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.

Flat or Bumpy: Choose Your Own Adventure

                                                                     The Abominable Volatility

Last week’s “whopping” 1.8% selloff on Wednesday shocked market players but was also blown way out of proportion.  The selloff also presented a nice little set-up to possibly scalp a few bucks out of the market over the next week or two.

Was Wednesday’s price action a precursor to some further weakness?  Or was it a one-inch pothole in the continued advance of this bull?

You choose the trade.  For you children of the 80’s, remember these books?  Hours of time wasted flipping back and forth as the protagonist.  The book reference is a good metaphor for the current state of the US stock markets.

                                            Volatility Hunter                 Don't Bother Trading

As I see it, the price action is saying we’re in for another little move downward.  I suspect no more than 5% down to around 2,260 on the S&P 500.  In the chart below, I’ve circled and described what I think can happen.

SPX Weekly (5-19-2017)

The recovery on Thursday and Friday are just small snapback moves for the real players and market makers to close out certain positions with a more positive effect on P&Ls.  Then the rug get’s pulled out from the crowd in a panic-inducing 5% “real” selloff.

This is just what the price action is telling me.  I’ve arbitrarily assigned a probability and bet (regional banks) and hedged (volatility) accordingly based on nothing but my hunch.

Incidentally, my old friend in the credit department thinks there’s room for a little further downside in the larger market.  Below is the chart of the action of what the credit-friend thinks.  Notice the tight correlation between the S&P 500 and my credit-friend.  It’s only over 90% positive, so maybe it’s nothing.

Friend in Credit (5-19-2017)

Besides my friend in credit, there is the alarming increase in vol shorts.  Or maybe the crowd is right.

VIX Shorts - ZH (5-21-2017)

To scalp or not to scalp?  You choose your own trading adventure the next couple of weeks.

It’s Like the Old Days in Commodities

For the traders out there, action in commodities has been highly volatile presenting opportunities as if it was the 80’s.  Basic technical analysis has been rather effective, especially within the softs and agriculturals.  Now the precious metals swell appears to be breaking, if only to regroup for the next move

It’s important to remember that large-scale traders and high-frequency traders are the beginning, middle, and end when it comes to trading.  Not only do they control breakouts and breakdowns, but they often make the market, too.  It’s important to exercise patience before positioning into a play.  Before a larger breakout or breakdown is firmly established, there can be see-sawing volatility that can jar traders out of position.  Patience allows you to skip a few waves before finding that swell you decide to ride.

What’s been hotter than the precious metals or related investments in 2016?  Not a whole heckuva lot, and silver has been on mad recent run but price action says it’s time for a pause.  The price of silver has already started turning over the last two weeks.  Because of the intrinsic volatility in the metal, it could be a quick ride down to the breakout point around $17.75.  I think this breakout in the precious metals is the real deal and I suspect we could see a sort of V-bounce right back up to the two-year highs once the breakout point is retested.

Silver Weekly (7-21-2016)

One of the calls I made in my last post was that sugar was looking blow-offy.  I wasn’t precise on the timing but clearly the action is looking corrective.  More importantly, the price action has been controlled to squeeze final long-profits and allow positions to be lightened.

Sugar ETF Weekly (7-21-2015)

I think sugar’s action could go one of two ways.  One, it could be like in the chart above where we see a downmove and then a bounce where final profits are taken and it gets sold off pretty hard down to a natural support point.  Or the market-controlling speculators could just sell the sweet stuff down in a hard, volatile move.  My gut tells me the first option is the probable play.  If you haven’t positioned for a sugar short, there’s still time.

Trading intense moves in an asset class is a lot like trying to catch a metro train.  You may have missed it going away on a long, but you can always catch it when it comes back on a short.

I don’t know nor can I explain why basic resistance/support chart analysis has been working so effectively since late 2015.  Maybe it’s the patience.  Maybe I’ve learned to read the action with HFT-tinted glasses before executing.  I don’t know.  All I know is that I don’t feel like I’m doing a whole lot different from most other years, but 2016 has been one for my own trading record book.  Who knows?  Maybe that whole 10,000 hours thing actually means something.

Let’s take a final look at bonds.  They’ve been driven up right along stocks.  In a bizarro turn, American equities are being viewed with virtually the same risk premium as corporate bonds and even treasuries, primarily because of solid credit ratings coinciding with high relative yields and developed-world central bank backing.

However, the boat is awfully crowded on the one side of interest rate direction.  The world has negative rates everywhere.  The crowd thinks there’s no way rates can move upwards just because the central banks are not in a position to act.  That is fallacious logic.  Observe:

10-Year Yields Weekly (7-21-20156)

Remember, the Fed’s final QE announcement in 2012.  You see that upmove in 10-year rates?  That was a market-driven move, not Fed-driven.  And yet money is allocated today as if there ain’t no way the market can drive rates up again in any sort of treasury selloff.  There is a widely held belief that American debt is one of the only pure safe havens, and it is to an extent.  That doesn’t mean that market controllers won’t inflict maximum pain for bettors letting their guard down.

We’ve already seen a sharp move up in rates recently.  Is there more to come?  I’d bet that the odds favor a continued, but possibly choppy ascent in interest rates.  This provides logical plays shorting TLT.

It’s not just developed sovereign debt that has seen a run.  Corporate debt has been plowed into as well.  Trading the exuberance on US corporate debt is as easy as some puts on LQD.  Have a look at the upward spike since Brexit:

LQD Weekly (7-21-2016)

LQD is already beginning to turn.  It may not fall down to support but hedging within a structured option play is well documented and easy to execute.

For my few followers out there, don’t give up on me.  I’ve been extremely busy with very little personal time.  I hope to post more regularly in H2 of 2016.  Have fun out there with your money.  Just don’t blow it.

Volatility and Price Action

On March 13th, I made a call that I thought it was time for the markets to begin consolidating. Now some may label that call incorrect as the markets have moved a couple of percent higher, even surpassing 2,100 at one point, but I stand by the call. I think late-comers to the rally pushed the S&P 500 that 2% higher.

Specifically, I guessed we’d “see about 7 weeks of sideways consolidation.” Well in order to get a sideways move, the market will need to see a little correction soon. I suspect we’ll get one starting this week. It wouldn’t surprise me to see a move downward of about 5% in the S&P 500 to the 2,000 – 1,975 area over the course of this week and possibly the next. That stem created last week on a weekly chart is the tell.

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But here’s the thing. I think market participants will completely overreact to the 5% or any move downward. I think the bears will start beating on their keyboards and cranking out articles and blog posts saying things like, “See! I told you! Here comes the real start of a 50% correction!” Pay these cranks no mind.

Instead, utilize the negative sentiment to leverage a potential move in volatility. I could see the VIX spiking to 20 in an over-reaction by hedgers. Those same late-comers to the rally in February will overdue it with VIX options potentially causing a spike.

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So how do you leverage the potential? As usual, if you’re a futures player then just structure your option strategy to take advantage of the fear. For the ETF traders and retail guy trying to swing trade some profits off his work salary, there’s the ProShares Ultra VIX ETF, UVXY. Now this ETF is a trading tool only and it’s not for the faint of heart. If you’re going to trade it then you have to be nimble and ready to take profits. The moves are sudden and quick, but profits can be spectacular if you accurately time an upward thrust.

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You can see in the last two moves of late summer last year and the start of this year, that perfectly timed trades have huge potential. In a 3 week run last August, UVXY moved up almost 300%. From late December to February, it moved up 150% in just 6 weeks. Again, not for the undisciplined. If this puppy isn’t played right, it’s easy to get shell-shocked and lose any profit potential.

Are these calls bold? Maybe, in that I don’t have any quantitative analysis to back my assessment. It’s just the gut feel I’m getting from price action and general sentiment. It can be dangerous to trust someone else’s instincts, let alone your own. A trade like this requires precision and a hawk-like watch over the action. Trading volatility can very often turn into a sucker’s bet. Let price action as opposed to greed guide your moves.