Talk of a market top is probably early

I’ve found Twitter to be an invaluable tool to get a sense of the stock markets. For years I used it only to announce blog posts, thinking of it as a weird newer Facebook or something. For news, I tried mainstream sources like the Wall Street Journal, the Economist, and even Foreign affairs for a while and found them to be somewhat interesting, somewhat time consuming, but not particularly useful. I looked to blogs like John Mauldin’s free newsletter, King World News, Wolf Street, and StockCharts.com for different perspectives. I found a lot of value from a paid subscription to Real Vision once they made their low cost tier accessible. Now its a whole different world – a huge number of free podcasts, many of high quality, financial chatter including beautifully laid out charts with technical analysis, and so on.

Of course you have to take everything with a huge grain of salt. It’s like a haystack of information with some very important needles if you can sort them out.

Technical analysis most certainly works for a number of reasons, but it is also easy to make a chart point out anything you want with lines and arrows. StockCharts.com has a great beginner course that I went through which describes the fundamental patterns and some of the reasoning.

Understanding the basics of technical analysis is especially critical now because everyone seems to be looking for a topping signal. You can see many TA shortcuts that get posted, with big circles by all the tops and corresponding signals below – but all signals have spurious results and many charts don’t bother to highlight those. People lose a lot of money buying puts at these spurious signals. If you can’t look at the chart by itself and re-draw the lines and arrows, then you don’t understand it well enough to act on it.

There’s a lot of chatter about the stock market topping out, buying puts, and the like after the Archegos fund collapse. This is certainly understandable, as everyone knows that they aren’t the only fund with excessive leverage, margin lending is likely to cap out or even decline, and margin calls followed by forced sales can happen at any moment. But before you put significant money on the downside, consider this:

A lot of the chatter I’ve heard mentions the incredibly low volume during the climb this week. I don’t quite get it … as you can see on the 6 month charts above, March and early April were certainly high volume but volumes were lower from Dec-Feb. It also seems that low volume is more associated with upside than downside.

You can see the simplistic lines I put on the charts above. The S&P 500 does seem to be breaking above a prior channel. Will it lead to a false break out or a successful backtest and new highs? The Nasdaq had been struggling lately but it printed a nice inverted Head & Shoulders pattern suggesting upside ahead. The Russell 2000 is still struggling after a monster 52% climb between November and March. Does this push it back to the 200 level, or do you stay bullish, focusing on its recent success in holding the 50 day moving average?

I’m not sure what the answer is to all these questions, but my gut tells me we’re at that Bear Sterns moment where we’re about to shock the bears with a coming rally through May.

I exited my crypto positions this week, as all the talk about Archegos and leverage shook me out of my least confident positions. This had me missing out on some gains, but I had gains. I probably won’t re-enter the crypto space for a while because I just don’t have the faith and conviction there that I can muster up for gold and silver when everyone hates them.

I admittedly have a bearish bias, and I feel that the long consolidation of precious metals shows a lower potential downside while the parabolic gains of crypto and mainstream stocks can lead to significant corrections or blow-off tops. Rauol Pal mentioned on Friday’s daily briefing on Real Vision that most people are mean-reversionists by nature … it’s just how we’re wired. This can crush us in a strongly trending market, and it’s also a big part of the reason that technical analysis works.

Here’s where my portfolio landed this week:

  • DOWNSIDE BETS (37.25%)
    • 29.8% TLT Calls
    • 5.2% IWM Puts
    • 2.3% EEM Puts
  • GOLD (22.9%)
    • 6.9% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 8.4% EQX (Small gold miner)
    • 7.7% SAND Calls (Small gold streamer)
  • SILVER (19.6%)
    • 11.5% AG (Small silver miner)
    • 0.9% AG Calls
    • 5.3% SILV (Small silver miner/explorer)
    • 1.2% MTA (Small silver miner/explorer)
    • 0.7% RSNVF (Really small silver miner/explorer)
  • COMMODITIES (15.5%)
    • 10.2% CCJ shares (Uranium miner with covered calls)
    • 2.0% ALB (Lithium)
    • 1.7% NMGRD (Graphite)
    • 1.6% NOVRF (Nickel/Copper)
  • CANNIBUS (6.1%)
    • 6.0% split between CRLBF, GTBIF & TSSRF (companies with significant US footprints)
  • OTHER (0.2%)
    • 0.2% short dated calls
  • CASH (-1.5%)

My short-dated call is in NEE, betting that some big clean energy ETFs will position there as they expand their holdings from ~33 companies to ~100 companies this month. This went along with a put in PLUG (where these ETFs are most concentrated) that I bid on but didn’t get on Monday. I closed out my short-dated TLT calls this week, so those went down a bit.

Aside from that I’m mainly watching at the moment. My portfolio was up on the week again, with gains in gold, silver and uranium. I expected half of my CCJ to be liquidated this Friday, but the close pushed the price below my covered calls and they expired worthless. So instead of looking for a dip to buy back in, I’ll be looking for a rally to sell covered calls into again.

I don’t have any covered calls sold on my precious metals miners at the moment, as I want to be open for explosive upside in case both gold and silver miners break their 8-month consolidation patterns to the upside here. When they move, it tends to be quick.

I still find myself in a weird position on the macro side being long both bonds and miners. I still believe we are in a fed-induced debt-driven asset bubble which is ultimately deflationary – and that the fiscal deficits are nowhere near high enough to combat the deflationary effects of record levels of debt. I agree with my fellow bond bulls that inflation won’t show up and yields will eventually roll over to new lows, but I disagree on their call for $1200 gold. On the other side, I agree with my fellow gold and silver bugs that sentiment in the miners has bottomed, that they represent great values today in terms of cash flows and assets, and that there really is a shortage in these metals. Yet I can’t help but roll my eyes whenever I hear about hyperinflation, Weimar, Venezuela, Zimbabwe, re-living the 1970’s and so on. Gold can go higher without a dollar collapse, especially in a world with central banks suppressing bond yields and encouraging asset bubbles while big investment funds scramble to hit impossible targets for returns.

The world I see is certainly a volatile puzzle when it comes to investing. I’m a big fan of Mike Green who says you want to be long vol rather than short, but don’t confuse this with investing in a “Volatility” ETF because those are money pits … to me it simply means be prepared to benefit from explosive upside (my miners) or explosive downside (my TLT calls) because markets are not going sideways from here.

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My deflationary view with a bullish tilt to Gold, Silver & Uranium miners

I finally broke an 8-week losing streak. After seeing negative portfolio returns every week since the beginning of February, taking me down 36.5% (adjusting the money I put in out of the gains), I hit a 2.1% uptick.

The reasons are obvious … my calls in TLT were absolutely killing me, while my heavy positions in gold, silver, and uranium miners weren’t helping. Last week I bought some falling knives in junior silver miners – particularly on Tuesday – and they rallied back hard by the end of the week.

One week’s performance means very little in the scheme of things, however. I need to focus on the longer term trends as I see them.

I saw an interesting link on Twitter yesterday with the article here: March Research Letter | Crescat Capital

This is what I really found intriguing: “It comes down to our primary macro call: long commodities and short equities, but especially long precious metals.

I have found myself in a strange wedge here:

  • I agree with the basic deflationary narrative of Steven Van Metre, Travis Kimmel, Lacy Hunt & Dave Rosenberg. Just like in Japan, the massive QE will not produce lasting inflation. To reflect this view I have long dated puts in EEM, IWM and long dated calls in TLT – betting on dollar strengthening vs emerging markets, US small caps going down, and long term interest rates rolling over and going back down. However, a number of these guys are bearish on base commodities and precious metals.
  • I am quite bullish on the miners – particularly in Gold, Silver and Uranium but also in the battery metals like copper, nickel, graphite & lithium. However, this brings me in with the crowd who are crying out hyperinflation with a major US dollar collapse.

I was interested to actually see someone with a similar nuanced view who is both short major equities but long the miners. However, I did find that I disagree with a significant amount of his reasoning. Ultimately, he sees a re-run of the 1970’s or 1910’s and I really don’t think that’s what we’re seeing.

One big disagreement I have with Crescat Capital is their claim that we have had massive wealth transfers which actually led to gains for the bottom 50%. Most of the gains for the bottom were from two things: one time payments of a couple thousand dollars, and expanded unemployment benefits which only really helped the newly unemployed keep up with food and rent for several months. Both are short-term impacts. He also mentions that most of the gains for the bottom 50% are in housing – but the bottom half in this country don’t own homes and likely never will.

My view on deflation:

  1. There are major deflationary forces at work that greatly outweigh any of the deficit spending we are about to see.
    1. High debt levels require regular servicing – which pulls dollars out of the system month after month.
    2. High unemployment and the large fraction of temporarary/gig/part time work will keep a lid on wages so that price spikes in one area will merely result decreased demand elsewhere.
    3. As more boomers retire, their replacements are typically paid much less – if those positions are even kept open. Many of them retired early due to covid and those high-paying jobs won’t come back.
    4. Small family-owned businesses like restaurants, hair salons, travel agencies, etc. don’t have access to the excess capital in junk bond markets and such. Lending for them has been tight, and many have gone under permanently. This is devastating for an enormous source of middle class mobility and wealth.
    5. Politics are still dominated by fiscal conservatives. The stimulus bill that just passed took a party-line vote in the senate with the slimmest majority seen. A 50-50 vote like this can only work a couple times a year – they need 60 senators for most bills including the infrastructure bill in discussion. They started big so that fiscal conservatives can add taxes or cut spending to reduce the cost of the proposed infrastructure bill, but it is about to be whittled down considerably and it is still unlikely to get enough Republican support to pass. What they are fighting over now is at best the early projects of FDR’s new deal – which was also heavily opposed due to its cost.
    6. What will actually bring lasting inflation is when they stop fighting about the cost all together like they did on the outset of World War 2. Wars are HIGHLY inflationary because they create an enormous demand for all kinds of raw materials and energy while bringing many people into the paid labor force as soldiers as well as in many other industries. The big reason we saw the high inflation in the 1910’s was WW1 and the reason we saw it in the 1970’s was the Vietnam war. The creation of the federal reserve and the exit from Bretton Woods were merely tools in funding the war spending.

How the debt cycle generally works:

  1. Dollars are actually created by lending. The central bank cannot create money, they can only replace US treasuries on bank balance sheets with lower-paying overnight reserves to entice them to lend.
    1. The central bank can actually hit a hard limit on QE by taking all of the treasuries off the bank balance sheets and replacing them with zero-interest overnight reserve assets.
  2. Banks need to make money on their loans with interest. They can only lend to credit-worthy borrowers and these are becoming more difficult to find.
  3. In past cycles, reducing rates enough would create another investment boom. Projects that previously seemed too low profit or with cash flows too far out would suddenly start to work. Investments in non-productive assets like housing wouldn’t seem as much of a burden. Then then next cycle would start.
  4. We hit a problem with the zero-bound in interest rates. Low rates make it harder and harder for the banks to lend profitably, and negative rates make it nearly impossible. The federal reserve has been begging the government to create some spending because they banks are finding it difficult, dangerous, and unprofitable to lend more money into the real economy.

What happened in 2020:

  1. At the end of 2019, there was a yield curve inversion that signaled problems in the credit markets. The federal reserve responded by massively increasing their lending in the overnight repo market and all seemed to calm down. This action essentially reversed all of the previous balance sheet reductions in a fairly short amount of time. Tradeable markets responded by going up.
  2. In March 2020 we hit a major problem with the pandemic and lockdowns. Credit markets were freezing up, stocks were plummeting, margin calls were being made, and everyone was concerned about massive defaults.
  3. The US Government and Federal Reserve responded in a number of ways. They created a number of lending facilities as a backstop to corporate debt and even some junk bonds, combined with a large amount of fiscal stimulus.
  4. Banks were enabled and directed to massively lend into this environment. Massive QE gave them enormous amounts of reserve assets to lend against, while the SLR rule exemption was put in place so that they would just lend without worrying too much about leverage ratios.
  5. Banks responded massively in both the junk bond and corporate debt markets. In addition, they were able to ramp up another extremely profitable line of earnings – margin lending. FINRA Margin Debt (ycharts.com)

6. Money is created by lending. Margin debt began to increase dramatically across the board. Banks were encouraged to keep any lending growth moving. This led to massive inflation in the prices of tradeable assets such as US stocks and bonds.

7. Real estate lending – mortgages – were also highly encouraged with similar results. Not only did interest rates hit record lows, but telecommuting enabled a surge of people stuck in overpriced cities to move far enough out to buy their first homes. For the banks, most of these loans are guaranteed by the government, and even purchased by the fed to create reserve assets.

The above seems to fit a highly inflationary narrative – except that things are beginning to change. The Federal reserve became worried about the size of the stock market and housing bubbles on the one hand, and about the persistently high unemployment and lack of lending into the real economy on the other. They have long considered “Forward Guidance” to be one of their most effective tools, and they have been using it to encourage the “inflation” narrative.

Those “in the know” began to highly short the long end of the bond market in anticipation of a fed reaction to back this narrative. In February, a number of Japanese entities began dumping US treasuries for reasons relating to the end of their fiscal year creating a rout hit the US long bond. Interest rates on the 10 year and 20 year treasuries shot much higher and my long investments in TLT plummeted. Those short positions are still they have been reducing considerably. The stock market began to wobble, especially the tech-heavy NASDAQ, the many recent SPACs, and the big money losers dominating the Russell 2000.

Next, they decided to let the SLR exemption expire. This makes it more difficult for the banks to keep up their massive levels of margin lending.

Then Archegos Capital blew up. This hedge fund had extremely high levels of leverage, with margin lending from a number of different banks. Many of the holdings were large positions in relatively low-volume stocks such as VIAC. Goldman Sachs and Morgan Stanley started dumping these positions on the market the following Friday, and the share prices plummeted. Ironically, this liquidation actually caused a major ramp higher in the major stock indices because the fund was “hedged” with considerable short positions in them.

So what now:

  1. Banks need to reduce lending, particularly margin lending, due to the expiry of the SLR rule exemption.
  2. Banks just lost a bunch of money from a highly leveraged hedge fund blowing up with assets unable to cover its margin debt. This further incentivizes banks to reduce margin lending.
  3. Just like creating margin lending was highly inflationary in tradeable assets like stocks, a reduction in margin lending will be highly deflationary.

This will lead to a significant move lower in the markets. The main question is when. Many smart players are going to a larger cash position. So what should I do here?

I think that if a major selloff occurs, long-dated interest rates are likely to return to all-time lows. This will create a big payoff in my large position of TLT calls, as well as increasing the value of my long-dated puts.

So why am I still so bullish on the miners?

  1. As interest rates go back to all-time lows while genuine fear returns to the stock market, a lot of money will be looking for a place to hide and will find it with Gold.
  2. Sentiment in gold is pretty lousy right now and a lot of speculators have been shaken out at the trade, yet it has stubbornly pushed above the 1700 level quickly after every attempt to push it lower.
  3. The physical shortages of Gold in the system are very real, as are the number of unallocated gold bars with more than one owner.
  4. Gold miners are extremely profitable at current gold prices, with great cash flow.
  5. Miners of all types have received very little investment since the 2013 crash in gold, resulting in a long period with very little spent on exploring and developing new veins. It takes several years to get these mines into production.
  6. Silver goes up considerably when the sentiment in gold improves, and it is essential in many popular “green” applications such as solar panels.
  7. Uranium is similar but somewhat unique:
    1. Miners have gone through massive consolidations and closures since the Fukushima disaster in 2011 caused a collapse in demand following the many lengthy shutdowns of Japanese nuclear plants.
    2. Meanwhile, nuclear power remains the main way that large countries such as China and India can effectively reduce carbon emissions – and they have been building large numbers of new plants. A significant supply crunch is coming in this industry.
    3. The cost of Uranium is a tiny fraction of the cost of producing nuclear power, so the demand can drive up pricing substantially.
    4. The entire Uranium sector has a relatively small market cap, so any significant institutional investment would drive the miners up considerably.

Note that a major deflationary event could bring some downside to the miners, but I tend to think this potential downside is limited and they will bounce right back on the next fed/government reaction.

That pretty much sums it up. Here’s where my portfolio landed:

  • DOWNSIDE BETS (39.8%)
    • 32.3% TLT Calls
    • 5.3% IWM Puts
    • 2.3% EEM Puts
  • GOLD (21.4%)
    • 6.3% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 8.1% EQX (Small gold miner)
    • 7.0% SAND Calls (Small gold streamer)
  • SILVER (18.9%)
    • 11.0% AG (Small silver miner)
    • 0.8% AG Calls
    • 5.1% SILV (Small silver miner/explorer)
    • 1.2% MTA (Small silver miner/explorer)
    • 0.8% RSNVF (Really small silver miner/explorer)
  • COMMODITIES (15.4%)
    • 10.1% CCJ shares (Uranium miner with covered calls)
    • 2.0% ALB (Lithium)
    • 1.7% NMGRF (Graphite)
    • 1.6% NOVRF (Nickel/Copper)
  • CANNIBUS (6.1%)
    • 6.1% split between CRLBF, GTBIF & TSSRF (companies with significant US footprints)
  • CRYPTO (3.0%)
    • 3.0% split between ADA, LINK & LTC (Coins smaller than ETH that are in the top 10)
  • CASH (-4.6%)

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Rethinking my positions as markets get volatile

It’s been a volatile week. Looking at my weekly market performance, I’m down 2.1%. In fact, my peak valuation was back on Jan 30 and since then I’ve been down every week with a cumulative loss around 36.5%. I actually have less money tucked away than I did in October 2019, despite working full time and saving a significant sum in the interim.

I realize that plenty of people would immediately say I should throw in the towel, never look at a stock market again, and put everything into an index fund from here on out. Then they’d point at their fantastic gains from doing just that. All I can say is, that’s not my path. I simply don’t trust that plugging all of my money into SPY would yield me enough to retire on in 30 years – it seems more likely to me that it would be like plowing all of my money into the Nikkei back in 1990, adding in year after year, and trying to retire off that. Besides, with my path I have hope – serious hope that I can get somewhere some day.

I made a few notable trades this week, like buying 1-month puts in EEM and QQQ on Monday and selling them on Wednesday for a decent gain. Then on Thursday I rolled those winnings into 1-month calls on TLT thinking that there was an air pocket without much resistance for a ways. I should’ve looked before I leapt though, which isn’t always easy when you’re working full time, because there is considerable volume at the 138 level traded on Feb 25th, making that a significant near-term resistance. Still, there’s the end-of-quarter rebalancing, the tightening regulations on bank capital, and the purchases of the federal reserve – it could turn back.

Aside from that, my PVG was liquidated last week when covered calls expired in the money and I saw the silver miners get a major smackdown – so I loaded up my exposure in silver miners this week.

I suppose I must be wired to look for mean-reversion in a market that is strongly trending. Interesting to think about anyways, I certainly have plenty of room for improvement in my trading.

Last year I was dumb enough to think that the economy would suffer and the stock market would eventually reflect it, then I moved on to being dumb enough to think that the massive amount of liquidity chasing low yields and highly overvalued companies would eventually find it’s way into precious metals, then I moved on to being dumb enough to think that the deflationary forces of record high unemployment and record high levels of unproductive debt would keep a lid on long-dated interest rates – and that precious metals and commodities would be there if I was wrong.

My main takeaway from 2020 is that my biggest trade ideas were way too consensus:

  1. In mid 2020, my calls of a struggling market were way too consensus – especially given the massive injection of Fed liquidity which has proven time and again to find it’s way into the stock market.
  2. Betting on precious metals was also way too consensus. Everyone, bullish or bearish, thought that gold and silver would be a good place to hide late last year. Speculative investors were heavily long, but that didn’t seem to bother me because they had been long since 2019.

Currently, my main two trades are not consensus, or at least they don’t feel that way.

TLT: 20+ Year Treasury Bonds

Everyone seems to believe that long-dated interest rates are going higher. They’re trumpeting that message on Bloomberg, and I see it endlessly on Twitter.

I look at the COT report however, and I struggle to figure out what it means: CFTC Commitments of Traders Short Report – Financial Traders in Markets (combined)

These financial futures divide out the following:

  1. US Treasury Bonds – I can’t figure out what the duration is
    1. Dealers are net short, which is typical
    2. Asset managers are significantly net long
    3. Leveraged funds are significantly net short but covered a bunch of shorts last week
    4. Other (small investors) is slightly net long and sold some longs
    5. Nonreportables in treasuries (perhaps foreign investors?) are slightly net short but didn’t trade much.
  2. Ultra US Treasury Bonds – A google search says this is 20+ years duration
    1. Dealers are net short
    2. Asset managers are heavily long
    3. Leveraged funds are heavily short and reduced longs
    4. Other is significantly long and covered some short positions
    5. Non-reportable is roughly even and sold some longs
  3. 10 year US Treasury Notes
  4. Ultra 10 year US Treasury Notes – Google says that the difference between the 10 year and ultra 10 year is the range of maturities. So is the duration 10 year but the spread between 2’s and 20’s vs closer to 10? I have no idea.

I was hoping to give some analysis here, but I’m lost on that – all I can say is that the world of US treasuries is extremely complex and opaque. I’ve heard about the record net shorts in yield-sensative assets but I don’t see where it is. I even tried looking at short interest in TLT and it doesn’t seem high or at a particularly high point.

All I can say is that I really think the long term deflationary forces in our economy (high debt levels requiring servicing, high unemployment, low wage growth) outweigh our inflationary forces (government deficit spending) and that many of our current inflation measures are up due to temporary Covid-related restraints on supply and transportation. This should cause interest rates to roll over, though it could easily take a couple of years to do so which would make all my call options worthless.

I’m leaving this trade where it is for now, but I really need to look into it more and I don’t have time at the moment. The chart looks like it is still oversold after plummeting substantially in February, and it has a decent chance of testing the 50-day moving average or at least consolidating a bit below the 138 resistance before it continues on.

Gold and Silver Miners

This trade also has a remarkably non-consensus feel to it. Despite the gold and silver squeeze narratives, gold has been hammered down to bearish territory on the charts while silver has been hanging on. Despite this, I am used to precious metals consolidating for longer periods between upward moves so it doesn’t seem that shocking that the bull flag formation starting last June would continue on for so long. Even the great gold bull market of 2000-2010 showed year-long downward consolidation moves.

The COT report in gold is thankfully much simpler than that of treasuries. There is only one contract for GOLD and one for SILVER.

Producers – the gold and silver miners themselves – are always short because they like to hedge their positions to ensure that their mining operations are profitable.

Swap Dealers – the big bullion banks who routinely manipulate the market – are close to neutral on Silver but still significantly short gold even though they’ve been covering those shorts relentlessly in past weeks.

Managed Money – Big investment funds are still long both gold and silver, and they have become a bit more long gold and less long silver last week but not by big margins.

Other and non-reportables – Typically smaller funds and retail – are still long both silver and gold. They picked up more shorts in Gold last week and reduced a few longs in silver as they become more nervous about both.

This looks like a classic story of retail being shaken out of the trade while the big guys cover their shorts, and I am happy to be long here. In fact, I still strongly believe that we’re in a bull market in precious metals which could last a decade, that the downside risk is somewhat limited while the upside possibilities are big.

The biggest danger I see for gold is an actual liquidity event – which could happen if the dollar continues to strengthen, more emerging market currencies blow up, and more funds blow up, but this event would make my bets on TLT pay off big time as long treasury yields would plummet just like in March 2020.

I do plan to shift from Gold more toward battery metals and emerging markets after the re-opening starts. In my view, this will be initially bad for risk assets as money finds more real world investments and pulls out of the artificial market ones – and then it will set the stage for significant growth … but this is a shift that is at least 2 years out.

Here’s where my portfolio landed:

  • DOWNSIDE BETS (41.2%)
    • 32.6% TLT Calls
    • 6.0% IWM Puts
    • 2.7% EEM Puts
  • GOLD (20.5%)
    • 5.9% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 8.0% EQX (Small gold miner)
    • 6.6% SAND Calls (Small gold streamer)
  • SILVER (17.5%)
    • 10.8% AG (Small silver miner)
    • 0.8% AG Calls
    • 5.0% SILV (Small silver miner/explorer)
    • 0.8% RSNVF (Really small silver miner/explorer)
  • COMMODITIES (14.9%)
    • 10.0% CCJ shares (Uranium miner with covered calls)
    • 2.1% ALB (Lithium)
    • 2.0% NMGRF (Graphite)
    • 0.8% NOVRF (Nickel/Copper)
  • CANNIBUS (4.9%)
    • 4.9% split between CRLBF, GTBIF & TSSRF (companies with significant US footprints)
  • CRYPTO (3.1%)
    • 3.1% split between ADA, LINK & LTC (Coins smaller than ETH that are in the top 10)
  • CASH (-2.1%)

I dipped in the margin a bit because the silver miners really got hammered this week and I had been meaning to load up on Silvercrest in particular for a while now. I do this from time to time when there’s a compelling buy, but not by much and I get back to positive cash fairly quickly.

A final note before I end my post today …

I started by mentioning my losses because I need to be honest about them. Last year I ended up losing 16.6% despite being up 4.4% from april to year-end because my views were more consensus than I thought. This year I am going for a different approach which involves significant risk using options to bet on non-consensus plays, so it shouldn’t be surprising that it goes down significantly before it turns back. These are long dated options with nearly 2 years to play out, and I’m diversified into a few other things, so my account won’t go to zero. However, if gold, silver, or long dated interest rates go my way then I will still be sitting on significant gains overall – provided I don’t cut out too early like I did with CCJ last week. I’m still relatively young and my expenses are low so this is the time I should be taking risk. Good luck, and happy trading!

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Uranium, Interest Rates, Portfolio Outlook

For me, this week was largely about the push in Uranium miners.

I came into the trading week with a few things in mind:

  1. The federal reserve meeting on March 17th about bank regulations and the rapidly rising interest rates. I expected that Powell would disappoint markets.
  2. End of quarter portfolio rebalancing as any retirement funds with a large fixed stock/bond mix would have to sell stocks (which shot up higher this quarter) and buy bonds (which have been losing significant value in the past month.
  3. The quad witch on Friday, where stock index futures, stock index options, stock options and single stock futures expire all at once. During these events, it is normal for a significant counter-trend move as the powerful market makers, who take the other side of the contract when everyone is betting long, have a large motivation to hammer the price lower before the close.

All three of those gave me a bearish bias on the week.

With Uranium, I’ve been bullish on it for a while and trading it using the large US miner CCJ. Over the past few months with the rapid run-up in price, I have been playing this with covered calls which tended to expire in the money and then I’d find a point to buy back in. Two weeks ago Friday I did just that, refilling my CCJ allocation on the big price dip that morning. The following week, I noticed that the call options expiring week ending 3/19/21 were selling like crazy. My first reaction was to buy back all of my covered calls, go to work, and see if it continued. The next few days, stock options continued to pour in so I purchased some – first at a $17.50 strike, then at an $18.50 because the price for those was only $0.20/share which is crazy cheap for one that will be pumped.

I was sitting on 70 1-week call options in CCJ by the end of the trading day on Friday (Mar 12th), with only about $1500 at risk. From my experience with prior gamma squeezes (AMC, then SLV, then FSR, then PLTR, then EXPR) I expected the following:

  1. A significant jump between Friday close and Monday open.
  2. A flurry of option-buying activity with end-of-week out-of-the-money contracts hitting up to $0.50/share way up the chain in early morning trading.
  3. Significant price gains from open to 20 minutes in, with a small dip around the 30 minute mark. Then significant selling pressure a few hours later with option premiums higher up the chain collapsing. Then a fight between buyers and sellers with a possible jump on Wednesday and a weak Friday.

With this game plan in mind, I jumped into action, getting to my computer for the 6:30am market open:

I found the volumes and the price jump on Monday morning particularly underwhelming. The $18.50 call options which I had bought at $0.20/share each on Friday were not moving up that much, the price seemed to be struggling, and I didn’t see the flood of call option buying I anticipated. I decided to cut with small gains here, dumping those back at $0.25/share and then selling off all my shares as well.

30 minutes later the price flew to $18.50 and I realized I blew it. That would’ve been $7k in gains – and another $7k on top of that if I sold around the $19.50 peak. Oh well, live and learn. I was still up $1k those call options, but I need to keep more upside than that if I’m going to make up for the mauling I’m still getting with TLT … overall I’m still down 0.8% on the week.

The biggest rookie mistake in stock trading is to cut your winners too soon (I need to grab these gains while there good!) and then hold onto your losers too long (It’ll come back. Won’t it? Maybe now?). I fear I’m making both mistakes right now. A good trader can make small losses 60% of the time while powering ahead on significant gains from the 40% that win.

Anyway, I bought back into CCJ on Friday morning at roughly the same price I sold out the prior Monday and I sold covered calls on all of it because the 1-month option premiums were pretty steep.

Aside from that I doubled my allocation into AG on Friday morning, and the covered calls I had on the existing half expired worthless. I really like using covered calls to chase things you want to get into … with AG, I actually bought it a month ago paying $19/share and immediately sold an at-the-money covered call for $1.50. Factoring that in, the buy price was $17.50 which is still above trading today, but it wasn’t that bad.

My overall portfolio outlook – TLT and Interest Rates:

I have clearly been bleeding out on this trade so far, but I’m holding it. If I didn’t jump in too high earlier I’d be tempted to add, because I still expect that interest rates will roll over and hit a new low. This could be rather quick given the enormous speculative shorts in long duration bonds, but it could also take several months or over a year. In early 2008, TLT was high and started getting crushed from March-June, then it stabilized through August, then saw volatility above and below the March highs until November when it massively spiked.

I’ll be honest, the technicals on TLT look simply awful. My bullish thesis really comes down to massive speculative short positions, very bearish sentiment, and the constant push of the inflationary narrative which I simply don’t believe. If the big players are all short and bearish then all it takes is for some of them to switch sides and get less short. Flight for safety in a stock market dump would do this. With inflation, I believe there is a serious misunderstanding about what causes it and what gives value to money – particularly involving levels of debt.

Swiftly increasing debt causes temporary inflation which could last if incomes pick up allowing a continued rise in spending. Debt itself is highly deflationary because it has to be serviced with monthly payments, sucking dollars out of the system. Imagine buying an expensive car with hefty payments … that shows up initially as a big increase in spending which is inflationary, but those payments require that your spending levels drop significantly in coming years. The supply and transportation constraints due to worldwide Covid restrictions will soon be lifted, and then the data will turn significantly as production increases while most people are still very tight on cash.

Game plan: I will not add any more to TLT because I over-allocated, but I won’t sell it either. I will also try to take advantage of this hedge to buy the dips with confidence in commodities like Silver and Uranium because a scenario causing them to tank will likely be great for TLT. I need to have more confidence staying bullish when I get the right setups.

Gold Miners:

Like TLT, the long consolidation in gold from June of last year has pushed well into bearish territory. Sentiment has been very bearish for gold as well as for TLT and you can find plenty of bear cases on both. Bloomberg for example talks about how bonds are rising due to inflation and this is pressuring gold lower because it pays no yield. However, gold and GDX have been hitting significant support levels and staying firmly above even on days when the rest of the market is selling off. This looks like a potential bottom to me, and if the formation is an extended bull flag then the upside could be significant.

In the longer term, I am very bullish on precious metals. In recent years we have seen the overuse of US Sanctions, an increasingly protectionist trade stance, a reduction in the US percentage of global trade and GDP, and an increasingly antagonistic relationship with the next largest economy which is China. In light of this, it makes less and less sense for trade between foreign countries to remain predominantly in US dollars. If trade is conducted in a larger variety of foreign currencies, then foreign central banks will not need to hold as many of their reserves in US dollars. Right now there is simply no major alternative to replacing the US dollar reserves as all foreign currencies have their own problems filling this role. As such, countries that wanted to rapidly de-dollarize have been turning increasingly to Gold. While I don’t believe that we can move back to a system where gold becomes the major world currency, I strongly believe that it’s relative importance in a basket of currencies will increase in coming years.

At the same time, foreign central banks will ensure that the US dollar is not going to tank for the simple reason that they don’t want their export markets crushed. At the same time we are seeing massive productivity increases from technology, massive debt levels worldwide, and central bank responses which tend to be limited to inflating asset values. In short, a period of low growth and continued financial repression which should be great for precious metals.

Other Commodities:

I continue to remain bullish on Uranium and battery metals as the countries of the world continue their push to reduce carbon emissions.

Uranium just came through an enormous period of oversupply and capacity reduction resulting from the Fukishima fallout, and we are about to see significant shortages in coming years as major countries such as China, India, and Brazil increase their capacity. At the same time, Uranium is a relatively insignificant cost in generating nuclear power so spot prices can increase rather dramatically. The main reason I like to focus on Cameco is because they own extensive mines and they are well positioned to get lucrative contracts with nuclear facilities in the Americas and Europe who are looking for reliable supply.

Metals such as lithium, graphite, nickel, copper, and silver are needed extensively for increasing use of batteries as well as solar panels, windmills and so on. As the US and Europe become increasingly wary of allowing China to dominate and control production in these sectors, we should see more favorable treatment of the miners we have going forward. In addition, I wouldn’t be surprised if we saw both an infrastructure push in a number of countries (including the US which badly needs more investment in it’s electrical grid) combined with a small boom in construction projects as big companies and SPACs, flush with cash from selling shares, buy up and repurpose abandoned restaurants, malls, office buildings, and so on.

Current portfolio:

  • DOWNSIDE BETS (38.9%)
    • 30.0% TLT Calls
    • 6.0% IWM Puts
    • 2.9% EEM Puts
  • PRECIOUS METALS (33.2%)
    • 6.4% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 8.2% EQX (Small gold miner)
    • 7.3% SAND Calls (Small gold streamer)
    • 11.4% AG (Small silver miner)
    • COMMODITIES (15.1%)
    • 10.0% CCJ shares (Uranium miner with covered calls)
    • 2.1% ALB (Lithium)
    • 2.3% NMGRF (Graphite)
    • 0.8% NOVRF (Nickel/Copper)
  • CANNIBUS (5.4%)
    • 5.4% split between CRLBF, GTBIF & TSSRF
  • CRYPTO (2.6%)
    • 1.4% LTC
    • 1.2% LINK
  • CASH (4.7%)

I think we’re about to see significant downside pressure in the major US indexes in coming weeks due to the following 3 effects:

  1. End-of-quarter rebalancing from stocks into bonds (required in a significant number of big investment funds)
  2. Rapidly rising interest rates
  3. Margin reductions. Hedge funds use massive leverage in stocks, bonds, and futures trading. Banks are required to hold more reserves as a percent of their balance sheet as the SLR exemption expires. When this exemption was put in place, banks ramped up their profitable margin lending and margin levels are higher than ever. As banks reduce these margin limits, big funds will need to sell to reduce their leverage.
  4. Potential de-risking. If selling of the major US stock indices hits a certain level, leveraged funds will need to begin selling to de-risk their portfolios. This could lead to bigger selling and margin calls sending prices plummeting, or it could simply absorb whatever buying pressure exists leading to choppy markets.

I’m thinking about buying more puts in the next short-term rally. If the SLR exemption starts on March 31, then perhaps I could look at a small amount of strategic puts in QQQ that expire in a month or two. Long dated puts would require a substantial investment per contract and would require a significant correction to pay off, so I don’t really want to add to my long term puts at this time.

Good luck navigating through this. I find it a very exciting time to be trading, perhaps the most exciting time since 2008. Just like then, I’m optimistic and full of ideas. Hopefully I execute my trades better this time around.

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The Crazy Thinking of this TLT Bull over the last month

Someone on Twitter asked “could you imagine being long bonds right now?” I replied that it’s a tough trade to hold, and then thought I should start my blog with it this weekend. Here’s a quick trace through of my portfolio allocations to TLT and overall returns:

  1. Feb 5: 16.9% TLT calls
    1. I saw TLT calls as an interesting portfolio hedge, perhaps better than index puts, because the long bond rate would plummet (& TLT rise) due to risk-off and fed reaction if the market tanked and the massive spec shorts in the 20 year futures meant that it could go up even if the market didn’t plummet.
  2. Feb 13: 48.7% TLT calls, portfolio down 1.2% on the week
    1. I really started to like the TLT idea. It looked like it was bottoming and at any time the algos could switch from hammering bonds lower in the off-hours to neutral and maybe even to purchasing. So I made a massive bet on TLT with Jan 2023 calls.
  3. Feb 20: 47.4% TLT calls, portfolio down 8.5% on the week
    1. I actually added to my TLT position that Friday on a dip, but it still went down as an overall percentage of my portfolio.
  4. Mar 1: 45.4% TLT calls, portfolio down 5.6% on the week
    1. I decided not to add to TLT any more. I did de-risk my portfolio a bit by selling all of my way out-of-the-money IWM Jan 2022 puts off. I also sold a lot of gold miners and had covered calls expire in the money on a number of things getting me a 19.5% cash position.
  5. Mar 6: 41.1% TLT calls, portfolio down 4.6% on the week
    1. TLT rebounded slightly this week, and gold was hit hard. I had been reducing my allocation to gold miners all thru Feb, but now I started to increase it again. March I increased it substantially.
  6. Mar 12: 32.7% TLT calls, portfolio down 2% on the week
    1. On Monday the 8th, I actually sold enough TLT to reduce my allocation by 5% – mainly Jan 2022 expiry – and put the money into gold miners. TLT was hit hard later in the week as well.

Adding all that up, my portfolio is down approximately 22% since I started getting really bulllish on TLT.

During that time I tried a few gamma squeeze plays that ended up duds including FSR, PLTR, and EXPR. These followed a general pattern where I saw tons of short-dated call options purchased on a Friday, I purchased some shares on Monday afternoon, and I dumped the shares a couple days later when the price broke $0.50 or so below the largest level of covered calls. These were relatively small allocations that ended up losing around 10% each time, but I learned a bit about the patterns of these things … especially seeing some of them shoot up a couple of weeks later as whoever was pumping them apparently didn’t give up on it.

One thing it got me thinking for example was that I should perhaps allocate more into companies with smaller market caps because they are more likely to be targeted and pumped. I was looking to diversify a bit from my big allocations to TLT and Gold Miners anyway so that I’d have something that wasn’t at the bottom of the investor sentiment list. This included small allocations into Canadian battery metals miners (Lithium, Graphite, Nickel, Copper), small allocations into cannibus companies with significant US footprints, and a much larger allocation into Uranium miner CCJ because that had been my biggest winner in prior weeks. These purchases brought me from 19.5% unallocated cash to fully invested and were all thrown in on the crazy dip the morning of March 5th.

That was last week.

This week I’d been focused mainly on 2 things … watching gold futures and hoping they held above the critical 1650-1700 support zone, and watching CCJ which had become 10.4% of my portfolio.

TLT is going down a bit still, but I am still on board with Steven Van Metre thinking that the Fed has little choice but to extend the SLR exemption, allowing big banks to increase the size of their balance sheets with US treasuries, and potentially triggering an enormous short-squeeze in these bonds. I plan to ignore my TLT allocation until this plays out. Limit sells are in place on all of my TLT holdings in case of a spike, with prices assuming intrinsic value only with TLT at 160 for the March calls up to TLT at 180 for the Jan 2023 calls. Aside from that I wont be buying or selling these, just waiting to see how March plays out.

CCJ became the target for a massive gamma squeeze this week. I looked on Monday and the amount of money flooding into call options expiring on March 19 was incredible – from the $14 strike all the way to the $20 at the top of the range. I immediately bought back all of the covered calls I had sold on my shares Tuesday morning before driving to work. After work I was thinking about how best to play this at get more upside exposure. At first I figured I could buy a bunch more shares on a pullback, but it didn’t pull back. That brought me through Thursday night where I started thinking that these gamma squeeze plays that were duds all hit significant rises on the Monday morning of the week of expiry. These slightly OTM call options were still insanely cheap, so I bought a bunch at the $16.50 strike Friday morning for like $0.35 each. Near the end of the work day someone tweeted about volatility being crushed in general so I looked back at CCJ and saw that these OTM call options were still super cheap. I bought a bunch at the $18.50 strike at only $0.20/share thinking that these would likely be selling for $0.50 on Monday when the short-dated slightly OTM call options really start flying – and if they aren’t then so many contracts will be sold that the gamma squeeze could be huge.

Here’s my current allocation:

  • DOWNSIDE BETS (41.2%)
    • 32.7% TLT Calls
    • 5.7% IWM Puts
    • 2.9% EEM Puts
  • PRECIOUS METALS (30.8%)
    • 6.3% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 8.3% EQX (Small gold miner)
    • 7.1% SAND Calls (Small gold streamer)
    • 5.7% AG (Small silver miner w/ covered calls)
    • 3.4% PVG (Gold/Copper miner w/ covered calls)
  • COMMODITIES (18.1%)
    • 11.7% CCJ shares
    • 1.2% CCJ YOLO Calls (YOLO=You Only Live Once. Call options expiring within a week)
    • 2.1% ALB (Lithium)
    • 2.2% NMGRF (Graphite)
    • 0.8% NOVRF (Nickel/Copper)
  • CANNIBUS (5.4%)
    • 5.4% split between CRLBF, GTBIF & TSSRF
  • CRYPTO (1.5%)
    • 1.5% LTC
  • CASH (3.0%)

The crypto play was purely based on a chart by @NorthStarCharts (twitter) showing Litecoin/Bitcoin at the bottom of an arc and suggesting that it should outperform Bitcoin substantially in coming months. I decided to take a stab at it, as I am still interested in having some of my holdings in hot sectors given my outsized position in the two most hated sectors of the market – long bonds and gold. Raul Pal from RealVision mentioned crypto again on Friday, and he had a good point … if Crypto seems to be pulling the gains from everything, why not take a small position in a coin or two and follow some charts?

Note that my fundamental view has not changed … we are in a market mania that may crash in a week or go strong for another year. I see the chances of substantial increases or drops as much higher than chances of a long sideways move. At the same time, short volatility plays such as selling covered calls and selling puts remain extremely popular among institutional investors who are desperate for anything that looks like the yield that they can’t get from the bond market.

This is a very exciting time where fortunes will be made or lost as a lot of money changes hands, and a very frustrating time for investors focusing on earnings and fundamentals which don’t seem to have any relevance to the massive market flows we are witnessing. If markets absolutely crater, then I expect my massive “Downside bets” to pay off handsomely. If they rocket higher, then my commodities, cannibus & crypto should look fantastic.

Gold is a unique play which I think will end up substantially higher in the next 2 years regardless of which scenario plays out. The COT report CFTC Commitments of Traders Long Report – Other (Combined) shows that the swap dealers are quickly shedding their short positions as managed money sheds it’s long positions. Too many speculators were long gold, and the swap dealers who functionally bet the other side have a lot of power in pushing the prices in the futures market. They could easily shake out more longs in coming weeks and potentially push gold past its 1700 support to it’s next significant support levels at 1580 and 1500 (based on consolidation periods in the 2yr chart). Sentiment has gotten pretty bad even as the physical gold sites like Money Metals Exchange: Trusted Silver & Gold dealer have many products sold out and list a substantial premiums to the spot price on the futures market. I’m still convinced that this market is relatively close to bottoming and that it will rocket higher once it turns.

Best of luck to you all, and may the odds be ever in your favor!

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Narratives and Rotations

I’ve done a lot of thinking about the market in the last week – where we are, where we’re going, and how to play my hand.

A few weeks ago, I decided to bet half of my holdings in TLT calls that expire in Jan 2023. Much of the market seems illiquid and fragile, as prone to a crash down as a crash up. This trade has been going against me these last few weeks as it is expensive to hold, yet it is also a large offset to downside risk. As such, the remainder of my portfolio needs to embrace proper upside risk. Gold miners were clearly not seen as a successful counter to this, as they are still on a long downward consolidation.

The question then is what works, and for that it’s often best to find and follow the overlying narrative.

In the charts above, you can see a trend from one narrative to the next. After the pandemic and the initial lockdowns, there formed a powerful narrative around tech. Work from home, zoom meetings, and the rapid acceleration of online shopping adoption. This was the main narrative until the turbulent shift around September. By November, the vaccine re-opening trade took over big time as the Russell 2000 small caps roared higher along with casinos, cruise ships, airlines and so on. Big oil like XOM was part of this narrative as well. Then the narrative shifted again from reopening to re-flation which fed all sorts of commodity trades including Uranium (CCJ), Copper (COPX), and Agricultural (MOS) as shown above.

I have been playing the commodity trades by looking for companies which paid significant premiums for covered calls with 1 month or less duration and then selling covered calls on them. The big ones I’ve been using were AG (silver), CCJ (uranium), and PVG (copper & gold). This left me with significant cash at the beginning of the week as a lot of these calls expired in the money so my shares were cashed out at the given strike.

We saw some significant market turbulence this week as long dated interest rates were rising at a rapid clip and there were significant pullbacks in different areas.

I decided to keep a relatively low proportion of money in gold miners, but I wanted to leverage it a bit to gain when these eventually turn – which got me first into a significant number of 2023 calls in the gold streamer SAND, and more recently into 2023 calls in the big players – FNV, NEM & GOLD. I skipped on WPM there because I’m still sitting on a significant number of shares, on which covered calls just expired.

On Friday morning the markets were kind of amazing. They opened high and steadily drifted down over the next couple hours. Everything was going down at once, which said to me that it was probably a liquidity event where the previous winners often get oversold to de-risk while taking profits, and I figured that the re-flation narrative would remain dominant. Commodity stocks were correcting down hard in everything from Uranium to battery metals.

My TLT position threw my risk management upside down here, because if everything kept tanking it would spark Fed action which would certainly be in the long bond – so my risk was the correction ending and everything starting a new leg higher. With that in mind, I wend nuts allocating all of my cash into CCJ, several battery metals stocks, and even a small position in US Cannabis companies just to diversify a bit. I didn’t sell covered calls on any of it because I’m playing for a sharp reversal. As the day went on I was shocked to see that I actually bought around the bottom and everything went up in a sharp V. I’ll probably sell covered calls on it again Monday morning. These are often valued the highest about 15 minutes after the open due to the retail traders at that time, so that’s when I’ll be selling these.

Here’s how my portfolio ended up:

  • DOWNSIDE BETS
    • 41.1% TLT Calls
    • 7.0% IWM Puts
    • 2.9% EEM Puts
  • PRECIOUS METALS
    • 4.8% WPM (Large gold miner)
    • 2.7% FNV, NEM, GOLD Calls (Large gold miners)
    • 2.7% EQX (Small gold miner)
    • 6.1% SAND Calls (Small gold streamer)
    • 5.3% AG (Small silver miner w/ covered calls)
    • 3.2% PVG (Gold/Copper miner w/ covered calls)
  • COMMODITIES
    • 10.4% CCJ (Uranium – I still love the growth story there)
    • 1.9% ALB (Lithium)
    • 2.0% NMGRF (Graphite)
    • 0.8% NOVRF (Nickel/Copper)
  • CANNIBUS
    • 5.2% split between CRLBF, GTBIF & TSSRF
  • 3.9% Unallocated cash

I changed my headings a bit to reflect my current thinking on these things. For example, my Hedges would previously range between 10-20% of my portfolio. Calling a 51% allocation of anything a “hedge” is disingenuous – that’s a downside bet. Also, as much as I talk about diversifying from precious metals I am still a bit of a gold bug, and I’d be really frustrated if I ended up selling the bottom.

As a final note, a friend of mine was telling be about the massive changes and renovations being planned at Dana Point Harbor. It really got me thinking … we’re in a time where many small businesses have closed their doors for good while the big guys are stuffed to the gills with cash. As a result, I wouldn’t be surprised to see massive construction projects going forward as many areas go through renovations and repurposing from shopping malls to office buildings to shopping centers, movie theaters, restaurants … if this happens then it could definitely give some life to the commodities boom, even as supply disruptions disappear in the post-pandemic world.

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Unloading at Big Bear

Last week was significant in my portfolio allocation, as I used the downturn in the major US indices to unload a number of my nearest date lowest strike puts – selling all of my IWM Jan 2022 puts with strikes below 170. It was also significant in that a number of covered calls expired. I was fortunate that most of my AG was effectively called for $17.50/share on Friday before plummeting on Monday. As it goes, I have a much higher unallocated cash position at the moment.

Here’s how my portfolio ended up:

  • PRECIOUS METALS/COMMODITIES
    • 4.5% Gold Miner Stocks, large
    • 2.5% EQX (small gold miner stock)
    • 5.5% SAND Calls (small gold streamer)
    • 5.2% AG (silver miner I’m selling weekly covered calls on)
    • 3.0% PVG (precious metals/copper miner I’m selling covered calls on)
    • 3.8% CCJ (uranium miner I’m selling covered calls on)
  • HEDGES
    • 45.4% TLT Calls
    • 6.1% IWM Puts
    • 2.7% EEM Puts
  • OTHER
    • 1.8% EXPR (Gamble on some meme stock with low $ price that occasionally gets pumped)
    • 19.5% Unallocated cash

I’m not sure how to proceed with trading at the moment, as we are certainly at a critical juncture in the markets. Here are some questions I need to ponder:

  1. Do interest rates keep rising? When will this be too much for markets to bear? How will the FED react?
  2. Is the commodities rally a fakeout or is it just facing a significant pullback?
  3. Are the main US indices (S&P 500, Russell 2000, NASDAQ) turning bearish per the selloffs last week, or continuing higher per today’s massive rally?
  4. Is the significant weakness in Gold now showing up in Silver?
  5. Should I diversify my commodities plays a bit more broadly or watch and wait for now?

For now, I’m just excited that I had a wonderful weekend with some old friends.

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Strategy adjustment from conditions at market open

Yesterday I mentioned jumping in on the gamma squeeze play on PLTR, but I ended up passing on that. Last night, the NASDAQ futures went down significantly. PLTR is an IT company that is part of the big ARKK ETF, so I expected it to be under pressure. Sure enough, morning came along and it went down pretty fast.

One thing to watch out for with the gamma squeeze plays is that it works both ways. If PLTR managed to stay above $30/share, where an enormous number of call options were sitting, it would create significant upside pressure because the options dealers have to buy shares to protect their effective short positions against a move higher. Conversely, a drop below this $30/share threshold means that the options dealers have to sell shares to protect themselves from losing money on a falling security. If you ever chase these, keep that in mind because risk control is essential to making it a winning strategy.

Gold and Silver went up, but I still decided to sell off NEM and FNV, replacing them with PVG, more AG, and more CCJ. As planned, I immediately sold at-the-money covered calls on all of them. Those three companies offer much better premiums for these calls. This as a win-win because I get more money for sitting on the shares, and the premiums reflect that these are more highly favored companies in riding the commodity inflation narrative higher.

Note that PVG, AG, and CCJ are more risky individually in that they will certainly drop further in a deflationary event, but my portfolio is over-hedged in that direction so I needed something more aggressively bullish. The big gold miners are great value plays that will do well over time, but I see a market that shooting higher until it drops and I’m aiming to get outsized returns on either side. Or more accurately, I’m positioned to get significant returns on a downside outcome and I need something that will offset my losses if the market continues wildly higher. My big bet on TLT could easily blow up in my face and I don’t want to go broke if that happens, but if you want a chance at winning you have to gamble a bit. Prudence will help you stay rich, but only risk can get you there – and I’ve never seen a market that is so risk-on!

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Considering strategies as my over-bearish portfolio struggles

My portfolio went down 8.5% last week. I suppose it could’ve been worse. My heaviest position, long calls in TLT, has been getting hammered as interest rates on the long end continue to rise. Meanwhile, my second largest position in the top 4 miners of GDX (shares with covered calls sold on them) has been hammered as well.

From my portfolio as listed last week, I had a total of 48.7% TLT calls, 32.1% gold miners, 9.9% puts (in IWM and EEM which were flat & volatile on the week), which represents 90.7% of my portfolio in things that lost value, so it’s interesting that it only fell 8.5%.

Trading began on Tuesday, when I reduced my gold miners substantially. I bought FSR (the gamma squeeze play) around $19.50 and was able to get $0.50/share on covered calls ending the week at a $25 strike. I bought them back a few hours later for only $0.14 – so far so good. The next day, I dumped FSR at $18.50 (you don’t want to hold a gamma squeeze when the big contracts fall out of the money) but it recovered and I bought back at $18.90 … only to dump it the next morning around $18.60 again. By then the trade was clearly dead. My other significant trade did better, as I bought AG (silver miner), sold covered calls on it for $0.55/share, and they expired worthless at the end of the week as the stock closed flat. My CCJ has been reduced substantially as I was selling short term at-the-money covered calls on it and they expired in the money – so that trade worked, 5% gain over 2 weeks.

Now I’ve got a tough decision to make. Do I dump my gold miners because they correlate too strongly with TLT, or do I wait for a bounce. I’m going to reduce them significantly again as a bunch of covered calls expired, but the question is how much. I’m tempted to just close out all of my FNV, WPM and NEM Monday morning and leave the rest, but then what do I invest the proceeds in because holding unallocated cash, TLT, and puts is very defensive for a market in a parabolic move higher.

The biggest narrative I’ve been hearing is the re-flation trade which has everyone excited about oil, uranium, silver, copper, farmland, housing, etc. Here’s a quick check on the market over the last 6 months:

Summary:

  1. SPY and IWM are both wildly bullish, with smaller companies outperforming large ones.
  2. Best trending sectors: Energy, Technology, Materials, Consumer discretionary, Financials
  3. Weaker upward trends: Real Estate, Health Care
  4. Consolidating: Industrials
  5. Weakest trends: Utilities, Consumer Staples

The most defensive sectors are struggling the most (utilities and staples) while the most aggessive are powering higher. It loos like chances favor another upward leg to this market.

I plan on keeping my TLT calls because I believe that the overall market is fragile such that beginning a risk-off posture could easily create an avalanche of selling with no buyers. I think the re-flation theme is a head-fake, that the underlying economy is struggling, and that rising bond yields and commodity prices will eventually lead to a market correction.

However, I don’t think this turn is imminent. While anything can topple an unstable market structure, it can also persist higher over the next year and I cannot allow my savings to get crushed if that is the case. That means I need to balance out my TLT and puts with significant upside exposure. One way I’m thinking of playing this is by looking for whatever pays the most in the least amount of time for covered calls. This will lead me to companies with bullish sentiment where I can position for a relatively safe return. So far I’ve got the following:

  1. PSXP with an at-the-money June 18 call pays an 8.2% call premium plus a 3.4% dividend payment on 4/30. Or I could sell the Mar 19 call and get 3.2% for one month. I can do better…
  2. PVG with a Mar 19 call gets me a 6% premium in a month. Not bad.
  3. AG gets me a 3.4% premium in a week at-the-money or 2.5% out of the money allowing up to a 5.3% max weekly gain – thats a winner
  4. CCJ gets me a 2.4% premium in a week allowing up to a 4.8% max weekly gain – thats a winner

I’m already significantly in AG, I’ll continue running with CCJ, and I’ll probably do PVG but I should find a few more. However, I still need the play for outsized rewards which is this week’s gamma squeeze play … here goes:

This is a very large number of options contracts that expire this coming Friday. They go out to a $65 strike where nearly 10,000 contracts were purchased. As the price goes above $30/share, it should start getting serious momentum higher. If it goes below $28/share, especially with only a day or two left, dump the trade. Expect shares and call options to be flying off the shelves Monday Morning. If you buy shares then, I highly recommend selling significantly OTM covered calls around the $33 or $35 strike and then purchasing them back a few hours later when they’ll likely be much cheaper. Aside from that, shares are the best risk/reward because they could potentially shoot up significantly while you can limit your downside by dumping after a 10% drop.

Keep in mind that these are risky plays, and I would never recommend buying the calls. Chasing these worked brilliantly for me with AMC, then SLV and FSR were both duds. As long as the market stays fully risk-on, enough of these should work to make it worthwhile.

I’ll end it here, wrapping up with my current portfolio:

  • PRECIOUS METALS
    • 14.7% Gold Miner Stocks, large
    • 7.0% EQX (small gold miner stock)
    • 2.6% SAND Calls (small gold streamer)
    • 10.6% AG (silver miner I’m selling weekly covered calls on)
  • HEDGES
    • 47.4% TLT Calls
    • 9.0% IWM Puts
    • 2.1% EEM Puts
  • OTHER
    • 3.6% CCJ w/ covered calls sold
    • 3.0% Unallocated cash

Note that I didn’t add any puts, they just went up in value relative to the rest of my portfolio. Also, TLT didn’t decline that much percentage-wise because I added more on Friday – though I admit I shouldn’t be following it down because I’m over-allocated there as it is.

Good luck on your trades.

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TLRY, FSR, and the band plays on

The great gamma squeeze plays continue. Stocks like AMC and GME are still restricted … I saw a decent number of short dated call options contracts flooding AMC last week, so I tried to get in on the action. I bought AMC end-of-day Tuesday figuring that the big players would try to flood sales into the close and I could get a good price. Then on Wednesday morning when the retail traders flood calls I was going to sell end-of-week covered calls and pick up some premium. Alas, it didn’t work; my Ameritrade account would not allow me to sell covered calls in AMC as it was still a restricted security. That didn’t bode well for a gamma squeeze play, so I dumped the stock at a $0.09/share loss.

Later in the week I saw this fabulous chart:

Apparently the WSB crowd (and whatever hedge funds drive it) has moved on to other names, pushing pot stocks to the skies last week with the main focus on TLRY. The question then became which stock would they pump next week? It is often difficult for me to figure out because I don’t have any fancy screeners and I work during the day, but the great Lily of NOPE @nope_its_lily Nope, it’s Lily – Medium mentioned in a tweet on Friday that FSR was getting gamma bombed. She is a young college student who made a big splash with her work on how options contract can distort the underlying markets, followed by interviews with the greats on Real Vision, Bloomberg and others. Anyway, back to FSR:

I highlighted above what it looks like when a stock is “gamma bombed”. It basically means that the shortest dated call options contracts were purchased in huge numbers. The options dealers who sell those contracts are effectively short the shares, so they have to buy to cover as the price increases so that they won’t lose enormous amounts of money at the end of the week on selling out those options contracts.

Here’s the play as I see it … money will flood into FSR shares and even more into these short-dated calls Monday morning. I’ll buy shares to chase around 30 minutes into trading and then sell some covered calls on them that are significantly out-of-the money. From prior experience, these calls should go down in price by the end of the day and I’ll buy them back leaving just the shares. If the gamma squeeze works, then the share price should shoot way up around Wednesday – with a target above $35 – the highest option contract that was purchased en masse. Then I’ll sell the shares.

I really don’t see how long these plays can last, but while they’re here they shouldn’t be ignored. As of now, I made some money on AMC and lost it back on SLV (I wrote about why last week), so this should push me ahead again. FSR is a small money-losing company in the electric vehicles sector, so this kind of action should dwarf it’s normal trading volume and that’s why it should work.

As for other trades, I’ve had a busy week. First I decided that with all of my hedges in place, I really needed to put the unallocated cash to work so I bought more shares of CCJ and went back into the big 4 from GDX: FNV, NEM, GOLD & WPM. Then I sold out-of-the-money covered calls on all of them to get some premiums.

As the week went on, I started to get more nervous about signs that the party might be over and a truly deflationary wind is underway. As Steven Van Metre @MetreSteven explains it, deflation means that big players need cash and they get it by selling things that are very liquid like treasuries, gold, and gold miners. On his youtube channel he showed the head-and-shoulders pattern of GDX and how both gold and gold miners went down preceding previous market crashes.

On Friday morning, there was a major hit to TLT, GDX, and a dip in the major stock indexes. That afternoon as everything but TLT recovered, I bought back my SLV covered calls, sold all the SLV shares, and put all of that money into Jan 2023 TLT calls. Now I’m pretty heavily positioned for a deflationary spike. Here’s how my portfolio ended up:

  • PRECIOUS METALS
    • 22.7% Gold Miner Stocks, Large with covered calls sold on them
    • 7.0% EQX (small gold miner stock)
    • 2.4% SAND Calls (small gold streamer)
  • HEDGES
    • 48.7% TLT Calls
    • 8.0% IWM Puts
    • 1.9% EEM Puts
  • OTHER
    • 9.0% CCJ w/ covered calls sold
    • 0.3% Unallocated cash

Here’s how I see things playing out:

Interest rates are near zero on all government bonds up to 2 years duration. Interest rates have been increasing on the long end, both the 10 year and 30 year, hence the declines in TLT. With the prevailing “reflation trade” narrative, big investors are heavily positioned in the short TLT and short the US dollar positions, so that simply reducing risk will create buying pressure in the long bond. Also, the US government pays more interest on its long bond than any other developed country except Australia … negative interest rates and extremely low yields are common elsewhere.

The stock market is at a position where institutional investors are almost all levered long. The short-squeeze crowd has been destroying most of the short trades which the big players often use for hedging, to offset risk on their long portfolios. Another important by-product of the gamma squeeze and short squeeze plays is to increase volatility – just look at any of the names affected like GME, AMC, TLRY and you’ll see what I mean.

Most of the volume traded on the US stock exchanges is as follows:

  • Passive flows from 401k’s into index-tracking vehicles. These simply buy at any price when they are put in and then sit there – they don’t buy or sell in a crash, they just take shares off the table for trading.
  • Algorithmic and high-frequency traders. These create a lot of volume, but with very short-term trades. They front-run other traders by purchasing ahead of them and selling immediately after, or they chase momentum or use other short-term strategies. Whatever shares these guys hold will be sold immediately if the market turns dicey.
  • Momentum traders. These have been some of the most successful investment strategies over the past decade. They look at chart patterns to buy as money flows into a stock and it goes up, and they use risk-management tools like stop-losses to sell shares immediately when markets turn against them.
  • Value investors. These funds have struggled mightily over the past decade as both momentum and index-tracking funds outperformed them enormously. They will buy as prices collapse, but they are small relative to the broader market so they will likely wait for prices to form a bottom before jumping in.
  • Buy-the-dip investors. These guys are mainly retail traders, and they just buy any dip in the stock market because stocks only go up. They have been rewarded handsomely over the past year.

With the above setup, I am worried that the biggest funds either remove liquidity from the system entirely (passive investors) or chase momentum in some way which tends to make both up moves and down moves more extreme.

So what happens next:

  1. Volatility rises, as shown in the VIX, as reduced liquidity makes it even easier for the big gamma squeeze plays to pop and drop stocks.
  2. Big investment funds using a VAR (value-at-risk) model decide that they need to take risk off the table. They are levered long (borrowed money invested in the market), so they can’t afford too much of a down move in stocks. They reduce risk by selling shares to pay back some of this borrowed money.
  3. The thin ice of buy-the-dip investors come in to buy these shares as prices begin to fall. All is well unless they are overpowered by this selling.
  4. If the buy-the-dip investors are overwhelmed, momentum traders and algos see the warning and start selling shares. Other institutional funds decide to de-risk as well. You start to see a growing avalanche of shares being sold with few buyers in sight.
  5. The US Federal Reserve carefully watches for signs of “illiquidity” like they saw in the fall of 2019. They respond by stepping into the market with repos or bond bond purchases (quantitative easing) in order to get more money into the market. They are currently only allowed to purchase government-backed securities including US bonds and mortgages from Fannie Mae & Freddie Mac.
  6. This leads to a significant boost for these securities and a spike in TLT, which is made bigger by the big institutional traders reversing their short positions.
  7. If this happens, I plan to sell my TLT calls and reposition into a number of commodity-related names including CCJ, FNV, NEM, GOLD, WPM, EQX, SAND, and others.

For now, I think I’m going to sell off my gold positions that have covered calls expiring in mid to late march. I’ll probably wait for the covered calls to expire for the week of March 5th and prior. I’ll continue to look for gamma squeeze plays to participate in like FSR above, and I’ll hold more cash on the side. I might go longer even longer TLT at some point, especially if work gets so busy I simply don’t have time to think about markets for a while.

That’s my plan. Good luck formulating yours and hopefully seeing it play out.

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