Weekend Profit Navigator October 24

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Tickers discussed: SPY / QQQ / IWM / Risk Appetite / GLD/ SLV/GDX/ GBTC, DBC, DBB, USD,   Strategy update

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.

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Earnings Season begins to Ramp

The week ahead will be the busiest for this earnings cycle. Headlined by Big Cap tech ( GOOGL / MSFT / FB / AAPL / AMZN ) they’ll also be a variety of other marquis names reporting across the various sectors. MMM, CAT, UPS, BA, HON, CP all report in the Industrial sector plus a bunch of high-flyer momo stocks like CHGG, AMD, TDOC, SHOP, TWTR, APPS, GPI, FSLY, PINS, ETSY and others.   As always, I will be more interested in the price action that follows earnings more than the absolute earnings results.  It may speak to risk sentiment ahead of the election.

Market Factoids

Hedge Funds go “triple max long” commodities as positioning hits extremes

Retail call-buying “dart throwers” continue to get killed

The “free money” trade during the summer months has become more difficult. The price action of the popular big-cap tech names has gone soggy since early September but retail keeps throwing money at call premium thinking somehow the turn is here.

Retail Re-thinks Mall Footprint

As traditional brick and mortar retailers re-think their business models, most like the GAP example below, are radically reducing their mall footprint. There is also a dramatic shift underway in the commercial real estate space as corporates re-think the need for all that expensive downtown office space.   Online retailing is accelerating and the Covid fall out in commercial real estate seems unlikely to bounce back to pre-covid levels any time soon.

Long Positioning Sentiment back at Extremes

Several slides showing everybody and their brother positioned for a post-election rip through Q4. It does not  mean the crowd is necessarily wrong, but it is enough to make you wonder.

Risk Appetite      Risk on / Risk off  ??

High Beta vs High Quality.  The ratio came off the lows in late September and has been climbing since. Bulls are looking for a breakout above the top of the box.  If the ratio begins to recycle back lower it will mostly likely be accompanied by a drop in equity prices as traders move to more defensive names.

High Beta vs Low Volatility  Very much the same look as the above panel. A breakout would take the ratio to 5 month highs and signal a clear preference for the high beta names.

Advance –  Decline Percent   Within the annotations you can see the criteria for the bull set up. We got that signal at the end of September. During this most recent wobbly phase all the subsectors held the zero line except NDX which fell below negative 2 which according to this measure takes it off a bull signal while the others remain on BUY signals.

 

Risk-on / Risk off Indicators   These indicators favor risk-on if they are rising.  As you can see 4 of the 5 are rising with RSP vs SPY being flat.  I give the benefit of the doubt on this one to the bulls. As long as the Equal Weight performs inline with the CAP Weighted SPy its fine. You just dont want to see the RSP / SPY declining which tells you the SPY advance is narrow.

Moment of Truth for the US Dollar 

The Dollar is quickly approaching a moment of truth level at 92 which is key support. A break below 92 will open up more downside.  A bigger downside move will be a tailwind for commodities and precious metals.

Precious Metals and Miners Struggle

Gold, silver and the miners gave us a fake breakout about 10 days ago. We go long GDX december calls on that move. Since our entry, the precious metals complex has struggled. Gold and Silver are both testing their uptrend support lines. A break below opens up more downside. That said, breakouts are just as close.  These charts are finely balanced with no clear path easily identified. If gold breaks lower, we’ll need to exit our GDX calls and re-think the space.

Gold

Silver

Gold Miners

Bitcoin Rips

After consolidating for the better part of 2 years, bitcoin is challenging the highs of the range. A break above 15 on the daily chart targets 17.  If price can take out 17 then the door opens up for a run toward the December 2017 highs.  I have not paid a ton of attention to bitcoin over the years but now I am.   Any time price gets close to critical points, as a technician, I naturally become more interested.

Commodities Shine

How are the major indexes positioned?

SPY Weekly

Price continues to consolidate after the impulsive move up. RSI and PPO remain in their bullish regimes. From the daily chart i think the key remains $341.50 which is the top of the prior trading range. As long as price stays above the chart remains bullish.

SPY Daily

As long as price holds $341.50 the chart remains bullish as price has formed a bull flag after the impulsive move off the September lows. A break above the downtrend line should open a path to challenge the prior highs.  Accompanying this price move you’d want to see RSI and PPO breaking higher.

QQQ Weekly

As long as price holds $280, the chart remains bullish. Another spinning top here showing indecision. PPO still has a bear cross working but it would take red candles going forward to prevent PPO moving higher and putting in a high-level bull cross. THe chart is still bullish and there are no sell signals. Only a weekly close below $280 would turn the chart bearish short term.

QQQ Daily

Price continued to pull back to support in what looks like a bull flag formation. With price being pinched between the downtrend and support something with have to give and soon. A break out above the downtrend line should open the door for a run to the prior highs and challenge the all time highs.   ON the flipside , a break below $280 would be pretty bearish. Favoring support to hold.

IWM threatens a relative performance breakout

While the IWM / SPY ratio has not broken out yet, the ingredients are there. IWM outperformed over the week and had the best price action of the indexes. Higher rates is fueling the reflation trade which is helping the banks and other cyclicals. This is a great ratio to watch to see if the value / cyclical trade is outperforming / persisting.

Momentum vs Value ( MTUM v VLUE )

The graph show the ratio of momentum stocks vs value stocks. So a falling ratio signals value is outperforming. From the chart we see several things. Price is breaking trend and is coupled with falling PPO and RSI indicators. The door is open for value to outperform. If the ratio jumps back into the channel it will be an initial sign that momentum is being resilient and again outperforming.  IWM bulls want to see this ratio continue to fall.

IWM Weekly

IWM has been an outperformer the past few weeks. A break above $167.50 would mark a significant breakout as that level has capped a couple of advances over the past few years. Buy the breakout if we get it.

IWM Daily

Price has consolidated in a bull flag pattern after its impulsive move higher. Price is above all its moving averages and has held key support at $160.  I am looking for a move higher to challenge the $167.50.  A break above $167.50 would open up further upside. For this to play out you’d likely need to see continued upward pressure on rates to keep regional banks staying bid and other value plays rising as well.

Pulling it all together

Indexes hold their breakouts

  • SPY, QQQ and IWM are holding their breakouts. 
    • SPY / QQQ have pulled back to back test their breakouts. It looks like a bull flag. Such a pull back is a common technical move.
    • That makes me more confident in adding long exposure within the context that we have an election in 10 days
    • We have well-defined, objective levels we can now shoot against. ( SPY $341.50 / QQQ $280 / IWM $160 )
  • Small cap and value names are not only participating, but leading.
    • This has broadened out the rally and has kept the advance – decline readings healthy
    • Watch the IWM / SPY and MTUM / VLUE ratios for signs of continued outperformance
  • Breadth
    • Breadth has broadened out and almost everything, except energy, is participating.
  • Calendar Seasonality
    • Although we’ve certainly had Q4 nightmares in the past, Q4 has been generally bullish.
    • Once the election risk subsides, I think we can look forward to some Vol being drained from the system, which would be bullish.
    • The base case is that fiscal stimulus is coming.
  • The Lead in to Earnings Season is usually bullish
    • We will do our best to catch some of these runners in our swing trading
    • Once earnings unfold, there will be plenty of GAPS for us to work with Bracket Trades.
    • There’s an ETF for that.
      • ETF’s are great vehicles to trade during earnings season, especially if you have a fundamental view on a sector / sub-sector.
      • ETF’s eliminate the single stock risk
      • For example, if you’re bullish on regional Banks, you can sit in $KRE as earnings unfold.
      • For those who are not yet comfortable with options, there are lots of 2x – 3x ETF’s that will get you some added leverage if desired.

FATMAAN / Tech still seems heavy 

  • The price action in mega-cap tech has been soggy ever since they pulled the rug in early September.
    • FB got a lift from SNAP earnings, and GOOGL has been strong but they faded TSLA, NFLX and INTC were dumped and AAPL / AMZN / MSFT have been soggy
  • We may be entering ( or already are ) in a period of under-performance as money flows toward beaten down cyclicals and value.
    • High Growth / Tech stocks dont like rising rates.
    • MTUM vs VLUE again provides a good barometer as a measure of this trade.
    • Seeing signs of high fliers rolling over.
  • Implications: 
    • We could see a rotation out of mega cap tech into value.
    • We have to watch closely because we have heard that before and they’ve been head fakes.

Commodities are Shining

  • Falling USD and Rising rates play into a bullish outlook for commodities.
  • Base metals like Copper are ripping. ( SCCO / FCX )
  • Ag commodity complex remains strong.
  • The only commodity that is really lagging is oil that has been trapped in a narrow range.
    • If oil breaks out, it will really juice the rising inflation narrative.

Play attention to Bitcoin

  • Regardless of whether you buy into “the story” or not, I think GBTC can be a great trading vehicle
  • Price is challenging key overhead levels and if it should breakout, price has room to run.

Summary

  • The Index charts are bullish but need to hold key levels.
  • Traders are in a crowded long position planning on a Q4 rip toward year end.
  • With an election 6 trading days away, doesnt seem like the right time to be piling in max long.
  • Watch for IWM and commodities for continued outperformance
  •  Add long exposure in a managed, reasonable way
  • Market risks remain.  Elevated VIX, Headlines, Tweets, Election are all still out there.

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