Margin Rich

Options Markets Muting Signals

Posted on November 20, 2021 by Margin Rich

Now that the options markets are the tails that wags the dog, equity market signals are losing power. Or at least temporarily losing efficacy. It doesn’t feel like a permanent arbitraging away, but huge capital (regardless of source) knows how to use broker dealers and market makers to maintain a supportive stance for respective portfolios.

I’ve been analyzing plenty of signals that a trap door is set up just under the stock markets. Amongst those signals is the clustering of Hindenburg Omens in the NASDAQ. A single Omen rarely proves useful, but clusters have been consistently effective in communicating large sell-offs ahead of time. Observe the following chart, courtesy of The Felder Report:

Just based on the chart, one would think that a large drawdown is very close. In the past couple of decades, any time we’ve seen clusters of the Omens in a single calendar year reach 13 or more, then it usually was a portent for a heavy risk-off period.

Subsequent to November’s OpEx, if large capital simply continues to allocate to higher strikes farther out on the calendar for the major indexes, then the signal the cluster is communicating could be totally dampened.

It simply hasn’t paid to be the least bit bearish, but it feels like we’re drawing closer and closer to a period in the markets where fear and option flows could feasibly create a perfect multi-year set-up for expert surfers of price action.

Looking out 10 years, my gut tells me that there are fair odds that markets won’t experience a single, long drawdown similar to the Tech Crash or the Great Financial Crisis. Instead, we’ll experience rolling drawdowns (15% to 35%) through the 2020’s but with an overall upward tilt on a long-term price chart.

It’s just a theory. The Final Arbiter will reveal its hand in time, but you might want to consider waxing up your board and getting a new wetsuit for the potential environment ahead this decade.

Insiders, Metaverse, and Options

Posted on November 16, 2021 by Margin Rich

1. Insiders: I’ve been watching Asana (ASAN) since the Summer…and kicking myself for not hopping on that train. Hard not to love the SaaS model and with ASAN you get a heaping helping of support from co-founder, Dustin Moskovitz, the Facebook pioneer.

A 500% increase in share price in half a year is performance anyone would love to write home about. And Dustin has been right there buying through all of it, buying almost $300M worth of shares out of pocket.

The exact skin in the game one wants to see from founders and executives. The real question is whether that’s just conviction in an undervalued business for which he has every relevant analytic to contemplate or does he have a real good idea about who would want to acquire ASAN and at what price in the near future?

And do you follow Moskovitz’s buying? Although his accumulation began in the Summer and ended in the Fall, lots of other insiders last week decided to get while the getting is good.

Future Overlord of America, Elon Musk, cashed in billions worth of TSLA. Co-founder of Airbnb cashed out a $100M. Sergey Brin, Google co-founder, added another $250M to his cash coffers. ASAN is definitely worth a deeper drilldown.

2. Metaverse: Geez how I hate Facebook. And their rebranding to Meta just feels like such an IOI-move. Regardless, they have a userbase i.e. scale. They have fairly priced equipment with Oculus.

And this is where Unity Software’s (U) purchase of Weta Digital is so damn interesting to me. I had been thinking about the buildout of a scalable AR-verse, one that the masses can really embrace. My thought process kept bringing me back to the elite visual effects houses of the movie industry. Somehow they had to be seriously brought into the fold because they’re genius and artistry are too great. I say this as an admitted sci-fi/fantasy addict who loves the cinema genre.

Weta represents CS engineering greatness, but artistry is what’s required for truly breathtaking world-building. Anyone remember a decade ago watching James Cameron direct his Avatar production sets rendered in real time into Pandora forests on a tablet? Who wants to stomp around on a bunch of pixelated blocks?

Assuming some artistic talent can be retained with the Weta players joining Unity and more brought aboard, as one of the leading engines for digital world-building, it just feels like Unity’s purchase has the potential to be historically significant.

Could Zuck make Unity an offer that couldn’t be refused?

3. Options: Call options! What else needs to be said? Everybody knows how to use them, because everybody knows they only go up regardless of strike and expiration. And even better, the “weaponization of gamma” just continues to help drive stock markets even higher. It’s a fabulous flywheel of guaranteed, easy wealth-building

With such extreme usage by retail and pros, it feels like a bit of shine will have to come off of option usage. Temporarily at the very least.

October’s speedy buying of September’s dip leads me to think that an equal selling of the advance (STA? – copyright & trademark pending) could occur within the next 4 weeks.

Have a look at the four major stock indexes subsequent to February’s gamma-squeeze highs.

I wouldn’t expect much depth on a move downward, just speed. Speculators may have been a bit premature in adorning themselves with an ugly sweater to ring in the Santa Rally that everyone expects.

I Can’t Fight This Feeling

Posted on October 24, 2021 by Margin Rich

Commodities have gotten white hot in a very short window. The sheer amount of headlines around inflation and raw material pricing is insane. I don’t have a nifty little Google Trends chart to show you but I’m pretty sure I already know how it looks.

Every other financial article or analysis is about inflation or commodity pricing.

Commodities are on top of everyone’s mind right now, which of course means a reversal is imminent. Which in turn should drive the buck upwards as commodities are priced in dollars and heavy amounts of short-term capital will have to hide there while steam is let out of this commodities rally.

Have a look at DBC. You can see when recent capital started jumping in enmasse as a result of commodity price action and the narrative heating up around inflation.

It’s all a bit too much, too fast. A correction may have already began last week and I wouldn’t be surprised at all to see DBC come off 15%. However, there are a ton of Calls outstanding on this ETF compared to the Put total with tons of theta purchased out to January of next year.

Gamma sways everything.

Still though, my gut tells me the narrative around oil and copper is simply too hot. I’m probably a bit early here, so if one were intending to go short on select commodities, be sure to purchase enough theta on one’s own Puts.

Just look at the raw YTD performance of the energy complex! And copper is easily outperforming the S&P 500 and NASDAQ.

A couple months back, I thought a harder selloff in the commodity complex might trigger selling action in the equity markets. Instead, equities took their own little breather in September as volatility rose.

But I don’t think we’re quite out of the woods with equity volatility. This “buying of the dip” has a delicate feel to it, as if fear was not properly washed out last month. I continue to stand by my hypothesis that commodity weakness will lead to general equity weakness.

Of course, the commodity weakness will be transitory along with any equity weakness. I expect to have a solid end of year rally in stocks.

Assuming my hypothesis is correct, oil and copper should be the triggers. Copper’s decline has probably already begun with last week’s 5% selloff (and more to come).

Oil would be the real trigger for overall weakness across markets. Observe this bit of backtesting on oil, courtesy of SentimenTrader. If the trend over the last 30 years holds true, then we should expect a rocky month in oil regardless of narratives and “shortages.”

Couple this with some end of month historical tendencies towards equity weakness, and we have the makings to pull the rug out from recent dip buyers.

From Tom Bowley of Earningsbeat.com via his weekly segment at Stockcharts.com,

One historical fact is that, at the close today, we will be entering the worst historical week of the year. The October 21st close through the October 27th close has a tendency to show weakness. Before I show you the numbers, keep in mind that the 19th through 25th of EVERY calendar month has produced annualized returns of -8% on the S&P 500 since 1950. So this October weakness is really nothing new. It just happens to be the worst of the bunch. Below are the annualized returns by calendar day (since 1950) on the S&P 500, followed by the NASDAQ:

But then these annualized returns are immediately followed up by historical strength in the S&P 500, so any weakness should be relatively short and shallow, but very scary. It is Halloween, folks. Observe the next 9 days of annualized results (since 1950) for the S&P 500:

Summing up: The inflation narrative and commodity pricing are too hot. Expect weakness there. This would then catalyze weakness in equity markets with overall weakness driving capital into the USD.

All sound far fetched? Have a look at the USD and performance when CoT shows Large Traders at a wide disparity to Commercial Hedgers.

Some hefty rallies noted. I don’t expect a monster run; just enough for a short-lived rally while capital hides. It’s only a hypothesis, but one has to trade their beliefs and manage risk accordingly. Can’t reiterate that enough.

If Everybody’s Thinking Alike, then…

Posted on September 13, 2021 by Margin Rich

While September’s seasonality, OpEx, and 7th straight month without a 5% dip has speculators on edge, if all the big banks along with many other outlets and mediums are calling for a correction, then can the markets have one?

Of course. Just enough time has to elapse since the calls of the last week for one to begin. When speculators have forgotten about the chance for correction is when a 5% – 9% dip can do its thing.

In the meantime, here’s a couple of opportunities worth considering regardless of where larger markets go this month.

Cannabis could be establishing a base from which to provide a nice little reversal trade. Let’s look at a weekly of MJ, the largest cannabis-themed ETF by AUM.

MJ seems to be finding nice support here at $15. If it can bounce here, then $21 looks like a solid resistance point. Between those 2 price points in the shaded area above is a confluence of various charting overlays & indicators. Should that bounce occur, there’s any number of ways to structure a trade within that range to take advantage.

The CAGR vector for revenues, margins, FCF, etc. across the MSOs is looking quite enticing. If the trading gods can deliver some political magic with a positive announcement of some sort around legalization, then you never know how spicy a trade might get.

And from the intra-week YTD high established in the 2nd week of February, MJ is down over 50%. Regardless of any wider market breadth issues, it seems like enough capital has fled the category and is ripe for capital to bounce back in. Overhead supply looks heavy between $22 – $24 so I wouldn’t get too clever pushing a move at the top of that shaded area.

The other potential trade setting up is in once white-hot Brazil. Heavy amounts of capital shifted into Brazil on the back of the commodity thesis earlier in 2021. It’s been shaken out a bit as EWZ has corrected 20% (intra-week) since late June.

It’s easy to see that the yellow horizontal line represents an important price point for speculators. And there’s a confluence of charty stuff, yada, yada, including a couple of intra-week bounces with longish wicks established in the past 4 weeks. The chart tells me that a bet on a 10% to potential 15%ish bounce might be in play. That’s just based on price action, but geopolitics and FX may hold more sway. Further assessment of risk is warranted, but a surf-able swell may be setting up.

Based on all the Wall St. banks jawboning about market weakness in the past 10 days, it appears the Fed is attempting to lubricate the transition into a tapering environment and get a little correction started. Just have to control volatility as an asset class and steam can be released with relatively little pain. But markets don’t work like that, right? Trade accordingly.

Volatility Interpretation

Posted on September 1, 2021 by Margin Rich

Volatility is a tricky asset class. At least for me. I’m sure quantitative methodologies utilizing various derivatives make it easier for the more mathematically inclined, but I do with what I got. Chart interpretation is definitely more art than science, and I wanted to share what could be a set-up for a short-term burst in risk-off sentiment.

We’re only two weeks removed from that spike in fear that got everyone’s under-garments in a bunch. Since April, the last 4 times the VIX spiked up resulted in intra-week advances but never closing a week above that top channel line.

Price action across all markets says to me that there is a lot of FOMO and confusion, as evidenced by declining or negative breadth and sentiment readings with new highs across various asset classes.

In order for a proper selloff across multiple asset classes, I’d like to see the VIX close out the week above 20. Not a bear here. Just positioned accordingly for some short-term profit should things soon get a little sparky for a minute.