Daily Profit Compass March 18

Tickers discussed: SPY QQQ IWM  Strategy and Tactical Update

The Daily Profit Compass provides the stock market analysis for the day. Key levels and trading locations for the indexes are provided, along with trading plans and timely commentary to keep you on the right side of the trade.

Inspiration – Practice, Practice, Practice

These are truly historic times in the markets. Records for volatility, point moves, technical readings, and untold other metrics are dropping like flies on a daily basis. The other day we talked about embracing the volatility and the randomness.  Although it is difficult, scary and uncomfortable I want you to expose yourself to this environment. It offers a powerful crucible for learning and growth as a trader. This exposure will pay huge dividends to your trading life. Down the road, you can make trading hi-vol markets your own personal playground.  5% – 8% intra-day moves offer insane opportunities to pile on gains, but in order to capture the opportunity, one must exhibit inner fortitude and quiet confidence.  And that in turn requires comfort and familiarity with one’s surroundings.  Practice in this environment by trading 1 contract of something or 5 shares of a 3x ETF. Get comfortable with the fast moves and reversals. While trading, try to stay in touch with your emotions. Work on maintaining composure in the face of insane volatility.  As you move through time and the varied conditions, your comfort will increase. As your comfort increases your confidence will grow. In another place and time, when you’re faced with a VIX at 65, your muscle memory will kick in and your trading will feel more akin to walking your dog than a triple black diamond ski slope when you’ve never skied before.

Earnings

News Flow

  • Stocks are limit down as Bond yields spike.
  • $1.2T Corona-relief bill crawls thru Congress.
  • Mnuchin warns Senate of possible 20% unemployment rate without stimulus
      • Marriott prepares to layoff tens of thousands
  • Airlines want a $50B bailout after spending $45B on buybacks over past 10 years; $BA wants $60B of its own
  • The FED ‘s Multi faceted “Bazooka rounds” are hitting the market like foam darts as world-wide dollar funding stresses mount and credit strains persist.
  • Oil hits 4 year low.
  • mREITS are getting destroyed; only the best of the best expected to survive
  • Momentum for “helicopter money” grows on Capital Hill

 

Wrong Way Jay

I am not a Fed expert nor do I consider myself even a keen observer of the FED.  But I think at this point, even the village idiot can see that the FED’s moves are not working as intended. The market is fading every single thing Jay Powell does. The bigger the bazooka round, the bigger the fade. Meanwhile Capitol Hill continues to fiddle while markets melt.  One FED observer I follow as often as possible is Zoltan Poszar . He used to work at the Fed before joining Credit Suisse.  Here are 2 recent writings by him outlining his prescriptions for the FED to get a handle on things. “The Wrong Bazooka” HERE and “Zoltan stares into the Abyss”  HERE

Quick Overview of my Assessment

Corona / Market dynamics

    • By its nature, the actions required to kill the spread of the corona virus also kills the economy
    • FED actions are primarily aimed at the financial plumbing of the markets; not towards the economy or “real people”
    • The effectiveness of any fiscal spending “bazooka” aimed at “real people”, including helicopter money, is limited because there is literally no where to spend the money
    • Prior Market shocks have been localized to specific sectors and primarily financially based disruptions.  2000: Tech Bubble pops  2008: Housing Bubble pops
      • Corona is a health-based crisis so everyone is directly affected and therefore no one sector can be independently targeted for help.

Information Black Hole 

    • Markets are a mechanism for pricing information and for the Corona there is a complete void
    • Unknown Information:  Cases infected; death rate; duration of crisis, impact on unemployment, severity of impact sector by sector in real economy, impact on earnings, balance sheet liquidity in a rapidly changing market, details of fiscal response and imagined efficacy, length and depth of a likely recession etc etc.
    • Within the Information Black Hole, when nothing is known for sure, the answer is SELL.  ( Everything )

Other Observations and Thoughts

    • A vaccine is a year away ( best case ) so Corona will be with us for a while. Warmer temps offer hope of less pressure in the US, but then fertile territory in the Southern hemisphere
    • Bad news flow set to persist for 60 – 90 days. Worse before better.
    • We got a peek at Wave 2 on Monday when the Empire MFG Index plunged the worst in history.  Although its hard to imagine more bearish price action than we’ve had. When our PMI’s start getting reported in the low 30’s, the layoffs start and the unemployment claims spike, those holding out for a quick V-shaped recovery will get a pie in the face. It will really sink in what has happened.
    • Like the Great Depression and  the Great Financial Crisis I think this Corona episode will leave scars and alter consumer behavior for years to come. I don’t think everything just pops back to normal by September 1 when it’s announced “We Won”.  It will take time.
    • The crisis will produce max stress on balance sheets causing credit downgrades.
      • Buybacks have been a significant portion of the buying power over the past 10 years.
      • I think it will be awhile before this Ponzi re-emerges
    • Although my eyes are wide open and ready for a rip your face off rally, I think we find the November 2016 breakout at 2100 at a minimum and possibly down into the 1700 range.
    • Within the carnage will be some fantastic opportunities for the long term investors who have cash to deploy.
      • If you are in this camp, BE PATIENT. I think you will be able to buy at lower prices this summer or early fall.
      • Work hard on a tight list of names you want to buy.

Technical Posture and Action

  • At the present moment I am mostly flat. Took positions down last Friday into the weekend and then did not feel like doing much Monday and Tuesday.
  • Hit and run Trading
    • At least on the index level, I’ve been careful with overnight holds.  With alternating 4% days its tough to swing.
    • Premiums remain very elevated. Getting caught in an overnight reversal hurts.
    • I’ve been mostly taking profits ( and a few losses ) as they’re given;  The intra day moves make it possible
    • Makes me want to open a futures acct and practice with the new micro-mini index contracts. Liquid, leveraged, and able to set stops 24/ 7
    • Best Strategy by far has been hold puts through the volatility; going lower despite vicious rips

 

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I thought Boris made some nice points here so I am posting the whole note.

BK ASSET Management Open Note

Equity futures were limit down once again in Asian and European trade today as the COVID-19 news remained bleak with worldwide cases approaching 200,000 mark and deaths passing the 7,000 barrier.

Governments have struggled to respond to the fast-growing health crisis that is quickly morphing into the greatest threat to the global economy since the Great Depression. With much of the industrialized world on lockdown as authorities try to institute social distancing measures, economic activity has ground to a halt and governments are scrambling to respond with emergency measures that include a hodge-podge of UBI, grants and loans proposals.

As we noted yesterday most of these measures will fail miserably as they are way too slow, are generally means based which would require a massive bureaucracy to administer and are not generous enough to stave off the catastrophic drop off in demand.

In Europe, the Germans finally appear ready to consider joint debt issuance which is a much-needed change in order to socialize the stimulus benefits across the continent, but whether they go through with the commitment remains to be seen.

Meanwhile, there is a very troubling development in the bond market as global yields have surged despite the selloff in stocks. In Italy, the 10Y BTPs are at 2.90% while in US 10Y yields were as high 1.21% an 11% pop since yesterday. The conventional wisdom is that the selloff in bonds is simply a margin liquidation event as investors scramble for capital, but we suspect that is only part of the story.

The massive fiscal spending plans to be put in place along with a sharp drop off in tax revenues are likely creating a crisis of confidence in the sovereign debt market at the absolute worst time possible. If selloffs in equities now lead to a selloff in bonds the global financial markets will enter into a vicious cycle from which they will not be able to recover.

Bonds’ primary function during market selloffs is to act as a risk cushion to investor portfolios and if they instead act as yet another deadweight on returns the margin liquidation conditions that we have seen up to now will be nothing compared to will come over the next few days. That is why it is critical for central bank authorities to act as the buyers of last resort and announce that they will cap any yield rises in the long end of the market with unlimited QE. If the authorities do not act soon the markets could plunge very sharply today as investors find no safe harbors anywhere.

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Index Chart Review

$SPX Broadening top

SPY and ES futures are sitting on the December 2018 lows. Think about that for a minute. Although many stocks are well below that level on SPY we’ve “only” retraced to where we were 15 months ago. That’s nothing. Start looking lower toward 2016 breakout level near $210 as a next target.

SPY 2 -hour

The December 2018 low of $235 is what everyone is looking at. Breaking below not only would open the door to the next target below at $210 but would also establish a massive level of overhead resistance for any future rally to contend with.

$235 is a very objective level to establish a new short position with a stop just above. Very clear and well-defined trade location.

 

QQQ 2 hour 

Price is near $170 in the premarket. THis too is a key level and you should consider it as your bull / bear pivot. You can be long against it while above but bearish below it.

A break below $170 would target $142 which is the Dec 2018 low. It is remarkable that QQQ is still $30 above the Dec 2018 low while SPY is about to break below.  If the bears truly go after AAPL and the other FAAMG names, this divergence will quickly correct.

 

IWM 2 hour

IWM been an under-performer and has been leading to the downside. Price has been methodically moving down the well-defined down channel.  Price is sitting on $102 which was my T1 on the daily chart. If $102 breaks, my next downside target is $90. As an underperformer this is a good one to continue to lean on the short side by fading weak rally attempts and support breakdowns.

 

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