Newsletter - 09/28/2024
New all-time highs on the $SPY! The "Blow Off Top" has begun! Or has it? For all the FOMO induced buying that occurred last week there appears to be a general lack of excitement. More importantly, there was little follow through telling me that all is not well underneath the surface. I mean, I HAVE been saying this for over a month so you might be asking yourself "Ok, I agree with you - what's taking so much time?"
Whenever I have watched PART of the market break out and the others do not follow quickly, or the others are taking time to break through to highs themselves it indicates to me that there is a lack of conviction.
Conviction is what is needed to take risk by going long, especially when an apparent breakout is struggling. In order to have conviction you must have confidence and in order to have confidence you must have a REASON to be confidant. If there is not a solid reason to be confident than any expected gains are built on a very shaky foundation.
So, how long will it take for the foundation to fail? From a stock market perspective the foundation is already failing. When will the decay be enough where the market collapses under the weight of it's own foolishness? That is an impossible question to answer. However, looking at the sum weight of all the evidence, I believe we will get the first test to the downside in October. Whether or not that test turns into something more sinister will be decided by what exactly finally "breaks" the uptrend. What is it that will
FORCE the market to start removing risk? That is also unknown but unlike pre-2008 this time there are many possible catalysts, compared to one on 2008.
Perhaps I am succumbing to bias but for all the supposed excitement and euphoria that usually accompanies all-time highs and "the inevitable soft landing" there is a distinct undertone of negativity and fear. I see evidence of this primarily in the MSM and Fintwit. It is as if everyone agrees the market is very much overvalued but no one wants to be the first one to act upon it. This is a classic case of the
market having a severe case of FOMO. And we all know what happens every single time FOMO is the motivator. In fact, in a "normal" market, where "normal" is defined as not being supported by constant liquidity and lies, the same FOMO that drives it up will suddenly reverse to FONGO - Fear of Not Getting Out. Remember that most market participants, professional and retail, base their investment decisions on faulty logic, feelings or emotions, the desire to "pull the slot machine handle" but not on data. In fact, the more severe the FOMO, the greater the resistance there will be to think logically, whether individually or as a market group.
BLAH BLAH BLAH - WHAT'S THE PLAN?
So what's one to do when faced with the level of uncertainty that currently exists? Simple - block out almost all the noise and focus on PRICE. Focus on the one thing that cannot be editorialized, that cannot be minimized and that cannot be misinterpreted. $43.70 is NOT anything else than forty-three dollars and seventy-three cents. And if the price is more than $43.70 over the next two days - then price is in an uptrend, short as it may be. and there is nothing that anyone can do or say to prove otherwise. Do not allow the purity of price to be tainted with the opinions or analysis by so called "experts" or your own bias. I hate to tell you this but : IT DOES NOT MATTER WHAT YOU THINK WILL HAPPEN WITH PRICE - that is a completely useless data point. It cannot be measured, nor can it be quantified so therefore it is a completely useless non-datapoint.
IGNORE EVERYTHING ELSE BUT PRICE?
Pretty much. If you are reading this and shaking your head wondering how the heck a former professional trader was able to have a successful career while ignoring the headlines, experts and Fintwit. To be specific, the only additional information other than price that is valid are possible news events that could occur during your estimated holding period. That's it. Anything more than that is only going to make the evaluation process that much harder. Don't waste your time and effort. It does not add alpha. It actually REDUCES alpha. In fact, I would wager that you probably also ignore your own experiences that prove more info = less alpha. The choice is simple: trade and invest YOUR way and continue to lose money over the long term or try a different way. Your decision will define how serious you are about protecting what you have and then growing it.
CHINA'S POO POO PLATTER?
In the mid 90s China was starting to open it's economy up to the outside world by establishing "Special Economic Zones" where Chinese companies and foreign money could come together. As a result of this there was an explosion of Chinese companies going public on the US stock exchanges. Honestly most of them were just ways to convert Chinese assets to USD via their stock listing so not exactly an enticing investment thesis. My firm identified three Chinese based companies that were interested in listing on a US exchange and after the usual process, all three IPO'd. For a period of time while Chinese stocks were "hot" the three stocks did well. But once the market got saturated with Chinese deals, US listed Chinese stocks were quickly, and sometimes violently, categorized as "good" or as "bad" investments. With the title of this section, you probably already know what happened to those three companies. Yup - eventually they all went down, to pennies, and then were reverse split, and then went down some more before finally being delisted.
My point is this: when the "China Boom" first happened in the mid 90s it didn't turn out so well for that first wave of companies and their shareholders. Why? Because one of the benefits of being in a Special Economic Zone was easier access to Chinese Government capital (stimulus), special taxing (stimulus) and other incentives such as cheap rents (stimulus), as an example. But a funny thing happened once a Chinese company went public - investors started evaluating companies based on their own merits absent of any consideration of all the stimulus they had received. I am sure you already know what the
result was: many Chinese IPOs failed within 3 to 5 years later. It wasn't a sudden collapse as much as it was a slow death. It became so bad that I nicknamed the three IPOs my firm had done as the "Poo Poo Platter" and much to the annoyance of my CEO and CFO, the name stuck. Eventually most of the firm was referring to the three stocks as a member of the Poo Poo Platter. Even worse was I started dating the daughter of one of the CEOs and SHE started referring to her own father's company as the Poo Poo Platter. Suffice to say that her father did not like me at all and I was never invited back to their 25,000 square foot mansion in Silicon Valley (remember I said that many of the Chinese IPOs were really
just a way for Chinese mainland execs to convert their newfound Chinese wealth to USD by selling shares to foreigners). When I compare China's recently announced stimulus plans to the stimulus in the 90s, I conclude that those plans are a much larger Poo Poo Platter than the 90s one. In fact, not only is it a much larger pile of poo it is occurring when there is significantly more risk in the world. Mark my words: the outcome will be the same (bad) but will be multiples worse than before.
Season of the Witch
The month of October has produced some of the largest drawdowns in stock market history. 1929 and 2008 are examples. In reality what is more dependable than a market crash is the increase in volatility during the month of October. But why does this seem to happen every year? Because a confluence of events occurs every year during October and it is these events that trigger a jump in volatility which can cause a small down to turn into a large down almost overnight. In a normal market environment these are some of the variables that all make
The month of October has produced some of the largest drawdowns in stock market history. 1929, 1987 and 2008 are examples. In reality what is more dependable than a market crash is the increase in volatility during the month of October. But why does this seem to happen every year? Because a confluence of events occurs every year during October and it is these events that trigger a jump in volatility which can cause a small down to turn into a large down almost overnight. In a normal market environment these are some of the variables that make October the "spookiest" month:
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October 31 is the end of many Mutual Fund's fiscal year - more transactions due to "window dressing" and closing positions.
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October, being the start of the 4th quarter, is when companies start focusing on the next year and therefore news can be slow or lacking detail resulting in more uncertainty.
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The market "remembers" that the worse crashes have occurred in October so there is an elevated anxiety level just because of the history.
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Market participants keep a tighter rein on losses since they don't want to "give back the gains" they have achieved in the first three quarters.
This year we have even more datapoints to concern the market. In fact, I do not ever remember a time with as much risk as now. In addition to the above, this October the market also has to consider:
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POTUS Election
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War in Israel, and Lebanon
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Fake financial data from the government
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Market near or at all time highs
It should be easy to see why I am long VIX calls out to December, yes? Will this October be another large down month? Unknown BUT looking at the weight and number of risks in addition to the normal market volatility in October it should be apparent that the probability for at least increased volatility is especially elevated this October. It remains to be seen if we will get a "trick" or a "treat" but I am betting investors are about to get their windows soaped and egged, so to speak.
A Big Fat Lie
ICYMI I discussed the above chart during my Live Session this week about Trading Psychology. If you are unfamiliar with it, it depicts the emotional and psychological rollercoaster that investors experience in their pursuit of profits. Guess what? It's a BIG FAT LIE. Why? Because there is absolutely no reason why you should even get on that emotional rollercoaster IF you are truly trading based on price and data. In fact, if you ARE on the emotional and psychological rollercoaster then it is powerful evidence of three things:
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Your investment decisions are not being driven by facts - they are being driven by your perception of information or price action.
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You have never consistently made money investing.
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You are doing it wrong.
The fact that investment gurus offer advice on how to move from a negative part of the rollercoaster to a positive one proves that those gurus are anti-gurus. Why? Because the most accurate advice would to be NEVER TO GET ON THE ROLLERCOASTER IN THE FIRST PLACE!! It's sort of like the drug induced rollercoaster of addicts who get high and then need something to bring them down and then need something to bring them back up. How about don't start in the first place?
There is a fairly easy solution though: DO NOT TRADE if you experience any of the above emotions for longer than a few minutes or until you can confidently rely upon price as the decision maker. How long should you stop trading? Early on when I struggled with it I would attempt to push through it by focusing on my methodology and plan. The first week was miserable. But with each successive week, it got easier and easier to ignore and control my emotions until it just became a habit. What? Did you think it would be easy? Cmon. Force your brain to switch from using it's emotional part to its logical objective part. I say this seriously: if you can stay off the rollercoaster your probability of success in trading goes up exponentially.
All You Can Eat Chinese Buffet - Or Is It?
The market was sent over the moon this past week when China announced the largest stimulus package since the pandemic. As part of their initial moves they:
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Cut two interest rates with a third promised for Oct. 21.
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Cut the amount of cash banks must keep as a reserve.
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Created a 500b yuan ($71b USD) for firms to borrow money to buy stocks. This could grow to 1.5TRILLION yuan.
In addition to the above which were made available immediately, the PBOC also announced plans to support their economy with the following future measures:
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Possible market stabilization fund
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Cut mortgage rates by 50 bps.
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Reduce the minimum down payment ratio from 25% to 15%.
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Provide 100% of the principal for bank loans to state owned firms to buy unsold properties.
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Capital injections for the six largest commercial banks.
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Issue 2t yuan of special sovereign bonds whose proceeds will be evenly split between stimulating consumption (what??) and helping local governments tackle debt problems.
I don't know about you but the above seems to me to be very serious and expensive measures to take. But it's all a shell game. As one example the PBOC is astonishingly STILL trying to fix a consumption problem (among many problems) by making more money available so businesses and consumers can buy more. On credit. Not from real savings or earnings. Why target increasing consumption? Because it's the quickest way to try and jump start their economy. The problem is that just like a person who does drugs, tolerance builds up after each "dose" forcing future "doses" to be even larger and larger. While China is still a manufacturing and export economy the rapid growth of its middle class has made consumption a vital piece of the picture.
So China is trying to repair it's real estate sector that is in trouble because of bad loans by making more funds available under even looser requirements than the initial bad real estate loans required. Their hope is that by stabilizing the real estate market it will make consumers more likely to spend. The problem with that is many of those consumers purchased houses and now owe more than their property is worth - it's going to take more than the above before confidence returns.
Finally, call me old fashioned but you do not fire with everything you have, so to speak, unless things are really really bad. I guess this time is different.
A Battle Royale
Up until this point the US, EU, Japan and China have been largely working together or at the very least, staying out of each other's way, economically speaking. While some might think that China and the US have been at war economically already but if they have, it has merely been skirmishes that resulted from one country's policies at odds with the others. However, I believe this is changing as I write this. Why? Because the margin for error globally is so small that we have now entered the stage of "every country for themselves." While only in the initial stage it could become much worse if the global economic situation worsens. And it's going to.
Here is an overly simplified version of each country's objectives, and their possible effect on the other members of "Big 4":
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China wants to prop up its domestic real estate and banking sectors.
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This reduces the funds available for investment outside of China, such as US Treasuries.
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Japan wants to save its economy from deflating again AND its stock market from crashing.
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Japan has been the US' errand boy actively helping to manipulate interest rate, oil and currency markets. IF they decide to take care of their own pagoda first, then the US loses their largest and most willing participant in crime.
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But does Japan defend their currency, support their stock market, continue to fund the US' destructive pursuit of global hegemony or do they continue their attempt to escape 20 years of deflation?
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The EU wants to avoid going completely bankrupt.
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Their solution has not been to rein in excess but instead to go and join in the fight against the evil Russian empire. This has been a major contributor to global geopolitical risk resulting in supply chain and materials cost increases out of Europe.
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The EU is creating a black hole of debt and falling productivity that risks pulling in the other members of the Big4.
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The EU is merely the second errand boy of the US, until its own situation inevitably decays to the point where they cannot "help" the US behind the scenes.
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The US wants to remain in charge of everything.
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The world is becoming increasingly disillusioned with helping the US "stay in charge."
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The rest of the Big4 will always be negatively affected by any US economic policy which is protectionist in nature, which all of them are.
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Do you see what I mean? The clock is ticking until one or all of the countries decide it's "every country for itself" time. WHEN, not if, that happens the result will be economic war. While the MSM and Fintwit will promote it as everyone is working together we know that's not true. When a country starts only looking out for its best interests the obvious result is that action is a negative for the other countries. It cannot be any other way. So, place your bets.
Week in Review
Model Portfolio - since 5/9/2023
This Week:
Last Week:
While the SPY finally broke to ATH's and the MSM tried to manufacture euphoria, it lasted only for days before the market ran out of momentum. Even with the news from China the market could not fully gain momentum. Even more telling was that on days the market was up the VIX was hardly down. Now the VIX might be a function of quarter end but I don't think so.
Trading was good this week with the Model Portfolio finally breaking 200%. A silly goal but nonetheless meaningful to me. While I had many really good trades this week for the most part their position sizing was smaller than normal due to the elevated risk going into Thursday when there were SIX Fed speakers. Did I anytime this week say to myself "Boy, I wish I had allocated more?" Yes - for about a second. I was quick to also consider what it would have looked like had the trades not done well at the reduced sizing and that snapped me back to "Protect Capital" mode. It took about one second.
Closed trades this past week:
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$DOCN Nov 47.5C: Stopped: -37% in 3 days
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$AXTA Nov 36P: Stopped: -14% in 1 day
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$OWL Nov 19C: Scale: +20% in 5 days
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$OWL Nov 19C: Scale: +52% in 6 days
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$EOSE Jan 2026 2C: Scale: +98% in 88 days
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$INTC Nov 25C: +41% in 1 day
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$CLSK Oct 8C: Stopped: -81% in 21 days
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$LITE Nov 65C: Scale: +66% in 2 days
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$CCJ Nov 50C: Scale: +46% in 1 day
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$QLD Oct 101C: Closed: +33% in 44 days
Closed Positions
$DOCN Nov 47.5C: Stopped: -37% in 3 days
$AXTA Nov 36P: Stopped: -14% in 1 day
$OWL Nov 19C: Scale: +20% in 5 days
$OWL Nov 19C: Closed: +52% in 6 days
$EOSE Jan 2026 2C: Scale: +98% in 88 days
$INTC Nov 25C: +41% in 1 day
$CLSK Oct 8C: Stopped: -81% in 21 days
$LITE Nov 65C: Scale: +66% in 2 days
$CCJ Nov 50C: Scale: +46% in 1 day
$QLD Oct 101C: Closed: +33% in 44 days
USDJPY
Same as last THREE weeks: USDJPY must hold level is 140. Friday's close was very interesting as the Yen strengthened against the dollar strongly for a one day move. This could have occurred for any number of reasons but of note is that price was rejected at the battlezone midpoint I believe a test of the 140 level is now possible next week.
THIS AND THAT
Oil manipulation continues with Reuters and the Financial Times each quoting "anonymous sources" for their conflicting info. (Zerohedge)
Uncle Warren is only 20m shares away from not being a 10% control position. Underneath 10% he would no longer be required to report his trading. Curious.
This past week's Gaslight of the Week award goes to this genius. I don't think the businesses and homeowners that have to rebuild feel the same way. I am certain that the property insurers feel exactly the opposite. Of course, they will just pass on any loss to the consumer via premium increases. What a deal!
Gross Domestic Income or GDI includes interest payments to and from the Fed. What do you see? (from Zerohedge)
Five years ago I would have classified this as BS. Today? It makes me despise the pharma industry even more. I pray Trump wins so Kennedy can get in there and raise hell.
And the latest example of Jerome is liar here we have US Financial Conditions at their LOOSEST since 2021. If the economy is "good and solid" then why the need for so much financial "looseness" such as lowering rates? Your pants are on fire Jerome.
$ENVX and $EOSE
I entered a long swing trade this week on a confirmed LCD. Once again this particular candle formation is proving to be a high probability reversal set-up.
As for the company, other than speculation management has remained largely silent. I still hold my Lotto LEAP calls but see no reason to add. Once again: COLLAR!
While Kamala sort of mentioned EOSE in a presser this week after visiting the facility, she failed to mention the name of the company. A later press release did mention EOSE but I don't think many investors read her "visit" press releases.
Price was resilient this week closing up about 8%. I remain confident there will be news soon announced. As for what the news will be?
$SPY
From last week's newsletter: "the $SPY finally broke to new highs AAAAANNND then immediately failed."
This week? Same.
I believe that the SPY is being held down by the fact that the Naz and small caps are not more strongly moving up. At the very least this tells me that the Mag7 are no longer leading the market. Furthermore, the tech sector is also losing its leadership affect.
Ultimately, weekly remains in a buy with the daily struggling to retain any large advance. Not evidence of a ripping bullish euphoric market. Yet. But the longer it takes the less likely it becomes for a Blow Off Top.
$QQQ
QQQ action this week was a whole lot of effort with little to show for it. Last week the QQQs closed at 486.23. This week? 486.75.
The good news is that the weekly remains firmly in an uptrend. The bad news is it again came on the back of pitiful overall volume.
If "they" are trying to convince Hedges to stop shorting the market and to attract the $6 trillion or so sitting on the sidelines they are going to have to do a much better job jamming the market higher. Quickly.
Doom
Anti Doom
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Thankyou Family!
theBoss
Nothing above is investment advice nor should it be construed as investment advice. It is offerred for entertainment purposes only. Always consult your advisors before investing any money. Do not "follow" or "mirror" any trade ideas provided. Mr.NotAdvice is not a licensed or registered investment advisor. Do your own research.