Newsletter - 03/10/2024
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Topic: My Trade Basics
You would think that the market crashed last week but have no fear, it was just a couple of the Mag7 and tech stocks. However, since the Mag7 have been THE momentum drivers in the market it is important to take note of their weakness. Additionally, $NYCB was "rescued" by the same guy who "rescued" Kmart and Sears, aaaandd the current shareholders got S C R E W E D again..
Week in Review
From TRowePrice:
"Stocks mixed as long-term rates fall on cooling labor market. Growing hopes that the Federal Reserve might begin cutting interest rates sooner rather than later appeared to help bring the large-cap S&P 500 Index and S&P MidCap 400 Index to new record intraday highs, alongside the Nasdaq Composite before pulling back late Friday. Small-cap and value shares outperformed, while mega-cap tech shares lagged due in part to a decline in Apple following reports about slowing iPhone sales in China.
Friday’s jobs report also seemed, at least initially, to reassure investors about the labor market. Employers added 275,000 jobs in February, more than consensus forecasts of around 200,000, but January’s gain was revised significantly lower, from 353,000 to 229,000. Moreover, the unemployment rate rose unexpectedly from 3.7% to 3.9%, its highest level in over two years. In a positive sign for inflation, average hourly earnings rose 0.1%, below expectations and down sharply from January’s 0.5% increase.
Fed Chair Jerome Powell testified before Congress at midweek. While the testimony was largely seen as reiterating previous Fed talking points, according to our traders, it did offer some less hawkish takeaways on the timing of the path of rate cuts. In particular, Powell stated that policymakers were “not far” from having the confidence that inflation’s downtrend will be sustained, enabling them to begin cutting rates. As a result, futures markets ended the week pricing in a somewhat higher (71.0%, according to the CME FedWatch Tool) chance of a cut at the Fed’s policy meeting by June.
Powell’s comments and the downside economic surprises helped push the yield on the benchmark 10-year U.S. Treasury note to its lowest intraday level (4.03%) since February 2.
Traders noted another week of heavy issuance in the investment-grade corporate bond market, with USD 51 billion in total supply surpassing expectations of USD 30 billion to USD 35 billion."
SECTOR BREAKDOWNS:
SPX and NDX
This is what I said two weeks ago in the newsletter:
"I am fully aware that the market is in buy mode and will both manage my short positions and seek new longs accordingly."
The SPX is back in the consolidation channel from 2/21 and while Friday's candle was ugly, it is NOT a signal to get short..
Now, the weekly SPX did print a doji but until we have confirmation either topside or downside, there is nothing to do but wait and watch. I have been noticing that breakout trades in both directions are not working as well so I remain cautious still about taking a lot of new positions.
The bottom line is that I need to see what this week's candle does before I can be more confident of any trend change or continuation. I have position sizing smaller than usual to protect capital and I will continue to do so.
NDX:
With the chip stocks getting hit on Friday, and actually the entire tech sector with the largest outflows from tech recorded, the market continues to "look for" a catalyst to drive it higher.
The NDX is a similar story to the SPX with price back in the consolidation area from 2/22. I am watching the 17800 level closely as that is approximately the top of a gap on the daily.
Small caps (RUT) did break out on the weekly and daily and have back tested the breakout level. If small caps show strength early in the week, I will look to get long that sector with a stop right below the break level.
DO NOT BE FOOLED to get into a trade because you are seeking ACTIVITY. This is a particularly higher risk area as well as time as seasonality is weak for the second half of March. Protect Capital. Wait for great, not good, setups. Let price tell us what it wants to do.
WEEKLY FUND FLOWS:
As was mentioned by T.Rowe price corporate bonds saw stronger than expected demand this past week. Now, this is not to be interpreted as bullish or bearish because it is only a single week of data. What is telling is the continued increase in money flowing into money markets. This would support the belief that hedge funds have been selling the tech sector heavily and putting the money to the sidelines. Do not take this though as a signal to sell everything and go to cash because until the major indexes decide what direction they will go, it is not a telling data point.
Sector wise, Financials continue to show strong selling but that could entirely be due to the NYCB debacle. Info Tech (Mag 7) again attracted strong flow as did Gold, Consumer Staples and Industrials. Money flowing into those three sectors has in the past been indicative of a defensive reallocation as well as an inflation trade. I personally believe that this could be the start of a rotation out of some tech into more defensive sectors. I have looked at trades in these sectors and frankly they have not impressed me as many of the most liquid and larges stocks are already severely over extended. Boring as it may be, the market sectors have not revealed yet if the inflows are part of a large rotation or merely a pause in tech.
Bitcoin & Miners
BTC absolutely crushed it to the upside this week setting a new all time high, moving up 11%. Of course, along with the spike in price came volatility as small holders (>100 coin) were the primary sellers as institutions and funds continued to aggressively accumulate. I am waiting for options to be available for the new BTC Etfs which should be in two to three months.
IREN closed the gap on the daily chart and bounced off of that support area four times this week. The Halving is expected to take place in mid-April so there might be additional weakness in IREN (and other miners) up and until that time. I am not adding since I have already removed all capital and significant profit.
After releasing strong earnings on Tuesday CIFR has its strongest day of 2024. Also, Thursday and Friday were almost a perfect 50% retrace of Wednesday's candle AND price found support exactly at the POC. Price could be restrained as we wait for the Halving and I still believe money is flowing out of miners and into BTC ETFs.
BITF printed a LCD on Friday although the daily candle was not strong (closed below the 50% level of the daily range. There is some volume at the $2.75 to $2.90 level that acted as resistance all week so until that area is resolved, I expect sideways to down.
Let me be blunt: the argument that miners should be sold because their production will be cut in half after the Halving is very short sighted and wrong. Remember that at this point in time, the current miners are THE ONLY WAY TO PRODUCE MORE BITCOIN AT SIZE. If another new miner wants to the enter this space, they will do so without ever having had a chance to mine at a rate pre-Halving.
I believe that the current miners have a significant moat in that they DID mine pre-halving and most have BTC in storage. I think that by the end of 2024 there will be some consolidation amongst the miners which might be an additional bullish catalyst.
For now, since this is an Event Driven trade, I wait and watch. I would only add more if prices got to really stupid levels and we aren't even close yet.
DOOM List Update
DOOM 1:
NYCB dominated this sector this week as its stock was under heavy pressure until it was announced that former Treasury Secretary Mnuchin and partners were going to be "White Knights" by injecting $1b into the troubled bank. My opinion is that they are less White Knights and more Monty Python clown knights. Their track record in "saving" companies is not exactly stellar: these are the same idiots who stepped in to "save" Kmart and Sears. That went well. Also, as I will discuss below, the structure of the deal is a complete and total screw job of the existing shareholders. All NYCB has done is buy themselves more time. While there has not been a huge deposit exit, deposits were down by 7% over the last month.
From a sector perspective, the news continues to be like a drumbeat of doom that is growing every week. Here are some news releases that show the sector is not getting better, it is worsening. More importantly, the emergency bank lending program, or the BTFP, will end on March 11. Why this is a big deal is because banks could borrow for one year under the program whereas it's replacement, the existing Discount Window, comes with fleas and depending on the collateral pledged has a maximum duration of 90 days but that is only for banks in sound financial condition, also called Primary Credit. Secondary Credit is for banks in trouble, and they can only borrow overnight.
Meanwhile, across most metrics banks continue to worsen from a macro perspective as can be seen from the following charts.
First, CRE delinquencies are at a level not seen since 2014:
Net charge-offs have increased significantly and that's with the banks playing there "extend and pretend" game - which they will only be able to do for maybe another quarter.
This rise in charge-offs is severely reducing bank income as can be seen in the next chart. This is key because remember that if banks' incomes continue to drop quickly, they will NOT be able to extend and pretend AND the bank itself will be forced to raise capital or offload poorer performing assets.
While everyone is focused on the coming damage to banks from CRE, the other main business lines of the banks are not doing well either. I covered auto loans last week and their negative trend but this week, I want to share with you another one of the industry's major business lines: credit cards.
Not only are credit card delinquencies spiking to levels not seen since 2011, net charge-offs are at their highest rate since 2012.
The bottom line is that there is not one bank business line that is not getting worse.
So, WHY THE HELL ARE BANK STOCKS GOING UP??
Easy - the industry is expecting a bail out / backstop program. Let's not review the absolute idiocy of this thinking because it would make me smash a phone. Instead, let's consider IF that were to happen, what effect it would have on the rest of an already weakened economy: say hello to much higher inflation. I have been consistent in stating that there is only one thing that prevents a collapse of KRE and CRE - a bailout. As maddening as that would be, it's the only thing that would kick the can down the road, AGAIN.
It's just a matter of time in my opinion so patience is key. Once I do see the weekly reversal I will be using 2025 puts which has been a benefit of watching this car crash in slow motion.
DOOM 2:
NATO and primarily the US continues towards what seems to be an inevitable showdown with Russia. The prospect of direct conflict between Russia and Nato should concern everyone but as it is with a lot of things going on in the world, the US public is more concerned with Netflix and buying more stuff they don't need then what could become a seriously dangerous event.
This past week Sweden ended decades of staying on the sidelines and joined NATO. I believe they will regret this decision.
After Zelensky met with the Greek Prime Minister this week, a Russian BALLISTIC missile exploded two football fields away. Was this an assassination attempt? Maybe. What I find interesting is that the NY Post used it as another reason to promote the whole stupid "give more money to Ukraine" message. This is just an example of the continued promotion by the MSM of the whole Russia is bad, Ukraine is good, and anyone not wanting to send more money to Ukraine is also bad message.
Finally, let's not forget that prior to actual conflict, countries have historically engaged in targeted assassination of the "enemy's" leadership. Also, WWI started with an assassination.
Doom Trades
$KRE
From the newsletter last week and three weeks ago:
"Any bounce will be temporary and should be contained to below $50" - so far nothing has changed as price printed another indecision harami this week.
The break level remains $45.66 - and it must do so on the weekly.
$VNQ
Same as last week: "$VNQ is in a weekly buy and it bounced off the Weekly POC. There is no rush here and I get a sense that I will be buying 2025s."
$BAC:
Weekly broke out of the bull flag and remains in a buy. Until price breaks $31.29 to the downside or it makes a new 52 week high, there is nothing to do but wait.
$TQQQ:
TQQQ moved sideways this past week as a result of the Mag7 selling off. However, due to my "Three candle rule" I have to wait until this week to see if we get a reversal on the weekly or it completes a three candle consolidation.
$TLT:
Price followed through on the LCD it printed a week ago. While the trend is still down, until we get more clarity on if the Fed plans on cutting rates in June, which probably won't happen until June. Could I miss a be dip? Sure but seriously, what trader wants to be positioned heavily in front of such a binary event. I will be watching KRE and CRE in April as well as the JCB before I consider opening a position.
Current Open Positions
$BOWL:
BOWL's price range is compressing on the weekly and frankly, has been uninspiring. Probably will close my trade this week with a small loss unless price is able to break through the $13.39.
$DBX:
DBX price has moved sideways for another week. I guess the only consolation is that price was rejected on Monday and Friday when it attempted to break topside. With time passing, I will be looking for resolution of the range this week or I willgo flat.
$OGN:
I was pleased to see price remain strong on Friday while the overall market sold off. This is not one of my main setups - I will call it the "JeffTee Scalp." As long as price remains above the 10ma, I hold and ride it.
$UPWK:
UPWK remains in the lower portion of the channel so like the above trades, I will give it just a little more time before pulling the plug.
$INTC:
Price was very strong until Friday. It went up on news that the US Government was going to invest $3.5b in it and then went down on news that it would not be the first recipient of the funds from the Chip Act. That honor will go to TSMC. Nothing I can do about it so will exit Monday for a loss.
$ENVX:
If ENVX breaks $8.95ish, I will short it. I will short it even if the overall market is moving higher. Why? Because the stock is dead money and I see no possible catalysts at least for the next 2-3 months, at the earliest. Do I think the company is going to make it? Flip a coin. But imo there is no doubt that there is a "Buyer's Strike" going on with ENVX.
WALLS STREET SCREWING AGAIN
While the market (temporarily) celebrated the "rescue" of NYCB by Mnuchin et al, by my calculations, the shareholders got screwed, again.
By my reading, the "rescue" means this to current shareholders:
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Dilution of over 50% and as much as 110% if the warrants ever have value - and unicorns appear.
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The new CEO is being paid $1.2 million as a base salary and has a one-time option to purchase 15 million shares.
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The dividend has already been cut to $.01 from
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HERE'S THE REAL SCREW JOB: Mnuchin is buying 41% of NYCB that had a market value of $9.8billion a year ago, for only $1billion. And the bank is Federally insured.
Even with the recent share price and market value drop of NYCB, Mnuchin is getting a hell of a deal, effectively buying 41% for only $2. per share. Now why is he doing this?
Because Mnuchin is betting that Treasury does not want another SVB - or another way to put it, he's betting that regulators will do everything in their power to make sure the deal works. That's a scary prospect for a bank that already has shown their risk controls are shit. And for a bank that is deep into the whole NYC rent control business - not a good growth business.
EFFECTIVELY Mnuchin knows that he will not lose a dime should NYCB fail (which I think it will sometime in the next 9 - 12 months). No, that loss will be passed onto YOU and I. Sure, the MSM will say any loss will be passed on to other banks through a rate increase in FDIC rates. But in reality, the final creditor is the US tax payer.
Finally, based on Friday's close, Mnuchin is already up on his investment almost 75%. The rich keep getting richer. And the screwed just keep getting screwed more.
SO WHERE ARE WE HEADED?
Trading continues to be annoyingly frustrating. While I am limiting losses and have had some nice triple digit gainers, compared to the previous 9 months, the market tone is changing. To put it as simply as possible: I believe that the "easy" trade environment is ending. Here's a couple of reasons why and where I think we are headed.
First, there IS a pivot going on, albeit slowly. While the VIX does not show it, because it's being artificially suppressed, the daily and weekly price ranges are going to start to tighten more as the market moves away from momentum and back toward value. Remember it takes time for the market to accept any change in expectations especially when it has been fueled by gambling being rewarded with no risk.
Second, there have been ZERO times in my 30 years that deteriorating macro does not eventually overwhelm even the most bullish of market participants. Why? Because while it does take a fair amount of time macro always finds a way to "bleed" into stock valuations. No one ever sees it coming and yet everyone seems to want to tell you exactly WHEN it's coming.
Third, the macro is worsening quickly. I have already covered this in previous newsletters but other than Crazy Joe, there is NO economic indicator that says the US and Global economy is improving.
Will the Fed cut rates despite the macro saying at the very least, they should stand pat at the current levels. What I think will force the Fed's hand is the same thing I have been saying since last summer - inflation is not falling, it is rising. Do I think that the Fed will cut rates bc POTUS tells them too? Absolutely. And that could fuel one last push higher. But that will only make the subsequent rate hikes even more painful.
I think that unless a new catalyst is identified to support higher stock prices, the market will stay choppy and overall directionless. Could we get a selloff after OPEX in March? Sure - but what would the catalyst for that be? The market finally acting responsible and not chasing due to FOMO? Cmon - the market never does such a thing unless it is forced too.
But I cannot ignore the record large withdrawals from the tech sector this past week, the rise in money market funds and the worsening economic conditions.
But what's really got my attention is the dropping momentum in stock prices themselves. For reasons unknown at this time, other than the Mag7 (which aren't doing so well either), momentum strength is weakening as can be seen in price breakouts either failing and reversing or their breakout ranges tightening; they aren't moving as much as they were one month ago.
I think that stock prices will experience alternating periods of euphoria and despair in the coming months and such an environment is just chop. Looking back, this is a marked change from periods of euphoria with periods of more euphoria.
So my plan is to trade first, the stocks I know the best. Second, my plan is to continue to make my stops smaller than they have historically been. And third, I intend to take shorter duration trades with smaller profit targets. How small? I have not decided but somewhere in the 20% to 25% range for the first scale. How short of durations? Maybe a month.
VIDEOS:
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This week's session covered
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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.