Update 97: Stock Market-Too Giddy? Stress Test-Read On
June 13, 2020 Option Professor Opinions & Observations
OUR BIGGEST LONG TERM CONCERN is that the Dow Jones TRANSPORTS (DJTA) FAILED at 10,096 which is where their 1-2-3 YR MA”s remain INVERTED to the DOWNSIDE (9800=10,147-10,161) and fell OVER 1,000 points & the RUSSELL 2000 FAILED at 1540 which is where it’s 1-2-3 YR MA’s are INVERTED to the DOWNSIDE (14810-1522-1524) and fell OVER 200 points. These 2 Indexes NEVER made a new high since 2018 & told us to BEWARE of 2020 S&P move to 3400 in Feb. as the Stock Market has NOT seen a sustainable RUN without these 2 indexes participating in the last 20 years! We still subscribe to Recovery & are LT Bullish…CAVEAT EMPTOR! LAST WEEK…..we were riding high and prices were zooming thru the roof… THIS WEEK…we got one of the biggest DROPS in history……What’s going on? We told you last week that BULLISHNESS was getting frothy (our support was 2975 & 2790) and SELLING CALLS & executing COLLARS could be a good idea to HEDGE your portfolio….EXACTLY the right strategy to employ. Campbell Harvey from Duke correctly predicted that the yield curve inverted in June 2019 & that 2020 we would we see a RECESSION that would be BRIEF (1 yr) and VIOLENT which started in Feb and should end in Q1 2021. He also cited risks/concerns that seem important NOW focusing on VALUATION-PROFITABILITY- CASH FLOW-DISCOUNT RISK UNCERTAINTY. You have not heard a PEEP out of Buffett (no buybacks/one time dividend payout/all that cash pile) in our opinion because the Russell 5000 divided by GDP at this point justifies very little value & the FED has OBSCURED real prices so well that even the Oracle of Omaha can’t figure out what stocks are worth. This week Powell & the 2nd Wave fears on the Virus put the risks back in PERSPECTIVE. A DIVERSIFIED portfolio served us well this week as large cap growth & tech did well (AAPL AMZN MSFT NFLX UP on the week) & BONDS did well offsetting weakness in other areas. Powell tapered the enthusiasm from the Jobs Report (revisions coming?) and said no hikes/low rates until employment returns which he knows is not going to happen. Business debt surged to 16.8 trillion surpassing household debt. Major retailers missed May rent payments (40%) & now renege & renegotiate. Simon Prop trying to get out of Taubman buy. GOOD NEWS is forbearance usage DROPS & Car sales were up & bookings on cruises & airlines are Up but keep in PERSPECTIVE still 82% Lower YOY. Most common age in USA is 29 yrs old which means the DEMOGRAPHICS in the next 10 yrs is solid. Houses & Cars will be bought and families created-very good underpinning. BOTTOM LINE…we told you were were way away from shore (3250 vs 2975-2790)…spec was high (Hertz)….Hedging made sense (Sell Calls/Collars) BUT so far the STRESS TEST of level one (2975) held & our WORST CASE is 2790 with a GOOD CHANCE of a TRADING RANGE to develop albeit WIDE with the VIX back in elevated territory (54% jump Thurs). The range for S&P in April (2975-2450) in May (3065-2760) & June so far (3231-2982)..we suspect the 2760 low will hold so we would continue with higher lows & higher highs…many of the epicenter stocks gave back a lot but still are above recent breakout points (banks/hotels/travel/airlines ) Stay Tuned Stay Safe
Questions on Covered Calls-Collars Hedging-Cash Put Selling-Spreads?? Shoot Us an email at [email protected]
Stock Market
The big question now is “Will Mega Cap Growth/Tech/Semis Hold Us Up”? Many feel if they give way then a more substantial drop is in the cards. As usual; it is a market of stocks not a stock market and that proved out in spades last week as stocks like PYPL MSFT AAPL AMZN NFLX NVDA XLK than the oils/banks/epicenter stocks. ATT (T) may be selling Warner games and could fetch $4 billion which would help them get ready for 5G or reduce debt. Gaming stocks loss their luster (WYNN LVS MGM DKNG PENN CHDN) but they could be buys on a pullback as slow or no openings expected to change over time (Singapore/Vegas/Macau/Sports). Best Buy (BBY) is opening 800 stores which is a relief to many while Ross & Tj Max (ROST TJX) should have a field day buying merchandise from retailers drowning in inventories & needing cash flow. Cloud computing, Cyber Security & semi-conductors in vogue. Concerns remain around state restrictions on restart procedures & the shape of consumer demand.
Want to learn more about what sectors/stocks are on our radar list?? send questions to [email protected]
Bond Market
Lower for longer is the message from the Fed as no hike until full employment mandate hit sounds like a pipe dream. Spreads are tight and expected tighter and our warning about duration risk a couple of months ago was EXACTLY appropriate as yields rose off the panic lows of March. NOW it appears investors have overreacted to the rebound with way too much optimism and the TLT going from 180 top to the 50 handle of last week may see a TRADING RANGE develop between the 2 points (180-150). The Fed changed the rules on Main street lending with lowering minimums to $250K & increasing Maximum to $300 Million while extending repayments to 5 years & no principal for 2 years. These things may end up being written off as grants who’s kidding who? Looks like that $500 billion in the muni facility will get some action soon as NYC needs $30 billion for MTA & Port Authority can’t be far behind…Hawaii is a total mess..needs $$$. Getting into High Yield & Leveraged Loans is welcome news to the investors (HYG_FFRHX)…thee still languish BELOW their 1-2-3 YR MA’s suggesting they are FAR from out of the woods…so Powell keep that check book out. Short to Intermediate duration seems to remain the sweet spot for debt.
Questions on what’s on our radar list email [email protected]
US Dollar/International
This week value & international got whacked after having a decent run. One reason was the shift from a 95 handle mid week on the Dollar Index to the 97 handle it finished the week. Like children running home to Mommy…when it hits the fan (Thurs)…the y still come home to the buck. LAT WEEK …We told you we were NOT in the secular bear market camp on the Dollar as we were above 95 support & many currencies had FAILED to get above their 50-200 day MA’s. So far; this patience has paid off. Germany hass a huge stimulus deal as their banks need help & the ECB issued DOUBLE the expected stimulus. IF we are to have an economic REBOUND of growth Europe & EM should do very well BUT VGK & EEM still struggling to get above their 1-2-3 YR MA”S so like their currencies-need more price proof. Aussie$ & Canadian $$ need more up & hope oil & Gold remain hot.
Crude Oil
Well the cops showed up in the oil sector this week (Increased Stockpiles) and took 10%-25% off the recent high prices. We told you last week that our short term Upper band for prices (25-40) had been reached and you could dust off your hedging tactics (Trailing stops/Sell Calls/Collars/Married puts) which would have been handy this week. Longer term…while we admit the demand concerns & stockpile build are concerns…we remain steady that L shaped supplies ( Venezuela output at 1945 level) & V shaped demand (albeit prices have moved up at the pump) portends higher levels in 2021 (40-55). A thieves market but done with $15. For Buffett’s sake we hope so.
Gold Silver Copper
Gold cash prices had their best week since April but GDX still consolidating above the 28-31 support zone. INFLATION is not a concern at the Fed or elsewhere for good reason. MONEY SUPPLY numbers have gone thru the roof in record amounts BUT MONEY VELOCITY has tanked the other way as banks have taken in assets thus curtailing velocity. For Inflation to get going you need to REVERSE this dynamic which will happen in 2021 & 2022 which is when your dreams of FIELDS of GOLD (Sting) have a better probability of happening. IF we take out 1800…a run to 2000 could happen and beyond in years to come. Still run the risk of a big pullback to LT MA’s in cash & stocks. Silver remains above 16-17 which we view ass constructive…it seems to react well when stocks react well (industrial)….UNDER $15…bye bye Silver. Copper is still a believer in the economic turnaround as we told you the last 2 months with increasing ranges (May 2.47/2.28 & June 2.70/2.42) with the 3 yr MA ahead at 2.80. All 3 MA’s remain INVERTED (2.55/2.66/2.80) so still a bit from all clear and if global restart stumbles..back in the soup she goes. The ones on our radar FCX & SCCO are hanging in there pretty good so far.
Soybeans Sugar Ect
Ass we told you…we believe these two markets have been turning up but both need additional strength & sustained price action to confirm. NOW prices UNDER $8 dollar Beans & $9 on Sugar seem unlikely as so there you go…lines in the sand…now we need supplies & demand to feed us bullish information so we can go from a walk to a jog to a sprint…price resistance remains above…if the lows hold/news improves..by year end maybe we go.
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