How I see this cycle playing out

I’ve been thinking that we are likely to see a pattern in the S&P 500 similar to the top we saw in the NASDAQ in 2000. Here’s roughly how that would chart:

Note that I created the above chart by roughly referencing the timeframes of the NASDAQ charts below:

Some rough thoughts on why I favor this approach:

1. The NASDAQ today is far more concentrated than it was back in 2000, while the S&P 500 is far more tech-heavy. As such, I think that the 2000 NASDAQ is decent fit for today’s S&P 500.
2. Today’s S&P 500 moved similarly to the 2000 NASDAQ in the year prior, going on a fairly steady up-trend that occasionally fell below the 50 DMA always stayed well above the 200 DMA.
3. Both the NASDAQ going into 2000 and the S&P 500 going into 2022 saw a choppy market with decreasing breadth, as the more speculative growth stocks began to fall heavily while the biggest growth stocks continued to rise.
4. Both the NASDAQ in going into 2000 and the S&P 500 going into 2022 saw a hawkish fed. In 2000, the rate hikes even continued one more time after the NASDAQ peaked and started its fall. Today, the political pressure on fighting inflation is enormous and the Federal Reserve sees the stock market as over-valued. They could easily do the same.
5. Investors are scared right now. Indications people have been posting on twitter such as massive put-buying and record holdings in inverse ETF’s (betting short QQQ or SPY) while the bulls seem more cautious. It may seem strange, but this behavior can easily lead to a scenario where an upturn accelerates as bears losing money start to close out their short positions giving the market it’s final rapid rise.
6. Seasonality is a real force in the markets. There is a reason that most stock market crashes happen in spring (March/April) or fall (September/October). These timeframes just tend to have less market liquidity. There are a number of reasons for this such as end of quarter portfolio rebalancing, banking adjustments to meet regulations in their holdings of different risk assets, corporate tax schedules, and so on.

On seasonality, one of my favorite measures of market liquidity is that of TLT:

I like TLT because long bonds have more to do with market liquidity than most other instruments, and the seasonality is pretty sharp with some months being very positive and others. It is interesting to note that there are inflections in spring and fall here, where long bonds shift positive in March and shift negative in September – which coincide with struggling times for stocks.

Not only do serious stock corrections start more often in March and September, but both months are low on the seasonality chart above (which only goes back 5 years here).

Market Rotations

Right now, there is a fierce rotation going on beneath the surface of the market. Speculative tech stocks like the one’s ARKK holds are collapsing while certain commodity plays like XOM are rallying. Let’s look at this in more detail here:

The biggest recent moves have been towards XLE (Energy), XLF (Financials), and XLP (Consumer Staples). These moves have been coming out of XLK (Technology) and XLY (Consumer Discretionary).

How am I playing this?

I have been avoiding direct exposure to the SPY and the QQQ throughout this rally. In retrospect that has been a bad move, but I am not comfortable with the enormous amount of concentration in the top sliver of companies. Right now, the top 9 companies in SPY are 27.4% of the index, and the top 9 companies in QQQ are 53.4% of the index. Despite the fact that the top 2 names – AAPL & MSFT – have enormous stock buyback programs, I still don’t like being long the same thing as everyone else. Who’s going to buy when these stocks start to sell off, and at what price? That being said, I’m not planning on going long these vehicles now. However, I’m not going short either, as I’ve found the risk/reward in timing the downside to be miserable. Maybe I’ll tiptoe into some index puts in March if the charts look just right, but that’s not going to be my focus.

The current narratives are high inflation, a booming economy, and rising interest rates. In the next leg higher, I expect energy, financials, and consumer staples to follow higher.

At the moment, I am still using a bit of margin going into February and I plan on building cash as we go into March.

As my portfolio goes, I expect great performance from my recent XOM position, significant outperformance from my Uranium Miners, and decent performance from my copper/nickel miner. If this rally happens, I plan to close out the last of my nickel/copper exposure (I reduced half of it this last rally), sell off my calls in XOM for a decent gain, sell of my calls my Uranium stocks, and sell in-the-money covered calls on most of my Uranium miners.

I also plan to leave my US Cannabis positions completely alone unless they double or something, but I don’t expect them to.

That leaves the big one for me, which is precious metals miners. This is a really tough one for me because it has been consolidating for so long with declining sentiment as many investors exit the sector entirely. I expect great things in this sector, but I expect them to come in quick moves out of nowhere just like 2020 where $12.50 silver raced to $16, consolidated a month, raced to $18.50, consolidated a month, then raced to $28. Needless to say, I’m planning on holding a sizable stake here regardless of what happens, but I am planning on reducing a bit if I get a decent bounce.

What the chart above tells me is that if I get a decent bounce in my precious metals miners by February, I’d better take advantage and reduce. It’ll still be my largest position because I’m a stubborn fool of a precious metals bull, but I can certainly reduce. In fact, I’ve recently sold Feb 4 $10.50 covered calls on most of my AG shares which should force me to divest them if we get that bounce. I’d been planning on selling them for a couple weeks already because I bought a lot of Jan 2024 $10 calls in AG on a big dip and I wanted to cover the margin debt that incurred. Let’s face it, this is my crypto sector where I expect to make big gains by holding junior miners and long-dated calls even though it’s somewhat irresponsible.

On that note, here’s my current portfolio:

• HEDGES (10.7%)
  • 9.9% TLT Calls
  • 0.8% XOM Calls
• PRECIOUS METALS (50.2%)
  • 7.4% AG (Silver), shares
  • 6.9% AG (Silver), calls
  • 4.5% SAND (Gold, Silver & others), calls
  • 5.0% EQX (Gold), mainly calls & some shares
  • 4.5% LGDTF (Gold)
  • 4.1% SILV (Silver)
  • 3.8% SILVRF (Silver)
  • 3.6% MTA (Gold & Silver)
  • 3.0% MGMLF (Gold)
  • 2.2% RSNVF (Silver)
  • 2.0% SSVFF (Silver)
  • 2.4% HAMRF (Gold)
  • 0.9% DSVSF (Silver)
• URANIUM (25.3%)
  • 14.1% CCJ, mainly shares & some calls
  • 6.0% UUUU
  • 1.3% BQSSF
  • 2.6% UEC, shares & some calls
  • 0.8% DNN
  • 0.6% ENCUF
• COPPER & NICKEL (1.6%)
  • 1.6% NOVRF
• US CANNABIS (16.4%)
  • 2.3% AYRWF
  • 2.1% CCHWF
  • 1.8% CRLBF
  • 1.7% CURLF
  • 1.8% GTBIF
  • 2.3% TCNNF
  • 2.1% TRSSF
  • 2.3% VRNOF
• CRYPTO (2.0%)
  • 1.6% MARA, Bitcoin miner w/ covered call
  • 0.5% XRP
• CASH (-6.3%)

As for recent trades, I bought 20 $80 strike XOM March calls last Monday as a hedge in case of the likely Russian invasion of Eastern Ukraine, and the havoc that would wreak on the oil and LNG markets (XOM is a top LNG carrier). Those calls doubled in value since I bought them as XOM soared this week, but I’m still planning to hold them at least through February. I have to admit, if Russia invades, I’d likely sell the news on it and book gains there. I lump this with hedges, because I expect it to be bad for risk assets in general and I’m nervous about it causing pullbacks in my mining stocks.

I left precious metals and cannabis alone this week, but I couldn’t help buying some of these dips in Uranium. I bought a bunch of cheap 1-month calls in UEC in case that jumps, and some more UUUU shares. I also sold half of my remaining NOVRF into a rally to reduce my margin debt a bit. Paychecks and a Q4 bonus helped with that too.

As for XRP, I have some friends who are really into it. They’re convinved that once the lawsuit with Ripple is over the result will be good for XRP holders as a chunk of the founder’s XRP could be burned and it could potentially be added back to platforms such as Coinbase to make trading easier. As of now, I got a crypto wallet which allows me to exchange crypto and hold XRP – so I can put money into Coinbase, transfer it to my wallet as Bitcoin or Bitcoin Cash, and then exchange it there for XRP. Total fees incurred are about 10% of the money I put in, so it’s not cheap, and the bulk of those fees are from exchanging the BTC (or BCH) into XRP in my wallet. I’ve found that ETH charges insanely high fees, and that USDT uses the etherium network so it also charges high fees just to transfer Crypto from Coinbase to my wallet. To move $100 over, ETH or USDT will charge $12-$15 whereas BTC will charge around $0.08 and BCH even less.

Note that if you expect the 4-year Crypto cycle to continue then it is a horrible time to invest in the space. I’m nervous about it, but I see the case for potential rotation to XRP in the Crypto space after the trial ends and it becomes easier and cheaper to purchase. That being said, I plan to unload MARA in February but I might slowly add to XRP on weakness. I’m not sure yet.

Last note, in case any of you are curios about my charts, I use stockcharts.com for fancy things like seasonality and rotations and I use finance.yahoo.com for all my basic charts with notes added in Paint. These two sites simply have the best free tools for finance.

Good luck navigating this year, and may the odds be ever in your favor!

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