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The past week has been a difficult one if you don’t expect price action
Participating in this market requires a sense for probabilities. I mean, stock market participants have very little visibility to the market may fall just days before economic data is released. The most recent example is last week’s CPI number. It is good and desirable to expect that the market will be nervous to sell before the CPI number and that the probability is high that the CPI will fail. This is another thing to look forward to with the market rallying then. Again, it weighs the probabilities that the market will drop against some relatively strong support in the 3750s. Moreover, there is a recurring pattern that after the inflation news the market finds reason to rally. Maybe it sounds like fairies but so far we have good results from timing the CPE number last week and doing the same with the CPI. The key is the discipline to generate money early and wait for the right time to strike. We have found that having money management discipline eliminates emotion over how and when to sell shares in anticipation of a market move. When you have an allocation of money from trimming positions, and you are focused on the event, it makes success easier.
Many people declare that we are in a recession. Perhaps that’s why buyers come in when the market seems to be finding support. If we are in a recession then the rate increase should start to go down. That said, if the question is whether the explosive reversal to the upside this past Friday means blue skies and new heights (see what I did there?), It’s questionable. However, do we have the possibility that this week will be buoyant? Yes, provided the tape deals with little reference to inflation, and revenues continue to beat estimates by 4%. The fact that retail sales were not crater, with restaurant and bar receipts up 13.4%, E-commerce up 9.6%, as well as the U of M consumer survey was better than expected. I’m not looking to the future yet, but I’m pretty comfortable with the idea that we can rally. I made a few sales at Friday’s rally so if there’s a seller tomorrow I’ll see that as a buying opportunity. The next milestone of inflation -related data is towards the end of the month.
The good news is that the next milestone is the month-end FOMC Meeting
The increase has been telegraphed for several weeks, and it will be .75%. There has been some talk about going to 1% but so far it has been beaten by some Fed presidents. This is unlikely to happen unless Powell puts the economy under “double secret probation” (film reference). Really what else can Powell say? Especially if they only increased by .75%. If it’s so scary why didn’t he raise it by 100 bips? At the same time, many new data show that energy and food costs are declining. And while it’s still early we’re hearing that housing prices are starting to cool a bit. I think Powell is careful to say that they have won the war against inflation. He could also say that even if energy remains volatile the summer driving season will soon weaken next month and that should ease the gas pricing pressure (I beg to different but he can say that). Part of revolving inflation is the expectation that rising prices will be a fixture of the economy, so claiming to win over some of those against the process of raising rates will increase the effectiveness of the restriction. So as it stands now, I don’t think the July Fed meeting on the 26th and 27th will upset the markets. That being said I would probably reduce my equities to buy the decrease.
Just this? (Peggy Lee)
No, I keep looking for short ideas. I usually present this with Put spreads, as a way to hedge a bit, rather than hedging the indexes. So far it seems to work for me. This market is quite volatile, and trying to have a short long portfolio I think will help guard my portfolio against unexpected market recessions. If I believe a stock is weak then if the market jumps it should still not work. Then when the market sells off hopefully it will fall enough to generate alpha and protect the downside somewhat. The plan is still the same. So far so good.
My future plan is to let my holdings rise for the next week or two. Then start building a larger reservoir of money as we approach autumn. Mid-term elections are approaching and everyone thinks the House will lose the Democrats and possibly the Senate as well. I usually ignore politics because the market generally doesn’t care who is in office as long as there is a political stalemate. In the hope that Democrats will at least lose in the House any obfuscation of that possibility could interfere with the indexes. Another reason to be prepared for a down market is the seasonal impact; September and October are the most difficult months on the calendar.
I will do my best to load up short ideas and prepare money. What else can be set in the market? More inflation problems, I am one of those who believe that the energy situation will get worse, not better. OPEC will not increase production to help the Biden administration. The incremental barrel ironically depends on American oil companies and Biden himself told them he wanted to destroy that industry. Why plan to do more drilling? The smart thing to do is return as much money to shareholders as possible before that happens. The current administration has partially recovered the price of oil by reducing the SPR – Strategic Petroleum Reserve. Soon after that, in case the reason why it’s actually there happens, like a storm, for example, or a hacked pipeline. Anyway, if WTI rises to 140 per barrel the market will go down. There are always unknown situations like an economic accident in China. Last week I blogged about some running into banks by ordinary citizens, and they are being beaten back by the CCP. Today we hear about the mortgage strike of the Chinese as the value of the apartments where they put their life savings and the cost of cratering. Some of them have signed up for apartments that have not yet been built, and may no longer be built. A lot of money is being wasted now from Crypto values, to wallets and NFTs, with high interest being paid to DiFi and then being discontinued. Also, the dollar is completely torn, we already have equality with the Euro. This could force the ECB to raise rates that endanger Italy and Greece. A lot happens and any number of them can cause a selloff, so I’ll save money. I might even do some real hedging in early September.
My trades
The Alphabet (GOOGL) is split into 1 to 20 and will be exchanged tomorrow. The pattern is not what I expected I thought Amazon (AMZN) would have their shares soaring after their split. Instead, they lived less than where they were before the announcement. The same happened with other recent splits. I sold most of my GOOGL but I kept a portion just in case. If it’s the same I think it’s worth buying into the cons.
I started to expand the stocks I had in my portfolio. If I can’t get a bigger position in these new stocks, I can treat them as a trade and release them in August.
I added Taiwan Semiconductor (TSM) I got a poor value at a good price. I thought I would have more time to accumulate a bigger position but buy after they report earnings. At one point when the market was selling off they became flat so I put a small buy in thinking I could buy it a little less. No. instead, it collapsed. I might bite the bullet and buy a little more. However, if it doesn’t give me a chance to form a decent position, I’ll trade it in a few weeks.
A similar thing happened on Workday (WDAY). I think they are in a good thing at expanding their offerings. If it continues to run or at least touches its current level I can sell it, and hopefully, make a good trade. I also bought my first tranche of Nike (NKE) which I hold to get it down to 100. Not so I started buying at 103 and 102ish, if I break the 100 I will be more aggressive. I also added Disney (DIS), as long as I only buy under 100, I am hoping it breaks under 90 and I will get more aggressive. I bought some ServiceNow (NOW), because it sold out heavily after an interview where the CEO said the European sales cycle had slowed down. What do you expect? First of all, summer, always slow there when summer, and second, hello there is war there. NOW will be fine and if it’s not temporary, I’m willing to buy it cheap now and hold it for 18 months, and see it become expensive.
In short positions, I closed my Wayfair (W) and generated little profit. I went ahead and shorted Kohl’s (KSS), I shorted Luminar Technologies (LAZR) on a put spread, and I still shorted Lucid (LCID), Rivian (RIVN), and Digital World Acq. Corp (DWAC) all in Put spreads. I am also short on Bitcoin via Bitcoin ETF (BITO).
All my other positions are the same.
This is a difficult volatile market but it is possible to expect stock market movements right now if you know what to look for. Due to the lack of clarity with mixed economic signals, almost every significant economic milestone will have a unique pattern that you can use to your advantage. You need timing and the ability to recognize the pattern.