What a Run, Now What?

From holding the SPX 2,740 to the intraday high around the 2,900 area in one week is a fantastic rebound! It was a classic rip your face off short squeeze in my opinion. The squeeze was magnified by underlying equities like the Beyond Meat (BYND) euphoric run and carried over into other names, especially software. While many will contribute this to the acquisition of Tableau Software (DATA) by Salesforce (CRM), as the reason for cloud software's gains, the fact is they were already ripping off their lows. 

So, what now? The SPY put in a shooting star candle today, which could indicate a change in short-term sentiment. While the market doesn't have to pullback and could continue higher, not allowing market participants to enter the market, it's unlikely that we don't get some form of consolidation to digest these rapid gains. This can be either done by a pullback or through time and going sideways.

SPY Options Open Interest Through June Expiration

SPY OI through June 2019.png

Looking at the open interest configuration, we could have a tough time getting above the 290-strike and easily trade down below SPY 285-strike call options before we find support in the event of a pullback. Moreover, I can even see us trade down to the 280-strike as we near expiration, which will look to be supportive. If we were to break the 280-strike, we would once again be at risk of a delta hedge scenario as I discussed last week and a risk we could see throughout the summer if we're not destined for new highs in the near-term.

A prudent speculator should have started taking some profits today and raising stops on swing positions here as we traded up to the round 2,900 century level in the SPX. Not only will this protect some of your gains, but it will give you dry powder in case we do get another pullback.  Markets throughout history love to retest bottoms or at the very least a support level on their ascent back to all-time-highs, and while that hasn't been the case in the latter parts of this bull market, we should be mindful of history because it will happen when we least expect it. 

We saw some bearish engulfing candles in restaurant stocks today, which was the leading industry going into this rally and shooting stars throughout sectors, industries, and many individual names. So, some short, tactical opportunities will likely present themselves starting tomorrow. However, I will only view these as very short-term opportunities. Weekly charts on the broader indices and many individual equities look great, so while taking some profits on positions that may have gotten ahead of themselves is fine, I will continue to have an overall long bias while we remain above 2,800 and look for opportunities as we likely will see some market rotation among sectors. 

Kwahi Leonard takes on Nike

The Toronto Raptors currently lead the two-time defending NBA Champions Golden State Warrior's 2-1 in the NBA Championship series. It's been great to watch a team compete with the Warriors superteam, but the most exciting news to me was off the court. Kwahi Leonard is taking on Nike in a lawsuit over his Klaw logo. The lawsuit filed is to regain control of his logo and claims Nike committed fraud in registering the logo with the Copyright Office.

I think this is great and someone needed to do this a long time ago! Kwahi appears to have a legitimate claim to the logo as the legal documents stated that this logo is an extension of logo ideas he's been designing since college with family and a creative designer as potential witnesses. Also, it says that Kwahi allowed Nike to use his logo when he signed an endorsement deal with them early in his career.

First, I want to clarify that a person or entity doesn't have to copyright a logo to have ownership according to the Copyright Office, but you do need to copyright your logo if you wish to file a lawsuit. Secondly, I have no idea if his endorsement deal had any type of clause declaring Kwahi the owner of the logo or if there was any provision that would allow Nike to take control of the logo based on the endorsement contract.

So, why do I think this is great? Many small business and startups are sued every year by major corporations for copyright infringement when the claims are darn right laughable. Take, for instance, Nike's competitor Under Armour. They've had three notable cases recently that had been in the press, but two stand out to me. One against a faith-based clothing company called Armor & Glory in 2015 in which Under Armours trademark attorney pledged no end to its litigation and guaranteed an expensive and time-consuming legal battle to the owners, per their email, that they handed over to the Washington Post. Another is a company called Armory Cascade in Bend, OR, which the logo is of an elk with words on top and bottom, nothing like Under Armour's logo.

Their options? Start over or be prepared to go bankrupt, fighting them in court. While I'm not the kind of person who believes in participation trophies, this is downright bullying. So, this is why I say I think it's excellent that Kwahi Leonard is taking Nike to court over his logo. I'm well aware that it's different than a small business and Kwahi is already wealthy, but I hope it sets a precedent that major corporations shouldn't be allowed to bully and sue over frivolous claims. There is nothing wrong with companies wanting to protect their business, but the claims should be legitimate. What they do is petty and hurts small businesses, which is the lifeblood that our nation was built upon, and I think it's worth following the story as it unfolds.

Full Disclosure: I'm a big fan of Nike products have been a shareholder in the past.

A Big Bounce

The markets bounced "bigly" today, so I thought it was prudent to share with you what I said in the Stocktwits Technical Analysis Room Monday night.  Before the futures even took off, I stated we could bounce after recapturing the SPX 2,740 level. I also said other levels I was looking at for potential bounces areas were just slightly below at the SPX 2,722 and 2,705 levels in case we were to fail, as they were marginally stronger support areas.  Although I was a bit reluctant that it could be the big bounce we like to see when bottoms occur, we certainly seemed to get one. 

AAII Survey Data Week Ending 5/22/2019

aaii.png

There were a few reasons I believed a short-term bounce was near. First, the AAII Survey Bull and Bear data readings were nearing extremes. Moreover, this was the 37th occurrence in the survey data where Bulls are below 25%, and Bears are above 40% since 1989.  When looking at the data, we see that 1-month later the market is positive 72.22% of the time, with an average gain of +2.05%. 13-weeks later it's positive 75% of the time, with an average increase of +4.54%.  If you follow me on Twitter or Stocktwits, I alerted followers of this on June 2nd.  I did note that Macro concerns could outweigh the sentiment indicator as it has in the past during 2008 and 2015, which is a valid concern in our current market environment.

Total Put/Call Volume Ratio via Stockcharts.com

cpc.png

Furthermore, I noted we saw elevated Put/Call ratios over the last week on the streams. The total P/C ratio, equity-only P/C ratio, and index-only P/C ratio were all nearing the high end of their ranges, which has been a great contrarian indicator in the past that we're near a bottom at least for the short-term.  On top of the sentiment indicators, nearly all daily chart technical indicators were in oversold territories, like the Relative Strength Index, Stochastics, etc.  Combined, this is typically a good cocktail recipe for at the very least a temporary relief rally. 

Additionally, I mentioned a risk that our firm saw in a potential delta-hedge scenario if we were to stay below the overhead supply level at SPX 2,800 for a prolonged period.  So, what is a delta hedge?  Well, often significant open interest strikes in the options market act as support as the option sellers, typically market makers, will defend these areas to ensure the options expire worthless.  But, during market weakness, these strikes can start acting like magnets since the market makers that sold the puts are not sufficiently hedged by shorting S&P futures.  As the strikes get closer, those that sold those puts must short S&P futures to hedge their risk, and this can start steam rolling out of control.

SPY Open Interest Through August Expiration

SPY OI Summer Stacking Puts.PNG

To illustrate this, please see the Open Interest chart for SPY through August expiration, as you can see puts are stacked down to the SPY 245-strike.  This OI configuration reminds our Sr. VP of Research of last falls correction in which we saw a delta hedge scenario trigger in December.  This risk looks like it could remain throughout the summer if we fail to confirm this nice bounce above 2,820 in my opinion, as we would risk a failure of the round century support level if we hover near 2,800 for a prolonged period.

SPX Daily Chart via Thomson Reuters

spx 6.4.2019.png

So what now?  I certainly didn't expect we'd make it back to the SPX 2,800 level in one day with all the uncertainty in the markets; nonetheless, we did.  I expect sellers will try to step in to prevent a breakout above the SPX 2,820 and attempt to push us back below 2,800 as a two-way trade ensues here.  So, if we break back below 2,800 we certainly are at risk to retest 2,740 if not a lower level of support and once again will be at risk of a delta-hedge scenario.  If we manage to break out above the 2,820 region and the subsequent downtrend line, we have overhead resistance levels at 2,860, 2,900, and 2,950. 

Were at a pivotal moment, and while I'm optimistic it's only prudent to remain cautious until we get confirmation.  If you have any questions, please feel free to reach out.  I will not always be posting such in-depth technical reviews, but when times call for them, I want readers to be aware of what I see in the broader market.  Good luck and happy trading!

Learn to Manage Your Losses

Let's talk quickly about how we can manage losses successfully, which will improve your trading strategy. Many new investors/traders often avoid losses, tend to forget about them, or even stop opening up their brokerage statements. I saw this countless times when I was running an RIA from potential clients.

The truth is, it's normal for people to prefer to avoid losses rather than confronting them. Think about it; people freeze up in stressful situations and run from confrontations all the time. In my opinion, as well as others, this is deeply rooted in our DNA from early civilization. While you could contribute this to "Fight or Flight" mentality, I prefer to go with the economic or cognitive psychology term for this behavior, called loss aversion that Daniel Kahneman and Amos Tversky first identified. If you want to learn more about it in-depth, go to Amazon or Google, and type in their names for great literature.

The thing is, to be successful trading public equities it's crucial that we don't freeze or avoid losses. You need to act diligently and swiftly at times to manage risk. This, in turn, means you need to learn to lose, and you need to do it quickly!

Losing is part of the game, and the saying "your first loss is often your best loss" is typically true. You can't be afraid to take a loss, the best investors and traders lose 30-40% of the time. So, if they lose that often think about how often you will lose, 50%, 60%, maybe even 70% of the time when you are beginning to trade. Capital preservation is always a top priority, but even more so when you're just starting because you likely have a limited amount of capital.

People make all kinds of excuses not to take these losses too, don't be one of them. I will spare you the numerous examples I've heard because if you've traded or invested even for a little while, I'm sure you've heard them all or thought some of them. Here's the thing, if it's past your mental stop-loss, a technical level broke that you thought would hold, a fundamental change occurred in the company that no longer supports your thesis for the trade -- you need to get out. Your drivers are gone, your edge has evaporated, and you have no business being in that trade now.

So, my suggestion to overcome loss aversion is similar to how others overcome phobias. Open up a brokerage account with a small amount of money, preferably at a commission-free brokerage. While technology is typically lacking at these firms for advanced traders, you don't need this exercise to cost you more than it has to. You can always use a different brokerage that has all the bells and whistles once you're ready.

To start, buy a share of multiple company's that you use or like. Determine your stop-loss parameters, whether that' s a percentage or a technical level of support. When one of them ultimately breaks, sell it. Do this over and over until your comfortable with losing money on positions that don't work. You need to train your mindset that small losses are wins because risk management is paramount in being a successful investor or trader. At some point during the process, you will become desensitized and become numb to losing small amounts, and by focusing on the losses, you will, in turn, learn to let your winners run as well.

When you think about it and start seeing the big picture, this is just a simple math problem behind the philosophy of taking multiple small losses, while letting your winners run. Hypothetically, say each position you have is identical in size (cash value), and you take losses at -3% and sell winners at +8% in your equity portfolio. Additionally, you have six losing trades, to four winning trades. Your losses will equal -18%, while your winners equal +32%, which equates to a +14% gain overall in your portfolio even when your win/loss percentage is only 40%. In other words, you don't need to be the next hedge fund star; you need to manage your risk correctly to succeed. The simple formula is below, feel free to play around with it to suit your trading strategy.

(0.08 * 0.40) - (0.03 * .60) = +14%

In life, there will come times you will freeze or avoid things, and that's okay, it happens to the best of us, but it's not okay to freeze or avoid losses when trading. Become numb to losses, execute like a mechanical machine, and move on to the next trade with confidence, because losses happen often. It's just part of the game.

Why I Stopped Writing

Over a year ago, I stopped writing abruptly. No, I did not stop due to lack of traction, although that could have been a good reason, and while my posts were sporadic at best, six in total, the reason was much more personal.

At the time, my wife and I got a "big" health scare. She underwent a biopsy for potentially cancerous tissue. We literally froze life as we knew it. Many thoughts and questions swirled through our heads. How could this be happening to us? We're too young for this and only in our early 30s. We haven't even started a family yet. What do we tell our family members, especially our parents, because this isn't supposed to happen to their kids?

It was terrifying, but we decided to follow the process and keep our hopes up, but nothing else mattered at the moment. Before this life-altering news, I was searching for my next career adventure, and all new applications or opportunity inquiries stopped immediately. We focused on each other, and our health as the steps for her unfolded. Eventually, it was time for the results. I don't think either of us wanted to look at the results online and we dreaded the phone call from the hospital. Thankfully, we were told the three best words ever -- benign irregular tissue! The relief was insane! One thing became, explicitly clear, nothing else really matters except for your health and those that you love.

Immediately afterward, I got numerous interview offers from months earlier applications. Then, I received multiple job offers. It was almost like we were being tested or something... We decided on making a move to Cincinnati, not exactly a destination city, but it has midwestern roots and much better year-round weather than Minnesota. It also made sense because the team I was joining was close-knit, and the firm was smaller, which allows me to make a more significant impact. I hate being just another number, replaceable, and forgettable. So far, we're happy with our decision even though we miss family and friends.

While my writing sabbatical has been mostly limited to my blog as I've kept writing for my new employer, I'd like to get back to sharing my market views regularly, and providing my insights and opinions on other topics as well. Writing has many advantages, it makes you a better storyteller, it keeps you honest with yourself, and it makes you think more clearly because we all know the public mob is all too eager to humiliate and criticize you.

To sum it up, I look forward to writing and sharing again.

Macro Technical Review: February 2018

YTD to the S&P 500 is up 1.5% but experienced an intra-month drawdown of 8.59% during February using closing prices. If we include top to bottom intra-day data to calculate the swing it was a 10.3% drawdown at the worst point. February worst month in over two years. We were coming into the month the most overbought since June of 1996, which subsequently was the last time we had an RSI reading over 87 on the monthly data. A similar drawdown happened in July 1996, so the reaction shouldn’t have been surprising. And, if I'm honest, it was welcoming to see volatility again. Below is the S&P 500 Index on a monthly basis. I have placed the 10-month and 20-month moving averages, fib levels, and RSI. You’ll notice we reached the 261.8% fib level in January setting us up for this correction, but the market bounced once it dipped below the 10-month moving average. Setting up March to be our confirmation month for higher, lower, or even sideways.

SPX 2-2018 Monthly with Fib.png

Much of this pay months volatility was because we were at market extremes on a technical basis. We also had a new Federal Reserve Chairman, Jerome Powell, takeover. And throughout history, the Mr. Market has been fond of testing new leader of the Fed Chairs. In recent past, Yellen, Bernanke, and Greenspan were all tested, but the history goes much deeper than that. Basically, I view this as hazing, and just like rush week in college, the joke is on the newbie. For more on this check out LPL’s Research.  

VIX 2-2018 50 break.png

The short-volatility trade also blew up when the VIX index spike over 50 for the first time since August 24th, 2015. Credit Suisse closed their short-volatility ETF (XIV), and Proshares short-volatility (SVXY) is down an astonishing -89.64%. Many traders and investors had been using these short-volatility ETF’s instead of the SPDR S&P 500 ETF (SPY). The low volatility environment the past few years created a perversion in the market where short-vol was being piled into like broad-based equity ETFs. I remember an article in the last couple of years recommending investors to switch from SPY to XIV for your equity allocation. The argument as always was more alpha, and it worked since the fall of 2016 until it started to crack one month ago. The chart below shows the gap the short-volatility ETF closed. Sadly, the retail investor never understood the product, or read the prospectus. If they did, they would have known it was a ticking time bomb.

SVXY Compared to SPY 2-2018.png

With that said, your sector leader was technology once again. With the Technology Select Sector SPDR Fund ETF (XLK) down a measly -0.49%. This is a great sign when leading sectors to continue to lead in weakness. The only concern is potential double top in the sector. We’ll want to see new all-time highs in the sector even if the broader market doesn’t make a new high.

XLK 2-2018 Daily Double Top.png

And, just for fun, look at agriculture commodities like wheat! The PowerShares DB Agriculture Fund ETF (DBA) was actually positive on the month up 0.89%.

DBA- 2-2018 15min Whole Month.png

In short, March is extremely important. Many market participants panicked during the volatility in February and who can blame them. The mind has been built for “fear of loss” mentality since the beginning of humanity. But as of now, I’m neutral, and the path of least resistance still favors the bulls until we break down further. To back this up, we also got some favorable fundamental data at the end of the month. S&P companies reported revenue growth of 8.2% in Q4 2017 according to Factset. That’s not bearish.  Also, earnings estimates for Q1 2018 has risen by 7.8% the past 12 months and 5.8% since December 31st. That’s not bearish either.

I like to call this view, cautiously optimistic. And, at worst I think we’ll consolidate sideways, which will contract P/E multiples and bring valuations down anyway. Of course, if we take out the lows, all bets are off this spring. But, who wants to be a pessimist? So, as we begin March and I stare at 4-feet of snow, please remember spring is a time of renewal!

*After a tough month for my family in February, I’m glad to be back writing. This month I’ll be producing more technical & fundamental outlooks on single stocks, macro market commentary, and even sharing some personal trials and tribulations my family experienced over February.   

The Streaming Life Is Almost for Me

Verizon and the NFL announced their new deal for 1.5 billion dollars over five years yesterday.  The new deal no longer gives Verizon exclusive mobile rights. However, it will allow them to use their Oath Inc. outlets, especially Yahoo Sports, to reach more consumers.  Yahoo Sports will now stream local games, along with Thursday, Sunday, and Monday night games.

And if you’re like me, the only thing that has kept you from cutting the cord is sports.  My family can get most of our media from online services, which is very cost effective, but a few sporting events have eluded us from cutting the cord entirely- in particular the NFL and my weird obsession with Formula One racing.  The NHL, NBA, and MLB all offer packages for every game during the season as well as playoff packages.  So why can’t the NFL?  Well, the current contracts with the major cable networks won’t allow it yet.  I had high hopes this Verizon deal would bridge that gap, but as usual, the consumer is the loser.    

Cellphone- How Bad Do You Want It?

I found it interesting that every article and press release focused only on mobile.  Have you ever tried to watch a game on your phone?  It is usually my last resort, not my first choice.  If you have bought a Smart TV recently, then chances are it came with the Yahoo Sports app. If you haven’t, the Yahoo Sports app is on other streaming devices, like Apple TV, Amazon Fire TV, and Googles Chromecast.  Maybe this is what Verizon should have targeted in their contract negotiations?  Getting game coverage on the TV app would have been a huge win for consumers and would have driven cord-cutters to Verizon with the ability to stream games over the big screen.  Verizon also dropped the ball by not getting rights to NFL Redzone. Yahoo Sports main feature is the Fantasy Sports platform, and every fantasy football fan loves Redzone.  Redzone keeps fantasy football fans up to date on every score around the league all day long on Sundays.  If Verizon could have executed and got both of these rights, it would have been a game changer for them.  Instead, it is only more of the same. 

From an investment standpoint, it is better to take a wait-and-see approach.  Much like the wait-and-see approach consumers have had to take when trying to cord-cut from big cable companies without losing their Football Sundays.