End of Cycle

I’ll start with a relative rotation graph of the major sectors. You can create one at stockcharts.com:

By far, the best performer is the energy sector, XLE. Next in line you have the biggest dividend safety plays, consumer staples & utilities. This feels a lot like 2008 when everyone was talking about oil hitting $150/barrel; classic end-of-cycle behavior before high priced commodities and negative real wages put a serious crimp into consumer demand and push us into recession.

I’m still predicting we start to see a serious stock market breakdown around the last week or two of the month. I’m fine calling it a hunch. There are plenty of reasons for a coming slowdown, including the fiscal cliff as the massive stimulus propping up markets in 2020 and 2021 is gone, mortgage rates are going up, the ban on foreclosures and evictions which helped keep the housing market artificially tight is gone, and the negative real incomes crimping sales growth.

There are plenty of signs of a coming slowdown, such as the inverted eurodollar futures curves you can see here: https://alhambrapartners.com/2022/03/03/the-rate-hikers-are-not-serious-people/

You’ll likely hear about the wonderful jobs numbers, but there are problems with those as well:

  1. Employment is a lagging indicator.
  2. The high numbers posted encourage more aggressive actions by the federal reserve this month.
  3. The crazy revisions make this latest data point useless. Read this for details: https://alhambrapartners.com/2022/03/02/bls-need-to-smooth-payroll-data-adp-hold-my-beer/

Anyway, I believe end of cycle is coming as we switch from inflationary boom to inflationary bust to disinflationary bust. My plan is still to wait until the fed actually announces the end of quantitative easing, initiates the first rate hikes, and talks about future balance sheet reduction. When will that be?

“Fed Chairman Jerome Powell on Wednesday said the central bank intends to raise its policy interest rate following the end of its two-day meeting on March 16”

Once that actually happens, I intend to load up on hedges which will most likely be more TLT calls, but may include puts in SPY or QQQ. Most likely I’ll stick with TLT calls as I expect that to be the inflection point before long dated treasury yields feel serious downward pressure, and I expect that the trade won’t be crowded.

Puts can get quite crowed on the other hand, and the structural dynamic of price-insensitive cash flows from payrolls into passive funds and corporate share buybacks are powerful forces to fight. I wouldn’t be surprised if puts purchased then actually lost money because they were overpriced and the market didn’t move down enough to cover the premiums.

My current portfolio allocation:

  • HEDGES (10.2%)
    • 10.2% TLT Calls
    • 2.6% AG (Silver), shares
    • 6.5% AG (Silver), calls
    • 5.3% SAND (Gold, Silver & others), calls
    • 6.0% EQX (Gold), calls & shares
    • 4.2% LGDTF (Gold)
    • 4.6% SILV (Silver)
    • 3.4% SILVRF (Silver)
    • 3.2% MTA (Gold & Silver)
    • 3.1% MGMLF (Gold)
    • 1.8% RSNVF (Silver)
    • 2.3% SSVFF (Silver)
    • 2.1% HAMRF (Gold)
    • 0.9% DSVSF (Silver)
  • URANIUM (29.2%)
    • 14.1% CCJ, mainly shares & some calls
    • 7.1% UUUU
    • 3.3% UEC
    • 1.9% BQSSF
    • 1.6% DNN
    • 1.2% ENCUF
  • US CANNABIS (13.6%)
    • 1.7% AYRWF
    • 1.8% CCHWF
    • 1.8% CRLBF
    • 1.7% CURLF
    • 1.6% GTBIF
    • 1.8% TCNNF
    • 1.8% TRSSF
    • 1.6% VRNOF
  • CRYPTO (1.0%)
    • 1.0% XRP
  • OTHER (0.6%)
    • 0.5% OGZPY
    • 0.1% ATCO calls
  • CASH (-0.5%)

I actually had a good week, as my portfolio value climbed by 7.4% bringing me into positive territory for the first quarter this year. I hate to say it, but the crazy Ukraine invasion and aftermath actually did a lot to help my gold, silver, and uranium miners. When I bought Gazprom (OGZPY) early into this, I didn’t think that Russia would move past the Luhansk and Donetsk regions or that we would sanction Russia so heavily. That’s down 80% and may end up worthless, but now many western nuclear utilities need to scramble for uranium supplies and enrichment facilities outside of Russia. Meanwhile, energy independence is becoming a political rallying cry as commodity prices soar.

The news for my Uranium miners is insanely bullish, and money has been pouring into the ETF’s which will need to purchase the mining shares. Despite this, I am really nervous about a potential end-of-cycle market crash so I sold a lot of Mar & Apr covered calls on my Uranium miners this week. Then last night I saw tweets about Russia attacking Nuclear plants and blowing them up, so I came in an hour or so into Friday’s trading and picked up another Jan 2024 CCJ call which put my cash allocation back in the negative. On the March 18 options expiry, I should lighten up on Uranium miners considerably as many of the covered calls I sold expire, some of which will expire in the money unless the sector really tanks before then.

My strategy on gold and silver miners is wait and see at this point. Gold and Silver are acting wonderfully as risk-off hedges, showing inverse correlations to the overall stock indices, but the miners have been lagging considerably and I am still quite negative on a lot of my holdings there. If the federal reserve is perceived to be too dovish, these should soar, and if the federal reserve is perceived to be too hawkish, I expect them to fall less than the overall stock market. I’m nervously bullish on these, but if we are approaching end of cycle, then they will come under pressure and they won’t really soar until the beginning of the next cycle gets started.

For US Cannabis, there’s a reason I’m not pushing my allocation much higher than it is. The sector is still bottoming, and my trading strategy here is to buy the bigger dips just enough to keep my individual holdings above a fixed market valuation and then wait for the big legislation. That strategy did have me buying more shares this week as they fell in a general risk-off move. Ultimately, I think these will pay off handsomely if I can keep this strategy going to ensure that I’m buying at the absolute bottom, but that requires an amount of ready cash that is fairly easy to manage at a 15% allocation but becomes extremely difficult to manage if my allocation grows much higher.

Good luck, and be careful out there. Market liquidity is fairly low leading to very choppy moves, including days which see markets plunge 1-2% after open only to close 1-2% higher. These moves will chop up bears and bulls alike.

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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