Weekend Profit Navigator March 22

Tickers discussed: SPY QQQ IWM   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.

Inspiration – Shut up and Stop Thinking so much

In the Twitter Universe of “look at me and what I have to say” coupled with a mindset ingrained from an infantile age that if you are not getting the result you desire you either don’t have all the information or you are processing it incorrectly, is it any wonder that we struggle as traders.  Evidence is piling up that we would be much better off emulating the average 5th grader in our trading than searching far and wide for hidden indicators and people of Twitter to follow.  Why? Because an average 5th grader’s thinking is unadulterated and pure. No fear of success nor of failure. No overlay of comparisons to other traders whom promote their last “killing” but fail to mention getting “run over”.   No relentless gathering of information that often only clouds our judgement with conflicting signals.  Do you have any whisper of doubt that if you showed a 5th grader support and said “BUY HERE ”  and resistance and said “SELL HERE”  that they could not do it?  Of course they could do it. In fact they could do it and would do it over and over again.  Yet we can’t or don’t.    I think if we shut up, then quiet our minds with less searching and thinking, we will make great strides in our trading.  The next time you face a decision for a trade ask yourself the question “What would a 5th grader do?”  If it’s too complicated for a 5th grader to answer, it’s too complicated for you.  If you can however answer the question, do what a 5th grader would do.  My bet is that it will be a better answer than we could come up with.

Observations and Miscellaneous Ramblings

• FED Fail:  100bps rate cut followed a 50bps rate cut plus about 5 other emergency measures to inject massive amounts of liquidity into the system including a $1T a day repo facility thruogh March.
  • Total Fail. 100% market fade on every count.  The market has figured out the FED is largely impotent at this point.
  • FED actions won’t help real people  but if their actions ensure the market plumbing from back ups it will be a good thing.
  • One trader said “The FED programs are like when Fed Ex pulls up with a birthday present for you while you stand in front of your house that is burning down. Very nice gesture, but not helpful. “
• Fiscal Bazooka or Cap Gun?
  • The US has roughly a $20T Economy
  • Do you think a $1.5T fiscal bazooka will actually do anything?  Maybe like getting a birthday gift while your house burns down
  • Fed Balance sheet and Federal deficit moonshots likely.   The Fed balance sheet may double; Fed deficit explodes as tax receipts plummet and spending rips
• A Global Recession is all but official:
  • Countries around the globe are destroying their economies in order to save them, including here in the US.
  • The combined GDP of CA and NY are 20% of US GDP.  That factoid coupled with the fact that additional states are locking down daily make it a forgone conclusion.  The swath of destruction will be wide.  From airlines and banks to Mom and Pop businesses across the country, the pain will be felt.
  • The goal now is to avert a deep recession that lasts for years. 
• Devastating Week-ending Price Action
  • SPY was at $250 in the pre-market Friday yet closed on the dead lows of both the day and for the week near $230
  • The breakdown included a false breakout on the 60min chart wiping out any hopes for even a meager rally.
  • Price closed below the spike low of Dec 2018; the door is open for yet even more losses.
• About the Bear Market Rally all are looking for
  • Every technician ( like me ) keep highlighting the oversold conditions, key support levels “that should hold” , and other supporting factoids for a “rip your face off rally”
  • V-bottom hunters cite that stocks are cheap and that buying the dip has worked for 10 years without fail.
  • Even the Village Idiot is calling for a “short term bottom” while I hear exactly zero people saying we are going straight to 2100 or 2000.
  • Here I will remind you that the market’s primary objective is to trap, fool and frustrate the most market participants as possible.
    • Technicians:   For the most part the technical’s have not worked. Neither have anticipated bounces at key support levels.  Max Frustration
    • Shorts: I get the feeling that a goodly portion of bears with short exposure have covered a good portion of their shorts and would love a rally to redeploy shorts at higher prices. If we keep heading south with no bounce, they will be denied a good entry.
    • V-bottom hunters: These traders trying to buy the bottom tick will get run over if we don’t bounce, further adding to their losses.
    • Sounds to me like a continued sell off, with no bounce at all, let alone a massive rally, would trick, trap and fool lots of sheep.
• Misery loves company
  • Have a bad week?   That’s ok. Ray Dalio’s Bridgewater Flagship Fund lost 20%.  His “Cash is Trash” Davos punch line was 100% wrong.

Surviving Catastrophe – A personal journey

I ran a mid-sized tropical plant nursery in Homestead, FL for 25 years. I had 2 near death experiences I want to share that have striking similarities to this Corona episode.

Episode 1:  Hurricane Andrew August 1992

• In August 1992 I had been in business 3 years and had just closed on a new property to expand my operations.
• It’s important to understand that in 1992 there had not been a direct Hurricane hit in Miami for over 40 years. Memories of destruction had long left the collective consciousness.
• We had 3-4 days notice the the path of Andrew was heading toward us.
• We did our best to prepare but without the imagination to conceive what was possible or even likely.
  • Windows were boarded up; but roofs were ripped off
  • At the business, servers were dutifully wrapped in plastic but the buildings in which they were housed exploded.
  • Some had small generators, but we went without power for 4 months. And without the ability to get fuel the generators were useless.
  • All my loyal customers found new suppliers; no inventory, no customers, complete reset at zero
  • I had zero income for 2 years.

Episode 2 : Key Client files Chapter 11

• In 2001 a key client filed for bankruptcy and hung us for $400,000 in brokered product.
• An event we never saw coming
• There was simply no way to re-pay our suppliers for product we had purchased.
• We were squarely facing a bankruptcy of our own as the cascade of bad fortune found the lowest level.

Our Response Function

In both cases, even though the reasons were widely different, our response function was remarkably similar.

• We immediately laid off all non-essential staff.
• All discretionary spending went to zero and stayed there for years
• To Bankers and Creditors: Our pain is now your pain
  • In Andrew we went to the bank with a polite ultimatum. You either give us a loan or you get your property back.  We got the loan.
  • In 2001 we went to all our creditors with a similarly polite ultimatum,  You either write this off as a loss or we file Ch. 11.   In either case you won’t get paid.  All creditors chose option 1.
• Both episodes resulted in years of lost income
• Both episodes took years to regain a growth trajectory.
• I don’t think our response function was much different than those which will face small business and personal catastrophe in the months ahead.

Tie in to the Corona Episode and the Post-Corona World

• Most never saw it coming; but even for those who did, most did nothing
  • Those building global supply chains never saw the risk; expect future de-globalization and supply chain diversification even if it means higher costs
  • Those seeing Wuhan lock down never saw it coming here
  • Most never saw the Fed building the biggest bull trap in history
  • I am not sure if it is Group Think or something else
• Changed Consumer behavior
  • When crises hit, people hold their money tight, even if they have it.
  • My parents have taken 1-2 cruises a year for the past 20 years
    • They very likely have already taken their last cruise if their recent comments are to be believed.  Are they one-offs or reflective of the common man?
    • Don’t think that just because somebody says “all clear” that folks instantly revert to old patterns; they dont.
• Politicians and Trader’s alike probably are lacking in imagination to consider what might be possible.
  • When the crisis began to unfold, could you or did you have the imagination to believe a 30% rug pull could happen in 4 weeks?   I didnt
  • As you sit there now, can you imagine no bounce and price finding 1800 a couple of weeks from now.
• Small and Medium businesses, are set up to be hit hard. 
  • Getting access to a loan is great, but most, like I did, will go into survival mode that will take a long time to dig out from.
• Chapter 11 Cascade
  • Zombie companies are likely locked out of credit markets and will probably die unless they get a free handout. ( oil companies and many others )
  • Wrong Way Hedge Funds will close their doors
  • Highly levered, but survivable companies are fighting to prevent a liquidity crisis from morphing into a solvency crisis
  • Massive IG credit downgrades incoming:   LQD, HYG , JNK going lower
• Bailouts
  • In an election year, with the GFC and Occupy Wall Street still in the collective memory, bailouts are a dicey proposition for policy makers.
    • Fun Fact: Cruiselines are not American companies and pay no US Taxes. Do they get bailouts?
  • I don’t think you’ll see blank checks for bailouts being written. To do so offers great political risk and blow-back
  • I think you will see equity stakes taken with strict covenants
  • The line for bailouts will wrap around the building with wide swaths of industry groups needing help.
• FOMC
  • QE Infinity period FULL STOP
• Stock Buy Backs
  • Corporate buybacks have been a huge portion of the incremental buying the past 10 years.
    • Do you think buy backs will account for as much going forward than they have in the past?
    • If the answer is no, the pace and amplitude of the eventual upswing will be lower.
  • Any company involved in a bail out wont be allowed to buy back stock
  • Companies will be going through a massive de-leveraging process.  Stock buy backs will not simply bounce right back to prior levels.
  • You may even see companies sell stock to raise cash.  A reverse buy back if you will.

Equities

$SPX Broadening Top

$SPX closed below key support which was the December 2018 low. Exactly zero support levels have held thus far, none.  The door is open for a move to the 2016 breakout level 2100 – 2150.  Really not far away at all in the whole scope of things. Unlike a couple of weeks ago where $NYMO was deeply oversold, now NYMO has relaxed to -51.  There is room to the downside on the oscillator to go lower. On the bull side, price needs to recapture $240 to begin the repair process and recapture $250 to encourage participants to think a bear market rally is underway.

SPY 2 hour

Horrible price action on Friday has price below key resistance at $235 and the downtrend line. While below both, stay short. If price breaks above both $235 and the Downtrend line you can be long against $235 for a potential rally that could see price find $272 / $275 for a first target. 

$QQQ Weekly 

The Q’s are outperforming as evidenced by the fact that price is $35 higher than the Dec 2018 low of $142. You can look at that as the glass is half full as the leaders continue to lead or half empty that the generals have to come down to have the chance at a meaningful short term low. A break of $170 will be a clue that price is heading lower.

$QQQ 2 hour

Traders can be tactically long against $170 but anything below and the trap door opens to $155 and possibly even $142.  If a bear market rally takes off, look for 192.5 / $194 as a potentail target.

$IWM Weekly

Leading to the downside and almost finding T2 down near $90. If a bear market rally brought price to $125 I’d be loading the bazooka for a big short w/ a tight stop above.

$IWM 2 hour

Active traders can use $102 as a tactical short term bull / bear toggle. 

Pulling it all together

Not much has changed for me. I am still of the opinion that we have not seen the worst of the Corona fall out both in the real economy and in markets.  That said, I will be most pleased to take advantage of being long for a “rip your face off rally” then re-deploying shorts.  Or a break of last week’s lows to carefully open tactical shorts. I am placing max effort to keeping an open mind to all potential outcomes. I think the moment you are telling yourself we can’t go 15% higher or 15% lower next week, or even tomorrow you’re dead.

If you’ve been following me for a while, you’ll know I’ve been saying cash is king for a while.  Given we are still in the sell everything mode; others think so too. These are treacherous markets to trade. At the top of my mind is the question “What is the mistake you can least afford to make?   For me  it’s being close to all in long or short and being wrong. So I am not going to permit myself anything close to that amount of exposure.  If I am right on my calls, I will do quite well. If I am wrong, it will sting but I will still be trading a year from now. As a trader, preserving trading capital is your number one obligation. If you have capital, you can trade; if you lose it you are out.

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