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.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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