Plans to make my stance more bullish, with an eye on bond yields

I’d been nervous about my Tesla put for a while. Last night I listened to an interesting interview from someone who’s been short the stock for a while here: https://www.listennotes.com/podcasts/tcs-chartcast-teslacharts-georgia-orwell-uYqMyJTiQKN/

A couple interesting things. First, he expects that it’ll probably be a few months before Tesla is added to the S&P 500, and that it will probably hit its high right around then. Second, he said that when Tesla is added, the SPY type funds will have to sell a lot of their holdings in order to allocate to a company with such a large market cap – which could push many of the other components considerably lower.

That being said, I’ve been trying to take advantage of this topping behavior in both Tesla and the NASDAQ to sell off my put as favorably as possible – and my limit sell order finally triggered at the end of the day today. I’m down 35% on that play, but betting on companies over earnings is risky.

Another thing I’ve been thinking about is what Tyler Neville was saying on the Real Vision daily briefing today. He says that there are some signs of a possible correction in equities in the short term, but that you really have to expect them to go up substantially in the next 5 years. In short, the world is run by an older generation who are terrified of the repercussions of letting the stock and bond markets correct substantially as the boomers are averaging 65, thinking about the effect it will have on pension funds and 401k’s as well as their own amassed wealth.

The response of central banks will be keeping rates low and pumping up their balance sheets for a very long time. As a result, we will see a lot of money pushed into assets when there are fewer and fewer companies to invest in. Much of this money will go to older companies that don’t innovate much or grow much, and little of it will go to truly innovative startup firms – so we’ll end up with an enormous and growing pool of money chasing a shrinking number of assets to much higher prices.

Tyler recommends finding the few truly new and innovative companies, perhaps in IPO’s, and focusing on “stores of value” such as precious metals and bitcoin.

I have a substantial portfolio of puts at this time – in IWM and EEM – and I’m thinking of reducing it substantially after the next significant correction. If we see a consolation lower like the month after June 8th, with the Russell potentially testing 1400 again, I’ll probably get out completely just like I used the last dip to 1350 to get out of my Jan 2021 puts. My guess is that this chance will come in the fall as the election nears and COVID resurgences happen while congress fights on fiscal stimulus and the Fed tries to look impartial.

After that I’ll move even more into gold miners, SLV calls, and Bitcoin. I’m getting convinced that the move we’re seeing so far is just the early stage of the rallies to come in these areas. With bonds yielding negative after inflation, many portfolio managers will start to see these instruments as the only real diversification from stocks.

Rick Rule said in an interview that the beginning of the 1970’s saw negative real yields and it started a massive push in precious metals (along with rough corrections along the way of course). He said that after a while, price becomes its own narrative and you get people buying even as bond yields start to rise, and the biggest part of the spike before the crash had very high real yields in the early 1980’s.

Right now the overall allocation to precious metals is relatively low, but that will change. I’m getting more convinced that we’re at the early stages of this rally.

The thing to watch is the yields in JNK and LQD. When those start blowing higher, get out and get some downside protection. Until then, expect asset prices to rise in general, regardless of the underlying economic weakness.

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Risk-on, and a solid week for Silver

I just got back from vacation yesterday and it was really nice. 2 nights in King’s Canyon/Sequoia and 2 nights in Yosemite. There were not many people around, all dining was outdoors only, and all the hikers (including us) had masks at the ready which we would pull up when passing another group. With the much smaller crowds we also saw more animals including a buck, a bobcat, chipmunks & squirrels, and many types of birds including a woodpecker and a kingfisher.

The week has been phenomenal for Silver, and also very risk-on. I have to admit that the risk-on behavior of the markets still baffles me … here we have the Covid-19 pandemic raging stronger than ever both here and abroad and we’re shutting down much of what re-opened last month. Places that were hailed as having very successful lockdowns that beat the disease, such as Australia, are locking down again because reopening led to more outbreaks. Berlin had an enormous protest over the Covid-19 response in Germany, showing that their approach isn’t necessarily sustainable either.

The mainstream news is finally beginning to mention that there may be long-term affects to getting Covid-19: https://www.usatoday.com/in-depth/news/health/2020/07/25/covid-19-long-haulers-fight-months-lingering-symptoms/5420534002/

The enormous amount of studies we have seem to bring up more questions than answers. It looks like Russia is planning to rush a vaccine out this October, but we’re likely to be much more reluctant. There is a lot of mistrust of the medical system and vaccines in general, so rushing one that’s ineffective or has significant side effects will mean that compliance in receiving the updated version will be much lower. The way this coronavirus attacks ACE-2 receptors throughout the bloodstream, brain, and organs and then promotes cytokine storms with excessive clotting means that even a mild case may block capillaries, causing damage to any major organ including the brain. We will get through this … I just can’t fathom that the S&P 500 is back at all-time highs – even if it is mainly led by just 5 tech stocks. The Russell 2000 is also positive on the year, even though it hasn’t quite hit that February mania peak yet. Same with the emerging markets index EEM.

As far as silver goes, I’m up a lot – enough to actually be positive the last 2 weeks despite my heavy put exposures. I keep pondering of how it will turn out … I saw a fascinating chart someone posted on Twitter with phenomenal silver spikes and crashes from the mid 1970’s onward, but I looked back at the raised floor of the last decade and I don’t think we’re in quite the same timeframe. Silver kept some significant and permanent value increases from 1960 to 1980 and I wouldn’t be surprised to see a higher floor after this market either. With central banks propping up asset values while bonds are paying zero or negative, I really don’t see many options that investors have to diversify stock market risk. They have commodities (which are struggling), real estate (hard to invest in and mixed), precious metals, and now even bitcoin seems an enticing alternative. After breaking key resistance around 10,500 I got interested in Bitcoin and I’m slowly stepping into that pool. I also couldn’t resist putting a little more into IWM and EEM puts as they march ever higher.

Anyway, here’s my latest allocations:

  • 1.3% Cash
  • 1.0% Bitcoin
  • 3.7% Short Tesla (Jan 2021 put)
  • 11.6% Short IWM (Jan 2022 puts)
  • 3.6% Short EEM (Jan 2022 puts)
  • 1.4% Long CCJ (Jan 2022 calls)
  • 11.7% Long SLV (Jan 2022 calls)
  • 51.5% Long Gold Miners (holding stocks of the biggest ones)
  • 14.2% Dividend stocks with covered calls

Good luck with your strategies!

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Vacation update – bitcoin and such

I’m on vacation this weekend, writing this from a cabin in King’s Canyon national park. After this I’ll see Sequoia right next door, then drive off to Yosemite and stay a couple nights, then I’ll be back home Thursday evening.

We had some great breakouts for gold, silver, and bitcoin this week. As I already have a big position in gold and a decent one in silver, I opened a Coinbase account to start a position in Bitcoin.

Unfortunately that ended up a failed experiment as far as I’m concerned… the first day I signed up and put $500 in bitcoin, for which I was charged $7 in fees. Then I couldn’t log back in all week because they require 2-point verification for everything and I’m just not getting the SMS notifications they say they’re sending me. You can’t deal with humans except through email, which is limited and slow, and I’m past the point of getting my account to work and trying to get them to sell the bitcoin and refund my checking account. I’ll probably just use my Ameritrade to purchase the GBTC ETF to avoid the hassle. Robinhood accounts let you trade bitcoin commission free, so that’s another option.

Aside from that, I bought a couple more EEM puts as it was back over 44 and I really think emerging markets are going to struggle with covid – while the china component has pressures from US sanctions.

I also held the Tesla put that expires in January. There’s a lot of finance articles about the overcrowding of investment into a few big names, and the heads of the big 4 tech companies went before Congress to explain how their outsized market power wasn’t disrupting small business, then there’s the fighting over stimulus and covid resurgence all over the world… all in all I figured I’d hold the Tesla put in case of a risk-off move.

Last thing I wanted to mention … with the US elections so close were seeing a lot of articles about how horrible were doing compared to Europe and Asia. Take this with a huge grain of salt … China makes up its economic numbers, Europe has a lot of small business related to tourism that got absolutely crushed – but they still show they’re keeping their employees at 70% pay till October unless their ‘furlough’ stimulus runs out (they’re not counted as unemployed), and the US had over 30 million receiving unemployment benefits with a headline unemployment number suggesting more like 12 million unemployed with all the oil outsized seasonal adjustments and whatnot. The point is, the Covid crisis and response has wreaked havoc on the economic reporting everywhere so none of the numbers are reliable and the vastly differing assumptions make them impossible to compare. Plus, Covid-19 is so contagious that even the tightest lockdowns see huge outbreaks once they’re eased. We aren’t out of the woods yet in any country you speak of.

That’s it for now, time to enjoy nature! Remember to count your blessings, and happy trading!

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My trading scorecard: decisions traced through the pandemic

I’ve been logging my various account values for long enough to get a rough scorecard together on how I’ve been trading through this crazy pandemic. The calculation is simple … % returns for a period = (final balance)/(initial balance + deposits added) -1.

Note that it is far easier and more flattering to get a straight chart of my balance over time – that is easily accessible in my trading account. However, I’m interested in my trading performance so correcting for deposits is crucial. . So here it is, the daytrader’s journal laid bare:

PERIODMY RETURNSPY RETURNIWM RETURN
Oct-190.16%4.40%6.56%
Nov-19-0.36%1.80%1.32%
Dec-192.58%4.25%3.49%
Jan-20-1.31%-0.97%-3.17%
Feb-20-2.51%-7.92%-8.85%
Mar-20-13.45%-13.00%-21.78%
Apr-20-8.54%9.71%9.33%
May-203.10%8.05%12.06%
Jun-203.63%0.92%1.13%
Jul-207.03%4.06%3.00%
TOTAL-9.44%9.43%-1.54%

So, I’ll admit that $100 invested in my fund would end up as $90.56 today vs $109.43 if stuck in the S&P 500 or $98.46 if stuck in the Russell 2000.

I can still trace exactly what happened. I was nervous about market valuations at the top, keeping a higher cash balance and such – hence my smaller decline in February. Then I saw that massive selling in March while on vacation in Portugal, and I bought like crazy, being fully invested with Margin by March 13: https://johnonstocks.wordpress.com/2020/03/12/the-panic-button-has-been-pushed/

I didn’t think they’d impose lockdowns in either Europe or the US … it just seemed so against our culture and prized freedoms and so on.

The following Monday, after hearing about the lockdowns, I sold everything: https://johnonstocks.wordpress.com/2020/03/18/why-i-decided-to-sell/

At first I was glad I did – valuations kept plummeting throughout the week. At the very bottom on 3/23/2020, the S&P 500 was down 34% from the February peak. It had barely passed below the lows of 12/2018. Here we had the top of a credit bubble – housing prices and stock valuations near all time highs, and the only reason the struggling market gained the last 15% of its value was because of the $250 billion of “Not QE” it poured in through the repo markets: https://wolfstreet.com/2020/02/07/end-of-qe-4-feds-repos-drop-to-oct-2-level-t-bills-balloon-mbs-fall-total-assets-down-to-dec-25-level/

In my mind, we had only reversed the last bit of juiced-up gains, and the market had a lot further to fall. The world economy was going to a virtual stand-still after all … trade was going to plummet, unemployment was going to soar, both people and businesses would struggle to pay rents that had been skyrocketing in recent years, etc. So I started buying puts … at first short-dated, then longer-dated, then puts on the SPY and so on: https://johnonstocks.wordpress.com/2020/04/06/i-may-be-wrong-but-im-still-bearish/

By the end of April I decided I’d be a lot more careful with my bearish exposure. I was still thinking – and I still am thinking – that the market valuations are crazy and the only reason they were up was because of the money pumped in by the federal reserve. I decided to sell off my bearish S&P 500 position and focus on the Russell 2000 instead: https://johnonstocks.wordpress.com/2020/04/23/perhaps-its-time-to-dump-my-short-sp-position/

I was getting absolutely hammered with my short positions at the time. I needed some bullish exposure, bad. I wasn’t willing to dump all of my bearish exposure because I was still sure the market had major selling coming down the pike at some point, I just didn’t know when and couldn’t assume it was close. I jumped headlong into gold miners with long options, figuring that much of the investment cash looking for a home would find a happy home there: https://johnonstocks.wordpress.com/2020/04/28/making-some-decisions-and-assessing-my-portfolio/

After some solid gains, I started to fear a pullback in gold. I didn’t want to dump my exposure entirely, but I wanted to make sure I had some protection. So I sold off all of my long options in gold miners, bought shares of the largest gold miners instead, and sold in-the-money covered calls on them: https://johnonstocks.wordpress.com/2020/05/16/planning-for-lower-risk-returns/

I remember how hard gold miners started correcting at this point. The in-the-money covered calls I sold allowed me to break even in the event of a pullback close to 10%, and they were way out of the money by this time. I actually purchased more gold miner shares while deciding to wait out the expiration of the covered calls I had. Gold never seems to do well on major options expirations after all, but I was still extremely bullish on Gold: https://johnonstocks.wordpress.com/2020/06/10/time-to-review-my-positions/

All of those in-the-money covered calls on gold miners expired worthless while the dividend payers went up and were called away. https://johnonstocks.wordpress.com/2020/06/21/time-for-defense/

Over the last month, the gold miners and silver soared. My exposure there is high, and so were my gains. Here’s where I’m currently sitting:

  • 52.5% Gold Miner Stocks
  • 14% high dividend stocks with covered calls sold on them
  • 5.5% unallocated cash
  • 7.5% 2022 SLV calls (silver)
  • 2% 2022 CCJ calls (uranium miner)
  • 12% 2022 IWM puts (my short on the Russell 2000)
  • 2% 2022 EEM puts (my short on emerging markets + China)
  • 4.5% 2021 TSLA put (my tesla short which isn’t going so well)

So that’s my story and my situation. If I could go back and invest everything in the SPY starting in October 2019 would I do it? Heck no, I’m a trader. If I can track progress and figure what I did wrong, what I did right, and why then I can improve my performance. Overall I’d say my main mistake was underestimating the effect of the massive stimulus (over $4 trillion from the federal reserve) on the stock market.

I believe that we’re living in a crazy time where markets are manipulated openly by central banks, interest-bearing securities return less than inflation, and valuations are so high you’re virtually guaranteed to have lousy returns as a buy-and-hold investor. These views are more mainstream than you might think … look at what John Mauldin has to say about today’s market: https://www.mauldineconomics.com/frontlinethoughts

On a positive note, I’m going on my first post-covid vacation next week. My mother and I are going to Sequoia, Kings Canyon, and Yosemite to enjoy some of the beautiful natural reserves we have in California. We’ve been taking Covid and distancing seriously, and this should be a fun and safe way to spend it. Stay safe, stay sane, and happy trading!

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Tesla and the NASDAQ – blow off top?

As you know, I purchased a $900 January put in Tesla last week, figuring that odds were they wouldn’t squeeze out a net profit on earnings and their stock could correct hard if their eligibility to join the S&P 500 was delayed another year. Earnings call was after hours Wednesday and they had a surprise profit. I started the morning with my position nearly 50% underwater, but the stock dropped hard during the day. Now on Friday, as it continues to drop, I’m still down about a 3rd. That brings for a tough decision…

Here’s an article I read on signs of a blow-off top: https://tradingsim.com/blog/5-ways-to-identify-blow-off-tops/

Basically, a blow-off top is when a stock has a massive rise with only minor or insignificant pullbacks, going up massively to more than double.

You have a bullish spike on high volume followed by an immediate selloff, also on high volume, and then a retracement bounce before it continues down. The event is much bigger if it’s associated index is also experiencing a minor or major top.

It’s something to think about anyway. If this is a significant blow-off top, then a re-test down to the 1000 level – where it was less than a month ago – is clearly a possibility.

I’ll wait and see how it plays out.

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Tesla Update

Well, I can fairly say the Tesla trade blew up on me – the option I purchased is down nearly 50% so far. Now I’m not entirely sure how to play it.

Excerpt from this article: https://www.msn.com/en-us/finance/savingandinvesting/will-tesla-be-added-to-the-s-26p-500-here-e2-80-99s-how-it-will-be-decided/ar-BB16JEtA

“If the index’s committee did decide to add Tesla to the S&P 500, it would not happen immediately when the electric car maker reports earnings next Wednesday after the market close.

Changes to the S&P 500 aren’t made based on when a company gains or loses eligibility, but rather whenever the index’s committee “deems necessary,” according to McConville, the spokesperson for S&P Dow Jones Indices.

“All that’s to say that there’s no future date on the calendar when the next changes will be made,” he says.

The S&P 500’s committee does meet monthly, and could potentially make changes to the index’s constituents then, but the firm could not confirm by press time when the next meeting would take place; it also rebalances the index each quarter, and could swap companies in and out then, but that’s not scheduled to happen until Sept. 21.

In the past, when S&P Dow Jones Indices has added companies to the S&P 500, it announces the changes four to 10 days ahead of when they actually take effect—which is always before the market opens for trading.”

Another thing I found interesting to look at was this chart:

It looks like the definition of a parabolic rise. Also, bonuses have been triggered to executives at various price milestones, and looking at the insider sales history, it’s years of selling.

That being said, I would not start a short position on Tesla today. I’m just hesitating to sell partly out of stubbornness … I just want to see how this meteoric rise consolidates. I might close out today or tomorrow, I might hold till the end of the month figuring that the S&P 500 won’t jump into a decision before then, and any kind of speculation can get some hot money out of the stock. It feels like sentiment couldn’t have gotten more bullish, so who knows. However this turns out, I expect my little short-Tesla trade to be a losing one.

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I actually did it… I’m short TSLA

We’re certainly in one of the strangest markets ever. Tesla Motors is valued higher than the entire US Auto sector plus Toyota. Elon Musk is now worth more than Warren Buffet. Meanwhile, we’re getting closer to a cold-war status with China – where Tesla has most of their sales. Covid-19 infections are raging – not just in the US but worldwide. Any country that opens up sees new outbreaks. The Auto sector has been pummeled. What gives?

First, I’ll give some credit where it’s due on this one. I didn’t come up with this idea – I researched it after reading this article by Jared Dillian: https://www.mauldineconomics.com/the-10th-man#

Lets start with the charts:

Above you can see the year-to-date chart of Tesla starting a bit north of $400 and ending at $1500 today. Next to it, you can see the gap on very high volume up to a peak around $1750, followed by a quick move down closing that gap. That is a bearish signal in that the many people who bought in above are likely to get spooked if it falls much further.

There have been numerous articles about the surging number of Robinhood trading accounts buying into Tesla. A lot of individual investors are clearly very bullish. Why?

  • Tesla has earnings coming up on 7/22 – a potential catalyst to move the stock
  • There is a lot of hype about Tesla potentially entering the S&P 500, forcing massive buy-in’s by the ETF trackers
  • There is a battery day announcement in September with some excitement about it
  • There is excitement about their progress with autonomous driving and perhaps the idea that they could become the world taxi service

The biggest one here is entering the S&P 500. Everyone knows that passive 401k money throughout the US would flood into Tesla, buying at any price, if it enters. It could enter, but there’s a number of reasons to think it might not as well. However this works, I’m willing to wager there’s a lot of short-term money betting on this outcome that will jump ship after the event. It could be a buy-the-rumor-sell-the-news event if Tesla gets admitted to the S&P 500, or it could be a get-out-now event if Tesla is delayed from entering.

Another major factor on Tesla’s rise was the incredibly high short interest, with a lot of market shorts getting squeezed out of their positions and being forced to buy out at higher prices. Here’s where that sits today:

https://www.nasdaq.com/market-activity/stocks/tsla/short-interest

I only posted what the screen would hold, but the current short interest is the lowest number on the entire page, which goes back to 7/15/2019 a bit below where this screenshot ends.

I can tell you now that shorting a stock this valuable isn’t easy. I don’t have an account that allows me to short-sell, and I don’t like the uncapped risk anyway, so I usually like to use in-the-money puts with long timeframes relative to the trade I’m doing. One put contract controls 100 shares, so this is overwhelmingly expensive for a small fry like me. I had to go way out of the money to get a bet under $10,000. Also I figured it’s a short-term bet in that I’ll admit I’m wrong if it holds for a couple months without any downward correction whatsoever, and I’ll be watching like a hawk on a down move and sell if it’s hitting significant resistance. So I went with a January put way out at $900, near the tip of the February spike.

Aside from that it’s been an interesting week. I cashed out my long call in BDX for a significant gain, chased SLV calls a bit on the dips, and parked a bunch into high dividend stocks, immediately selling 1-month at-the-money calls on them.

Here’s where I stand:

  • 53% gold miners (I didn’t chase these this week, they went up in value)
  • 15% dividend stocks with covered calls (MO & PPL)
  • 12.3% 2022 puts in IWM (russell 2000)
  • 6.2% 2021 put in TSLA
  • 5.2% 2022 calls in SLV (silver etf)
  • 3.9% unallocated cash
  • 2.5% 2022 puts in EEM (emerging markets)
  • 1.9% 2022 calls in CCJ (American uranium miner)

Trader John, signing out.

(The next morning) I found this article interesting on the Tesla subject: https://www.ccn.com/tesla-stock-sp-500/

The end of the article mentioned a number of late December inductees into the S&P: LYV, ZBRA & STE on or around Dec 23rd 2019 , and they didn’t seem to move much in the weeks that followed. LYV was perhaps the most interesting because it plunged 10% on Dec 13 and gained it all back Dec 19, perhaps in anticipation of joining. Then it was flat thru Jan 10th. If I’m right about the “buy the rumor sell the news” motivation on Tesla joining the S&P 500, it would definitely plunge a bit if Tesla doesn’t make the cut this time while it would likely be flat to slightly negative if Tesla joins. The late Tesla buyers are hoping for a pop on the news after all and will be a bit skittish if it doesn’t happen.

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Valuation does not drive stock prices

I found these charts interesting, showing the performance of the 5 biggest stocks and then the performance of the rest of the NYSE stocks without those 5. https://wolfstreet.com/2020/07/11/wild-ride-to-nowhere-appl-msft-amzn-goog-and-fb-soar-to-new-high-rest-of-the-stock-market-is-a-dud-has-been-for-years/

It’s fascinating how different these charts are, and it has a lot of implications for how the modern stock market works. Money has been shifting from active funds to passive funds over the years, favoring the biggest companies in the NASDAQ, the S&P 500, and other popular ETFs because many of them are value-weighted. In addition, the easy money policies of central banks around the world and absence of SEC oversight has led to a winner-take-all economy where large firms have easy access to limitless amounts of capital while small competitors just don’t.

Many people take the wrong approach here – remembering the tech mania of the late 1990’s and the following tech crash and trying to call a top and short it. It’s really tempting to dig into crazy valuations and convince yourself that they can’t possibly get crazier, but they can. Take Tesla for example:

Does it make any sense that this company should be worth more than the entire US Auto sector plus Toyota? Of course not. Should you short it? No, it could double again. Valuations have nothing to do with the price movement in this stock. You simply have an enormous percentage of shares held tightly and not traded, combined with a lot of media attention and excitement plus a large percentage of shares sold short. I would avoid this altogether. You could purchase it, put in a tight stop loss, and hope it shoots higher – but stop losses work best on highly liquid stocks with a lot of trading. I highly recommend this type of momentum trade with any of the “giant 5” or the NASDAQ – but I’d avoid it on a stock as volatile as TSLA.

Last week I put a lot of thought into starting a momentum trade in tech – buying a dip, setting a tight stop loss, and riding it out hoping it doesn’t trip. At first I thought of getting an ETF like CLOU – the chart looked good, cloud computing sounded like something big in the covid world and all that – but I ultimately decided to just do it in top 2 – AAPL and MSFT – if I do it at all. The expected pullback never came, the stocks shot higher, and I’m still waiting for the right moment. Note valuation doesn’t matter here – its just about buying at a time where chances of short term gain are high enough that you can put a firm stop loss in and it won’t just trip and sell.

Last week I did finally get the pullbacks I was hoping for in the IWM (Russell 2000), so that I could sell off the last of my Jan 2021 options. Now all of my option plays are for Jan 2022, so I don’t have to worry as much about the short-term moves.

Silver had an amazing week, closing above 19 which was a very important breakout on the chart. I couldn’t help but chase, buying a couple more Jan 2022 calls in SLV. With the move in gold and the smaller size of the silver market, I’m getting the feeling that a silver spike is coming, and those can be quite phenomenal.

Anyway, here’s my current positioning and reasoning:

  • 12.5% uninvested cash. I’m working on getting this invested, it’s a process that shouldn’t be rushed. I kind of expect that the large corporate stimulus money in the treasury general account will keep markets calm through October despite the crazy Covid data.
  • 52% Gold miner stocks. I invested in the largest companies only because they have all the access to capital and that’s where ETF investors will unknowingly flock.
  • 8% dividend stocks. Actually this is just because I bought MO again and sold some August covered calls on it. I see it as a fairly low-risk trade that gets me some small, easy gains.
  • 5.8% call in BDX. They sell vaccine needles and such. This one’s up a good bit for me, but I’ll sell if it retests the old highs.
  • 4.2% calls in SLV (My silver exposure. I have some physical as well, but that isn’t counted here – this is my silver for trading)
  • 1.5% calls in CCJ (Uranium miner that will soon sign a new multi-year contract with US nuclear plants. I expect it to be a good one as it’s a tiny unit cost for nuclear plants, so they’ll want a dependable US supplier and they’ll pay more for that.
  • 13.5% puts in IWM (If the market corrects down to reflect economic conditions of an ongoing pandemic, this will be good. Plus the chart is bearish, unlike the NASDAQ, so I already know that the current liquidity flows aren’t heading there.
  • 2.5% puts in EEM. I really think that we’re going to see more hardship for the emerging markets with lots of dollar debt. A good portion of EEM is in China which has unique risks as well, as they are an export-heavy economy facing an ever more skeptical US and European market with political risks such as Hong Kong related sanctions.

Best of luck with your strategies.

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The treasury balance sheet and the election cycle

I’m going to start with the charts.

US Treasury General Account: https://fred.stlouisfed.org/series/WALCL

Federal Reserve Total Assets: https://fred.stlouisfed.org/series/WALCL

I’ve been focusing a lot on the balance sheet of the federal reserve, wondering how long the stock market can hold up when their assets are declining instead of rising. Today I was made aware of another very important piece of the puzzle – the treasury general account balance.

Back when the stimulus bill passed in congress, it enabled the US treasury to build up a balance of an additional $1.4 trillion. Markets didn’t notice the issuance because the federal reserve purchased $2.4 trillion of assets – primarily US treasuries – at the same time these were sold.

The question now is how will it be used. Part of it can be used for stimulus to large corporations – perhaps bonds that become grants under certain conditions. Part of it can be used to issue additional stimulus checks to people if approved by congress. Part of it can also be used to backstop the stock market.

I don’t typically like to mix politics and markets, but in times like these they collide. Everyone knows that Trump has been touting the strong stock market as a sign of his leadership. The US treasury has the means to ensure that the stock market stays high up through the election regardless of any covid-related shutdowns.

With this in mind, I strongly recommend a heavy bullish bias up through November.

That being said, I highly suggest you get closer to market neutral once November hits. We will be coming off of highly juiced markets, first by the Federal Reserve, then by the US Treasury. After reaching the election finish-line, both government entities are likely to slow down with purchases and let the markets correct downward a bit. The political pressure will be off, and they don’t want to keep emergency spending levels going forever even if Trump wins.

If Biden wins, it will get a lot more risky. The news will spook investors with the chance of a large tax increase, such as eliminating the corporate tax cuts from the Dec 2017 tax changes. Trump definitely would not want to the treasury or the federal reserve to support the markets in the event of a loss, so a much more significant downward move could occur before the Federal Reserve felt inclined to intervene.

My plan is to invest the remaining 20% I have in cash over the next couple weeks. According to the charts at the top, the federal reserve and the treasury haven’t been making moves in recent weeks, so I have a decent chance of a better buying opportunity before months end. I will also use that opportunity to dump my remaining Jan 2021 puts, so that my entire bearish exposure has a Jan 2022 duration. I was really hoping to add to my silver longs this morning, but it had a nice jump that I don’t want to chase. I can’t complain though, as I have some decent exposure already.

I plan to stick with the big players and the winners to date, rather than looking for value. I suggest you do the same, as chances of an internet darling like Amazon getting even more expensive are much better than that of a beaten-down oil stock recovering, especially with all the economic uncertainty. Good luck and happy trading.

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Avoiding the Bull vs Bear scuffle with Momentum Investing

Intro: my own journey through the financial news world

I have been a Real Vision (https://www.realvision.com/) subscriber since they first started low-cost subscriptions for ordinary people like me. It’s interesting how the world of financial media develops … when I first got into investing back in early 2000 as an undergrad in college, I was really into The Motley Fool (https://www.fool.com/). I went from the free site to the paid newsletters during my go-go early working years when it was easy for a new grad to make money. As a frequent commenter on their Global Gains forums, I heard about the free David Rosenberg newsletter back in 2008. In 2009 with my inevitable layoff, I cancelled all paid subscriptions and found I still needed an outlet. That’s when I started this blog. Rosenberg led me to reading This Time is Different (book), which led me to Endgame (book), then Mauldin Economics (https://www.mauldineconomics.com/) and so on. Through them I’d been introduced to many other financial sites which I use today. I remember when David Solomon broke from the Mauldin team to start RealVision with Raul Pal – and at first it was just another closed source like Rosenberg … something for the big money to subscribe to only. A few years later they totally shifted gears with the idea of having tiered memberships, lots of interviews, and a lot more content – allowing me to join the basic tier and learn a lot from the professionals.

Anyway, this week they had a live interview with a momentum investor named Mark Ritchie II which was very well done. I’m going to sum up some of the ideas I gleaned from it right here.

Right now there is a lot of bearish sentiment out there with as Covid outbreaks resume and openings are rolled back. The put-call ratio shows a huge bias to the downside (http://www.optionistics.com/put-call-ratio/SPY). Many big investment firms have missed out on the rally this last quarter. There is a lot of money on the sidelines which ultimately has to achieve some kind of investor gains. Where are they going to go? Bonds yield next to nothing – as an investor you basically have the choice of going into stocks or alternative investments such as precious metals, bitcoin property, and so on. Many pension funds are looking to private equity which has its own risks, but much of the investment money is restricted from going there.

Most of the arguments against Mark had to do with valuation. How can anyone expect the current environment to lead to higher valuations of the S&P 500 than we had at the pre-covid highs? The answer is simple … valuations do not drive the stock market.

Mark argued that right now it’s best to forget about the news in general and look to specific charts. Many stocks have been under steady accumulation since March – such as AMZN – while many others have not been recovering much at all – such as GE. Stocks in a bull phase tend to go up in spurts followed by pullbacks. You look for a pullback in a strong name and mark out the chart, buy in, and manage your stop-losses to ride it.

This example has nothing to do with the interview, but is my own take based on my experience with the strategy:

I’ve experimented with this style of trading before and it really works – but you always have to follow the markets and adjust to new conditions. I work full time sitting in front of a computer, and that does make it a bit more difficult to track a large number of trades like this. You have to find your own investing style and see what works for you.

My current strategy has involved puts in the IWM which I see as a weak chart with struggling fundamentals beneath combined with longs in the gold miners which I see as strong charts in an uptrend I expect to last. Sitting in cash can be good at times, but only for the short term. I’m really thinking about investing much of my remaining cash after listening to Mark’s interview – in my own way and not all at once of course. I don’t think I’ll pick amazon necessarily either – that was a quick example of a company everyone knows that took just a few minutes to put together. I like the long-short balance I have because if the market tanks as a whole I’m okay, but if the rally drives further I’m also okay. Most recently I sold more Jan 2021 IWM puts on the pullback below 138 and then bought a couple more Jan 2022 IWM puts on the bounce back above 142. Now I’m ready to dump all the rest of my 2021 IWM puts at a re-test of 138 while still maintaining the bearish exposure I’m after.

There still is an island reversal pattern in both the SPY and the IWM. Also, the federal reserve balance sheet has been shrinking in recent weeks. So go ahead and invest, don’t sit on the sidelines forever, but look for strength … don’t just blindly jump in to the SPY. I strongly believe that we’re in a new trading regime, in which passive buy-and-hold the index strategies will underperform while more nimble active approaches will outperform.

Notes on the theory behind momentum trading:

I’ve always been a theoretical thinker, which is why I went Mechanical Engineering as an undergrad way back when. Investing in stocks just because s chart pattern says so is not enough for me, so I’ve read a good bit, some of the theories stuck with me, and I built up my own collection of reasons why this works.

  1. Money flows into and out of investments are like a river. The flow goes on longer than you’d expect without mean reverting. Here are some examples of why:
    1. The big investor’s perspective.
      1. You need to invest a large amount of money, and you have your thesis on why a stock is moving up. You can’t just buy in because you are big enough to affect the stock price … you would see a spike when you were buying followed by a dip afterward as others sold in reaction. Therefore you spread out your buying over a longer timeframe. You might even go with a strategy of big buying at the dips with shallow sales at resistance levels to shake out investors and accumulate more shares.
    2. Passive fund flows from 401k’s
      1. Every paycheck, a certain amount of money goes into 401k’s – straight into a mutual fund or index fund. The money is dispersed according to the fund’s strategy. With an SPY index-fund this money simply piles into the most highly valued stocks without any consideration of current price levels.
    3. Stock buyback programs
      1. Stock buyback programs are announced and put into place with a plan to purchase a certain dollar amount of shares over a certain timeframe. The buying is price-insensitive and at regular intervals over the intermediate term until the program comes to an end.
  2. The self-fulfilling prophecy of momentum trading. The more investors buying the dips, the more shares react to the upside. The more investors selling resistance, the bigger the pullbacks.
    1. Algorithmic (bot) trading
      1. There is a lot of hedge fund money that uses the idea of AI to invest money in algorithmic trading. They not only strengthen the trend, but they also try to strategically break the stops by selling to manipulate the price just under known resistance levels before reversing and buying back. Many of these bots can even read where most of the stop-losses registered with the brokers are. Even so, you just see this on the charts as bigger upswings and bigger pullbacks making the momentum strategy that much stronger.
    2. Passive funds such as MTUM which do their own momentum-based strategy.

Last thing to note: A correctly applied momentum strategy is safer than it seems. If a stock tanks, it will pass through important levels of support first. This includes previous lines of resistance as well as key moving averages such as the 20-day, 50-day and 200-day. Most momentum investors avoid anything below the 200-day moving average, and the professionals carefully adhere to their own stop-loss points, so they don’t ride the stock down when the trend shifts.

I hope this gives you some ideas. Happy trading!

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