Update 99: Stock Market- ST-Sell Signal Tuesday- RSI-Divergence
June 27, 2020 Option Professor Opinions & Observations
Bingo!!….For those of you who keep in contact with us during the week; we were able to ALERT you to a Short Term SELL SIGNAL on TUESDAY when HEDGING TACTICS (Cutbacks/Covered Calls/Collars/Married Puts ans also Replacement Trades) made a lot of sense. We noticed the VIX hit 29 and was turning back into the 30’s (bearish). We monitored the NEW HIGHS in FANG names and others. We saw the the NEW HIGHS on FB…AAPL….AMZN NFLX-GOOG were ALL accompanied with RSI READINGS that was LAGGING the new high. WHAT DOES THAT MEAN?….Well… to us it suggests that much of the VOLUME may be SHORT COVERING & EXHAUSTION…..which at LOFTY LEVELS tends to run out & the market is left to FALL UNDER ITS OWN WEIGHT…..once the algos smell weakness on EITHER SIDE of the market….they PRESS THE WEAK SIDE with the understanding that the WEAK SIDE CANNOT HANDLE THE VOLUME. Also; REVERSION TO THE MEAN has really been the story since the March lows when we hit SP 2174 and the LT MOVING AVERAGES were up near the area of SP 3000 (almost 50% UNDER). Yeah we went up to 3250 (failed to fill gap at 330 & recently failed to fill gap at 3200). We told you in RECENT UPDATES that we must be CAUTIOUS with this rally because the DOW TRANSPORTS & RUSSELL failed to get above the 1-2-3 yr MA’s and now are moving SUBSTANTIALLY below those levels. Q-2 report cards (earnings-revenues-profit margins-losses-guidance ect) will be coming out in July. Also; in July ass benefits RUN OUT…Mnuchin wants more money for PPP & extending BENEFITS thru year end (Trump_Mnuchin-Powell will plow UNLIMITED $$$ into the system to OBSCURE losses of Income & Debt Defaults-Inflate Assets before the election). To do so….scaring America & Congress (stocks drop??) is the BEST WAY to get their way. RIGHT NOW…we are TESTING our SUPPORT zone @ 2950-3000 and if we can HOLD tho levels & get the VIX back UNDER 30….we could BE BACK ON the bicycle. Should the VIX break ABOVE 40 and we BREAK support and the BAD NEWS exacerbates…..then look for our other SUPPORT ZONE 2750-2800 area and CALL the PLUNGE PROTECTION TEAM. For those uninitiated; the Plunge Protection Team (colloquial name) was created by Reagan on March 18 1988 after the Crash of 1987 by Executive Order 12631. It is headed by the Treasury Secretary (Mnuchin), also The Federal Reserve Chairman (Powell), along with heads of the SEC & CFTC. Their mission is to advise the President during times of economic & stock market turbulence. Some skeptics/critics feel it goes beyond into actively intervening and colluding with banks & institutions obscuring real values. It is said they met at Christmas 2018 after stocks plunged 25% in Q4 2018. We would bet they’ve met plenty in Q1 of 2020. Not exactly transparent; and the minutes of their meetings are not released which leads some to believe they go beyond analyzing & advising. Our free market system is supposed to be an open one and not influenced by mysterious forces or obscurity. Many believe that the gains in the second half of the year may come from the EPICENTER STOCKS but not from the weaker but rather the SURVIVORS who will have LESS COMPETITION potentially. If Correct…in the airlines maybe we look toward LUV & ALK…in hotels MAR HLT…in energy CVX XOM in restaurants SBUX CMG MCD YUM DRI…in travel BKNG EXPE…in gaming MGM LVS CHDN…. in housing ITB LEN PHM TOL DHI..rent a car CAR ect. NEXT WEEK…we will get more info on jobs, virus #’s & closures, any such additional rebalancing (was estimated up to $76 Bill by pensions & others Norways’ Norse bank) The consumer has been buying up a storm on durable goods, restaurants and retail sales (Cars-houses-furniture-restaurants). Some furloughed workers in hospitality & other businesses are being terminated and the helicopter money needs reloading. The Fed has gotten away with jawboning that they are buyers..our guess..real money spent soon. Our stimulus % to GDP is 15% vs Japan 42% but remember Japan’s stock market peaked in 1989 and still trades about 40% below the peak today. GOOD NEWS….T.I.N.A is alive and well and so is that $4.7 Trillion in money market plus a vaccine is on the way. Is the stock market train returning to reload?? Sitting in Cash/Dry Powder??..Let’s hope so……
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Stock Market
They hit the BIG FIVE this week and if there’s more to come then more will come. We have told you that basis the MOVING AVERAGES many sectors and stocks had either gotten way ABOVE the MA’s or had rallied to just BELOW their averages and turned down. We spoke of STOP & GO restart story which seems this week was staring to happen. History tells us that a NEGATIVE result for stocks in the FIRST HALF of the year is sometimes followed by the 2nd half having ho hum results. If the spikes in the Virus leads to substantial deaths….then we may see just that HOWEVER if the bad data is transitory then the FISCAL & Financial stimulus could cause EARNINGS & VALUATION surprises which the administration’s objective. The Cloud (CLDR FSLY WCLD XSW SKYY CLOU FTEC) as well as Cyber security (HACK CRWD FEYE FTNT PANW) as well as Virus breakouts (PTON ZM0 still seem to be popular and obviously despite the pullback…analysts still love MSFT AMZN & AAPL. HOWEVER; the bloom came off the rose in FB & GOOG as advertisers are leaving (at least temporarily) which may be problematic for search/social media that depend on their revenues. Nike had a big miss but also had digital did well & store will be reopening. China is hurting them & SBUX…..Tariffs talk & acrimony not helping the situation. Albertson’s deal came to market and was a real thud despite KR is doing great. Investors may seek refuge in COST DG CLX CSCO BBY……while SHOP SPOT have been very strong…the RSI’s are in the blue zone so pricing out covered calls & collars seems appropriate. Others on our radar are BABA TECHY CHEGG & the international markets in Asia & Europe.
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Bond Market
Well the Fed have been jawboning they have all this money to support High Yield & IG, Fallen Angels ect ect…this could be the week when they need to spend some money as HYG has been rolling under some moving averages and the RSI is under 50. Our base case is that TLT topped at 180 and dropped to a 150 handle and now is trading in a range between those two points. International bonds (BNDX) seem to be holding up well as Munis. Mortgages and other instruments on the Fed’s Christmas List. Some are suggesting pricing out convertible bonds and others are suggesting preferred in the banks so they are further up the capital ladder and avoid getting their “feet wet” as stock prices tanked on the banks this week as eliminating buybacks and capping dividends was not welcome news coming out of the multi-lettered (V-U-W shaped recoveries) outlined in the Fed Stress Tests last week. CLO’s are working at 8 to 10X leverage which sounds dangerous…but now days who’s not super leveraged using borrowed money (sometimes a La Cosa Nostra rates) trying to avoid insolvency and bridge themselves to the land of milk and honey awaiting on the other side of this crisis…hope they’re right or otherwise…TIMBER!! Our view remains..don’t stretch for yield..stay short to intermediate term.
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US Dollar/International Markets
As we have said in prior UPDATES…we are NOT on board the Dollar SECULAR BEAR train as of yet as our base case is that 95-96 is the base and so far we have traded UP off that region and this week was no different as the index went home with a 97 handle (close 97.49). If we break above 98 resistance could be dead ahead at 99 where we broke down from that area (quadruple former lows)..50-200 day MA’s are 98.64 & 98.37..bullish above. The Japanese Yen is slipping as well as the Can$ & Aus$ while te best looking one basis the MA’s remains the EURO ass the ECB & Germany stimulus packages have got the bulls running in places outside of Pamplona. Stock Markets in Japan, South Korea, Emerging Markets, Europe started to roll over last week so let’s see if they accelerate to the downside or hold water. On a relative basis; they seem better valued than USA but we’ll see.
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Crude Oil
Our base case was that we’d see in the 40’s this year (Rigs closed/Frackers done/OPEC Cuts-Russia cut this week)) which creates a L shaped supply & a V shaped demand picture…so far so good. Next year; with an economic recovery (vaccine) we could exacerbate the move and see in the 50’s. In the short run; unless we are off on demand, the market looks mature here. So covered call- collars- replacement trades worthy of a look and sticking with SURVIVORS like XOM & CVX ect seems the most prudent way to go right now.
Gold Silver Copper
We are getting the point where Gold ect are either on the verge of breaking out as Gresham’s Law finally materializes or we could be looking at one of the great SHORTING opportunities in a long time. Every trade has two sides so let’s CONSIDER BOTH SIDES. The BULLS have got the MOVING AVERAGES on their side as most are rising & inverted to the UPSIDE. Certainly the amount of money supply growth worldwide is staggering and if spot Gold can breach 1800 & 1900 then we would be in uncharted territory. Also money flow into Gold ETF’s, coins, stocks is at record levels. Finally; The RSI numbers are favorable and in areas preceding up moves. The BEARS can look to the 90 Day TRADING RANGE of $1800 to $1700 area as distribution…..they can acknowledge the money supply spike if the Bulls will admit MONEY VELOCITY has tanked (no inflation) and Gold shares are severely discounted to the last time spot was in the neighborhood. The bullishness is unanimous and coins are being HOARDED pushing premiums up dramatically (froth). LONG TERM MOVING AVERAGES are under prices by SUBSTANTIAL AMOUNTS (1600’s/1500’s 1400’s 1300’s) which historically is resolved with a PULLBACK…. BOTTOM LINE…..the Fed is OBSCURING VALUES so maybe Gold just goes on….but we would like a little more confirmation before ADDING as the unanimity of bulls beckons a hedge. We thought the move above 16-16.50 got the BULLS in the control position and still believe a move past 19-21 is possible spike…Keep Your Eye on the Ball. Copper has not changed much and suggests that a recovery is still the bet. Staying above 2.50 is good…getting above 2.80 and 3.oo would be better.
Soybeans-Sugar
Both markets lost altitude this week as more bullish news was not forthcoming. Apparently name calling & assignment of blame is not the best way to do business in Asia….so unless we can hold 8-8.60 Soybeans plus get over 9-10 and on Sugar hold 10 and surpass 13….the future may be bleak.
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