Weekend Profit Navigator April 12

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Tickers discussed: SPY QQQ IWM TLT HYG GLD GDX NYMO NAMO  Strategy and Tactics

The Weekend Profit Navigator provides a big picture stock market analysis for the week just past with a look ahead. 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.

NOTE:  Markets are closed Friday April 10 in observance of Good Friday.

Inspiration

If you’re like me, you’ve likely spent the vast majority of your adult life in go-go mode.  Working hard in your career and likely making sacrifices along the way for what you thought was the betterment of your family. Later you’ve likely done the same in your trading life. Some may have discovered those sacrifices were misplaced. A quick example.  A friend of mine worked at the Turkey Point nuclear reactor in Homestead, FL during Hurricane Andrew. As the storm approached, the utility company offered 3x pay to those volunteering to man the reactor during the storm. My friend jumped at the chance. He tucked his family away in their well-prepared home, and went to work during the storm. To make a long story short, the roof on his house blew off leaving his terrified wife and kids inside. His family never forgave him. He and his wife were soon divorced. A tragic outcome to his decision. My friend’s priorities were misplaced.

In this time of “forced sudden stop”, its a perfect opportunity to do some honest and deep reflection on who you are and where you want to go from here.  As Daily Zen suggests, do a full assessment of your strengths and weaknesses, along with your greatest fears and gifts.  Be brutally honest with yourself. I’ve titled this week’s Navigator as “Crossroads”. Although I mostly had in mind a crossroads for the market, this moment could be a crossroads for us in our “real lives”.  Instead of viewing yourself in this moment as a victim of circumstance, view it as a point in time where you can make positive changes to your work, trading and family life. A chance to reset priorities. The best time to plant a tree was 20 years ago, the second best time is now.

Earnings

Earnings season kicks off this week. Tuesday will offer interesting insights as those reporting cut across several important industry groups.  $JPM and $WFC will offer a look at big banks; $FAST is a large industrial supplier and $JNJ will give us a look at large cap healthcare.  As we roll through the week we’ll get a more complete picture of financials ( both big bank and regionals )

Crossroads

From my viewpoint,  the market is clearly at a crossroads. Technically speaking, the major averages have retraced 50% of the original drop off the highs. This bounce or “rip your face off” rally if you prefer, has come on steady but low volume and has served to squeeze out shorts as they’ve been forced to cover.  The V-bottom hunters have been in “told you” mode, while the “re-test the lows” camp have gone mostly dark and back on their heels.

Here are some of the main bull and bear arguments.

Bull Thesis

  • The Fed is clearly “all in” buying everything that is not nailed down including select “fallen angel” junk debt. They will print as much money as required to NEVER let this market go down.  The measures taken make their moves after the GFC 1 look like baby games. Scope and scale dwarf the GFC 1 response. Don’t fight the Fed !!
  • Will anyone be surprised if the Fed starts buying the junk-rated debt of the shale patch or the outright buying of ETF’s Japan-style.
  • The economic shutdown will be short-lived and give way to a V-shaped recovery
  • The Covid models were way off and too pessimistic. The Covid 19 infection curve is bending. The light at the end of the tunnel can be seen and is closer than most expect.
  • Once the economy re-starts you’ll see a brisk uptake in economic activity and while even the most ardent bull will admit Q2 will reveal disastrous numbers, the market will be forward looking and largely dismiss the event as a one-off.
  • There will be many followup relief programs to put money in the hands of small businesses and consumers in the future until we are out of this mess.

Bear Thesis

  • The Covid 19 forced economic shut down will leave epic scars on both the consumer and business landscape. The market has in no way priced this in the varied implications of the “sudden stop.
  • As soon as Singapore lifted draconian isolation measures, new cases saw an almost instant re-acceleration. The President suggests it’s borders may be closed for a year.
  • The event exposed the massive over-leverage on balance sheets that will require immediate and drastic repair action including taking on even more debt short term to ensure a liquidity event doesn’t turn into a solvency event. Coming out of the lock-down, a wide swath of companies will find it difficult to service all the debt with diminished cash flows as pre-crisis business is slow to return.
    • Expect credit downgrades, halting of dividends and buybacks to preserve cash, and Ch 11 filings for the especially weak
    • Buy backs have been a stalwart of the bull market run from GFC 1 until now. Who is the incremental buyer from here?
    • Balance sheet repair and corporate deleveraging is equity bearish.
  • Bulls have hung their hat on “the consumer is fine” for years. ( it’s 70% of our economy )
    • If the past is any guide, deep crisis throws the consumer into a defensive mode.  Here too, balance sheets need repair.
    • It’s doubtful consumers will run out to buy cars, homes, durable goods with the GFC 1 still fresh in their collective memory.
    • Unemployment will be a persistent problem.  Who believes all the furloughed people will be welcomed back when the government gives the all-clear?   The Congressional Budget Office anticipates 9-12% unemployment for at least 12-18mo.  I can only assume their projections are optimistic given they are part of the government.
    • The CARES Act and its $1200 stipend is a band-aid on a gaping wound. Peanuts.
    • Expect lots of mortgage defaults well past whatever grace period is provided at the outset of the crisis.
  • This event is Global
    • The world experienced a sudden economic stop not seen in our lifetime. And it isnt over yet. At the earliest, May 1 restart but may drag into June depending on the Covid Curve
    • Re-starting complicated, intertwined global economies is not easy. You don’t simply flick a switch.
    • Recently well-respected economists and analysts don’t expect 2019 levels of corporate profitability to return until 2022 at the earliest
    • Supply chains have been blown up. Companies never saw the risk of single source China supply chains. They will be diversifying that risk. That will take time and will be expensive.
    • This event will result in accelerated de-globalization and nationalistic movements that were well on their way before Covid ever arrived.
    • China stands to lose a lot of business as multi-nationals diversify away from single country risk.
  • Massive debt. 
    • The Fed is racing toward a $10T – $12T balance sheet and they don’t care if it goes to $15T
    • The US Government debt is racing to $30T or 150% of GDP. Those are Greece-like numbers.
    • The ramifications are well above my pay grade, but it cant be good
    • Some say it will result in a decade of austerity to get things “back in line” .  Personally don’t see the political will to do that. We will keep spending until forced to stop.
    • Sets up for Gold’s ” golden age”
  • Valuation
    • Cam Hui of “Humble Student of the Markets” points out that in the bear markets of 1987, 1990, 2008, and 2011, saw P/E’s bottom at around 10. Currently we’re at 17 with the E of earnings highly suspect.
    • Can we expect a new bull market starting at a P/E of 17 when the 5 year average is 16.7 and the 10 year average is 15?
  • Sentiment and lack of capitulation
    • Too many V-bottom hunters and those looking to “put money to work”.  Bear markets end in despair. We have not seen anything close to despair.
    • The average bear market lasts 14-16 months and has a “capitulation low” .  Nobody capitulated at the March low; it was a burst of forced liquidation dash for cash mostly by institutions.  John Q. Public never capitulated. Not even close.

 

Conclusions

I think the bears win the argument on paper, but the Fed has the biggest bazooka in the world and hasn’t been shy to use it.  They’ve shown a remarkable ability to blow bubbles in any asset class which they put their mind and effort behind. Their resolve and ability shouldn’t be underestimated. I offer these “macro musings” as food for thought. If you know anything about me at all, you know I am a technician at my core. Both the bull and bear cases may end up being right. If we break above the 50% fib level in the weeks ahead, we go higher and can look above to the 200 ema’s and 61.8% retracement levels as near term targets. Longer-term, the market may conclude it has totally miss-calculated and prematurely dismissed the longer-term demise of the US and Global economic situation and do an about face to send prices lower.  In the 1929-1930 period, there was a 6 month rally before a reversal happened once the “hopium” ran it’s course.  As trader’s there is no conflict in us taking advantage of any remaining up move in prices while being ready for an eventual reversal.  Keep positions on a short leash and overall exposure in check.  Don’t let a macro view, either bullish or bearish, get in the way of the price action in front of you.  I think the next few weeks will reveal a lot about the near term direction of the market.

The Oscillators; Buyer Beware

When you want to get together and split 3 bottles or wine, 48 beers, or a bottle of fine, small batch bourbon, I will share about the last time i fought NYMO at extremes. When I am done with the story, there’s a good chance you’ll be shivering and your fingernails will be gone. There is a large contingent of people that will get their faces ripped off buying at these extreme levels, but it wont be me. I learned my lesson.  “Don’t fight NYMO” is carved in my desk top. I wont forget my near-death moment.

Put – Call Ratio

While my extreme-o-meter has not flashed extreme call buying in recent weeks, it also hasn’t flashed extreme put buying either. In the absence of put buying, there is room for the market to go down

% Stocks above their 20 ema.

Running hot across the board. Unsustainable IMO.

Bonds – TLT

TLT has a $2 wide consolidation. A break above or below target a $2 move at a minimum.  See the chart annotations for a detailed explanation of the potentials trades on TLT.

 

$HYG Weekly

HYG put in the best week in history as the Fed starts buying selective junk bonds.

$GLD Daily 

A strong week fueled by the Fed printing money “forever”.

$GLD Weekly

Finishing near the highs. We’re long May calls. If we can get a push above above $159 this week, we’ll have blue sky to $165 at T1 and $170-172.50 as T2. We can also move stops up to $159 / $159 if we get that move. Looking strong.

 

Equities

$SPX Broadening Top

Watch that NYMO reading!!

 

SPY 2 hour

Price did not like the 200ema and 50% fib confluence. That will be a tough level to pop but if it does the rally rolls on. If it doesn’t price is coming back down.

Follow the chart annotations for specific levels and commentary.

 

$QQQ 2 hour

Price at a crossroads level. It either pops resistance to move higher or it comes down. Key levels are shown on the chart. Follow the annotations for specific trade locations.

$IWM 2 hour

Massive week for small caps as they made a historic run adding 18% and running to the Dec 2018 low of 125. I think the dream dies here but if it doesn’t and price pops 125 we could see the rally extend.

Pulling it all together

I am positioned bearishly with small put positions in QQQ and IWM so when I say I think we pull back, I am talking my book. If price pops resistance, the rally rolls on and I will cover those shorts.

NYMO / NAMO are extended to their extremes but are not in and of themselves sell signals but do indicate a further advance of any magnitude are almost impossible until those oscillators burn off the extremes.

Staying very tactical and nimble with modest position sizing. With the market remaining treacherous I am not going all in. I will take profits as they come off the table and hopefully avoid snap back reversals that can erase nice gains in an hour or two.

Earnings season should be revealing to how the market views things at this juncture.

Cash remains king. If you have cash you have the privilege of trading. Remain defensive in your trading. Once your cash is gone, you are out. There are very few, if any, ALL-In Moments. Commit yourself to the idea that “if I am 100% wrong, I will still have enough reserves to keep trading”

Trying to keep you in the game guys

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