Investing | Margin Rich

Credit Rumbles But Juice Left to Squeeze

Posted on March 22, 2022 by Margin Rich

Rising Rate environment. War in Europe. Inflation printing at levels seen 50 years ago.

Known knowns so they’re priced in, right? I suspect so.

Last week’s price action in equities is being widely viewed as a short-covering event. And there is a plenty of evidence to support that notion, which I agree with. But that doesn’t mean we haven’t seen a potential legitimate shift in animal spirits for risk assets, at least in the short term.

We’ve gone from 0.00% to 0.25% on the Fed Funds rate. Threats of an additional 50 basis points if and when needed at any of the next FOMC meetings and potential initiation of balance sheet runoff by the start of Summer

With 6 remaining meetings in 2022, you at least have a printed schedule of interest rate risk-events.

If the known knowns are essentially priced in, then how much volatility is left to sell and hedge? Which brings me to junk or rather high yield (HY). With the start of the year, the HY spread began to widen, but I suspect with current risks digested, people are still going to stretch for yield.

Over the past few years, each spread-widening event has been met with subsequent compression. Observe.

Why? Because interest rates are so low and capital requires yield. End of story.

Rates are still historically low and the Fed’s balance sheet liquidation process still awaits. This means liquidity. Recession risk is obviously rising as earnings will assuredly contract, but again, what’s priced-in in the short-term? I’d wager more than speculators suspect.

HYG is sporting a meaty 4.25% yield and a slight discount to NAV to boot at the time of article composition.

Sentiment in HY has reached an extreme, as observed in the HY McClellan Summation (courtesy of SentimenTrader). Observe an extreme not seen since the GFC.

Additionally, debt-volatility as measured by the MOVE (courtesy of TradingView) has begun to abate. Is the worst over? Not sure, but there’s enough signs to wager yes in the short-term at the very least.

Let’s take a look at HYG from a technical standpoint. A couple of things jump out. One, the buying thrust in volume last week (200M+ shares traded). Over the past few years, this level of green volume has typically led to solid, multi-week or month rallies as noted by the yellow circles. Couple failures (red circles) in 2020 as the world was being taught how to live with a pandemic. Different environment now.

HYG has also bumped down into it’s 150-week EMA. Nothing magical about that, but it did prove to be a stopping point at the end of 2018 when people were thinking the next GFC was upon us.

Huge risks are everywhere. None can be marginalized but they do have to be appropriately discounted and I think the markets are doing that now. If you’re looking for yield and maybe a bit of capital gain, HYG is worth a look at structuring a play.

Pride Goeth Before the Fall? – A Performance Review of 2021

Posted on March 1, 2022 by Margin Rich

It’s been awhile since completing a review of market calls made here at Marginrich.com. As my general knowledge of market inter-workings and crowd psychology has refined over the past several years increasing in nuance and depth, now’s as good a time as ever.

Let’s start with accuracy percentage and a list of the articles with basic details. Then I’ll provide a quick, detailed breakdown of each call afterwards down below. We’ll work backwards from the most current post, skipping 2 posts where I don’t make any directional calls or predictions.

Nine of the 11 asset forecasts between December 2020 and December 2021 were correct, for an accuracy rate of 82%. Stellar by any definition, especially for a free blog written in spare time. Each forecast was actionable via options, futures, the underlying asset, or simply raising cash.

Forecasts:

1. Trading Brazil – 12/12/2021: The Brazilian Real would strengthen against the US Dollar and Brazilian stocks were about to be re-rated higher. (CORRECT)

2. Options Markets Muting Signals – 11/20/2021: Trapdoor underneath stock markets and potential for a large selloff in the near future. (CORRECT)

3. Insiders, Metaverse, and Options – 11/16/2021: Options usage too extreme; quick & shallow selloff felt very close. (CORRECT)

4. I Can’t Fight This Feeling – 10/24/2021: Commodities sentiment extreme and due for a selloff led by oil with a rise in the US Dollar. (CORRECT)

5. If Everybody’s Thinking Alike, then… – 9/13/2021: Technically, I stated the cannabis sector looked as if it might be basing for a potential up-move. I didn’t actually make a directional call, but I’ll still own it. Same goes for EWZ, for which I actually did make a directional call 3 months later. (WRONG)

6. Volatility Interpretation – 9/1/2021: Volatility was about to show its face in stock markets. (CORRECT)

7. I Don’t Know Why I Talk About Crypto in a Public Setting – 8/30/2021: Ethereum on the verge of another run upwards. (CORRECT)

8. The Best Part of Waking Up – 7/22/2021: A correction in coffee was imminent. (CORRECT)

9. Bitcoin – A Quick Technical Read – 7/16/2021: I thought BTC had one more puke-dip into the $20k range, anywhere between $21k and $29k. Major whiff. My article actually bottom-ticked that particular correction before BTC went on to return over 100% within 4 months. (WRONG)

10. Oil Taking Its Breather…Finally – 7/7/2021: Oil correction had begun (not obvious yet) and XLE would sell off accordingly. (CORRECT)

11. Beware the Secular Trend’s Short-term Counter Move – 12/28/2020: The Euro/USD pair had reached an extreme point and a USD rally looked primed, which would coincide with potential fear-events in the equity markets. (CORRECT)

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So that’s the quick and dirty. Keep reading below for a bit more detail and to view the charts better illustrating each forecast. Each chart will have a yellow circle denoting the date the article was published.

Trading Brazil:

Calls on EWZ were the chosen expression for this trade. Pre-tax return was 100% in less than 2 months. While everyone has been focused on energy, I focused on an EM component that looked ripe to provide a kickstart to 2022 trading.

Real strengthening vs the USD. Any reader could’ve bet futures here on the currency pair for a tidy profit.

Options Markets Muting Signals:

This particular article actually top-ticked the NASDAQ Composite, but I didn’t go short here. Hindsight being what it is, I should have, but instead I simply raised cash levels for the opportunities that are currently availing themselves.

My focus was on the NASDAQ in this article however one has to include the S&P 500 if one is going to comment on general equity markets. No top-tick as there was a bit more demand for the S&P 500, but within a matter of weeks, the trapdoor opened for this index, too.

Insiders, Metaverse, and Options

You could almost smell the move coming, like a turkey basting for hours. Then, Black Friday delivered a little fear for the unprepared. No trade here as raising cash was the strategy, and the ensuing rallies assisted with that process. Going short up until the past few months was a dangerous endeavor and understanding option flows was and is critical.

I Can’t Fight This Feeling

That little 11% jaunt downward in the underlying ETF over the next month resulted in a 135% pre-tax return on simple Put purchases. Of course, energy as a sector is a different beast entirely now, and along with inflation, the Russia/Ukraine conflict has put commodities front and center of the financial space again.

The US Dollar followed it’s typical anti-correlation to commodities by rising. Since that initial run upwards, it has chopped in this uncertain environment. I suspect the ultimate, long-term path is downwards for the USD, but that’s a philosophical discussion for another time.

If Everybody’s Thinking Alike, Then…

Ugh, what else needs to be said? This one is ugly. To reiterate, I did not actually make a directional call or bet here. I simply thought that the bear market in cannabis may be reaching a nadir. But investors and speculators had other ideas as the market pounded this ETF for an additional 50% loss subsequent to publishing the article.

Volatility Interpretation

The article literally bottom-ticked the VIX. Unfortunately, I didn’t directly trade Vol here. I used the ensuing volatility to pyramid some positions in the long portfolios.

I Don’t Know Why I Talk About Crypto in a Public Setting

Those percentages in the chart above were from the publishing date of the article (yellow circle). The actual moves were, 20% as annotated for the first ascent, then a quick 50% downdraft followed by a 75% spike. If you ignored ETH in 2021, or crypto period, then you missed some of the best trading opportunities of the year.

The Best Part of Waking Up

Coffee was the gift that kept on giving for about 4 weeks in late July through late August, before squeezing out of an old school pennant to what seems like non-stop upside. The initial trade was simple Puts on the JO ETF for a 40% pre-tax return in a week. Then I was able to scalp 20% in a week out of JO with some Calls before finally squeezing the last bit of Put juice for 10% in a week before THE breakout in coffee.

Subsequent to those trades, I did overestimate the extreme in buying-sentiment and underestimate the impact of the freeze in Brazilian crops. Consequently, I gave back a bit of the profit with additional Puts and failed to capitalize on the ensuing multi-month rally as a result of my bias. All additional lessons at a fair tuition price.

Bitcoin – A Quick Technical Read

I darn near bottom-ticked BTC with this particular forecast. So wrong! As BTC goes, so goes the crypto markets so it wasn’t long before I was pursuing the other opportunity as noted above. As has been said countless times by countless players, trading is all about managing risk (control losses & maximize gains).

Oil Taking Its Breather…Finally

Oil (West Texas Intermediate) was overdone. I top-ticked the high in July on the day of publishing and was fortunate to estimate an unsurprising 20% sell off in the commodity.

I favored Puts on the XLE as the expression for this trade and the market rewarded me with a 100% pre-tax return in under 8 weeks.

Beware the Secular Trend’s Potential Short-term Counter Move

I published this article in the midst of what felt like virtually everyone expecting the “obvious” demise of the USD. The dollar’s imminent demise down into the $80’s has since proven to be fallacious logic. Its haven status as the world’s reserve currency has kept it afloat and demand will probably keep it there for some time until internal and external geopolitical/economic events shift perceptions and capital flows.

Once again, the anti-correlated pairing could’ve provided currency traders with an exceptional opportunity. Admittedly, I failed to take advantage of this potential trade with a currency pair expression.

What I did do was expect more intense volatility. As such, I purchased hedges which ended up costing me insurance premiums as the S&P 500 simply chopped for a month before continuing onward and upward. Sure, I was correct about some volatility but wrong about the amplitude. Still though, I contend that the price paid for peace of mind was worth it.

It’s my sincerest hope that if you’ve read this full performance-review that my skills and experience are apparent. I’m not some wannabe, greenhorn daytrader posing as a professional. Although I mostly showcase my technical analysis skills here at the site, I’ve honed my fundamental analysis skills for all asset classes and sectors. Over the last 20 years, I’ve poured my heart and soul into building an amalgamated skill set around a professional-level understanding of investing, finance, banking, currencies, economics, accounting, business operations, sales, geopolitics, crowd psychology of markets, leading/managing/coaching, and asset management.

Now I’d like to test those skills in the appropriate arena. If you’re here just to have a read, I hope you’ve enjoyed. I’ll continue to intermittently share actionable thoughts. But if any readers from the professional, financial space are interested in how I can benefit their organization, please don’t hesitate to reach out. Email address is listed at the menu button in the upper-right of the screen. My LinkedIn profile can be accessed at the About page by clicking the hamburger in the upper-left of the screen.

Here’s to a fruitful 2022 for any and all readers of Marginrich.com.

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.

Beware the Secular Trend’s Potential Short-term Counter Move

Posted on December 28, 2020 by Margin Rich

Right now the markets are at extremes. Essentially all of them. Current price action across a broad swath of sectors and assets classes strongly reminds me of the end of 2019 and beginning of 2020.

My gut tells me that a fear-event is near. And my gut is being primarily led by current action in the US dollar. Short positioning in the buck is extraordinary.

Yeah, yeah, macro-top-down, commodity bull, central bank largesse, and all that in regards to the USD but this is egregiously exaggerated. Not that it can’t get more extreme, but consider the following charts.

Seasonality, courtesy of SentimenTrader, tends to be pretty strong in January for the buck.

With currencies, large fast moves in a short period are atypical but we live in a time of atypical. Pairs always have to be acknowledged and the anti-correlation to the euro is at a bit of an extreme. In the last decade, every time the Euro to USD line (white-monthly) has approached 2 standard deviations above the 25-month MA, then it’s been go-time for a USD rally (green).

Does this mean a reversal is imminent? Nope. Does it mean additional portfolio hedging here is warranted? I’d say it’s a prudent use of capital.

The long-term case for the dollar’s demise is well documented. Goldbugs have been the longstanding voice of fiat destruction, but more recently, Ray Dalio has picked up the baton. Sam Zell has now officially thrown his name in the dollar-destruction ring with this recent quip.

The single greatest risk that we are dealing with today is the loss of the U.S. dollar as the reserve currency. If we keep doing what we are doing right now, I think it is 10 or 15 years away.

These investment legends are right. The USD will in all probability lose 30% to 40% of its reserve status this decade. And world markets as well as geopolitics will be volatile as a result.

Why do you think Bitcoin has jumped so hard? That’s institutional fear of central banking monetary policy, not retail FOMO driving Bitcoin. It’s palpable, but it’s ahead of itself in the USD and Bitcoin.

Nothing moves in a straight line and short-term counter spikes in any trend are as sure as sunrise. I’m not implying that a fear-event has to rival Covid’s March spikes or we’re at a long-term top in equities. Just saying that a short-term move to remove some excess is worth hedging at this point.