and associates know that the podcast is available, and so that they can take advantage of it. Again, we went over quite a bit here today. Again, we will be off next week and will be coming back right after the first of the year.

Again, for stocks, look for the 24 area, plus or minus a little bit, to be an area where it could have a capitulation. Again, once it does, look for a low surrounded by higher lows to give you an indication that the selling has abated. Right now, we’re making new 52-week lows in many things, so it’s too early to make that statement, but we are getting very far away from the moving averages, and historically that has told me that we should be looking for a place to enter, not exit, and not for a bull market, but for a very substantial bounce.

Okay? All right. It’s very good to be with you again. I’m Jim Kenny, and again, this is the weekly update for the optionprofessor.com. Good holiday to everyone, and again, we’ll be back with you right after the first of the year. Be safe and enjoy your holiday time.