Tickers discussed: SPY QQQ IWM $NYMO $NAMO $VIX $WTIC $USO 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.
This is a passage I found……….
Most religions strive to teach a person how to calm down the senses and make the heart and mind peaceful. The secret of calming down the senses is to eliminate desire which is the root of our disturbances. It is very important for us to have contentment. The more people crave material “things”, the more they have to suffer. Property does not give happiness to man. Most of the rich people in the world today are suffering from numerous physical and mental problems. With all the money they have, they cannot buy a solution to their problems. Yet, the poorest men who have learnt to have contentment may enjoy their lives far more than the richest people do.
Mike Bloomberg found out this past week that $500M bought him nothing. No votes, no influence, literally nothing.
When the Miami Heat basketball team was formed, the politicians as they typically do, dropped the Miami Arena into the most blighted, poverty and crime ridden neighborhood in the city. The mass transit dropped those attending the game about 3 blocks from the arena. Folks then faced a gauntlet of panhandlers on their way to the game. I made that walk many times over the years. Along the curb, one guy stood out. Without a pot to piss in, nor two nickels to rub together, he was the happiest guy I’ve ever seen. I don’t think it was fake. While asking for money, he’d engage the crowd about the upcoming game, ever cheerful. When we’d blow him off, he genuinely told us to enjoy the game and to say hi to D. Wade for him. I think the guy was truly content and happy. It didn’t have any thing to do with money. He was happier than Mike Bloomberg. You could see it in his face.
None of us will ever have Mike Bloomberg’s wealth. Hopefully we will also never need experience the poverty of our friend in Miami. We’ll spend life in the space in between. Win or lose, anyone reading this is blessed being able to trade. Learn to be content. Learn to be happy. Then don’t let the result of your last trade influence either.
Where we stand and where we may be heading
- The strong jobs report on Friday let us know that at least heading into the Corona virus threat, the economy was on pretty solid footing.
- That said, the world economy is very weak as demonstrated by China’s PMI plunging into the low 30’s and with Italy, Germany, and possibly France on the verge of recession.
- Ditto for Japan, So. Korea, Hong Kong and other Asian countries whose economies have ground to a near halt as corona fears and caseload explode.
- Italy has gone full Wuhan, quarantining 16M people in various cities
- The FOMC gave us a 50bps rate cut but the markets have already priced in another 25-50bps cut in 2 weeks. The FOMC is now on a 10 day blackout period ahead of the meeting so there will be no commentary from them. The market, by and large, are dictating FOMC actions
- IMO the Fed is wasting valuable bullets here. Monetary policy wont fix what ails the economy; their conventional ammo is almost gone
- Only targeted, timely, and coordinated fiscal policy response by countries across the globe will foam the runway and prevent a fiery crash
- The epic bond moves are unprecedented and are pricing in a massive economic shock. World record low yields across the entire curve for US and German Bonds
- Why this time is different
- This emerging crisis is not being driven by credit or financial excesses. It is from a virus for which there is no present cure.
- The prescription is to contain the virus to arrest its spread, but that is the very thing that grinds economies to dust
- So many conferences, events being cancelled and thousands of employees being told to work from home.
- The slowdown is both on the supply side AND the demand side. That is very different from prior slowdowns
- Commodities are pricing in a collapse of demand
- The $CRB commodity index is attacking the All-time lows of 2016 and well below support that goes back to 1973
- OPEC+ looks to be dead with Russia walking away from talks and no agreement to cut oil production; Oil off 8% on Friday alone.
- Oil broke support at $42. $35 is now in the crosshairs; a break of $35 takes us to the 2016 lows near $25
- Expect the weak shale producers to give up the ghost
- Most vulnerable will be those who are highly levered, have low cash positions and have a wall of debt to roll near term ( which is a lot of them )
- Those with strong balance sheets and cash positions who dont have much debt to roll should be able to weather the storm
- Expect either consolidations and / or bankruptcies going forward as liquidity crunch digs in.
- Credit Crunch
- If a big demand shock is realized it will impact cyclical and consumer centric entities the worst.
- Expect tons of credit downgrades to highly levered retail and other consumer / cyclical names
- Lots of BBB debt will find its way to junk status over the next few months as consumer spending slows down impacting cash flows and increasing liquidity concerns with highly levered balance sheets.
- Technicals are all that matter now
- Fear will exacerbate moves
- Fear has no regard for fundamentals; market moves are being technically driven
- Traders with strong technical awareness and savvy will rise to the top
- Those trying to make a fundamental long case for a company or market at this early stage have a strong likelihood of getting run over
- We have seen thus far that traders are toggling risk on / risk off with no regard for specific names.
Strategy Overview ( Updated )
- Hold fire and be patient on long term long positioning (dont buy the dip) Dont worry, you wont miss out
- Lack of visibility into earnings or further distress points to a more likely rounded bottom vs V-shaped spike higher.
- THe mistake you can least afford to make is stepping in early and getting run over.
- Migrate from strategic to tactical thinking and trading. Near term, the days of sitting in positions for weeks and weeks is likely over.
- Expect added chop and volatility. Look at the period after the Jan 2018 and Summer 2019 rug pulls; possibly even like Q4 2018 if credit markets lock up
- Reduce position sizing. With the added vol and out-sized moves you can make good money with smaller position sizes.
- Flip your mentality from offensive to defensive if you have not already done so.
- Unlike Dec 2018, the FED wont be able to flip flop so the chances of a steep V recovery are diminished somewhat. Lower interest rates wont cure corona or repair supply / demand destruction. THey will do everything they can including QE4 or 5 to save this, but it will be harder than in Dec 2018 / Jan 2019.
- I expect a bounces into key fib and OH resistance levels will ultimately fail. I am looking to fade such moves.
- In this environment, fundamentals go out the window as the technicals come to the forefront.
- Valuation guesses are not going to get it done. Both “good” and “bad” companies will get sold equally hard with the market on further rug pulls.
- Those who are smart at such things can identify , then make a list of companies you want to own on the other side of this
- Look for relative value plays where solid companies were sold down to unrealistic levels
- Watch the cyclicals for signs of a bottom. When cruise lines, airlines etc stop going down could be an early signal of a turn coming.
- Be ready for Wave 2: Wave 2 is when we start seeing Corona’s impact on actual data points like earnings and guidance, PMI’s, GDP’s etc To date the numbers have been pre-corona and honestly were not that hot to begin with. China just posted its PMI at 35…ugly Wave 2 may be the catalyst for price to roll over after a healthy bounce.
- Cash is king. A gun is worthless if you don’t have ammo. This is a time to protect your resources. Prevent losses first; Make money second.
Earnings for this week
Eye of the Storm
Being in the eye of the storm is weird thing. After being hammered by the first half of the storm, the wind dies, the clouds clear, and the sun shines bright. To the uninitiated, it seems like the worst has passed and the storm is over. Little do they know the second half of the storm is mere minutes away.
SPY and QQQ consolidated the prior week’s down draft and finished the week almost where it began although with a ton of volatility. On a purely technical basis you dont often see a major down leg resolve higher almost immediately. You usually see a period of consolidation , then a second move down. Then a bottom is carved out. This is typical in bull markets. In bear markets each consolidation resolves lower, with periodic bear market rallies that rip your face off. At the least I think the market will test the prior lows. The IWM has already broke the prior lows and is now on a LT sell signal on the weekly. I think the QQQ, which is outperforming, finds a way to back test it’s original break out at $194. SPY has already found that level.
The oscillators remain stretched and flashing oversold. You can see that early in the week the rips in equities “relaxed” NYMO and NAMO which offered the potential for another down move which we ultimately got. I watch these oscillators closely. I dont want to be caught in a bunch of short positions when the oscillators are buried in oversold conditions. It’s a recipe for disaster.
$SPX Broadening Top
$SPX back tested key overhead levels but ultimately closed below thus not progress was made to correct the technical damage. Until price can reclaim at least 3005, the technical picture remains bearish.
Price had a wide range doji bar and finished nearly unchanged and showed indecision. To get constructive, price needs to close above 300. The door is still open to back test the lows down at $285. Between 305 and present levels traders should expect a lot of chop and continued vol. Breaks above $306 would be definitively bullish and breaks below $285 bearish.
The Q’s are outperforming. Price tested the 40 week ema and held. That 40 week ema is a great benchmark for traders to key off. Above keeps bull ideas alive, below opens up more downside. $194 was the original breakout level. Any move below would likely bring in more sellers.
IWM took a deep look below the key $144 level but managed to rally late Friday to close above. $144 is a great bull / bear toggle. Above traders can look for a bounce. Below opens up lots of down side.
Rumors currently circulating that $WTIC will open down around $32 when the market reopens. Setting rumors and predictions aside, price closed Friday below a key support level. the door is open to $35. If there is any hesitation Monday, get short against $42 and look for $35.
$2.50 is key support. A break below opens up more downside. $SCCO and $FCX are equity plays on copper. Back in 2016, FCX dropped to like $4. It’s hovering near $9. Some traders may prefer to wait for a generational bottom and buy at that point.
Aside from the GFC, a VIX of 50 has been a hard level to hold. As a hedge against a short book would be to short the VIX at / near 50. To do that, you can sell upside call spreads, buy PUts or put spreads or buy calls on SVXY. Keep in mind that the VIX can and has gone to 100. If we get a downright panic sell off it will crack 50 and go much higher. On a green surge day, VIX should drop below 40 and head toward 30. Those would be locations to cover your short and take profits. I’d use this strategy only as a hedge against a short book. Rinse and repeat while the turbulence persists.
$SPY – short term bottom?
Although my longer term view is lower, Friday’s hammer close leaves me guessing as to short term direction. The Friday candle may mark a short term bottom and favor a bounce early week. The key overhead levels are $300 and the 200ema near $305.60 are upside targets for a bounce. If we get that, I will be looking to fade price at key resistance levels. Getting good trade location is critical in this market to be able to hold in and wait for the reversal to take place.
Pulling it all together
I am still of the opinion that we have not seen the worst of the Covid fall out. As the economic realities set in, I expect further downside. THat said, I am open to trading the rips until then. This isnt the time to camp out in long or short positions. Remain tactical and fluid in your trading and thinking.
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