Markets have continued to see pressure ever since Thanksgiving, as seen in the significant pullbacks in the S&P 500, the junk bond index JNK, commodities like gold, silver and oil, and cryptocurrencies like Bitcoin.
The famous inverted yield curve signal has projected every recession infallibly for decades. The short term rates are buoyed by the perception of a hawkish fed, while the long term rates are going down by the perception of a weakening economy and the beginning of flight to safety.
What happened to markets after the last yield curve inversion? Here it is:
Here’s what various markets did after that time. I marked the yield curve inversion date with a blue arrow on each one:
As you can see above, both the S&P 500 and Oil struggle and drop in following months, then start to recover after the famous “Powell Pivot” the following January. Similar story with JNK, representing corporate high yield debt.
TLT, representing long-dated US treasuries was a great hedge during the turmoil.
Junior silver miners and Gold struggled a bit with a much flatter range, then broke to the upside before stocks and oil.
Right now there seems to be genuine fear in the precious metals sector and definite wariness in Uranium. I couldn’t help but get longer both – including purchases of a nice chunk of Jan 2024 $10 strike calls in AG. I also wanted to get longer the US Cannabis sector, which I’m convinced will rocket higher once Congress passes legislation allowing them access to the banking sector. At first I added a little more to some of the 6 names I had to somewhat even out the share counts, then I just decided to add a 7th name.
I also reduced by TLT calls by a full 25%, though I’m thinking I should’ve held, and I sold the last little chunk of Crypto I was holding.
Here’s where my portfolio ended up:
16.3% TLT Calls
PRECIOUS METALS (43.7%)
10.3% AG (Silver), mainly shares & some calls
4.0% SAND (Gold, Silver & others), all calls
4.6% EQX (Gold), mainly calls & some shares
4.2% LGDTF (Gold)
3.8% SILV (Silver)
3.4% SILVRF (Silver)
3.5% MTA (Gold & Silver)
2.8% MGMLF (Gold)
1.9% RSNVF (Silver)
1.5% SSVFF (Silver)
2.9% HAMRF (Gold)
0.8% DSVSF (Silver)
2.0% UEC, shares & some calls
COPPER & NICKEL (2.5%)
SHORT SQUEEZES & OTHER TRADES (1.4%)
As you can see, I kept a positive cash balance which is important in a potential downturn, so that you can be looking to add when others are hitting margin calls. Still, I should show more discipline, as I added significantly to both Uranium and Cannabis and even to my largest silver miner when I should be building more cash.
The market value of my portfolio actually dropped 13.4% in the last 3 weeks which shows the volatility of my holdings, particularly the long dated call options in gold and silver miners as well as TLT. As long as I don’t dip into margin this level of volatility won’t be a problem, and the volatility certainly works to the upside as well; in the 5 week winning streak prior I saw 25.9% gains.
The twitter feeds in finance are still focused on inflation vs deflation, is it transitory, is the Federal Reserve going to crash the market, did a major correction in the S&P 500 already start or is there going to be another rally before the real crash sometime in the first quarter next year, and so on.
There are certainly a lot of risks out there, and our extreme levels of margin debt leave us open to a March 2020 style crash. This could be especially bad given that central banks throughout the world are worried about high CPI increases. Both governments and central banks are unlikely to push anywhere near the level of stimulus into the markets that we saw in reactions to the first Covid lockdowns in March 2020. And of course, governments are still tightening borders and restrictions in response to both the continuing surge of the Delta strain and the highly contagious new Omicron variant.
What can I say, I suppose that’s why I like focusing on precious metals – which can be a bit of a safe haven – as well as unique and under-held markets like Uranium miners and US Cannabis, and why I tend to avoid the trades I see as crowded including the general US stock markets and Crypto. I’m under no illusion that these will hold up nicely while everything else falls – I just think the fall will be much more shallow, and the rebound much more significant. In the end, you have to risk your money somewhere or you’ll never build up anything.
Last note – I am going on a river cruise starting next weekend from Amsterdam to Basel with port stops in Germany and France. It was limited to selling at 70% capacity, and they’ve had a lot of cancellations. We’ve had to go through some hoops to be allowed entry into these different countries, and I went ahead and got a 3rd jab so they won’t bug me about that, but I’m fascinated to see how it will go. If it works, then it will be an amazing trip with little to no crowds and an interesting group of die-hard travelers to meet. Here’s hoping it works!
I’ll start today by summarizing my take on the new Omicron strain.
Omicron has spread widely in the region of South Africa it was discovered. Cases have also been detected in a number of other countries including Botswana, Hong Kong, the UK, the Netherlands, etc.
Implications: Omicron is highly infectious and it is spreading. They think it might be more infectious than Delta but that is not sure yet.
Omicron shows a number of mutations on the spike protein, more than any other variant.
Implications: There is speculation that Omicron may evade natural immunity from previous covid strains and covid vaccines. A number of companies are working on an Omicron-oriented booster shot.
If Omicron is not affected by immunity from Delta, there is no implication that Delta will be affected by immunity from Omicron. In other words, we could potentially see both waves spreading together rather than Omicron replacing Delta as Delta was replacing other strains such as Alpha and Gamma. This is pure speculation.
Many regions of the world including Europe have been increasing restrictions in response the large outbreaks of the Delta strain
Implications: Omicron will potentially lead many parts of the world to increase Covid restrictions.
How will this affect the stock market?
There is speculation about how more lockdowns and restrictions will affect the stock market, particularly because so many were blindsided by the fact that Covid-19 was so enormously bullish for the US stock market. Every time we heard about more waves of Covid restrictions and lockdowns, US stocks would soar to newer highs.
My take on this is that we are nearing the time where this news will be a big negative. The reasons are as follows:
Central banks around the world, including the Federal Reserve, have been under a lot of pressure to combat the high CPI readings. A number of central banks have been raising rates and stopping or tapering QE programs in response already. I don’t believe that central banks will move to reverse this stance unless the stock market, particularly the big US indices that the Federal reserve monitors, falls substantially.
An unprecedented amount of fiscal stimulus was pushed out after the 2020 lockdowns including programs in Europe to help people retain the bulk of their incomes, credit boosts in China, and the US response including unemployment boosters (which already expired), one-time checks (which might not be repeated), and huge programs to line the coffers of US corporations.
2021 so far was a new all-time record year for US corporate share buybacks. Many of these companies, particularly in the financial sector, will be restricted from doing these buybacks if economic trouble is percieved – just like we saw in 2020.
China has had a significant economic shift, from cracking down on big corporate leaders like with Alibaba, to pulling the Ant Financial IPO and effectively nationalizing it, to allowing big developers like Evergrande to fail in an effort to tamp down on excessive speculation in housing and ghost developments held by investors with few people living in them. There is good reason to believe that China will not be interested in juicing financial markets as a go-to response this time.
What’s going on with inflation vs deflation?
I think that a lot of the commodity price increases will persist for the following reasons:
The European Union has decidedly moved against the Nordstream pipeline, and they have not shown any interest in supporting any additional drilling for natural gas or oil on their own.
The US cut back it’s oil supply dramatically as the covid lockdowns led to a supply glut. With the reopening in 2021, we have banned any new investment into fracking wells, and we are working on decreasing rather than increasing the number of usable oil and gas pipelines.
The US is focusing on demonizing oil and gas company profits and potentially banning oil and natural gas exports. This will discourage local oil and gas investment and exacerbate shortages elsewhere. The US is still a large producer.
OPEC can’t raise it’s supply of oil and natural gas forever, nor do they have incentive to keep oil at the 2014-2019 levels. It makes a lot more sense to expect them to let oil float in an $80-$120 range.
The port of Vancouver is a major exporting port for resource-rich Canada. The recent mudslides have caused an enormous amount of damage to cities and towns as well as the roads and rails which connect the port to those resources. This includes 5% of the grain destined for overseas markets as well as a lot of coking coal (used to make steel) and oil (the pipelines in this area can’t be used and are very likely damaged).
Many of the minerals we mine, including copper and nickel as well as rare earth metals, are highly concentrated into a small number of major suppliers in a small number of countries. They can make a lot more money with tight supply than with heavy supply, and they have covid safety protocols as an excuse to dampen supply at will.
Similar problems are cropping up with Potash, a key ingredient in fertilizer, which will likely push food prices higher.
At the same time, we are NOT suffering from an excess of dollars. QE does nothing but take bonds from banks that would otherwise pay 2-4% per year and replace them with “overnight reserve assets” on the central bank balance sheet which cannot be traded and pay yields ranging from near zero to less than zero depending on country. This is why QE in Japan has never solved it’s persistent problems with deflation. We see this as emerging market currencies are losing value as they sell gold and treasuries and hike interest rates in response.
However, QE is used extensively as a tool to boost inflation expectations – which are being boosted louder than ever on the mainstream news right now in order to convince investors to continue to borrow money in order to buy assets – from stocks, to real estate, to cryptocurrencies. Margin debts in the US hit an all-time high, reflecting the tip of the iceberg for the amount of leverage in the market. Levered ETF’s are also extremely popular. Investment funds have been buying up houses like crazy, often sight unseen.
How much longer can this last? Insider selling has been at record highs, making big investment funds start to worry about being too long. Zillow (along with many similar firms) was buying real estate like crazy and has now abandoned buying altogether and started listing properties at a loss in many regional markets. Banks are concerned with defaults for the first time in 18 months as Evergrande and many similar firms fall into default. If this wave of borrowed money flowing into assets merely subsides, the lofty valuations can quickly start falling from their peaks. If it begins to reverse, we’re back at March 2020 all over again.
Thus my strange opinions that commodities are a good investment even while we are in a deflationary environment.
I am still in the mindset that we have one last hurrah before everything falls apart, and that we won’t really see that until Q1 of 2022. When that happens, you will want to be long US treasuries (such as ticker TLT), short the major indexes, or have a sizable cash position so that you can deploy capital.
If there is a major stock market crash, I believe that the government will intervene and commodities will prove to be tremendous investments at that point – particularly ones in short supply that take time to ramp up production in such as most mining companies. A deflationary bust as I described could easily push oil down to the $20’s again, but without investment in supply it wouldn’t take long to jump back up to the $80’s. Similar stories with gold, silver, copper, uranium, potash, steel, and so on.
My current allocations:
20.6% TLT Calls
PRECIOUS METALS (43.8%)
8.6% AG (Silver), mainly shares & some calls
4.7% SAND (Gold, Silver & others), all calls
4.4% EQX (Gold), mainly calls & some shares
4.8% LGDTF (Gold)
4.1% SILV (Silver)
3.5% SILVRF (Silver)
3.6% MTA (Gold & Silver)
2.7% MGMLF (Gold)
2.1% RSNVF (Silver)
1.7% SSVFF (Silver)
2.8% HAMRF (Gold)
0.8% DSVSF (Silver)
0.4% UEC, all calls
COPPER & NICKEL (2.6%)
SHORT SQUEEZE (1.6%)
0.5% FUBO, shares
0.7% OCGN, shares
0.3% WKHS, shares
0.2% BB, calls
0.1% ROOT, calls
0.2% SDC, calls
DERECKS TRADES (0.2%)
Hedges: I actually sold some of my short dated TLT calls on Friday as it rallied like crazy with the risk-off stock dump. I’ll buy more if the inflation narrative manages to drive it down again. If we see another risk-off rally, I might start to pick up some puts, but for now I think they are too early and too expensive.
Precious Metals: The seasonality for these is great as they rallied in December from Thanksgiving week lows in all 5 of the last 5 years. I bet on them doing the same thing again, even betting a bit more on calls in AG expiring in January. If we do see a significant rally, which I expect, I’ll be a bit more aggressive on taking profits – particularly with my call options. I still plan to ride through next year with a large position here however, as I believe the valuations are still strong (ie. limited downside and large potential upside). A Q1 market dump like I predicted would cause precious metals to dump considerably, but just like in April-May 2020 I expect a fierce bounce-back recovery.
Uranium: It’s hard for me to be anything but bullish on this sector. It has highly concentrated ownership (mainly Cameco and Kazatomprom). Buyers are price-insensitive; it’s a small relative cost for utilities, and they need to keep their power plants running. Investment excitement with the Sprott Physical fund and Kazatomprom’s new physical fund with explicit goals of driving up the spot price. Lofty goals to produce more nuclear power in China. SMR’s and MMR’s (small modular reactors and micro modular reactors) which make development much easier for many countries, and a worldwide push to reduce carbon emissions. In addition, it is extremely difficult to increase production with the safety and environmental precautions required for mining and processing radioactive materials. I’ll be riding this sector no matter what happens, and if a deflationary bust hits these down, I’m buying here big time.
Nickel/Copper: I am much more worried about these in the short term because of the slowdown in construction in China. However, the supply of these key metals is highly concentrated. Chile and Peru produce the vast majority of our copper, it’s not even close. In addition, all of our crazy ESG programs require tons of it – electric cars, solar panels and windmills with their excessively oversized long-distance power lines, and so on. I’ve reduced as much as I plan to, and I’ll be buying here big time if there’s a crash next year. • Largest producer of copper in the world 2020 | Statista
Cannabis: The main reason I got into this sector is because I wanted a strong growth story that didn’t involve commodities. US Cannabis certainly has that – these companies are growing like crazy while major investors are not allowed in the space until Congress passes legislation allowing them to. It looks more and more likely that this will happen as time goes on. On Friday, when almost everything was selling off, I looked in to buy but they didn’t drop – they actually rose on the day. In fact, my allocation increased significantly this week without any buying, because these went up as everything else dropped. Anyway, I’m not planning on buying more at this time, but I’m not selling either, and if you don’t have a stake in the sector then you should consider adding one, because I really think it’s long bottoming process is finally behind us.
Crypto: This sector frightens me. Bitcoin City, Crypto Stadium, big NFL players asking for salaries in Crypto – these are things you see at tops. Plus, this is a highly speculative asset class where most investors are clearly expecting to get rich quick. I’m holding a bit of Cardano in case of a year-end hurrah like we saw in Bitcoin in 2017, but I’m not planning on holding a stake into January.
Short Squeezes & Derecks Trades: This was my attempt to play out the highly favorable seasonality in SPY during the month of November. It didn’t work out well; Derecks Trades did okay while Short Squeezes was a big flop. I’ll play out what I’ve got, looking for decent exits and selling before year end, but I’m done adding here for a while.
Cash: I intend to build up a stronger cash position in Q1, but I won’t rush to sell things before then. I expect it to continue to hover between 1-5% in December.
During Thanksgiving week, it is normal for precious metals and the miners to get crushed prior to the options expiration, which comes on 11/23 this week. This effect is magnified in the mining stocks. Here’s a quick look at the seasonality that’s coming:
As you can see, the senior gold miners and junior silver miners tend to move together here, and you generally want to hold them during the month of December. How well does this level of seasonality usually work out? Let’s look at the last couple months that had 100% readings:
As you can see, the seasonality seemed to work for October in Bitcoin and November in the S&P 500, so now we’ll see for December in precious metals, where the week of Thanksgiving almost always marks a low.
As far as the general market goes, I’m as nervous as anyone about the current situation we’re in. The parabolic rise in price over the past 20 months, the relative divergences, the insider selling, the low breadth, meaning most stocks are dropping and a few names are pulling the index higher. The bond market is showing a flattening curve that screams low growth ahead, while the US Dollar rallies as a sign of financial trouble. Europe is locking down again over concerns with Covid-19. China is slowing with the Evergrande default and their construction sector will stay slower for a while. German industrial output is low, as are their export weights & volumes, though their exports have gone up in dollar value, the CPI has been soaring with huge bottlenecks in shipping and rising energy prices (oil, natural gas, etc.), and the port of Vancouver had an enormous problem with mudslides that will put all transportation to and from that area out of commission for weeks – and this is where 4% of the world’s wheat exports are shipped in addition to large amounts of coking coal (used in steel production) and huge disruptions in oil pipelines.
In other words, we’ve got more to worry about than ever, so why is the market at all-time highs? Well, margin debt went higher yet again in October so investors are still convinced it’s a good idea to borrow money to invest right now. Corporate buyback programs came back big time this month, pushing the big names higher even as insiders sold. Stock options are still being gamed all over the place to drive indexes.
Note that days to cover is just the number of shares sold short over the average daily volume traded – I use that here because it helps to compare one stock vs another and show a relative gauge for how much short squeeze potential is available. I think about this primarily because of the short-squeeze characteristics of the 2000 Nasdaq top which like today was led by tech and had record high retail participation, though today there is a lot more data available to the average person and a lot more short-squeeze and options market gaming going on. Here’s our market compared to a few prior tops:
It seems that both October and March are popular months for stock market crashes. Perhaps these represent weak points in the workings of our financial system, maybe with overall liquidity from Eurodollar debt cycles or financial moves made by big corporations and investment funds on a quarterly basis, who knows, but I tend to think that a crash outside of these seasonal parameters would take a significantly bigger exogenous shock.
That being said, I am still looking more for a 2000-style short squeeze to blow-off top rather than a sudden November or December crash. So how am I trading this?
I sold off all of my EEM puts for a small gain last week, so I have no puts left. I also bought some more TLT calls, so this bet on dropping long-dated treasury bond yields are my only current market hedge. I reduced my base metals exposure a bit more, selling off more of my NOVRF copper/nickel royalty play. The strengthening dollar, flattening bond curve, and drop in Crypto spooked me a bit as well, so I sold off my Etherium for a decent gain. Crypto could be a canary in the coal mine to a dollar shortage in this case, but it could also be a normal selloff we see regularly in this sector.
Last week I also saw significant gains all due to precious metals, and I took advantage early this week by selling off some of my Jan 2023 calls in miners. That will allow me more leeway to increase back next week if I’m right about those getting crushed over Thanksgiving week and jumping higher in December. And last but not least, I increased my short-squeeze plays a bit.
SDC has been a big short squeeze play for me lately, with its prominent position on highshortinterest.com, its high options open interest in a variety of strikes, and its super cheap call options. For example, Thursday morning I went ahead and bought 100 $4 calls in this one for $0.03 each. I lost this bet of course, but 100 calls means that for every dollar above $4/share I would get 100 calls x 100 shares/call = $10,000 of upside. The chances of a spike might seem remote, but look what happened to AMC in a similar position back in February:
Basically, this stock jumped from around $4.90 to $19.90 overnight. I’m not necessarily betting on that level of spike with SDC, but when you’re spending a small amount per call option, any tiny gain is magnified. You can lose week after week with these things, and it is important to see if you’re still getting that open interest in call options on these plays. So I’ve divided between a number of different potential short squeeze plays, with a small amount of money bet in each, and with SDC in particular I have bets going out the next few weeks – on which I spent anywhere from $0.08 to $0.12 per call option. If we see end-of-year short squeezes anywhere, one of mine should hit. Keep in mind, these are lottery ticket plays so the calls are likely to all go to zero, but the crazy outsized gains possible are also there. This not only means that one win could easily make up for 20 losses, but also that I actually have a chance of winning really big, which isn’t normal in the investing world. Strange times we’re in.
Anyway, here’s where my portfolio ended out the week:
19.1% TLT Calls
PRECIOUS METALS (46.0%)
8.5% AG (Silver), mainly shares & some calls
5.1% SAND (Gold, Silver & others), all calls
5.1% EQX (Gold), mainly calls & some shares
5.0% LGDTF (Gold)
4.0% SILV (Silver)
3.8% SILVRF (Silver)
3.8% MTA (Gold & Silver)
2.9% MGMLF (Gold)
2.2% RSNVF (Silver)
1.9% SSVFF (Silver)
2.8% HAMRF (Gold)
0.8% DSVSF (Silver)
9.1% CCJ, covered calls sold on it
4.5% UUUU, covered calls sold on it
0.4% UEC, all calls
COPPER & NICKEL (2.6%)
SHORT SQUEEZE (2.4%)
0.5% FUBO, shares
0.8% OCGN, shares
0.4% WKHS, shares & calls
0.2% BB, calls
0.2% BBBY, calls
0.1% ROOT, calls
0.5% SDC, calls
DERECKS TRADES (0.3%)
A couple of other buys I should mention… On Friday, I bought the dip in Uranium miners, adding more CCJ shares and some calls in UEC. Also, I bought the dip in Cannabis stocks by topping off each of my stocks to stay at my new arbitrary minimum fixed dollar level. It’s an easy way to average in, I just add a few hundred when a name drops a few hundred below my threshold, and I let the stocks ride when they are at or above that threshold.
Also, I haven’t been adding to the Derecks Trades portfolio I had, but I should mention the performance so far … I have 5 call options remaining on different names that still have a month of duration left, and those aren’t looking good yet. I also closed out 6 names from that list, which end up with an $87 profit for $1,720 at risk so the performance remains to be seen. If you count my MARA play because he did recommend it, I just bought it for my own reasons at the same time, then shoot the profit up by $4,800 because that one was wildly profitable. As for now though, I’ve been reviewing his charts and elliot wave counts mostly to try to gauge when this market will peak. Dereck thinks it might have already, but I fear the 2000 short-squeeze potential enough to keep my hedges in TLT calls and avoid buying index puts at this time. For now, I’m assuming that we end with an up-month in November just like we saw in the past 5 years, but I might scale into some puts in December and a bit more between January and March 2022.
My portfolio value hit a decent milestone this past week, finally eclipsing it’s prior peak back in January 2021. Corrected for cash added from paychecks, the valuation rose 26% rise in the last 5 weeks, after falling 14% the previous 4. This shows the roller-coaster volatility I’m working with here. Far from bothering me though, it actually makes things more interesting as I am young enough to take risk and I really like the possibility of getting a big win. The most obvious reason for these ups and downs is my enormous allocation to precious metals miners, and the recent upleg in gold.
I see gold as a potential breakout from a bullish wedge, with solid support around those 1675 lows, and significant resistance coming up at 1900. If it breaks out, it could easily run past the peak to approx. $2,000 +(2000-1675) = $2,325, or the height of the wedge from the peak price. I tend to prefer that simple view of it here, where gold, silver, and the miners roughly move together so you can lump them in one basket.
One way to differentiate the precious metals though – if you include platinum and palladium as well – is that Platinum was used a lot with Diesel vehicles, which had been falling out of favor for over a decade, Palladium is used a lot for Gasoline vehicles, and Silver is used a lot for electric vehicles and solar panels. Gold is the one central banks own, and the most important to a country that wants to de-dollarize (generally because of the threat of sanctions). Gold and silver both have heavy demand from investors and as jewelry and as relative safe havens when emerging market currencies are under pressure.
I like the safe haven aspect because I am very worried about the asset bubble we’re currently in. It also makes me feel safer that the sector isn’t crammed with passive investors or ESG funds, which will be just as insensitive to price on potential outflows as they are on inflows. I also like the structure of a cyclical commodity that went through a rough period of consolidation and mine closings from 2013-2019, and that requires an enormous investment of time and money to increase production. The trends of slow de-coupling from China and a growing Chinese trade sphere are good long term drivers for gold demand, and the trends of electric vehicles and solar projects are good long term drivers for silver demand.
Uranium has an amazingly bullish story as well, with the spot funds soaking up excess supply as demand for nuclear power continues to grow, but it is a much smaller and more volatile market than gold and silver so I allocate significantly less there. Another nuclear disaster like Fukushima could throw a wrench in things again, and it is always possible when we continually re-license these old plants from the 1960’s instead of building newer ones which are much safer. Or we could just get a natural or political disaster that cripples some of the miners. Either way, its a great sector to allocate to, but risks like those are why I don’t make it my dominant position.
Anyway, I’ve actually diverged a bit from my headline here – opportunities in a crazy market. With those, I was simply thinking of my short-squeeze portfolio. Last week, I looked at a bunch of names on this website: High Short Interest Stocks and I picked these:
I looked through the 1-week call options to see if any of these were getting interest there, and picked 6 which were – some of which I checked because I’d heard them pumped in the past, like FUBO which was actually a ways further down my truncated list here.
Here’s an example of what I call interesting options action:
You can see the open interest for 11/19 calls is relatively high throughout the strikes, going all the way out to $12. I went ahead and bought 50 call options at the $5 strike that expire the following week (11/26) for only $0.11 per share. I could lose that $550 – there’s actually a pretty good chance I do – but I remember AMC blowing up from the low $4 range to $16/share overnight and that’s the kind of move that’s possible when too many shares are sold short (31% of the traded shares of SDC) while money is flooding into the near-dated calls to try to trigger a squeeze. I honestly see these plays as some of the best risk/reward out there on the market right now, as a single win can get you a 20x return when the calls are that cheap.
Aside from that, I actually do believe that Cannabis is looking to be an incredibly good play at current prices. I’m not allocating more at the moment because I don’t like to chase, I prefer to just ride the shares higher and add if a big dip hits out of nowhere.
Crypto has been making me more nervous even though it Bitcoin and Etherium have been acting extremely bullish. I actually reduced my stake in Etherium a bit last week, but I’m planning on holding my ETH and ADA at least until December before I re-assess. I tend to sell early on these things as the volatility makes me worry about holding past a peak. I’m not a real believer in the space though, I just think the price action is too good to ignore. To many it represents some kind of revolution in finance, but to me it’s still just betting that the price of a volatile token, that doesn’t represent ownership of anything, in a virtually unregulated space, will go up based on price trends, investor sentiment, and/or manipulation by large unknown players.
Aside from that, I should mention that the Dereck’s Trades section has mainly been languishing because I’ve been adding elsewhere- particularly using that speculative money for short squeeze plays. I still check his analysis and charts a lot, and I find it useful in trying to figure out when I should switch my view from nervously bullish back to bearish and build up some puts.
Due to the insanely bullish seasonality in November, I don’t plan on adding any short positions (puts) until the month is over, but when it is I can’t think of a better way to spot a potential top early than his elliot wave analysis. I honestly believe that elliot wave stuff can work but it is not for amateurs, you have to be into it and have experience, and it is fuzzy / more art than science when trying to figure how to put in the counts. In other words, I’m not planning to go beyond my basic understanding of technical analysis with the basics of trend lines, support & resistance, bull wedges, bear wedges, and potential reversals – it is simply too much work when I have a full time job that has nothing to do with investing.
Twitter and basic subscriptions are very helpful in this – currently I pay for RealVision, The Grant Williams podcast, The Silver Chartist Report & Dereck’s Trades, and there are a lot of non-paid blogs & podcasts I like. Jeff Snider’s Alhambrapartners.com is one I’ve been extremely into lately, but there’s also Steven Metre’s podcast, Hidden Forces, Macro Voices, Superinvestors, Doomberg, and many others.
Anyway, I hope you had a nice Veteran’s Day weekend. I actually took Friday off and spent the weekend with family, friends, campfires, and dirt bikes. Here’s my latest allocations.
It’s not often you see an $1.2 Trillion market cap company jump 50% in value in a few short weeks. How does that happen? Short squeeze & Gamma squeeze. It has nothing to do with a potential deal with Hertz. It has nothing to do with fundamentals such as earnings at all for that matter. TSLA has all the right players to create this type of perfect storm.
Short interest. Puzzled fundamental analysts hate this stock. The sales are miniscule compared to any major car company, the CEO will say anything and insult the SEC, the idea of Robotaxis has been just 1 year out since 2016 and seem as remote as ever, and every major car company is pushing competing electric vehicles. Because of this, short interest has always been relatively high. As of October 15, at the beginning of the spike, 30,340,000 shares were sold short totalling $25.6 billion and 3.7% of the float (shares available to the public).
Large price-insensitive buyers. If you’re investing in an S&P 500 tracker, 1.5% of your money goes into Tesla. Nasdaq tracker? 3.9% goes into Tesla. Popular ESG funds all buy Tesla. Popular tech funds like ARKK also buy Tesla. They don’t care about price, they just allocate money there as part of their strategy.
Dedicated cult following. Whether you like him or hate him, Elon Musk is a headline grabber. His Twitter account has 62.5 million followers. When he speaks, it moves markets.
Options gamers. It is very clear that call options move stocks. Essentially it works like this … big financial firms act as market makers and take the other side of the trade to sell investors what they want. Like any good bookie, they are supposed to make money regardless of how the stock moves. They do this by adjusting the premiums paid for these positions and hedging the exposure. When they sell an out-of-the-money call that expires in a few days, they initially don’t hold any stock in reserve. As the share price goes up and approaches the strike, they start to buy shares so that they can deliver them at that strike price on expiration. This pushes the price higher and the calls go in-the-money, so the firm buys shares to back them completely, pushing the stock higher. Call options that were further out are now in the money, and they have to buy even more shares. This produces a spike in the stock similar to a short squeeze. There is often a move down after expiration because the buyers of these options are not necessarily interested in holding those shares … but sometimes those buyers will roll over to the next week and buy more calls near the money so the process continues. This can easily create spikes that collapse, like you see in TLRY in February. However, it can also persist as prices move from spike to spike like you see with GME or AMC.
So where are the indexes headed? Let’s start with the major components of SPY, the biggest passive fund ($374 Billion) that tracks the S&P 500:
As you can see, 27.4% of the S&P 500 is driven by just 9 companies (two of the top 10 are Google). Now look at QQQ, the biggest fund ($193 Billion) that tracks the NASDAQ:
This fund may be half the size of SPY, but it is twice as concentrated with 53.4% in the top 9 holdings (again, Google has 2 of the top 10). In fact, only the bottom two tickers are different – SPY has BRK.B & JPM while QQQ has PYPL and ADBE – so nearly everyone is crowded into the top 7 stocks.
Now let’s look at the options action. The gamma squeeze effect is primarily driven by near-the-money calls expiring the following week. What we’re interested in is the Open Interest, which represents the number of call options contracts which are currently out there.
Warning, this list is a bit long. What I did here is used Yahoo Finance to find and list the closing cost of the nearest options expiration (11/8/2021 on QQQ and SPY and 11/12/2021 on the all the underlying companies), the strike price, the open interest, and the dollar value of shares that essentially must be purchased (or sold in the case of puts) in order to cover those contract amounts. This amount is simply open interest (number of contracts open) x strike price (price where the market maker is covering) x 100 (each contract represents 100 shares of stock).
In-the-money contracts are highlighted grey, dollar values $500 billion to $999 billion are highlighted yellow, and dollar values $1 Trillion and over are highlighted orange.
Note the following on the above:
Both SPY and QQQ have a significant amount of contracts in out-of-the-money puts to hedge a decline of more than 5% on Monday. Often times these are the result of options strategies, such as bull spreads, where the investor sells a lot of at-the-money puts (hence the low open interest there) and hedges that by purchasing much cheaper out-of-the-money puts. These can accelerate a fall if the market gaps down, but they are unlikely to hit.
A big bullish bet is place in near-the-money call options for Monday, which will pull the SPY toward $470 with a trillion-dollar magnet.
All of the large notable bets on price movement on the individual companies are in call options. The most powerful are always the large numbers just outside of the money like you see in both AAPL and TSLA.
MSFT, AMZN, GOOG, and FB have relatively boring options action here – no big money coming in at nearby price points.
AMZN has hearly $1T of call options at $3,500. These have likely been covered by the market makers already, meaning you’ll see significant selling if the price falls below this point.
AAPL has significant money at both the $152.50 and $155 call strikes, which will launch those shares higher after each of those points – after which the momentum will swiftly top as the following contracts have relatively low dollar amounts to keep the buying pressure on.
TSLA has a rocket-fuel gamma squeeze chart which is way beyond the other big 5. Look at the highlights for the $500 B and $1 T points going out from the closing price through every strike all the way to $1,500 per share. At every one of these price points, market makers have to pour in more and more money to hedge their exposure to the shares which will likely squeeze the price all the way past $1,500.
Conclusion: DON’T short this market, the odds are not in your favor!
There are so many fundamental issues to worry about, from the Chinese slowdown, to the housing market implications from Zillow turning from buyer to seller, to the fiscal cliff as 8 million people are recently off unemployment benefits which represents a lot of money that would have been spent on food and services being taken out of the system, to the off-the-charts parabolic action seen recently that a short position seems like the smart way to play. It’s just not how these markets work.
In fact, I am convinced a significant short squeeze is coming. On Wednesday after work, seeing another spike in TSLA, I decided to put some money to work on that theory. I looked up companies with high short interest and looked at their coming options action one by one, eliminating anything with a relatively boring options chart. That left me with 7 names. Thursday & Friday morning, I bought into 6 of those 7 using 3-week calls if the price looked okay and just buying shares when the calls looked expensive. The result is in my new Short Squeeze section in my portfolio below.
In case your curious, the 7th company was BGFV which spiked that morning and got away from me. I’m still looking at the action here as a proxy for how to play the other 6. Here’s what I’m thinking… BGFV started the week at $25, spiked to a high of $42.50, then quickly collapsed back to the low $30’s where it is now.
Obviously I want to sell at the spike, so I need to look through the options action on each of the other 6 names (you’ll see them in the list below) and put some limit sell orders somewhere just north of the latest contract with big money. I haven’t done that yet, it’ll be my homework tonight or tomorrow.
Setting these automatic sale points is important… I’m still figuratively kicking myself a bit for selling AMD too early. I bought calls in AMD on Monday after a guy I follow (@BrownTexasNinja) pointed out an enormous amount of money placed in AMD call options. I clearly saw the options action strong all the way through the $140 strike. I got cold feet on Wednesday though, selling for a $400 profit when I could have had up to a $1400 profit on it. I had a couple more weeks on the call so it wasn’t a question of going to zero, and the bet wasn’t that high to begin with. Needless to say, this time I need to put in limit sale orders at my price targets for each of these plays. One complicating factor is that these all have high short interest (>20% float) which will make the spike significantly larger than just the latest call strike with high open interest volume … I’ll have to think this one over.
Anyway, here’s where my portfolio ended up:
18.3% TLT Calls
0.9% EEM Puts
PRECIOUS METALS (46.5%)
8.6% AG (Silver), mainly shares & some calls
5.8% SAND (Gold, Silver & others), all calls
5.2% EQX (Gold), mainly calls & some shares
4.7% LGDTF (Gold)
4.2% SILV (Silver)
3.6% SILVRF (Silver)
3.6% MTA (Gold & Silver)
2.8% MGMLF (Gold)
1.7% RSNVF (Silver)
1.9% SSVFF (Silver)
2.1% HAMRF (Gold)
0.8% DSVSF (Silver)
0.9% WPM (Gold, Copper & Silver), all calls
0.8% GOLD (Gold, Copper), all calls
7.7% CCJ, covered calls sold on it
4.5% UUUU, covered calls sold on it
COPPER & NICKEL (3.3%)
SHORT SQUEEZE (2.5%)
FUBO 0.7%, shares
OCGN 1.0%, shares
WKHS 0.4%, calls
BBBY 0.2%, calls
ROOT 0.1%, calls
SDC 0.1%, calls
DERECKS TRADES (0.4%)
TLT is gaining significantly this month as expected, and I’m holding there.
EEM is still surprising me with it’s strength given all that’s going on in China, but my hedge there is relatively small.
Gold finally broke up to 1,820, launching above it’s 50 and 200 day moving averages. There’s a good chance all my miners have seen the bottom, but I’m just patiently holding those. Still, I’ve got a lot of money in those, including a significant amount in Jan 2023 call options, so I’ll hit it big when these finally break out. I consider precious metals miners in general as a big value sector today and I plan to be patient with it.
Uranium is still red hot, and I’ve gone to selling 6-week covered calls on everything again because the premiums were so enticing after some big runs. I sold these significantly out of the money, like $30 strike for CCJ and $11 strike for UUUU, and I wouldn’t be surprised at all to see them end up in-the-money. If I see another dip like I saw a week ago Friday, I’ll be an aggressive buyer again.
Copper & Nickel is an amazing long-term ESG play for this decade, but I think that story is way too early with a looming slowdown in Chinese housing that is likely to spread throughout the world. I’ll sell a bit more NOVRF if it approaches $3 resistance, but I’ll keep a small stake and add to it later on.
Cannabis has been continuing to bleed downward, and I have been buying to keep the dollar amounts in each of my 6 companies steady, even up through Friday morning. After listening to Jesse Felder interviewing Todd Harrison in the “Super Investors” podcast after work on Friday, I decided maybe its time to increase my allocation again, perhaps it’s finally bottoming. Then I calculated all my positions and was surprised to find that every single one ramped 10% higher or more end of day Friday. So I suppose I’ll just keep it where it’s at by allocating to this higher level if it drops and letting it ride if it’s ready to rise. Like precious metals miners, I see this sector as a unique value opportunity which isn’t tainted by the massive crowding of large price-insensitive passive funds.
Crypto is still something I see as nearly pure hype, the ultimate meme sector. This looks to be a great month for meme stonks as well as Crypto, and both tend to be spiky with blow-off tops. I sold off my MARA calls for a solid 4x, but I’m still riding ETH and ADA. I actually added a bit to ADA last weekend, but I probably won’t add too much more. It’s hard for me to ride these things when I see them as numbers with no intrinsic value. Even with the big ones which will almost assuredly be around for years to come like BTC & ETH, the token valuations are entirely driven by investor mania hype (and possibly underground leverage and manipulation), and the functionality of Cryptocurrencies in the world of banking and finance will remain the same regardless of the values of these underlying tokens. Still, I’m bullish through December.
Not much to add beyond that at this point. There is big money to be made in digging through the options action in a lot of these stocks and making bets accordingly, and this money won’t be easy to make forever, but each individual play is still very risky and gets much more so when you can’t monitor the markets all day because you have a real job. I’ve been wondering how many people who got laid off last year ended up figuring out how to make money this way and are going to ride this cycle out until they either reach escape velocity (financial independence by accumulating enough to live off relatively safe passive income) or until the market finally turns.
We certainly are in a market reminiscent of the dot-com bubble peak, and there will be a turning point, but it’s not here yet. So as the saying goes, make hay while the sun shines … just also formulate some sort of plan to make sure you have plenty stored away safely when the next storm hits.
At the end of the year, you often hear about the Santa Claus rally, where stocks do seasonally well in November and December. The two most important charts on this are the ones I posted last week and the week before (combined and re-posted below):
Corporate buybacks. Companies often have blackout periods that prevent corporate buybacks as well as all insider trading up to a month ahead of significant earnings announcements. These can range, but most overlap as 5% of the S&P 500 companies were in blackouts early September, then it ramped to a peak of 80% in October, then it fell to less than 20% after Oct 29 and close to 0% end of November. This is an enormous amount of money that will be pushing up these shares in coming months.
The seasonality of stock markets shows gains in November 100% of the time in the past 5 years. This follows seasonally weaker months of September and October.
Right now I’m leaning bullish for the next month or two based on the above.
At the same time, there are a number of risks to the economy including:
Slowdown in Chinese construction following the Evergrande situation
The fical cliff as consumer purchases are no longer buoyed by government stimulus
Higher prices from oil and gas spikes as well as climbing housing costs divert money from discretionary spending
The seemingly permanent reduction of the labor force from pre-pandemic levels
The enormous inventory and shipping bottlenecks which seem increasingly likely to resolve by pushing a glut of goods on the market that consumers either won’t have the money to buy, or will arrive too late for seasonal sales and then heavily discounted to clear.
As you can see above, the labor force is certainly weak. Even if wages rise a bit, we’re still looking at 3 million less workers than the peak.
What about the high job openings? There are some interesting reasons to question the job openings data, which I heard mentioned on a podcast this week:
US Companies often list jobs as a way of gathering information on the labor market demand, with no intention of filling them.
US Companies know that hedge funds will search job openings at one company vs another to get an idea about relative growth. The CFOs and CEOs are keenly aware of this and they’ll often list jobs to game these numbers.
Regulations often require that US Companies list jobs even when they intend to hire inside employees or source cheaper labor from abroad.
While I’m on labor, I did think about writing on the myth of sticky wages this week. Instead, I’ll just list a number of ways which I have seen wages actively decreased over the last 20 years.
Replacing highly paid personnel with low-cost temporary/part time/seasonal workers. This includes:
Tenured college professors replaced by adjunct professors and/or TA’s
Retiring full-time librarians with high pay and pensions replaced by two part-time minimum wage employees.
Laying off higher paid employees at the slightest downturn and then hiring lower wage employees to replace them. My niece saw $38/hr nurses replaced by $25/hr nurses at the Antelope Valley Hospital this way a number of years ago. Defense contractors are notorious for this behavior as well, laying off thousands of highly paid employees after a government contract expires and then hiring new grads when the next contract is signed.
Reducing benefits and/or bonuses or increasing employee contributions.
Reorganizing sales staff and payments. A company such as Oracle will often heavily incentivize their sales force to get new accounts, promising a portion of the account revenue every single year. 5 years later they re-organize their sales staff, either laying off their highly paid personnel or encouraging them to quit, and then re-assigning their accounts to much lower paid client reps.
Simply leaving wages put while the CPI and costs of living rise year after year. I’ve had a career in the private sector, and I’ve never seen a COLA adjustment like the government employees get.
Now that I’ve pushed my case for a relatively weak labor market, what about all that massive money printing from QE? Well, my argument is that QE does not actually increase the money supply – it simply encourages debt-financed asset speculation. You’ve probably seen the charts of the fed balance sheet vs the S&P 500, but you have to admit the correlations for this one can’t be ignored:
Note that I couldn’t find any good charts on margin debt, but I was able to download the data from here: Margin Statistics | FINRA.org and download the S&P 500 data from Yahoo Finance with a custom time period to match. Then I used a simple line chart in Excel.
Always consider the data from a number of angles in a chart like this, no matter how compelling it looks. I am arguing that the stock market is driven by leverage, and that the margin data shows the tip of the iceberg as far as the level of leverage is concerned (only margin balances included, not other forms of leverage widely used by hedge funds). The counter-argument would be that margin debt simply reflects investor appetite, which also correlates with the moves in the S&P 500, and it would make sense to see both rise if QE left markets awash with excess liquidity (i.e. excess cash looking for a home).
Whatever the case, it’s worth noting the risks. Fortunately, we are also at a relatively good seasonal period for one of the major market hedges which is long-dated US treasury bonds:
With this chart in mind, I added to my TLT calls a bit when it was down a week and a half ago.
17.9% TLT Calls
1.0% EEM Puts
PRECIOUS METALS (48.2%)
8.7% AG (Silver), mainly shares & some calls
5.5% SAND (Gold, Silver & others), all calls
5.1% EQX (Gold), mainly calls & some shares
5.0% LGDTF (Gold)
4.5% SILV (Silver)
3.7% SILVRF (Silver)
3.8% MTA (Gold & Silver)
3.1% MGMLF (Gold)
2.0% RSNVF (Silver)
2.2% SSVFF (Silver)
2.4% HAMRF (Gold)
0.8% DSVSF (Silver)
1.0% WPM (Gold, Copper & Silver), all calls
0.6% GOLD (Gold, Copper), all calls
7.9% CCJ, covered calls sold on it
4.1% UUUU, covered calls sold on it
COPPER & NICKEL (3.5%)
2.6% MARA calls
DERECKS TRADES (0.7%)
It’s actually been a fairly active couple of weeks for trading for me. That often happens when prices are struggling and look like compelling buys, but my cash balance was also unusually high following the forced sales of much of my Uranium portfolio when the covered calls expired above strike. Here’s the quick breakdown:
HEDGES: I added to TLT calls as mentioned above, and left the EEM calls untouched.
PRECIOUS METALS: This is around the limit of my allocation, but there was fantastic news from Discovery Silver and the price was compelling so I initiated a position. No other changes. I am expecting a potential pullback perhaps as far as $1675 in Gold, and I’ll probably add a bit there, but you never know. I’d rather stay long and not miss the move than try to time it perfectly.
URANIUM: I’d been buying on dips and selling covered calls on rips. Last Monday I sold covered calls on everything, and then I added a bunch more on Friday at much lower prices (no covered calls sold on those yet). I like to sell slightly out-of-the money covered calls when the premiums are high just to make sure I lock in some gains. If anything, I’m more bullish than ever on this sector with the growing push for acceptance of nuclear power and the new physical Uranium fund from Kazatomprom taking the cue from Sprott on getting investors to push the spot price higher. As always, I am very picky when it comes to Uranium miners, and I like the big existing ones rather than the speculative plays … it is just extraordinarily difficult to get all of the permitting and infrastructure together when dealing with radioactive waste.
COPPER & NICKEL: I actually reduced this recently. I like copper long-term with the enormous increase in use required for everything considered ESG, but I am very wary with the slowdown of construction in China. Highrise apartments use a lot of copper, and they’re building less going forward. The latest cries of “inflation” gave me some good price points to sell.
CANNABIS: This sector has been steadily dropping all year, and I’m finding it more compelling as it does. I kept adding, which is why the allocation is higher than 2 weeks ago, and doing this by nibbling at each of the 6 names to keep their allocations relatively even – hence the very even 1.4% across the board you see above. I’m still convinced this sector will once again get high, especially if we get movement on the federal side. After all, we have fiscally conservative Democrats in charge who want to tax everything in their new stimulus plan, and I think most would be in favor of formally legalizing cannabis for the tax revenue. That being said, I don’t plan on increasing my allocation much … I’m just going to keep adding as it bleeds lower and then hold when it turns higher.
CRYPTO: I actually added a bit to Cardano this weekend, but aside from that I’m just waiting out the rise. The alt-coins have mostly been trending sideways while Bitoin and Etherium gained 50% in the last month, but they usually follow. I’m still looking for that December peak to sell into at which point I will again be out of the sector for a while.
DERECK’S TRADES: I closed out a few of these last week. So far that’s 6 names closed out for a small gain overall, but 6 more remain open. One I added recently, AMD, was purely based on the crazy high open interest in November 19 calls spread from at-the-money $120 up to $140. Risky, sure, but worth a shot at a gamma squeeze.
CASH: That brings my cash allocation to slightly positive which is generally where I like to keep it. This gives me some room to add on dips (I can tap margin if necessary), but I’m anticipating a strong November and December in which I take some profits, followed by a wary 1st quarter next year.
Good luck making sense of it all, and happy trading!
I’m writing today from Minneapolis, where I had a week-long visit with my brother and a job interview. It’s interesting to consider what it would be like moving out here. I’ve lived in many parts of the country in the past including Hammond Indiana and upstate New York which also have cold snowy winters. Compared to Southern California, it certainly has a lot more interesting places you can walk to and a lot less traffic as well. Who knows what the future will hold, but I’m optimistic about this change.
As for investing, the markets certainly haven’t been dull. In the last week I added a Jan 2024 call in DOCN when it dipped below 90, though I’ll likely sell it soon as it may be nearing the end of its run before a correction. I also bought more Uranium exposure on the dips and sold some out of the money covered calls on it with today’s rally. I also added some more US Cannabis exposure on some dips though it’s hard to tell how it balances out without my laptop.
Precious metals miners are having another nice rally. I haven’t been adding much lately (last was a bit of DSVSF last week on solid news from exploration- the kind of thing you hear about when you have a paid service that tracks precious metals and Uranium miners. It’s Steve Penny’s Silver Chartist Report if anyone’s interested. It’s not clear that precious metals have bottomed yet, though with sentiment today I wouldn’t be surprised if it has. These things turn when most people see no reason to own them after all. As for Uranium, Kazatomprom followed Sprott’s lead with another physical Uranium fund to help Jack up the spot price of Uranium and encourage the big utilities to start a new contracting cycle. I’m especially bullish on the large existing Uranium miners here, so I stick with CCJ and UUUU.
The most important things to consider in the stock market right now are the following:
1. Buybacks are back (lots of corporate buybacks scheduled which push the indexes higher)
2. November is exceptionally strong for stocks seasonally (October is significantly weaker)
This is from @Callum_Thomas who has a free weekly Chartstorm that’s worth subscribing to:
I’m not going to bother posting seasonality again because I did that in a few recent posts. I need to get to the airport soon, so I’ll sign off here. Happy trading.
I’m going to have to make this week’s post short – my brother’s over with his 4 kids so breaking away to write is not easy.
It’s certainly been an eventful week though, my portfolio value jumped by over 10%. That helps fix some losses a few weeks back so that I’m now up 2.3% over the past 4 weeks.
Uranium went on a tear midway through the week. I have to admit this was a bit disappointing, because my covered calls all expired in-the-money so I’ll have to wait for a pullback to buy back in. I sold at-the-money covered calls on all the shares I bought a couple weeks ago because they were worth quite a bit … I generally like to do that after a quick run-up in price. Needless to say, my Uranium position is now way down and my unallocated cash is way up.
I’m also extremely bullish on Crypto at the moment, with the idea that we’re going on a massive end-of-year rally (and possible blow-off top) like you see with bitcoin in 2013 & 2017. There are a number of really bullish events coming forward including signs that an ETF in Bitcoin Futures is likely to be approved. One thing I should point out with this is something that Rauol Pal has been mentioning … that it’s really inefficient to have an ETF based on Bitcoin futures rather than allowing one that just purchases bitcoin – much like the Sprott funds in gold, silver & uranium. Futures involve a lot of middlemen making money though, so it amply rewards the Wall Street power structure, and that makes it much easier to approve. Whatever the case, it’ll have an effect.
There was also a decent rally in gold and silver miners this last week from very oversold levels. Copper ripped higher as well, and I sold off 20% of my copper/nickel miner NOVRF. I am still very bullish on copper over the next decade, but the current cover of The Economist focusing on rising commodities (natural gas in particular) has me nervous, as this tends to be a sign of sentiment and positioning getting a bit too hot.
Interest rates at the long end pulled back a week this well, which is good for TLT. Between the slowdown in China that the Evergrande situation portends and the fiscal cliff passing in the United States, I still expect lower rates next year and I’m also nervous about the effects on commodities. Gold and Silver miners should be a better protected than industrial commodities, particularly given the relatively low sentiment and the positioning in those spaces, so I still like the old Bonds-Bullion position for a slowdown here. My TLT calls position is pretty light compared to prior months over the past year, and I intend to add to it, but I’m waiting until the seasonally weak month of October comes to a close.
As for Fed tapering, I would probably use a tapering announcement to purchase more TLT calls as these have been bullish for bonds in the past. Like many things with bonds its a bit counter-intuitive, but it has to do with risk-aversion picking up. As I’ve said in the past regarding QE, I believe that it is a psychological game to try to encourage people to expect inflation and thus borrow and spend more. The actual effects in the system are mainly to take long term bonds and mortgage-backed securities from the banks and replace them with “overnight reserve assets” which they cannot sell or do anything with, and which pay them an interest rate near zero instead of 2%. Still, these psychological effects have proven extremely effective in the stock market. Also, I’ll repeat myself and say that bonds are low and gold has not been moving because QE is not money-printing and we are in a strongly deflationary environment – not because a highly sentiment-driven cryptocurrency market has replaced them as an inflation hedge.
Here’s where my portfolio left off. I have to go, have a nice weekend.
Last week, I wrote a post on seasonality, showing the following chart for Bitcoin:
As you can see, for the last 5 years Bitcoin has always gone down in September. Then it would rally strong in October. The exception was 2018 where it fell 3.5% – in an environment where the S&P 500 fell 6% and the Federal Reserve, which was on a program of balance sheet reduction and small interest rate hikes, reversed course back to easing the following January.
In other words, Crypto is exceptionally strong in October so it was on my mind. In addition, Crypto has previously moved on a 4-year cycle based on the 4-year halving cycle of Bitcoin (Bitcoin’s production rate for “miners” drops in half). Both 2013 and 2017 have had enormous end-of-year runs (followed by blow-off tops), and there have been a lot of comparisons with different Crypto assets to these prior moves in Bitcoin. The 50% mid-year pullback has also been a common theme. I’d been expecting this year to be similar, but debating on whether the current high levels of attention mean that acceleration to blow-off top happened early. Then last Sunday I saw an interesting catalyst in the “Pandora Papers.”
In case any of you haven’t heard about it, it’s worth YouTubing “Pandora Papers.” Basically, hundreds of journalists got together and did an in-depth study to expose the financial dealings of the world’s wealthiest individuals, and how and where they moved their money in shell companies. The actions of the super-wealthy can definitely move markets so it’s best to give it some thought. There are many countries, China being a big one, that have extraordinarily wealthy insiders who are vulnerable to political purges.
Picture an enormously wealthy politician in Hong Kong for example, seeing anyone associated with the 2019-2020 protests arrested, then seeing Jack Ma brought down and a big crackdown on rich people who were siphoning money out of the country. Now there’s a big release in the Pandora Papers showing shell companies he controls and assets in an array of foreign countries. Even the fear of what they might uncover could be enough to convince that person to flee, and he’ll want to bring as much money as he can with him. How do you do it? Banks are all run by intermediaries, and they would certainly not allow these transfers if they fear government reprisal – but Cryptocurrencies move money outside of that system. A wealthy person with a server could buy a cryptocurrency and move it to a numbered digital wallet to reclaim anywhere – which is why China has been moving to prevent any of their banks from supporting any transfers of money into cryptocurrencies.
Even if China was successful in preventing this, what about super-wealthy looking to flee Russia, Pakistan, the middle east, Iran, etc – any of these people trying to move money through crypto is an enormous catalyst to push the price further. Add in wall street momentum traders, a stock market which has roared higher every single November for the last 5 years, and the end of the 4-year rally and I think we really have something here.
Needless to say, once I connected those dots, I wanted to put more money into Crypto – especially the biggest two, Bitcoin and Etherium, because money moving through a token like this would want the liquidity of the biggest ones. I immediately transferred more money into Etherium in my Coinbase account, but most of my money is in my trading account, which doesn’t do crypto. So I looked up bitcoin proxies and there are several – MSTR, GBTC, MARA, etc. I wanted to leverage a small amount with call options, so I went with MARA (MSTR’s share price is high so options are too expensive, and GBTC doesn’t have options trading).
Here’s where my portfolio ended up:
14.9% TLT Calls
1.3% EEM Puts
PRECIOUS METALS (49.5%)
8.9% AG (Silver), mainly shares & some calls
5.9% SAND (Gold, Silver & others), all calls
5.9% EQX (Gold), mainly calls & some shares
5.2% LGDTF (Gold)
4.0% SILV (Silver)
4.1% SILVRF (Silver)
4.0% MTA (Gold & Silver)
3.4% MGMLF (Gold)
2.1% RSNVF (Silver)
2.3% SSVFF (Silver)
2.0% HAMRF (Gold)
0.9% WPM (Gold, Copper & Silver), all calls
0.8% GOLD (Gold, Copper), all calls
9.1% CCJ, covered calls sold on most of it
6.7% UUUU, covered calls sold on most of it
COPPER & NICKEL (5.4%)
1.6% MARA calls
DERECKS TRADES (1.5%)
It was a pretty light trading week for me, aside from the MARA calls Monday morning. I didn’t sell any of my TLT calls – they got crushed a bit as long bond yields soared higher – but my account gained 1.2% on the week as the smaller miners rallied so it’s still a hedge.
The negative cash balance is a small amount of margin. I don’t like to dip into margin too much because I don’t want to be subjected to forced sales, but it is useful when you want to put on a trade and you don’t want to sell anything. Next week my covered calls expire in CCJ and UUUU, and I’ll see if my Uranium is reduced to a much smaller allocation that I’d be adding to off dips or if they expire worthless in which case I’d hold what I have. Either way, I probably won’t trade much until that resolves.
I do plan to add to my TLT calls at some point here because I am still completely convinced that bond yields will revisit the lows, but with the extreme seasonal weakness in both September & October followed by a stronger November, I think I’ll refrain from adding anything there until the end of the month.
Last note, I should mention that I’ve been hearing a lot of bearish calls lately.
Make no mistake, this chart of the S&P 500 certainly does look bearish with a clear head-and-shoulders pattern followed by a failed test of the 50-day moving average.
Risks are elevated, and I am certainly wary – that’s why my overall bullish exposure to the general stock market is crammed into the 1.5% I call “Dereck’s Trades,” which is call options in companies that have very bullish patterns based on Dereck Coatney’s Elliot Wave projections, currently divided between 9 different names. I also expect the mining stocks and cannabis stocks I hold to fare better in a market correction because they have already been pulling back for a while (aside from Uranium) and they don’t have much (if any) institutional or mutual fund exposure – so if those guys sell that won’t be what they’re selling. Finally, a real market crash would end up with a rush to govenment bonds and my hedges would gain.
That being said, I don’t think we’ve hit the top yet. Too many people seem worried – the debt ceiling fight, will the fed taper, the high CPI readings, the ongoing Covid-19 restrictions, etc. Why would that prevent this from being the top? Market mechanics. Many put options have been purchased as hedges, and many shares have been sold.
A common dip like we’ve seen many times in the last 2 years works like this … active investors start to sell, worried about chart formations or Evergrande contagion, or fed tightening, or whatever. As the market goes down, two forces spring into action buying up shares – the dip buyers, and the closing of short positions and puts by active investors. Much of the money just sits on the sidelines and doesn’t trade. Once the active investors are done selling or have no more to sell, the market stabilizes and starts to shoot higher as the next waves of price-insensitive buying continue on – both from corporate buybacks and from 401k flows into passive index funds. Active investors start to get left behind and have to get long again leading to the next peak.
A larger correction, like we saw in March 2020 or Oct & Dec 2018, involves a big enough rush to sell to lead to forced selling from stop losses, margin calls, and so on. The downturn in 2008 even included what they called “mutual fund puking,” where people shifted 401k money away from stocks and the underlying funds had to sell shares. You could argue we’re seeing that with ARKK, but that’s not where the vast majority of US workers are parking their 401k money.
Anyway, here’s why I’m leaning bullish:
Seasonal factors: September and October are generally tighter months as far as liquidity is concerned, which I believe is due to banks starting to unwind and reduce derivatives trading to meet their Basel-3 regulatory targets by end of year. November is more bullish as much of this unwinding is complete and holiday sales & sentiment pick up. We saw a similar struggle in the S&P 500 last year.
Bearish positioning: I admit that I don’t have any fancy programs to help me find positioning or sentiment, but from what I see from the finance crowd I follow on Twitter, there is significant bearish positioning right now – which means those who are worried have less to sell and there are a substantial number of index put positions which will either be sold off or expire worthless on the Oct 15th options expiry.
Federal Reserve response: From Covid worries to employment report disappointments, to fiscal stimulus pullbacks and debt ceiling fights to allow the federal reserve to hold off on anything the market would consider tightening. This at a time where the 2022 mid-term elections are nearing and Fed Chair Powell is in a precarious position as a bargaining chip amongst fighting factions in the Democratic party.
With those 3 points, I really think the market’s got another leg higher. I expect the top to come when Covid restrictions are all but gone, and both the US government and the Federal Reserve agree that the US economy no longer needs emergency support. Once that happens, you’d better be ready for a drop!
I’ve been thinking more about seasonality lately as we come into 4th quarter. First, it is important to think about what seasonality is telling you. At a surface glance, it’s just telling you the number of times that the underlying stock ticker went up from beginning of month to end of month over the last 5 years. If it’s 4 to 5 times (80-100%), there is a good indication that there’s some seasonal reason you want to be long or at least not short. If it’s 0-1 times (0-20%) perhaps you want to be short or at least trim back longs. If it’s 2-3 times (40-60%) then look to other factors.
Why would seasonality actually work? There are a lot of financial forces that operate on a seasonal calender. The obvious ones are tax time, christmas shopping season, summer vacation season, weather-related affects (heating in winter, hurricanes in fall, etc). There are also reasons having to do with mutual fund activity such as end-of-quarter portfolio rebalancing or quarterly reporting.
In the link above, Jeff Snider and Emil Kalinowski explain how banks use the 4th quarter to adjust their balance sheets to hit whatever score they are aiming for in the Basel 3 regulatory system, so they often unwind derivatives and such in a way that causes bond yields to rise. This is certainly consistent with the typical drops in September & October.
The chart below helps you see the underlying trend and spot the anomalies. The anomalies above are very hard to spot, like the one in October 2017 when TLT bottomed at the end of September but barely rose in October – so the idea that these are weak months for treasuries based on repeating seasonal patterns is solid.
For the trend, TLT is barely above a declining 200-day moving average (above you see the 50-week moving average which is still rising). The current direction is still down as the TLT peaked with a major risk-off event in March 2020 and has been falling back toward its previous long-term rising trend.
Note that the primary reason I am interested in treasuries is because they tend to spike in a risk-off event. If all goes well, interest rates will steadily rise, but there are fragilities in the financial system which make periodic risk-off events more likely. The article below does a good job describing them, though it is a bit complex for the casual reader.
That being said, I should not be adding to my long TLT position until at least the end of October. I added a bit last week, which I wouldn’t have done if I considered seasonality first, but I’ll hold it through because it is still my primary hedge in case of a significant risk-off event (like a 20% drop in the S&P 500).
Now onto the S&P 500, using it’s big ETF proxy SPY:
You can see on the seasonal charts, that the S&P 500 almost always goes up month-on-month, though it is particularly strong both in Summer and in the November run-up to the Christmas shopping season. Last year, the S&P 500 struggled in September & October and the same is happening again this year. A lot of people on twitter are calling a top right now, which makes be more inclined to be long, especially through November.
Note that sentiment is a lot more about positioning than anything else – and there certainly has been a lot of put buying in the indexes lately. This is important because these hedges tend to be sold into a drop forming the next layer of support before the market climbs higher. The S&P 500 has significant regular price-insensitive inflows from both corporate buybacks and regular 401k contributions, so you can run out of active-investor sellers who then start to buy back in as the index reverses creating violent upward corrections. Around mid October, I should have significantly more long exposure in the S&P500, which I will express through more call options in bullish charts I see here: Home – Dereck’s Trades (dereckstrades.com).
I realize that the S&P 500 is very risky with it’s elevator-like drops and extreme valuations, which is why I am not positioned heavily here, why I have significant hedges in TLT, and why I think a relatively small number of call options might be the best way to get upside exposure.
Now let’s move on to my biggest position, precious metals miners, shown using the gold mining ETF GDX:
One thing I would like to immediately point out is the similarity between the 5-year charts GDX and TLT. Both were roughly flat with a minor rise in 2019, a spike in early 2020, and a consolidation lower ever since. In my opinion, this is because both are major hedges for local currencies that are held by central banks around the world. This gives them unique properties such as tending to well in risk-off scenarios.
As I have explained in previous posts, I follow Jeff Snider’s view that the world has been in a regime of top-tier collateral shortages and Eurodollar shortages since 2008. Central banks use “forward guidance” as their primary policy, with quantitative easing to give them the illusion of great power even though it does little, and their goal is to stoke the “animal spirits” of the market to make everyone more bullish with an inflationary bias. The result has been a series of compressed runs and panics in the real economy which has ever-lower employment and trend growth. Meanwhile financial asset declines are truncated by routinely scaring the “bears” and cheering the “bulls” while price-insensitive passive flows continue to drive valuations higher. As such, I believe that bonds and gold are both showing the same thing, which is a higher valuation related to asset scarcity and deflationary tendencies.
Precious metals miners are still my favorite holdings because miners in general tend to shut down production and consolidate after years of price declines (see 2011-2019), while ramping up production to meet higher prices and demand takes a lot of time and money, leading to long busts followed by long runs – and I believe that we are in the early stages of a long run through 2030. Add to that the increasing relevance of gold in the international system as many countries such as China attempt to move past the aging petro-dollar system and their reliance on US dollars for international trade. China looks to Russia and Iran as examples of what they want to avoid in the event that the US turns the weapon of sanctions their way.
Back to the seasonality chart though. The big declines are in February are likely centered around the Chinese New Year, as the strongest buyers of physical gold are off the market. As for the weakness in autumn, particularly September, my guess is that it has some similarities with the decline in bonds during that period. Also, Thanksgiving (end of November) is thinly traded week in the US with an important expiration in Futures that is always preceded by large amounts of contract selling. This creates an annual event that is always so oversold that it sets up December to be an easy gain.
I’ll finish this off with Crypto. Although I am currently betting on Etherium, I am using the Bitcoin seasonality chart as a proxy because they tend to trade in tandem, and Bitcoin was a more mature market in 2017:
To be totally honest, I should be using a log chart for this one but I can’t figure out how to make log charts in Yahoo Finance, and the log chart in stockcharts.com won’t let me set the date range. The reason for a log chart is simply because the a standard chart artificially shrinks the price fluctuations of the past. On a log chart, a 2x return is the same length whether it is $1,000 to $2,000 or $15,000 to $30,000 – and this makes sense because you experience a double the same way as an investor. If you aren’t into crypto, think of it as viewing a 50-year chart of the Dow Jones Industrial Average – a log chart shows the extreme volatility of the 1970’s on par with the moves today, whereas a standard scale would make it look like nothing really happened in the stock market until the early 1990’s.
As far as the chart goes, it’s easy to see the similarities between the 1st and second peaks of 12/2017 and 2/2108 as similar to the peaks in 4/2021 and 8/2021, concluding that we passed a blowoff top and we should avoid this asset class for another year. I get that, which is why my position is small. However, there is also an argument to be made that bitcoin is retracing its paths in 2013 and 2017 which included significant corrections and volatility mid-year before peaking in December.
As for seasonality, October has been a winning month for crypto for whatever reason. November has been iffy, but it has been a fantastic month for stocks and I consider Crypto a highly risk-on asset, so I will hold it through October at least. Perhaps I should then sell when it hits significant resistance on the chart (like if bitcoin just manages to hit it’s $60k peak at the end of October), then buy back in on a correction just to see if we get that parabolic year-end rise, but I don’t currently plan on holding it past year-end in case of a 4-year cycle repeat.
I’ll keep watching crypto though, the weird thing about tradeable asset classes such as stocks, commodities and cryptocurrencies is that they are always changing. There are plenty of reasons to expect different behavior now than during 2013 or 2017 because we have a large financial presence complete with futures markets and ETF’s that simply didn’t exist in those cycles. The bitcoin halving cycle was a primary driver of the movements back then, and there are many reasons to see this decrease in relevance as other forces take over – though for now I lean toward viewing these new forces as amplifiers of the current cycle, as more momentum chasers push us toward a final year-end pump.
Here’s where my portfolio landed:
18.5% TLT Calls
1.5% EEM Puts
PRECIOUS METALS (45.8%)
9.1% AG (Silver), mainly shares & some calls
5.3% SAND (Gold, Silver & others), all calls
4.8% EQX (Gold), mainly calls & some shares
4.5% LGDTF (Gold)
4.0% SILV (Silver)
3.9% SILVRF (Silver)
4.0% MTA (Gold & Silver)
3.1% MGMLF (Gold)
1.9% RSNVF (Silver)
2.1% SSVFF (Silver)
1.6% LWDEF (Gold)
0.9% WPM (Gold, Copper & Silver), all calls
0.7% GOLD (Gold, Copper), all calls
9.3% CCJ, covered calls sold on all of it
7.1% UUUU, covered calls sold on all of it
COPPER & NICKEL (5.6%)
CRYPTO (2.2%): All ETH
DERECKS TRADES (1.6%)
I did some buying last week as miners were hit hard. This includes small adds to precious metals miners, another Jan 2023 TLT call, a little more Cannabis to even out my holdings, and a touch more in Dereck’s trades (sticking with the bullish ones).
I also bought significantly more CCJ and UUUU. I’ve been worried about completely losing my stake in both as everything I held in these had covered calls expiring in 2 weeks with trading very near the strike prices. If the calls expire worthless and I keep my stake, I’ll be happy to keep a higher allocation given the success of the Sprott Uranium fund as a major catalyst in the space. If my shares get called, I managed to pick up an initial new stake significantly below the strike prices they were called at.
That buying has pushed me into margin a little bit (hence the negative cash), so I should add sparingly in coming weeks. Good luck and happy trading!