The Best Part of Waking Up

The Best Part of Waking Up Attention Grabber

Wow, what an ignition for coffee.  This all-important soft has shot up a rough 20% in three days as of today.  That’s smoking momentum.

Props to those who are grabbing or grabbed a piece of that squeeze.

However, capital is nervous these days.  One can feel it across multiple asset classes and sectors.  That general nervousness could cause capital to quickly shift out of coffee and into some other asset bearing a superior portfolio correlation.  The move this week feels like a firework as opposed to a rocket headed to the moon.

FinViz Daily ChartFinViz Coffee Daily (7-22-2021)

And fireworks fizzle out.  Now maybe this is a legitimate breakout.  Destination?  Moon.  I don’t identify as a commodity market expert in any futures category so there are definitely legitimate fundamentals factors that I’ve spent zero time assessing.

In fact, I don’t identify as an expert in anything.  I just like to surf the swells of extreme price action across various sectors and assets classes.  Simple as that.  Sometimes I win big.  Most times I lose small.  Just trying to net higher and higher.

Let’s zoom out to a monthly chart of coffee (FinViz Monthly with COT).  The blue circles below show every time the big-money, savvy traders get a bit out over their skis against the smart-money commercials.

FinViz Coffee Monthly (7-22-2021)

Over the last 16 years, it would’ve paid to heed this signal more often that not.  In 2010, it was a total bust during that commodity super bull coming out of the GFC.  But other than that, futures and options would’ve paid out nicely betting on a sharp change in trend.

I’m a simple man.  Simple mind.  Simple life.  Simple trading tactics, and Puts on the JO ETF could provide a solid reward to risk if a reversal is essentially imminent.

The spreads suck, but there’s enough liquidity.  If coffee is to see holders start grabbing profits just as fast as they’ve made them, then the zone highlighted in yellow below looks like a logical place to explore opportunities.

Stockcharts Coffee Weekly (7-22-2021)

Ideally, we’d like to see profit taking tomorrow (Friday 7/23/2021), in order to add a wick to the top of the current weekly candle.

Again, beware of that price action in 2010.  And the Great Mother asks you to kindly stop brewing your morning drug with single-use plastic pods.

Bitcoin – A Quick Technical Read

So the last time, I tried to seriously interpret BTC action in a public setting was 2017.  Right before BTC decided to offer speculators a nifty little 10x return in less than a year.  And I was not on the right side of that 10x.

Like many, I’ve significantly increased my education in the blockchain.  I see and agree with the future of the potential.  Not necessarily in agreement with the anarcho techno-extremists, but clearly an enormous amount of innovation in the space is going to go mainstream in the coming years.  It’s like Pandora’s Box.  Can’t be closed again.

Because of it’s ability to attract those looking for an easy score coupled with everyone being a “Market Wizard” thanks to the internet (including A-holes like me), some action appears to be setting up in BTC.  Observe.

BTC Weekly (7-16-2021)

Or maybe it’s a “vomiting camel.”  Look at the most current weekly candle on the right of the chart.  See how it’s breaking down through the shoulder-line.  I suspect that cheap bit of technical analysis will cause a relatively quick descent into the $20k area; anywhere between $21k and $29k.

This will be the result of whales and algos drawing in the suckers, who arrived to the party far too late, to puke.  I hypothesize, with zero quantitative support, that the $20k-ish price range in the gold oval above will draw in big money establishing a floor for the next move in BTC.

And I believe these moves will be hard and fast.  A consolidation could then occur allowing time for new positioning, but I don’t think BTC goes sub-$20k.

This will in turn cause a selloff in all crypto-assets.  And I think Ethereum could get sold off all the way down to $1200 but probably find strong support at $1400.  Institutional support for the future of smart-contract based applications may set the floor at that $1200 to $1400 range in ETH.

Headlines from a few days ago like the following help to anecdotally support the thesis.

Coindesk Lead AM Article (7-13-2021)

That bullish analyst quoted in the article was Kate Stockton of Fairlead Strategies.  Have a read of her bio.  About as accomplished as you can get for being a chartist.

Katie Stocktcon - Fairlead Strategies

I can only trade my beliefs about the markets within the edge that I’ve cultivated.  I don’t see a bullish breakout yet.  I see a falsely bearish breakdown, consolidation, and the beginning of the next leg of the advance.  Handicapping future outcomes ain’t easy and trading imaginary patterns is typically a fast way to Lossville, so the price action is always the final arbiter.

Diamond hands and laser eyes aside, if you got some play-money then a better buying opportunity may well be on its way in cryptos.

Oil Taking Its Breather…Finally

For traders who’ve been waiting oh so patiently, it genuinely appears an oil sell-off has begun.  Discretionary trading requires sound, subjective judgement which comes through diligent research and a practiced  hand.  Do I have any of that?  It’s certainly questionable, but you’re here reading so let’s get to the squiggly lines.

There’s a massive confluence of moving averages, Bollinger Bands, and indicators on a weekly chart signaling a sell-off could have some legs, at least temporarily.  Have a look at the monthly chart of West Texas Intermediate (LC).  That horizontal yellow line represents a very good stopping point should momentum build to the downside as H1 P&L’s get protected.

WTIC-Monthly-7-6-2021.png

A 20% correction in oil would not surprise me.  This coincides with action and positioning in the US dollar.  For event-traders, OPEC+ activity has definitely raised hackles so I suspect stops have been pulled up pretty tightly which can exacerbate a move to the downside.

On the monthly chart above, since the bottom of that negative-price move in April 2020, hi-to-lo oil is up 1000% in 15 months.  It’s up 350% using closing prices, and hell, it’s up 135% since November.

We did get a 15% correction starting in March that began a little consolidation period from which oil has recently broken out.

WTIC-False-Breakout-Weekly-7-7-2021.png

I suspect that June breakout drew in a bit of newer capital that failed to position earlier and could be chasing in addition to pyramiding by existing position holders.  Feels like a false breakout from that wedge.  Commodities across the complex have all been taking breaks, but not the King of Commodities.  Consolidation yes, but no true breaks.

I’m of the persuasion that a commodity super bull has legitimately begun.  But that thesis ran so white hot with nary a breather, that now it’s time for the granddaddy of the commodity complex to kick up its legs for a minute.  Any multitude of ways to go short.

One of the methods I like is Puts on the XLE.  Vast liquidity with excess positioning will allow for a potent ROI on a well-timed swing.

XLE-Good-Bottoming-Point-7-7-2021.png

That horizontal yellow line on the weekly XLE chart also represents another good confluence of moving averages, bands, volume@price, etc.  Use any spread methodology desired within the options complex, but $45 looks like as good a point as any for a possible bottom and a consolidation to begin.

As usual, I’m handicapping here.  This is a personal bet just for me and no others using my own proprietary methodologies that have consistently given me an edge.  Risk management is always the key to a successful trade.  I use a mix of technicals, fundamentals, and anecdotals that all get swirled around the noggin until the organic computer kicks out a trade suggestion just for me.  Then I write about it on a site nobody reads anyways to help me flesh out and think about the theses a bit more.

If you’re somehow reading this content, it’s not a trade or investment recommendation.  I’m just thinking out loud.

Commodities and stocks have just been on a tear in 2021.  Performance as such for both the S&P 500 and BCOM has occurred a handful of other times in financial history.  It tended not to bode too well for commodities over the next couple of months.  Observe the following chart  from SentimenTrader.

BCOM-Performance-After-It-SP-500-Kick-Ass-Through-Day-122-of-a-Year-July-2021.png

Sample size not withstanding, with oil and natty combined being the largest component of the BCOM, a short thesis just might profit.

Have You Lost Your Mojo

Sad Mojo Jojo - Copy

Which side of the speculating-fence are you on?  Are you euphoric with gains from this rally off the low?  Thank you “dumb” money.

Or are you annoyed sitting in cash, position-less, and asking the market why is it not listening to you about this being a bear-market rally?  I see you “smart” money.

I was fortunate to have lost very little thanks to my hedges coming into 2020.  Partnered with basic risk management, returns on the year are flat.  Not great, but I’ll take the profits off the well timed trades to mitigate losses in the long-term buckets.  Bottom line, I missed this rally.

But the major indexes are up 40% off of their seppuku-inducing lows.  Are we in for more?  Is everything fixed?  Will we see new highs and then push on for an additional 30% to 40% more in gains?  I want every reader to remember just how great and unusual 2019 was for returns.

You could’ve made 30% in 2019 in your sleep with zero skill and no risk management.  We’re going to get back to back years of that?  Highly unlikely.

Is this rally legit?  Well if you sell and realize gains, then hell yeah!  But are we truly in the clear from a bear-market rally and more damage?  Who’s to say?  Just history.

Have a look at this chart that Macro-Ops put together.

Bear Market Rally Duration & Performances

Here’s another chart from BofA.  It’s already made the rounds and is dated at just over six weeks old, but have a look at the 3 columns specifically on the right.  Have a look at the dates and percentage losses that were still pending to the date of the actual, final low.

BofA Bear Rally Chart

The coast may be clear but 2020 has seen the most unusual market action in history.  I have no way of knowing if this is a bear market rally or a legit restoration of the bull that I’ve missed so far.  But my portfolio’s cash levels clearly mark where I stand.  And if the statistics above are not enough history imploring caution, then have a look at this chart near the end of the GFC in 2008/2009.

S&P 500 2008 Crash & Bounce Volatility

How many bottom-callers gave away healthy chunks of their stacks during that 6-month rundown?

The most successful, sharpest speculators on the planet are currently telling you outright where they stand on this market and it’s poor risk/reward set-up.  That has to make you pause even though the price action is the final arbiter.

People are trained to not fight the Fed, now.  Even dumb money is trained.  Everyone now “knows” that the tsunami of liquidity washing over the financial and corporate world will support equity prices.

It worked for the last 10 years.  It has to work now.  Right?

The stock markets are a discounting mechanism.  They see the future and the future is bright according to speculators, currently.

But let’s revisit the realities of the pandemic’s effects on spending and thus business earnings as well as viability to continue as ongoing concerns.

Tens of millions of people have lost their jobs regardless of whether it’s a furlough or a permanent termination.  How many people who retained their jobs have taken salary cuts of 20% to 30%, possibly permanent?  And somehow this is not going to have a long-lasting impact on business conditions?

The current, typical mindset seems to be something like this, “Just write off 2020. It’s a sunk cost. We’ll have vaccines soon. People are social distancing. And the government is propping up everyone. 2021 is definitely going to be a great year, economically, so let’s price stocks accordingly now.”

However, widespread impairments to income will lead to widespread impairments to business operations.

Have a look at the credit downgrades from Q1.

041520-SCO-Credit-Downgrades_5e9744cba4085

Bankruptcies are going to happen.  Capital will be lost.  Is that being appropriately discounted right now?

Right in line with the credit downgrades, let’s take a look at the HY option-adjusted spread.

HY Option Adjusted (May 2020)

We’re in a recession.  The BEA will report this.  And yet spreads are diving.  Well the Fed is buying HYG and JNK.  Don’t fight the Fed.

But let’s look at HY’s default rate versus debt to GDP.  You see that wide mouth?  It’s going to chomp and the likely path of convergence lies with the default rate moving upwards.

Debt to GDP vs Default Rate (May 2020)

And what about leveraged loans and CLOs?  Approximately half of the the leveraged loan market, $600 billion, is securitized via collateralized loan obligations.  Between downgrades and further business earnings impairment, wait till CLOs begin acting like 2008 CDOs.  Will it be a positive or negative for equity prices?

Let’s keep it simple and return to equities with a final look at the pure concentration of capital in this Q2 rally.  Here’s the BofA chart that’s played out by now.  It doesn’t seem to matter that capital is concentrated because this time is definitely different.

Market Concentration (Apr. 2020)

These stocks support the work-from-home new economy so it’s all good, but let’s take a look at a SentimenTrader chart.  After all these years, SentimenTrader continues to generate so much value at such a small cost.  Literally, every player subscribes to it; even those that already have Bloomberg terminals and the best info-flow money can buy.  Chart is dated 5/13/2020.

SentimenTrader - Concentrated Rally (5-13-2020)

Not a pretty picture but we’re almost 2 weeks removed from that signal and the market is up almost another 10%.  Not trying to mine the data but I just can’t shake the nagging feeling that a selloff is imminent.  And by imminent I mean within weeks if not days, just not tomorrow.

Based on the concentration levels then it would stand to reason that the NASDAQ will truly indicate when a correction is to begin.  With the 5 stocks (FAMGA) up above representing 45% of the NASDAQ vs 20% of the S&P 500, look for weakness in the NASDAQ to indicate a trend change.

Once a correction starts, I could see 8200 as a solid support area.  This would put the NASDAQ about 13% below from current prices.  For those of you that missed this rally, some Puts on the QQQ followed by some jumping into quality long positions once that 8200 level is reached will be a good way to make up lost ground in your P&L for 2020.  This would be just above a huge price area of recent purchases, noted below in the chart.

$COMPQ Support Level

Hard to fight this rally.  I know.  But if you want to get that mojo back along with some of that lost capital, it might pay to be bold.

Another Bounce or Not

Hmmmm.  What to do in a market like this?

For your long portfolios, my advice would be to sit tight.  The odds are strong that we’re in a multi-week bounce before another little shakeout.

SPX Thru 2018 Holidays (Nov. 2018)

I’d suggest getting long after the next move downward.  Market behavior suggests a rally into 2019.  It could be the start of the final leg of the melt-up as “late-cycle” keeps getting bandied about out there.  Over the past few years, the drill seems to be a quick move down followed by the exhaustion-bounce followed by another move downward before regaining the up-trend (weekly charts).

For the contrarians, it’s hard not to look at China and energy as two obvious areas for medium-term plays.  If you play in the markets at all, I don’t need to throw up charts to illustrate the performance of both sectors of late.  Tencent and JD could be easy moneymakers.  And the energy toll roads can provide a nice yield along with cap. gains on an oil bounce over the ensuing months.

EPD has the infrastructure footprint and financial efficiencies that begs for yield-starved investors who’ve been waiting for a better opportunity for entry.  However, the company’s price remains quite steady in the $20 to $30 range.

Oil’s price action looks exhaustive.  Fundamentals appear to bear out an inexplicable magnitude of this sell-off.  If institutional traders on the wrong side are able to quickly offload positions, then there may be enough support by energy bulls to resume an up-trend without extreme volatility.  I remind energy traders of what we saw in H2 of 2016.

I liked the Starbucks story, but it quickly got white-hot before I could position with my long portfolios.

SBUX Retrace (Nov. 2018)

Based on the trajectory over the last several weeks, it wouldn’t surprise me to see a retrace down to the $56 – $58 range.  That’s a good spot to get positioned if you’ve been eyeballing this world-class caffeinator.

In the quasi-cash-equivalent area, muni-CEFs have presented recent value with their widened NAV discounts.  The discounts have come off a few points as investors have taken advantage of the historically free money and positioned accordingly.  The big question mark is interest rates.

Does the Fed raise rates next month?  If so, that could renew selling action in muni-CEFs and widen discounts again.

Interest rate tape reading has rates looking a little toppy.  Not like they’re going to topple over as we know the Fed will raise rates which will force support.  But still, I like interest rate-sensitive funds here to drive a little yield for a bit in place of sitting on excess cash.

          IIM Current NAV Discount (Nov. 2018)

          JPS Current NAV Discount (Nov. 2018)

Remember, these aren’t long-term investments.  We’re talking about using them as cash-equivalents, but their volatility makes them decidedly un-cash-equivalent.  We’re speculating on additional points on your money earned relatively conservatively.  Mind your stops.  Protection first.