Newsletter - 04/14/2024
UPCOMING WEEK:
Finally the market is showing some weakness - but we aren't quite where we need to be. Yet.
Two large down days does not a trend make. But its a start. But you watch, the Bears having their beargasms are going to get smacked bc they will think they have finally gotten to the finish line but not quite yet. Team Euphoria is not going to give up that easy. They have waaaay too much to lose.
But we are close. This earnings season will tell us how close.
Week in Review
From TRowePrice:
"The major equity benchmarks retreated for the week amid heightened fears of conflict in the Middle East and some signs of persistent inflation pressures that pushed long-term Treasury yields higher. Large-caps held up better than small-caps, with the Russell 2000 Index suffering its biggest daily decline in almost two months on Wednesday and falling back into negative territory for the year to date. Growth stocks also fared better than value shares, which were weighed down by interest rate-sensitive sectors, such as real estate investment trusts (REITs), regional banks, housing, and utilities.
The primary factor weighing on sentiment appeared to be Wednesday morning’s release of the Labor Department’s consumer price index (CPI) data, which showed headline prices rising by 0.36% in March, right in line with February’s increase, in contrast with consensus hopes for a small decline from the month-earlier pace. A rebound in the price of medical services (from -0.1% in February to +0.6% in March) was partly to blame, as was a continuing sharp rise in transportation services costs, which rose 10.7% over the preceding 12 months—fed largely by increases in the cost of car insurance. Overall inflation rose 3.5% over the preceding 12 months, its biggest gain since September.
More concerning may have been a material increase in so-called supercore inflation, which tracks services prices excluding energy and housing costs, which policymakers have acknowledged are a lagging indicator of overall inflation trends. Supercore inflation jumped 0.7% in March and 4.8% over the past 12 months, substantially higher than expectations and its biggest increase in 10 months.
In the wake of the report, futures markets began pricing in roughly a 20% chance of a rate cut at the Federal Reserve’s June policy meeting versus roughly 50% before its release. The week was a busy one for commentary from central bank officials—with 11 scheduled to speak, according to T. Rowe Price traders—and they seemed to confirm a change in their perspective following the CPI release. In particular, Richmond Fed chief Thomas Barkin said that the latest data did not increase his confidence in disinflation, and Boston Fed President Susan Collins said that the recent data argue against an imminent need to cut rates.
Thursday’s release of producer price inflation data seemed to help calm inflation fears and help equity markets recoup a portion of their losses. Producer prices rose 0.2% in March, a tick below expectations and well under February’s 0.6% increase. Input goods prices fell 0.1%, continuing a recent pattern of goods deflation that had been interrupted by a 1.2% surge in April.
Stocks pulled back sharply to end the week, however, in the wake of reports that Iran was preparing to directly attack facilities on Israeli soil for the first time. Oil prices rose on the news, along with the U.S. dollar, which is typically viewed as a “safe haven” in times of international turmoil. Meanwhile, the CBOE Volatility Index (VIX), Wall Street’s so-called fear gauge, spiked to its highest level since November.
Sectors
SPX and NDX
There should be no doubt that the euphoria of the AI trade is no longer working to lift the market. The SPX has been either topping or consolidating and I think we will find out this week. We have largely avoided this chop by reducing the number of trades - it's dangerous to trade when the indexes are not trending.
The weekly chart printed a classic reversal at significant resistance - ATH's. BUT with the big red candle last week I want to see if we get a retrace before entering a short trade. I think we will get that Monday or Tuesday even with the Middle East situation.
NDX:
Unfortunately there is no clear breakdown in the NDX either on the daily or the weekly chart.
As I have said repeatedly, it takes time for the market to ACCEPT that their party is almost over.
There can be no doubt that the market is directionless and has been for weeks - in fact, all the way back to the end of January.
While the MAG7 has not yet "broken" they are still much weaker than have been for months.
Now the question is this: is price topping or consolidating?
I think we are about to find that out this upcoming week.
The failure of small caps to confirm the breakouts in the SPX and the NDX has been a major drag on the markets. But I think that money that would usually go into higher risk small caps has instead chased into BTC. Nonetheless, the RUT is now in a down trend after double-topping. I do not think it will drag down the SPX or the NDX.
Fund Flows
As further evidence the markets are "stuck" all one has to do is look at how all asset classes, other than money markets, have had incredibly low asset flows. Classic evidence of indecision and anxiety. Fund flows are a big deal because obviously you want strong buying to support up moves and selling to support down. We have neither and thats very frustrating to market participants. It is data like this that can be used to ascertain if adding more risk is wise. Clearly it's not at this time.
The chart below is, in my opinion, meaningless since the amount of money flowing into the equity subsectors is so low. Only when the market chooses directionally will the below chart matter as it will tell us which sectors are the new leaders.
Bitcoin & Miners
I repeat what I said last week:
"After being stuck in the 74k to 60k range, BTC has tightened its range to 64700 to 72300 range. Classic "pennant" action and in my opinion, price action that typically leads to a break HIGHER."
IREN is still stuck rangebound. This week with the halving, I believe that will be over.
Technically, IREN has had lower highs and higher lows - a pennant. I do not think that the price action in miners has been organic - I think its institutions establishing positions.
CIFR is weak but for me, I am not concerned due to the huge profits I have already realized, trading around the core position I hold.
I will be watching post-halving to decide on if I need to set a stop loss or not.
Price has broke below $2 but I can't add more until the halving is over. The break through the $1.92 support was very strong but I do believe we could get a bounce this week - if not I will look to exit or roll.
From last week: "BITO must hold level is $28." It did and is tracking BTC so there is really nothing to do at this point but watch and see if we get a pop in BTC this week.
The Halving is upon us. I don't think anyone has any idea how BTC is going to trade post halving nor the miners. I honestly do not see BTC moving higher just because the halving occurs. In fact, I am leaning toward a sell the news event. I think that since so many are focused on the halving as a catalyst expectations are too concentrated to the optimistic side. Plus, a sell-off would set up the perfect rug pull to allow institutions to establish larger sized positions before the run to 100k this summer, driven simply by supply and demand.
Doom Trades
$KRE
I am waiting for price to break below that $45.66 level and with regional bank earnings over the next two weeks I beleive we will finally get a trend direction. I am monitoring the daily candles also as I noticed that at the end of last week, KRE was not participating when the SPX rallied. Do not be surprised if price moves back up into the channel if regionals somehow are able to hide their CRE losses for another quarter. But I do not think this will happen because I am sensing a change in tone regarding banks toward the negative side.
$VNQ
I adjusted the break level by a couple of pennies due to price last week bouncing. There is no doubt that on the weekly, price is in a falling wedge starting with the 12/11 candle high. I am biding my time UNTIL it breaks through to the downside.
$BAC:
From last week: "If price prints a HCD on the weekly at the current level, which is a year-old resistance level, I will short it per my DOOM thesis." - Since it did exactly that, I am looking for a retrace this week to enter. More conservative traders could wait for the break of $35.21 before getting short but whether it's the confirmed weekly HCD or a break, the great thing about my methodology is that I have all week to decide which setup is better.
THIS DOOM TRADE IS NOW ACTIVE
$TQQQ:
Still no setup to get short or long as a secondary position to my larger DOOM trades. Protect capital - avoid the chop - and be patient. Let the trade come to you.
$TLT:
I am switching out TLT for HYG, a high yield bond ETF. If interest rates are truly going to be going up high yield bonds will get hurt the most as they lose principal value due to rising rates. This will NOT be a large DOOM position due to the fact that it appears that POTUS is determined to force at least one rate cut.
Current Open Positions
$AAPL:
I entered a LOTTO long on Friday because price bounced off of support strongly on Thursday AND despite the large selling day on Friday, AAPL remained green. Now, this could be due to perhaps selling to pay taxes was done with stocks that are up for the year which is not AAPL. In my professional experience, clients would sell small parts of their winners instead of their losers in order to pay taxes as "hope" was firmly entrenched in their psyche. Also, if AAPL is now being discussed in the same AI terms as the other MAG7 stocks, since it has not rallied due to AI I can see money chasing the last gasps of AI by flooding into AAPL. Certainly, the recent MACD Histogram would support this.
Either way, I do not think we will have to wait long - maybe Tuesday of next week before we are either rewarded or penalized.
Closed Positions
$UPWK:
I closed UPWK this week as we were very close to the theta cliff, and of course the market sold off two days later dragging UPWK down with it. Does this happen sometimes? Yup. Did it annouy me? HELL YEAH but there is nothing gained from playing "what-if" over and over in my head. In fact, it's terrible for the brain. The loss I took was -35% over 48 days - waaaay too long.
$BYON:
A quick 5 day profit of 34% and in retrospect, a gift since the market dropped the very next day.
$ARKG:
A small -10% loss for a 5 day hold and just like UPWK, would have been profitable had I held. But here's an important point: looking back and saying "Gee, if I had held I would have made money" is incorrect thinking. I sold ARKG due to it's failure to break further and that's a trading rule so I did my job. Next trade!
$AGS:
The only long I had last week and it's failure to have any follow-through in trend compelled me to go flat for a small -16% loss. the portfolio can withstand lots of small losses but it cannot withstand taking losses in the -50% or more range.
Doom Update
DOOM 1: CRE IMPLODES
JPM kicked off earnings season and honestly, I think the market over reacted. It wasn't as if they had realized a lot of CRE losses - they keep hiding those. The stock went down because JPM said their NII or Net Interest Income would be lower than what analysts had expected.
JPM did make a point of focusing on how much the new Treasury reserve requirements are hitting their earnings but a -$.19 hit for a company that will do over $4 in EPS is a joke, as is all the bitching about it that Evil Jamie and the rest of the industry are doing. Boo-f'ing-hoo.
This type of price action is interesting in that as I alluded to above it was an over reaction to their earnings news. However, what it MIGHT be is that slowly investors are starting to accept that banks are at the very least
going to have a harder time going forward. In my opinion the market was disappointed that JPM, a normally strong leader in the sector, faltered and that put some fear into traders. No matter, JPM is NOT the bank that would fail in the event of a CRE collapse. That title is reserved for WFC or BAC. But still, JPM's warning on their future NII being less than expected is confirming that even they are being affected by rising rates and the falling CRE sector.
Just another example of a CRE property being sold at pennies on the dollar. The property at the right sold for 2.5% of it's original value. The $1.5 million sale price is ridiculously low and in my opinion, is an example of what's coming.
If the owners of the property thought that CRE would improve (the property has 40% vacancy) then they most certainly would not have been selling at this price. They wanted out, period.
DOOM 2: JAPAN GOES FULL KICHIGAI
Does anyone take the JCB seriosuly?? How can you when they aren't even serious.
Here's the dialogue thus far:
" 150 Yen is the line in the sand" when the Yen was at 145 to 148.
"150 Yen is the line in the sand" when the Yen was at 150.
"150 Yen is the line in the sand" as the Yen moved above 153 this week.
Central Bankers have a way of painting themselves into shit corners and the JCB is no different. So at the same time the Yen is dropping like a rotten piece of sushi which could be alleviated by Japan raising interest rates (this is what they want to do) real wages in
Japan are dropping. If the JCB raises interest rates it would directly impact Corporate Japan's earnings, negatively, which would cause further weakness in what those companies can pay their workers: higher expenses means less money to pay to workers.
DOOM 3: GAZA EXPANDS
As I write this Iran has launched their response to the recent assassinations. This is a troubling development but was expected. My view is this is exactly what the US has wanted for decades - a chance to hit Iran. The US will assist in defending the airspace from the drones but this probably is only the beginning. Iran was baited into this war and it is a war they do not want because they simply cannot win. Using proxies is entirely different than Iran as a country engaging directly with Israel.
Iran has painted itself into a corner. On the one hand they cannot simply turn the other cheek - they must respond. But doing so opens the country itself up to an attack and there is zero chance they can win, whatever that means. Now that they have started, they have opened up the very real prospect that their oil refineries will be struck which would greatly damage Iran's economy.
I look for the US to take this opportunity to strike Iran's nuclear facilities as well as target specific members of the ruling religious leaders, long a thorn of the West and vehemently anti - US. The US has moved naval assets closer to be able to help defend choosing not to assist from their own military bases in the Middle East as that would open those bases and US forces to attack. It remains to be seen if all the parties involved will take a measured approach or if Iran follows up the initial wave of drones with ballistic missiles. The US is probably privately hoping Iran decides to target the US military so they can effectively "nation build" Iran into the sand.
The market is not going to like this and could be another step in the process of risk being reasserted in the market. As with any conflict, if it remains contained the market drop will be temporary. If the parties continue to escalate then it will be an overhang in the market that even AI will not be able to overcome. Bitcoin is already dropping but has found support at the 64k level (now where did you hear that level before?). Oddly, if BTC is a safe haven asset then it should not be dropping. If it is a risk asset then it is not working as it is not correlated to other risk assets.
I hope and pray that this regional conflict will not expand further but I have little faith in man's ability to exert self control. Truly sad.
Have We Crossed the Rubicon?
No. We are not there yet. Where is there? The move lower in CRE and all it's associated investesment vehicles. But we are very close. To use a football analogy: currently the Eagles are about to score their 7th touchdown against the Giants to put the game out of reach. Ok, the game was out of reach the minute the Giants stepped on the field. Back to the analogy. The Eagles are inside the 10 yard line and unless the Giants make a goal line stand, the Eagles will punch it in.
That's where we are with CRE. It is breaking. It is getting worse and worse. But it's will and spirit has not been broken yet. I think the next two weeks of the market as well as regional bank earnings will be a deciding factor. Here's a few scenarios and the one I think is most likely:
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The market bounces here but CRE does not. This would excellent bc it would show that the CRE assets are losing their correlation to the overall market.
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The market bounces and CRE bounces. This would tell me that the regionals did another excellent job hiding the trash and the next quarter will be the deciding factor.
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The market dives and CRE dives. Not the best bc I would rather CRE decouple from the overall market.
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The market dives and CRE goes up. Not going to happen.
Of the above scenarios I believe #1 and #3 are most likely with #1 being my preference. With the Iranian response underway earnings season might take a backseat to geopolitics for a time being but that actually would be a good thing in my opinion as the market would take a direction finally.
The Iranian response does complicate the market's ability to trend strongly because for the time being the market will key off of headlines. If the recent past is any indication the market will move on fairly quickly as long as there is not escalation. But the focus for a period of time will not solely be on the US' economic woes but on Iran and Israel. Therefore, even if KRE breaks this week I will have to gauge what is going on in the Middle East before establishing a larger position. The Middle East has added a level of uncertainty and complexity to the CRE trade thesis, albeit for a short period of time.
This also might signal the end of the bull if there is a significant drop in the markets next week. My reasoning is if the market would drop sharply, there is nothing to power it to new highs and those new highs will be even further away. It could become a sell the rip market. I am not ready to call it the end of the bull but the Middle east just made the bears' job a lot easier, at least for the time being.
My biggest frustration is that the focus might move from how bad CRE and the banks are to how bad the world is geopolitically. The result will be the same of course but the latter also opens up the possibility of risk assets rallying when the conflict ends.
The bottom-line is that I want any move lower to be because of the asset itself, not a geopolitical event.
Closing Comments
With the portfolio in the largest cash allocation since a year ago, you might be sitting there and saying "why aren't you heavily short?" Easy - there was a pending unknown event (Iran) that frankly could still swing either bullish or bearish for the market thereby making risk too high. When risk is too high then I revert back to the first rule of trading: protect capital. This might turn out to be very positive for the bears and make it "easier" to take shorts in fact. But it does no good to play "I should have" or "I could have" because that is looking backwards. Now we must prepare to trade in a slightly different environment - and that's making the assumption that the market responds negatively to this. Remember when Israel was attacked the market went up.
Perhaps the thing that I am most excited about is that volatility is going to enter the picture and that means trading will actually improve. Sideways sucks. Currently the implied open for the Dow is -400 but that is really not a large move relative to the developments in the Middle East.
Risk is high, unknowns have increased, and I am largely in cash. I will have the opportunity to get short but truthfully if the market dives and stays down, I have a new concern: the market will rally when the Iran response is over. Therefore, this might require some more nimble trading, which I am fine with doing. That means quicker profit taking and above all, respecting stops.
I remain confident that I can trade any market environment and make money but first, I need to sww how this all plays out. I could absolutely see the market rallying next week as the initial dread of the Iranian response quickly moves into the rearview mirror. That has been the playbook and until something different occurs, that is the these I will be using as my guide.
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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.