Watch Out for Quicksand

What did you always see in movies with a quicksand scene?  Hero and fellow adventurer plodding along through the forest.  Hopeful and intent on making it to the lost temple of treasure, but cautious for danger.  Then all of a sudden…up to their ribs in quicksand and a rapid descent into panic.

Well that’s how the stock markets kind of feel right now, except there’s an unusual amount of calm.  I get the sense that an air pocket can develop to rip 8% to 10% of value from equities.  It would be fast and temporary.  I firmly believe the stock markets will keep moving upward and I actually think we’re going to have a strong Fall and Winter.

I don’t have any charts or article links to share; just a gut feel backed by anecdotal evidence.  Let’s briefly review the negative factors that one would have surmised to have a higher impact on the broad stock market:

– Repo rates flash-spike up to 10%

– Momentum Factor crashes with Value Factor spiking

– Saudi oil processing plant attacked affecting 5% of total world output

– The 10yr. Treasury took a hard spike downwards

– Fed and ECB are cutting rates

I mean all of that just happened in the last 2 weeks and the closing range on a weekly chart in the S&P 500 is right around just 1%.  It doesn’t feel right.  I suspect we could see a delayed reaction to these negatives, which will be exacerbated by the algos.  That’s how we could see a 2-week down-spike.

All the Bears will claim they were right within that first week and the next GFC is surely here.  Then the second week traps the Bears as the Bulls take over by the end of that second week.  I think if we see action like that then it sets the stage for a V-bounce and the start of the next leg in this Bull market to new highs over the holidays.

Those negative events were enough to halt the down-move in treasuries and stave off a correction in gold, but I think that’s also temporary.  Instead of a flight to safety placing a bid underneath longer Treasuries and gold, we could see a flight to cash.

Again, this is only a gut feeling but it keeps nagging me right now.  If this gut feeling becomes a reality, it could look something like this.

SPX Possibile Air Pocket (Sept. 2019)

Plenty of ways to play that action alone in equities but when you toss in Treasuries and precious metals, it could be a trader’s delight.

Oh, and one last thing on the repo rate spike.  It’s not just a little plumbing issue. That spike up to 10% mattered.  It’s a tell.  If it didn’t matter why exactly would PIMCO say,

In our view, the repurchase (repo) market, where banks and broker-dealers can obtain overnight collateralized loans from intermediaries, is a critical barometer of the health of the financial markets.

Tread lightly…at least temporarily.

Sneaky Suspicion

Today, tomorrow, and Monday.  That’s all we have left of the 2018 year in equities.  This bipolar market has even the professionals pulling their hair out; Monday’s despair vs. Wednesday’s relief.

Here’s how I think the S&P500 plays out to end 2018 and you can take advantage whether you’re a short-term trader or a long-term investor.  These are just gut-guesses that also influence my own decision-making process.

Thursday (12/27/2018) – I suspect we’ll get a flattish (up 0.25% to 0.50%) day.  But the pros are smart and they’re going to harvest their tax losses and perhaps perform some year-end window dressing

Friday (12/28/2018) – Down between 1.25% and 2.8%.  This will freak out entrants who will feel they waded back in too early.

Monday (12/31/2018) – Down 3.5% to 4.9% and we erase Wednesday’s recovery.

I can easily see the skilled timers across all genres of the investor universe using the unskilled timers for lipstick-on-pig returns to dress up their 2018 performance against the damage of Q4. 

Then get ready for a great H1 2019.

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.

Really? You Didn’t Know?

Come on.  Who didn’t know that at some point when you make virtually everything about your life freely available to the public, or at least approved “friends”, that the data shared would eventually be misused?

Any rational person knew that.  It was inevitable.  But do the majority of Facebook (“FB”) users actually care?

There are so many different types of users of FB.  I would wager that there are vastly more users who care so much more about maintaining their public status and perception, than incursions into their personal freedoms.  Mind-blowing, right?

Which means that FB will continue to be a cash-flow gold mine, despite account closures and losses of ad sponsors from corporate partners.  Mr. Market will tell us the answer before 2018 is over; maybe a lot earlier.

The stock has taken a quick, hard thrashing since the last week of January.  Intra-week losses (Hi to Lo) are at 23% since that final week in January, with a chunky 10% during the week before last.

image

Don’t expect the Senate or Congress to actually take action.  FB lobbies, and I don’t know if you knew this, but FB pays taxes, too.  A lot of’em.  My guess about this whole Cambridge Analytica-thing, “This too shall pass.”

Look For The Wick

I have come to utilize charting techniques less and less as their ability to help handicap asset price movements continues to wither away.

You’re either trading algorithmically in front of the market or you’re a trading loser.  Every single chart pattern and set of indicators in every conceivable combination has already been mathematically expressed by people smarter than technical analysts, and easy profits have been completely arbitraged out of the market from visual chart cues.

There will always be pockets of sheer luck.  There are always exceptions.  But earning consistent profits on price/indicator pictures…get real.

I have come to rely more and more on fundamental analysis, experience (see “gut”), and semi-quantitative tools to manage the risks of trading capital.  Like a degenerate heroine addict, I still chart.  I’ll never give it up, but it’s just another input.  Mostly noise.  Sometimes valued signal.

Despite all that, here’s one visual cue I think a lot of professionals are probably waiting for and that is a second long-stem on the S&P 500.  It could potentially indicate that risk appetites have returned.  If the HFTs see this then we could see a “schooling” move upward, like fish or a flock of birds, as the programs feed on each other’s momentum calls.

Take a look to better understand.  We are looking for a 2% to 3% wick below the weekly closing price.  That’s it.

Everybody's Waiting for a Stem - SPX (3-28-2018)

That might be all it takes to re-engage risk taking.  Not without increased volatility, of course, because liquidity is draining and conditions are tightening.