Friday’s Explosive Rebound Could Start A Rally, But Prepare For Fall

Old compass on vintage map

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The prior week was a tough one if you didn’t anticipate the price action

Participating in this market requires a feel for probabilities. What I mean is, that stock market participants have so little visibility that the market can be rocked just days before the economic data is revealed. The most recent example was last week’s CPI number. It was all well and fine to expect that the market would nervously sell off before the CPI number and that the probability was high that the CPI would disappoint. It’s another thing to count on the market rallying afterward. Again weighing probabilities the market was down against some pretty strong support at 3750s. Moreover, there is a repeated pattern that after inflation news the market finds a reason to rally. Perhaps this sounds like fairy tales but so far we’ve had good results from timing the CPE number the week before and doing the same with CPI. The key is the discipline to generate cash ahead of time and to wait for the right time to strike. We find that having a cash management discipline takes the emotion out of how and when to sell shares in anticipation of a market move. Once you have an allocation of cash from trimming positions, and you are focused on the event, it makes success that much easier.

A lot of people are proclaiming that we are already in a recession. Perhaps that is why buyers come in when the market seems to be finding support. If we are already in a recession then the rate raises should begin to tail off. That said, if the question is did the explosive reversal to the upside this past Friday mean blue skies and new highs (see what I did there?), it is doubtful. However, do we have the possibility that this week will be buoyant? Yeah, provided the tape cooperates with little reference to inflation, and earnings continue to beat estimates by 4%. The fact that retail sales didn’t crater, with restaurant and bar receipts up 13.4%, E-commerce up 9.6%, also the U of M consumer survey was better than feared. I haven’t looked at the futures as yet, but I feel pretty comfortable with the idea that we could rally. I did do some selling into Friday’s rally so if there is selling tomorrow I will find that a buying opportunity. The next inflation-related data milestone is toward month-end.

The good news is the next milestone is the month-end FOMC Meeting

The raise has been telegraphed for weeks, and it would be .75%. There has been some talk about going to 1% but right now it was batted away by several Fed presidents. This will likely be a non-event unless Powell puts the economy under “double secret probation” (movie reference). Really what more can Powell say? Especially if they only raise by .75%. If it’s so terrible why didn’t he raise it by 100 bips? At the same time, a lot of new data is showing that energy and food costs are coming down. Also while it’s early days we are hearing that housing prices are starting to cool a bit. I think Powell will cautiously claim that they are winning the war on inflation. He could also say that even if energy remains volatile the summer driving season is about to wind down next month and that should ease the pressure on gas pricing further (I would beg to differ but he could say that). Part of spiraling inflation is the expectation that rising prices are a fixture of the economy, so claiming to win some of the battles in the process of raising rates will raise the efficacy of the tightening. So as it stands right now I don’t think the July Fed meeting on the 26th and 27th will roil the markets. That said I will likely reduce my equities to buy the dip.

Is that all there is? (Peggy Lee)

No, I am constantly searching for short ideas. I am largely expressing it in Put spreads, as a way to hedge a bit, instead of hedging the indexes. So far it seems to be working for me. This market is quite volatile, and trying to have a short long portfolio I believe will help guard my portfolio against unexpected market retreats. If I believe a stock is weak then if the market jumps it should still underperform. Then when the market sells off hopefully it will fall sufficiently to generate alpha and protect the downside somewhat. That is the plan anyway. So far so good.

My plan going forward is to let my holdings rise for the next week or two. Then start building up a bigger reservoir of cash as we get closer to the fall. The mid-term elections are coming and everyone is assuming that the Democrats will lose the House and maybe the Senate too. Normally I ignore politics since the market generally doesn’t care who is in office as long as there is a political stalemate. With the expectation that the Democrats will at least lose the House any obfuscation of that possibility could perturb the indexes. Another reason to be prepared for a down market is the seasonal effect; September and October are the toughest months in the calendar.

I am going to do my best to load up on short ideas and have cash ready. What else could set off the market? More inflation woes, I am one of those who believe that the energy situation is going to get worse, not better. OPEC is not going to raise production to help the Biden administration. The incremental barrel ironically lies with American petroleum companies and they have been told by Biden himself that he wants to destroy that industry. Why plan on doing more drilling? The smart thing to do is return as much cash to the shareholders as possible before that happens. The current administration has been able to partly offset the price of oil by unloading the SPR – Strategic Petroleum Reserve. That will be coming to an end soon, in case the reason that it is really there for happens, like a hurricane for instance, or a hacked pipeline. Anyway, if WTI goes up 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 several runs on banks by ordinary citizens, and they getting beaten back by the CCP. Now we are hearing about mortgage strikes by the Chinese as the value of the apartments that they put their life savings into and the value cratering. Some of them signed for apartments that haven’t been built yet, and may never be built. There is a lot of money being destroyed right now from Crypto values, to wallets and NFTs, with sky-high interest being paid out in DiFi and then stopped. Also, the dollar is totally ripping, we now have parity with the Euro. This could force the ECB to raise rates endangering Italy and Greece. There is a lot going on and any number of them could cause a selloff, so I am going to salt some cash away. I may even do some real hedging at the beginning of September.

My trades

Alphabet (GOOGL) has split 1 to 20 and will trade as such tomorrow. The pattern is not what I expected I thought that Amazon (AMZN) would have their shares soaring after their split. Instead, they settled lower than where they were before the announcement. The same happened to other recent splits. I sold most of my GOOGL but kept one share just in case. If it does the same I think it’s worth buying on weakness.

I started to widen the stocks that I have in my portfolio. If I can’t get a bigger enough position in these new stocks I may treat them as a trade and let go of them into August.

I added Taiwan Semiconductor (TSM) I got a pitiful amount at a great price. I thought I would have more time to accumulate a bigger position but bought in after they reported earnings. At one point when the market was selling off they went flat so I put in a small buy thinking that I could buy it a little lower. Nope. instead, it popped. I may bite the bullet and buy a bit more. Still, if it doesn’t give me a chance to build a decent position I will trade it in a couple of weeks.

A similar thing happened with Workday (WDAY). I think they are up to good things in expanding their offerings. If it continues to run or at least hold its current level I may sell it, and hopefully, make a good trade. I also bought my first tranche of Nike (NKE) I was holding out for it to go below 100. It didn’t so I started buying at 103 and 102ish, if it does break 100 I will get more aggressive. I have also been adding to Disney (DIS), as long as it stays under 100 I will buy, I am hoping it breaks under 90 and I will get more aggressive. I bought some ServiceNow (NOW), as it sold off hard after an interview in which the CEO said that the European sales cycle has lengthened. What do you expect? First of all, it’s summer, it is always slow over there in the summer, and second, hello there’s a war over there. NOW will do fine and if it doesn’t it’s temporary, I am willing to buy it cheap now and hold it for 18 months, and see it become dear.

As far as short positions, I closed my Wayfair (W) and generated some profit. I went ahead and shorted Kohl’s (KSS), I am short Luminar Technologies (LAZR) in a put spread, and I am still short Lucid (LCID), Rivian (RIVN), and Digital World Acq. Corp (DWAC) all in Put spreads. I am also short Bitcoin through Bitcoin ETF (BITO).

All my other positions are the same.

This is a difficult volatile market but it is possible to anticipate stock market movements right now if you know what to look for. Because of the lack of clarity with mixed economic signals, nearly every significant economic milestone will have a distinct pattern that you can use to your advantage. You need timing and the ability to recognize the pattern.

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