The Forest and the Trees

One crazy thing about trading stocks is that you are hyper-focused on market moves and news events day by day, while looking in on charts that go back years. It seems so easy to point out the tops in these historical charts, but if you zoom in a bit you’ll find all sorts of fake-outs where bears called a top just to get gored by rushing bulls.

Professional traders are amazingly good at reading sentiment. They have their own indicators, often proprietary or paid subscription, and they are very good at using tools like stops to cut their losses quickly or adjust higher to lock in profits while letting the stock run. I don’t trade this way, because it costs money and it can be a lot of work, whereas I’ve got a totally unrelated day job and a portfolio that’s not quite big enough to cover the costs of expensive tools.

My strategy is more along the lines of picking a few sectors that should be solid winners over the next 5 years or so, selling covered calls on big runs, and acquiring more on big dips. I often use shorter-term setups to do option plays that cost little and have a potentially big payoff, in hopes of a win that shoots me toward escape velocity, or a level at which a modest return could fuel my lifestyle without working. I figure that would be around $800k total or so, so I’ve got a long ways to go and work alone will never get me there. That being said, I am happy taking a higher risk approach, and I can sit through years of losses if I can keep the hope of a big win someday.

That being said, I’ll start with my dot-com bubble roadmap from last week:

We are certainly in a very strange environment. The 2000 tech bubble did not include a housing bubble or a bubble in non-tech stocks, and short dated treasuries gave you a 5.5% yield. You could argue that our tech bubble has already collapsed by comparing the highly speculative stocks back then with the performance of ARKK in 2021.

If you look at SPY in 2000, it double-topped in August 2000 before dropping around 45% over the next 2 years. After that, the housing market skyrocketed along with commodities over the next 4 years. This time around, we have a major housing bubble like we saw peaking in 2007. At that time, the 2009 crash was just a correction for many commodities such as gold, silver, and copper, which peaked in 2011 – mainly due to the enormous stimulus and building programs in China.

Where are we today? Many have called it the everything bubble – stocks, bonds, housing all making new highs within the past year. Is it reasonable to expect everything to collapse? Not necessarily. Markets tend to rotate between sectors more than anything. Besides, the federal reserve can do a lot to juice the stock market as we saw just 2 years ago.

So where does that leave us? All I can do is throw some thoughts out about different sectors and decide on a direction to take. Using roadmaps from the past can help, but we have to realize that they are for different roads and be a bit more flexible with our thinking. So here are my thoughts:

  • Interest rates cannot go much higher without seriously breaking something in the financial system.
    • Debt/GDP levels are extremely high in every major world economy.
    • Junk bonds are a $4.7 trillion market vs corporate bonds at $609 billion according to https://www.fitchratings.com/research/corporate-finance/us-ig-market-size-grows-to-4-7-trillion-on-tech-driven-issuance-30-11-2021
    • The biggest fear that the Federal Reserve has is that companies will not be able to roll over their enormous pool of junk bonds and they will start defaulting. That is why the federal reserve made such a big noise about supporting the junk bond market back in 2020.
    • Meanwhile, CPI numbers (a lagging indicator) have been consistently surprising to the upside while the headline unemployment rate (also a lagging indicator) remains strong, and the Federal Reserve is under enormous political pressure to bring down inflation any way possible. Their only real tools are influence over interest rates with the discount window & repo markets, and the size of the fed balance sheet. They will increase pressure on the financial system using these tools until a significant market correction occurs.
    • The questions are how fast will the fed tighten, how much will it take to crash the market and cause a recession, how will the markets react in the interim, etc.
  • Commodities are in short supply
    • Many commodities markets have suffered a decade of poor returns, consolidation, and under-investment. Combine the ESG mandates, the winner-takes-all effect of passive index investing (where 9 companies are worth over 27% of the S&P 500 index), and the miniscule representation of energy and mining companies in the S&P 500 and we saw a serious lack of investment.
    • Supply problems in many commodities are so bad, that in today’s highly covid-constrained economy prices are skyrocketing as they can’t keep up with demand. It takes years of investment to get more mining and oil online, and we don’t see the level of investment needed.
  • Populism is growing
    • Populism often leads to geopolitical risk whether its the uprisings in Kazakhstan, the escalations in Yemen, the potential invasion of Ukraine, etc.
    • People are increasingly pushing for basic needs. Cheaper food, cheaper energy, affordable housing, etc. Meanwhile, governments in the US and in Europe shy away from any major investments in anything they don’t consider environmentally friendly such as the electric grid, mining, oil, nuclear, roads, bridges, etc. This is going to change at some point – but until then, deflation is the major risk.
      • Clarification on the deflation risk: The risk is not that CPI prices will drop, but that asset prices will drop such as stocks and real estate. Deflation in this sense simply means less money traveling through the system to bid up assets and fuel discretionary spending. In this framework, squeezing people on energy, fuel, housing, and food for money they don’t have will cause a nasty recession rather than a crack-up boom.

Basically, I’m loaded up on things I see as undervalued growth sectors for the future. Especially on gold and silver miners because they are more defensive commodities; they can soar when big money is looking for somewhere to hide. How’s that going? Let’s take a look:

The charts above are all 1-year charts ending Friday 1/21/2022 with their 20-day and 50-day moving averages.

Here’s my current portfolio:

  • HEDGES (11.7%)
    • 11.2% TLT Calls
    • 0.5% XOM Calls
  • PRECIOUS METALS (51.9%)
    • 7.9% AG (Silver), shares
    • 7.8% AG (Silver), calls
    • 3.4% SAND (Gold, Silver & others), calls
    • 5.3% EQX (Gold), mainly calls & some shares
    • 4.5% LGDTF (Gold)
    • 4.5% SILV (Silver)
    • 4.0% SILVRF (Silver)
    • 3.8% MTA (Gold & Silver)
    • 3.1% MGMLF (Gold)
    • 2.1% RSNVF (Silver)
    • 2.1% SSVFF (Silver)
    • 2.6% HAMRF (Gold)
    • 0.9% DSVSF (Silver)
  • URANIUM (25.1%)
    • 13.0% CCJ, mainly shares & some calls
    • 6.5% UUUU
    • 1.3% BQSSF
    • 2.5% UEC, shares & some calls
    • 1.1% DNN
    • 0.8% ENCUF
  • COPPER & NICKEL (0.0%)
  • US CANNABIS (15.4%)
    • 2.1% AYRWF
    • 2.0% CCHWF
    • 1.8% CRLBF
    • 1.9% CURLF
    • 1.8% GTBIF
    • 2.0% TCNNF
    • 1.9% TRSSF
    • 2.0% VRNOF
  • CRYPTO (23%)
    • 1.3% MARA, Bitcoin miner
    • 1.0% XRP
  • CASH (-6.5%)

During this last week, I sold off my copper/nickel miner and reduced my gold & silver holdings a little bit. Much of that money was spent on adding to laggards among US Cannabis stocks and Uranium Miners. As a result, my margin debt got a little bit bigger.

Some of my short-dated calls expired at zero, but my March XOM calls did well. I bought 20 of them at $0.15 each and sold half this week averaging around $0.92 each.

I bought back my MARA covered call again, bringing my average buy-in cost down to about $29/share. I’ll sell another covered call on it this next rally.

Right now I’m mainly looking for a serious breakout in my gold & silver miners and/or Uranium miners. I would like to reduce my holdings in both a bit before the end of March, but I do think that we see a significant bounce in both here over the next month so I’m not selling yet. When I do reduce, I also plan to do it mainly by selling covered calls, assuming that they have a decent premium to them. Gold and silver miners have practically no short-term premium on their calls at all right now, so I’m more inclined to want to buy them for a potential lottery win than sell them for a pittance. Next week my covered calls on AG expire and I’ll see if I keep those shares or not. If they do sell, it will greatly reduce my margin debt – which I mainly incurred by buying all those Jan 2024 AG call options to lever up my exposure while it was cheap.

Good luck trading these markets, this year will be a difficult one to trade.

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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1 Response to The Forest and the Trees

  1. This is a fantastic analysis, many thanks.

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