Tickers: Macro Framework / Market Internals / Technical Posture / SPY QQQ IWM / SPDR Sectors
The Weekend Profit Navigator provides a technical recap of the prior week’s trading with a look ahead to important trade locations and trading considerations in the coming week.
Inspiration – Losers Average Losers
In the trading room there is a member named @Bud Weiser. He and I used to be part of an informal trading group 8-10 years ago. Another trader, who seemed to be successful (he made a point of letting us know) was also part of the group. He traded mostly smaller cap energy names. He was famous for going 2x, 4x, or even 8x into hole by adding to his positions more and more as price declined. When the stocks finally bounced, he presumably made a ton of money. As the calendar turned to 2014 and the shale boom was cracking, lots of E&P names began rolling over. Our trading friend stayed true to his program and continuing his strategy except this time there was no bounce. Many of those companies went BK. Then we noticed our friend went AWOL for a while. Weeks turned to months, then years; no goodbye’s, no social media sightings, he simply disappeared. We assumed he and his account imploded. Never forget that the market will take every last dime you have if you let it.
The photo is that of Market Wizard Hall of Famer Paul Tudor Jones. He famously had his hand-written post-it note “Losers Average Losers” prominently displayed in his trading room. A reminder to himself that averaging down in a losing position is a losing strategy. It reinforces what Livermore taught as well which was to “buy on a rising scale” and “sell on a declining scale”. Livermore was happy to pay higher prices within a rising trend and sell more at lower and lower prices. Be careful in this market. Be especially careful of thinking prior names that made you a ton of money on the way up are bound to bounce soon and return to their former glory. And take me seriously when I say more than a few may go to zero. Take Carvana clone $VRM, which IPO’d in 2020, for example. It’s gone from $65 to $1.50 in 18mo. It’s over for ponzi’s, frauds, and bubbles. If they didnt like ending QE, how do you think they’ll like QT? Take the cautionary tale of our trading friend and the teachings of Tudor Jones and Livermore to heart; your long-term success as a trader depends on it.
Earnings
Mega week of earnings for the Mega-Cap Tech names. Make sure you know the dates for these important names that can and likely will move the entire market.
Companion Video
The video is a detailed technical review of the indexes and SPDR Sectors. All the key trading levels are identified along with commentary and trade plans for each ticker. Run the video at 1.5x to maximize efficiency without loss of clarity.
Find the Companion Video HERE
Macro Framework until further notice
Shrinking Liquidity
The combination of aggressive rates hikes and balance sheet run-off are bearish for markets. Markets thrive in times of ample liquidity and starve in times of low liquidity. JPOW & Co. now have a singular mission to knock down inflation by the reverse wealth effect. These guys won’t stop until the market is down substantially. There will be lots of trades both bullish and bearish between now and then, but they’ve made themselves clear, they will insist on the market going down. This will be the over-arching theme from now through the summer. Here is an excellent 75min video that explains the linkage between global liquidity and capital markets. HERE
Persistent Inflation
While inflation may moderate later this year, I think that inflation will be persistent for at least a year. The FOMC’s rate hikes will tighten financial conditions and thus make it tough on financial assets, but it wont affect oil or gas prices, a grain shortage or a myriad of other commodity based inflation inputs that are the root causes of the problem. s
Commodity Super Cycle
“Spot Prices cure Surpluses; Long-Term Contracts solve shortages” Jeff Currie Head of Commodities at Goldman Sachs. Commodities, historically speaking, tend to trend in broad 10 year Boom – Bust cycles. This is also coincident with capital funding of the sector. The commodity boom of 2000-2008 was met with a wall of capital investment. THis greatly expanded capacity of all manner of commodities. Then from 2012 – 2020 was a period of capital destruction and collapsing returns. The emergence of ESG has constrained re-investment into these “dirty Sectors”. We are now in the upswing of the commodity cycle. We are probably in just the first year of the upswing. We are literally YEARs away from seeing supply expand because no capital is yet flowing into the sector. The exception of course is a recession. A recession will kill demand and cause most asset classes , including commodities. Here is a 60min podcast that summarizes the commodity situation. Find it HERE
Earnings Season & Bracket Trades
As earnings season kicks into gear, a reminder that this is prime time for Bracket Trades. Bracket Trades are those trades created when a stock gaps up or down from a news driven event. Bracket Trades are set up as “2nd day trades” where you alarm the high and low of the prior day’s trading range, then patiently wait for price to either break lower or higher from the range. You then follow price out of the range. I will do my best to help identify them for you, but you can easily find them yourself by doing a sort for “GAP ups” and “GAP Down” on your trading platform. I add additional filters for only stocks above $10 and at least 500,000 shares traded. You can add additional filters to cut down the sort further. Generally speaking, stocks favor continuing in the direction of the gap higher or lower.
You can find out more about Bracket Trades in the video Run the Player at 1.5x HERE.
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