Newsletter - 02/11/2024
UPCOMING WEEK:
VIPS (all times MST):
WEDNESDAY at 7pm - Weekly
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Free Session THURS @Noon
Topic: TBD
DANGER DANGER DANGER!
With the markets taking out all time highs on the SPX and NDX the Bears are angry, the Bulls are ecstatic, and I am very cautious.
This is the stage of the market that is very dangerous because FOMO is now the primary driver and no one knows when that will end, and typically its very abrupt.
There are profits to be made to the upside but understand that you are doing so in an incredibly risky environment. Now is the time to stick to the rules not to succumb to the FOMO.
Week in Review
From TRowePrice:
"Most of the major indexes moved higher over the week, with the S&P 500 Index reaching new highs and breaching the 5,000 threshold for the first time. The advance remained relatively narrow, however, with an equally weighted version of the index significantly trailing the standard market-weighted version for the fourth time in five weeks. T. Rowe Price traders also noted a downward trend in the number of stocks that remained above their 50-day moving average. The narrowness may have reflected in part a relative dearth of economic data, leaving investors to focus more on individual companies’ earnings reports.
After a quiet start to the week, the market picked up momentum on Wednesday morning, seemingly helped by the solid reception given to the U.S. Treasury Department’s record $42 billion auction of 10-year notes. The auction calmed fears that the government’s record borrowing levels would push borrowing costs higher, thereby removing some of the Federal Reserve’s power to cut interest rates if needed to stimulate the economy in the coming months. Our traders noted that small-cap stocks found their footing later in the week despite ongoing weakness in biotechnology shares and regional bank stocks. Shares in New York Community Bank plunged after the lender reported weak results in the wake of its acquisition of failed Signature Bank during early 2023’s regional banking turmoil."
SECTOR BREAKDOWNS:
SPX and NDX
The SPX finally closed above the 5000 level. This is a MAJOR technical resistance level and closing above it confirms to me that the market euphoria has moved to a new stage.
If this move was organic and was supported by macro news such as earnings growth, hiring, expansion it would be a very different story.
With every move up, risk goes up even more.
NDX:
The NDX continues to rise on the back of FOMO. Stocks adding tens of billions in market cap in one session is NOT healthy, NOT typical and will not end well.
Until the NDA reverses on the WEEKLY chart, the trend is up and the momentum is strong.
The challenge is that at this stage, the "euphoria" will pivot before prices.
Finally, to see quickly how risky this market is, count how many weeks out of the last 15 have been green.
WEEKLY FUND FLOWS:
Take note of the above. For the second week in a row, flows into money markets were very strong, was strong into bonds but last week, equity fund flows were strongly NEGATIVE.
As the following shows, the flow into Tech (grey) has slowed remarkably. Again, breadth continues to narrow.
Macro
Frankly, at this point, there is no point continuing to expound upon how F'd up the current economic outlook is. The market is in euphoria mode and there is no way to tell what specific macro news will cause the market to pivot. I am here to make money and teach you how to protect capital, manage risk and use statistics to increase probability. But with the markets so detached from the trend of the underlying economic conditions, the macro is taking a back seat to the momentum.
So this week I am taking a break from my "doom" view of the macro but I will leave you with a chart that I have shared previously. The current market is 140 ABOVE the regression/mean. You math nerds know what this means: the probability for a reversion to the mean is extremely high. Do you want to trade on probability or do you want to trade on FOMO?
As evidence that I am passionate about looking at ALL perspectives, the following graph shows how the 12-month forward PE measures up against the last 25 years. Other than US Large Cap, US Tech and India, on a relative PE basis, the markets are NOT fundamentally unbalanced. This is NOT in conflict with the longer term view of falling stock prices. To me this supports the narrowness of the market move upward RELATIVE TO EARNINGS EXPECTATIONS. Not all broad market categories are stretched. This does NOT show that the macro picture is good and that companies are healthy. Do not be confused by macro illustrations that appear to show one thing but are actually insight to a completely different data point.
Don't be Stoopid
With all the festivities surrounding us that everything is awesome it can be easy to stick with the plan: protect capital, trade probabilities, etc. Therefore, I thought that I would share some common mistakes that retail makes during times of market highs, mistakes I endeavor not to make. Additionally, I offer some suggestions on how to rectify those mistakes.
Stoopid #1 - FOMO:
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This happens to the best of us - feeling as though you are missing out on a move, either higher or lower. It can be especially compelling at market tops and bottoms.
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Solution: Size down. Take a smaller position so that you have some exposure to the trend while at the same time protecting the majority of your capital by not going in "heavy".
Stoopid #2 - Chasing:
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You know the scenario: news on a stock is released and you check the price and it is moving so you jump into a trade trying to capture some of the gain, only to see the price immediately reverse.
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Solution: Do not trade. Seriously. It is better to build TRADE DISCIPLINE then it is to possibly catch a move because you are following the crowd - because "crowd sourcing" your trade plan is a sure way to poverty.
Stoopid #3 - Frozen:
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On the other end of the scale of emotional responses to markets is the decision to do nothing because you "just know" the trend is about to pivot.
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Solution: Wait for confirmation based on TA. Remove the emotion and block out the noise. If price does not pivot, look for an in-trend entry. Or, DO NOTHING.
Stoopid #4 - YOLO:
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Just because you don't risk your entire portfolio does not mean you are not YOLO'ing. YOLO'ing is an extreme version of FOMO because it is without reason and almost entirely emotional.
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Solution: Don't. If you lack the self control, shut off your platform for a day. YOU ARE NOT GOING TO MISS ANYTHIN - THERE WILL BE OTHER SETUPS.
Stoopid #5 - Trying a New Strategy:
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I have seen this a lot also. Traders who think they are "missing out" on a particular stock's move decide to change their trading plan so that it matches some pattern in the stock they believe they are "missing out" on. Changes could include trading different assets (usually more aggressive assets), trading different products (moving to scalping from stocks) or some combination.
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Solution: Don't be stoopid - don't do this. You will be bouncing from strategy to strategy and YOU WILL LOSE.
Stoopid #6 - MORE!!!!:
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Traders will often increase their position sizing, increase their trade frequency, ignore their stops, ignore their profit targets.
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Solution: Remember what brought you to the party so to speak and stick with your plan.
Stoopid #7 - Neverending Story:
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No, not the weirdass movie from the 80s or its accompanying title song (although it was great in "Stranger Things"). I am talking about the mistake of believing that the then current environment will last a long time. It won't because they never do.
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Solution: Don't be stoopid.
Stoopid #8 - Be an Ostrich:
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Sometimes traders get so angry about "missing" a move that they just say "F it" and ignore their portfolio.
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Solution: Grow the F up. If you aren't mature enough to control your expectations and emotions, you have no business trading.
You might have more but these are the most common ones that I have seen. The one tie that binds all of the above is that they are based on emotions, they are based on very short term timeframes. All of the above are motivated by your base emotions: fear, joy, etc. These never produce reproducible results.
Finally, here are some broader suggestions:
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A very effective way to overcome doing anything foolish is to make sure that you review research that is OPPOSITE to what you think and why the price is trending. Challenge the thesis. Collect more data.
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Use a trading partner that will keep you accountable to following your trade plan.
In conclusion, I want to leave you with this:
Why do you think doing what retail does will produce results that are different than retail?
DOOM List Update
DOOM 1: CRE IMPLODES:
$NYCB continued to make headlines as it dropped further and then rebounded a bit because management bought some stock. Do not be fooled. An executive purchasing $200k of company stock is a drop in the bucket and call me a cynic but often, the reason for the purchase is to counter future legal actions - so the executive can "look good" to possible future regulators or jurors. A CEO buying stock is NOT a buy signal because you don't know WHY they purchased, what their timeframe is, or even if they used their own money.
Moving on, here are a couple of headlines I saw last week that I deem to be important.
Yellen says the quiet part outloud: CRE is going to cause baking stress and losses. Yellen believes they are going to be "manageable" and as long as she can sell that line of bullshit thinking $KRE will have some level of support. My bet is that like every previous time the Fed has attempted a soft landing, they will fail again. You have to make your own decision on who to believe.
While not huge from an absolute perspective, the trend in Office CRE is not good. And getting worse. And the following shows the CRE problem is not just in the US.
DOOM 5: NATO AND RUSSIA ENGAGE DIRECTLY:
Nothing really new to report, except this:
Doom Trades
$KRE
Back in the lower "Battlezone" on the weekly and still in a downtrend.
On the daily chart, price is in a buy which is to be expected as it attempts to reenter the upper channel. Any bounce will be temporary and should be contained to below $50.
Unless material news occurs that regional banks have realized CRE losses and are treating the current situation more seriously instead of playing the "pretend and extend" game, or the Treasury department releases data that the Discount Window is being tapped, I remain bearish and the $KRE short is active. And I will be adding until I get to 40-50% of total.
$BAC
Ok, price is in a channel at a previous longer term support and resistance level.
I will wait for price to break lower before adding as a short. If price goes higher, I will look for it to be contained below the $40 level and a reversal to enter.
$TQQQ:
Another new ATH. I will be adding an intrend trade this week but will have a very short leash.
$TLT:
Weekly is no longer in a buy - price is now consolidating. I am looking for a break below 93.11 on the weekly to enter a two-month short trade. I do not want to be long rates the closer we get to the expected rate cuts in May or June. Risk is that I get caught with a surprise cut.
This Week's Screw Job
If this were just a one-off it wouldn't be newsworthy. If the penalty had been anywhere near what the theft was, I would not be mentioning the following. Unfortunately it is an example of what happens every single day in the markets. It is supported by the SEC and FINRA and Washington. There is no doubt who the markets are meant to benefit, and its not you.
Bitcoin
Price has broken out and is up strongly. I expect price to hit $50k this week, maybe Monday or Tuesday.
FREE TRADES
From last week, $IP was a total loss but that's the risk with earnings plays. One important related note is that this past week I decided I would no longer be providing Earnings Play ideas - they are crapshoots at best.
$UVIX is at a loss but even though the SP500 is up, the VIX has price has not gone down in proportion. I will look to close this trade this week for a small loss because I do not want theta decay to destroy the premium.
Either the VIX bounces and reverses early next week or the TA is saying get flat.
UPDATE: $KWEB May17 $12P for $0.94 is doing fine. Weekly trend is down, daily trend is down. Chinese Lunar New Year is this week so the Chinese mainland markets are closed so I will pay some theta decay with no price action. My expiry is far enough out that it won't be meaningful.
NEW FREE TRADE IDEA: $NCLH, Norwegian Cruise Lines, closed below the daily and weekly breakout level of $16.49. I will be looking to enter into the May $15P for $1.05 or better on Monday, unless it reverses back into the channel early Monday.
CLOSING COMMENTS:
It seems as though every week the need for vigilance and discipline increases. Even more so, it can seem that it becomes harder to remain objective and see through all of the noise. But that's the point: trading is hard. Knowing when it is time to act can be the hardest decision. But it is exactly during these times that doing what the crowd is doing carries the most risk. Remember your plan. Lean on our community. And most of all, when you are feeling an emotional pull in one direction or the other trying to govern your trade decisions, stop and remember that emotions are never the signal to trade.
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Thankyou Family!
theBoss
Nothing above is investment advice nor should it be construed as investment advice. It is offerred for entertainment purposes only. Always consult your advisors before investing any money. Do not "follow" or "mirror" any trade ideas provided. Mr.NotAdvice is not a licensed or registered investment advisor. Do your own research.