Newsletter - 10/20/2024
I believe we have entered a period in the market where risks are at a level that is unprecedented. Read that again: yes, I have NEVER seen so many different risks all occurring at once. I just finished a 1 on 1 with a VIP who has been a Psychiatrist for three decades and the discussion centered around how is it that the market keeps going if things are so bad? How is it that investors seem to be uber bullish and that doesn't correlate to the rising risk environment I say we are in. So what's the deal? I want you to think back to 2007. If you
don't recall just look at the price chart but ask yourself this question: did you have any concern that an economic crash was possible? Probably not. And yet, there were plenty of professional market participants who not only thought it was possible but probable. Do you remember hearing about all of those professionals that prepared before the crash based on the then incoming data trend? Me neither. Because going against popular opinion is not a position that most people can emotionally handle. The only reason I can is because i have had a lot of practice.
One of the most successful investors is Warren Buffet. Everyone loves to quote him: "Be fearful when others are greedy and greedy when others are fearful" is one of his best known statements. And yet, if you are being honest with yourself, you probably find it hard to follow his advice. And that's because you lack the experience that doing so leads to profits. But here's the point i am trying to make: I am sure you have followed the opposite of Buffet's advice and have gotten greedy when others are greedy and the result has been losing money. Therefore, it is illogical that you would choose that same unsuccessful path again, and yet that's what you "want" to do. Now is the time to choose to be different. Now is the time to choose to act differently and make different choices than just the same choices that previously have reduced your investment capital.
This week's Newsletter is focused on preparing for any of the possible market "landmines" but it doesn't mean I will not look long. Remember I am completely agnostic as to direction or thesis - it is all driven by the price chart. However, especially for the next couple of weeks through the election I will continue to size positions down to reduce risk. I also will continue to be a bit more demanding of any trades I take since I know that there is the rising possibility that the "invisible hand" will be removed, either by choice or by being forced by something breaking.
Allow me to conclude the introduction section with this: I believe we have entered a period in the market that will last until mid-January where market tone will begrudgingly be forced to turn negative by outside events. My level of confidence in this is as high as I can go and so high that I am willing to make the short thesis be up to 40% of my total portfolios. That would mean I could be 80% invested. My expectation is for a minimum 5X return by the end of January and then at least a 20X out to the end of 2025. But be warned: this trade thesis might take time as the trigger event is unknown. SO I once again am alone in my call for a drop outside of a couple of Fintwit people.
These are the type of setups I live for: supporting data is present for a crash but trader sentiment is exactly the opposite. Effectively I will make money, if I do, because I was able to put aside my emotions, look at the data, ignore the non-fact based views that overwhelmingly oppose my trade thesis, and execute. I will make money doing the same thing that I do when I trade anyway and that's why the size of the opportunity has no affect on me. Neither does that fact that the very few others have such a doom outlook as I do. All of that is already reflected in price.
You read this Newsletter or you are a member of the Discord or you follow me on Twitter. Or you are a paid VIP. My goal is to teach people how to be a professional trader. Welcome to what's it like being a professional trader. I am making a market call that if I am wrong I will lose money and I might even damage my credibility. I am well aware of this. BUT - the data and my experience tell me my thesis will be a "Big Short" type of trade.
Short Term Outlook and Possible Outcomes
I have been giving this a lot of thought: with all of the economic and political risks that are metastasizing what are the probabilities of the major risks I have identified actually occurring? Also, how does the rest of 2024 look regardless of who is elected? And finally, how to be best protected (first) and positioned to profit (second)? Before diving in remember that all of the following can be thrown out the window if the Fed announces a new stimulus program.
Possible Triggers and Probability
While I have explored and discussed a myriad of possible triggers for a market reversal, I want to focus on those that I believe are most likely to occur by the end of 2024.
Trigger 1: Election Delay or Interference
While I have no idea how it will happen the chance that the election will be delayed or interfered with is extremely high. Worse, no matter who wins the "other side" is going to be angry and will not accept the results which will lead to the entire issue being dragged into the courts. The only other time the US had a contested election was the Bush v. Gore contest in 2020. For 36 days the contest was not decided until the Supreme Court handed the victory to Bush II. From November 7, 2020 until the end of November 2020 the SPX fell 8.1% and the Naz dropped 24%. It is important to note that the market was already technically in a bear market when this happened but my point is this: the market does not like the unknown and if this election is delayed, the market will drop. How much? Unknown. My probability measure for this is +90%.
Trigger 2: Israel or Iran attack nuclear sites
While recent "leaked" intelligence reports suggest that neither Israel or Iran "intend" to hit each other's nuclear sites war can change dynamics quickly. I have been surprised that each side has been telegraphing where and when they will attack and attribute this to the fact that this war is not (yet) about complete annihilation but instead a "tit for tat" response cycle more geared toward public opinion. However, the risk of a quick escalation is still very much present. Recently Israel stated that they were NOT going to wait until after the US election to strike Iran but that could just be information warfare. Although the risk of a hit on a nuclear site is higher than usual, I place the probability of this occurring at 50%.
Trigger 3: Bad Earnings Season
With the bulk of earnings are being released over the next two weeks I don't think it will be the trigger for a market reversal. I am not saying that no reporting companies will be hit - I am saying that I do not believe that the overall tone of the earnings season will be negative enough to cause a downturn. First of all, Q3 earnings expectations have already been lowered.
In addition to the bar for earnings already being lowered the largest buyer in the market is about to be able to start buying again, and at the largest $ amount, ever. Who am I talking about? Corporations via corporate stock buybacks. The "blackout" period that precedes earnings announcements is ending and that will put about $65b of corporate buying according to Goldman's Corporate Execution Desk.
I think the chances of the market dropping due to a poor earnings season is low, maybe 20 to 44%. That is not to say that this earnings season won't be bad - it will be, at least on the forward looking side.
Trigger 4: Japan abandons the US and defends the Yen
I don't think this is a high probability event over the next three weeks. After that I believe the probability will grow quickly that they JCB will be forced to step in defend the Yen against the dollar or risk re-deflating their economy. 160 USDJPY is the level that FX traders largely expect the JCB to step in and defend and as one of the US largest trading partners and allies it will not want to affect the US election. I'd say a 1% chance of happening, unless something breaks.
Trigger 5: Loss of Internet or Communications
In the last couple of months there have been multiple events that either are suspicious in nature or were knowingly hacked. American Water (AWK), the largest water utility in the US, was hacked October 7, 2024. This follows the recent hack of UNH and a Russian hack in January of a water filtration plant in Texas. And then there was the recent VZ hack with some people losing service for days. VZ said officially that it was due to a "technical issue" but online sources stated that the attack targeted the power supply of cell towers and that it was too focused to be random.
While I have no doubt that the above were all dry run tests I do not have any evidence that an electronic outage will occur before the election or even after it. I know that the risk is rising of such events but rising risk does not mean rising probability. I put the chances of this at 10% even though my feelings say 60%. Evidence and analysis say its low prob.
So What's the Trigger??
Of all the above possibilities the only one I think is a high probability is that there will be some kind of election interference or delay. When that happens, the market will react very unfavorably. It is impossible to predict how much because I don't know if a delay of the election will cause other things to break. As you know. I believe that at some point the stress on the system will crash under its own weight.
If I was forced too I would predict that the market will crash no later than January 2025. From now until then I assume the longer term trend will continue: up. Until price reverses and/or confirms a downtrend on the weekly chart I won't have high confidence that the downturn has begun. Therein lies the challenge: wait and most likely miss the initial move (where more than price is moving in my favor) or get in early and wait, watching as your p/l trickles lower? Only you can answer that question.
What's Breaking?
I personally think it is much easier to identify evidence of something breaking instead of watching for the break itself. No matter if you are talking about the financial world or the physical world, stress in the "system" does not occur without negatively affecting the system and sometimes, the stress is so great that it will break the system. I don't care if we are talking about the monetary system or a steel girder: each is designed to withstand a specific tolerance only.
Keeping with the theme of evidence that the system is breaking, let's take a look at more esoteric datapoints, what they mean, and why it's bad.
SPX vs MOVE vs VIX
If you don't know what MOVE is it is simply Bond Volatility. As the chart below shows the SPX and MOVE (inverted) have historically moved together but the current gap is massive. Either Bond volatility falls or the SPX falls.
Our Economy's Fuel is About to Hit "E"
I have explained ad nauseum how liquidity has caused all assets to jump in value as a record increase in dollars chased the same amount of product. What many forget is that all of that purchasing pwer, which is the fuel that drives the US economy, has been driven by the very same liquidity that has pumped stocks. However, unlike Wall Street who can just print more money the average American consumer cannot. As can be seen by the following chart, American spending is about to crater. When consumer spending retracts it will ripple throughout the economy, and quickly. As a side note, it's interesting that the record savings that existed are all but gone and debt has risen to almost exactly the same amount.
Bank Deposit Outflow at SVB Crisis Levels
Banks fail because depositors remove their cash quickly. When SVB failed in March 2023 it was because accounts that were not covered by FDIC insurance because they were over the limit had no choice other than to pull their cash. While no specific larger bank is failing (A smaller bank in Oklahoma failed last Friday) deposits are still leaving at an astonishing rate relative to the recent history.
So if it's not a bank failing, then what is it? Well it's the genius of Jerome Powell! When he lowered rates by 50bps it should have driven down long term rates also. It didn't. The higher long term rates go the closer the #CRE gets to breaking for good. Worse, the higher rates go the worse banks' balance sheets get. And they are already terrible. As rates go up deposits leave banks to seek higher yielding products. This is another reason why Jerome cut - to help out the banks. Again.
Retail: the Ultimate Top Indicator
And if you are not convinced yet that things are breaking, I submit the following graph without comment.
Trade Plan
If you are confused after reading the last two sections because there appears to be a conflict: there are structural reasons for the market to continue to go up AND there are structural reasons why the market is breaking. Well, yes and yes. Both are true if you realize that their expectation timeframe is different. In the short term, say through the end of the November, the market is set up to go up because there will be an increase in the supply of money chasing the same amount of shares, because of corporate buybacks. Also, any possible bad news resulting from earnings should provide some downside resistance in the event the market decides that bad earnings are actually bad. I intend to position myself using the following products for the following timeframes.
Current to January Opex 2025
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I am adding to my current VIX Calls by adding some December 2024 Vix calls. I want to give enough time since i have adjusted my timeframe to after the election. I will be entering these options this week since I also believe risk is rising into the election and shortly thereafter.
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I am adding SPY OTM puts, also out to January 2025.
Current to January Opex 2026
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I am buying SPY OTM puts out to January 2026 to bring my total allocation to 10%.
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I am adding to my BAC January 2026 puts to bring my total allocation to 10%.
Post Election to January Opex 2026
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I will buy VNQ OTM puts out to January 2026 to bring my total allocation to 10%.
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I will buy additional REIT specific puts to bring my total allocation to 10%.
The sum of the above trades will raise my short exposure to a minimum of 40% of my total. I expect returns of at least 10x and that could be conservative for some of the trades.
A Special Note About BAC?
I am focused on BAC for a number of reasons. First and foremost is the fact that Buffet has been selling. Now the easiest conclusion would be he sold because he either sees bad times ahead or he wanted to get below the 10% reporting threshold so that he doesn't have to report future sales. I think its a bit of both. Upon further investigation I discovered that Buffet also sold all of his shares in C, WFC and USB. And he sold all of his shares in AAPL. I think Buffet is raising cash because he believes the market is about to correct AND he wants to once again be the lender of last resort for the US Treasury and Fed.
In addition to what the above might be forecasting, there are a couple of structural reasons why BAC is in trouble if rates continue to move up. BAC was the largest buyer of longer dated mortgage bonds in the summer of 2020. You know, when interest rates were zero and those bonds were at their peak price?
According to Porter Stansbury on TwitterX, BAC bought $500 BILLION of these long duration bonds. Whats the problem? Well since they bought when rates were zero and since rates are now 470bps higher, their bond portfolio is getting absolutely hammered as its principal value keeps dropping as rates rise. Estimated loss thus far is $100b. I say $200b is their pain threshold. Unless rates suddenly reverse back down, BAC's situation is only going to get worse.
Week in Review
Model Portfolio - since 5/9/2023
This Week:
Last Week:
Pretty quiet week trading where I was unable to get into a number of trades because price moved too much. I also added BAC 2026 puts and BYON Nov puts.
Closed trades this past week:
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NONE
Closed Positions
None
USDJPY
You know the range: 140 to 150. The USD has been rallying and has pushed the Yen down to the 150 level. The JCB probably will not intervene unless the Yen depreciates to 160 vs the USD.
THIS AND THAT
SLV and NVDA - a marriage made in ???
SLV has some catching up to do in order to "catch up" to GLD
Harris odds down / Trump odds up
Banks and oil front ran the expected Blue Sweep of the 2016 election
The Giants suck.
Remember lower oil is just as good as lower rates.
$ENVX and $EOSE
EOSE closed the week confirming not only a HCD but also a downward trend. I am looking to add to some short dated EOSE calls if price gets down to the 3.13 area. EOSE was subject to a Bear raid that included a short report driving the price down from a high of 3.55 to a low of 2.91 before closing at 3.32. Price must hold 3.
ENVX was very weak at the beginning of the week before stabilizing to close at 11.45. 13 to 11 is the range that must be broken before I can go long or short. ENVX moved its earnings up to October 29 although I do not know if this will turn out to be a good thing or not for the stock. I also think the price fell due to my podcast with Greg Reyes.
$SPY
From last week's newsletter:
"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."
Well Goldman confirmed the Mag7 comment and I laid out above my thoughts on what it will take for a Blow Off Top.
These next two weeks are going to be the best chance the market has, in my opinion.
The SPY will test the ATH this week.
$QQQ
The QQQs were unable to make a new high last week as the 500 level proved to be strong resistance. The daily chart confirmed a HCD on Tuesday but the weekly remains in an uptrend. If the QQQs can break and close above the 500 level then I would expect them to make ATHs.
$RUT
The RUT (small caps) had a very strong last two weeks rallying 100 points from 2170. However, similar to the QQQs the RUT has a big overhanging level right above: 2300. Unless we break and close above that there will be no continuation of the blow off top.
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.