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Wednesday, February 21, 2024

Whipsaw Wednesday – Dip Buying or Just Dips Buying?

SPY DAILYWas that it?

On February 24th I wrote "TGIF – Sell in March and Go Away?" and I laid out my case for why I thought we were going to fall off the table in March and we have, indeed, fallen right off the table right on schedule since then.  I said that Friday, that the post was intended as a bookend to my September 30th bottom call as I felt that we had captured all of the upside we were likely to see off the "good news" that Greece was "fixed" and the economy was "improving."  

I'm not going to say anything bad about the economy here, I'll let Michael Snyder do that with his "15 Potentially MASSIVE Threats to the US Economy over the next 12 Months" – I think he pretty much covers it!  8 trading days ago (2/24), we had two short trade ideas in our Morning Alert to Members, they were:

  • SQQQ April $13/17 bull call spread at .70, still .70 (even) 
  • DXD April $13/15 bull call spread at net .55, now .70 – up 27%

SPY WEEKLY In Member Chat that day, Exec asked if I was getting bearish and my response was:  

Bearish/Exec – Are you kidding, this is me painting a sunny picture! Give me a few drinks and I'll tell you how off the rails the Global Economy is right now… Do you know how much Kool Aid I have to consume not to scream short on every single stock I see. CAT $116, CMG $386, DIA $130, GMCR we already did at $70, IBM $200, KO $70, MA $415, MCD $100, MMM $88, MO $30, MON $80, MOS $59, OIH $45, PCLN $593 (did them too), QQQ $64, SPY $137, TM $85, USO $41.50 (got 'em), UTX $84, V $117, WYNN $119, XOM $87, XRT $59 (got 'em) – and that's just off my watch list of stock I like to buy when they're cheap! We are not just priced for perfection, we are priced for perfection plus a return to full employment a forgiveness of all debts without write-downs and inflation without rising interest – we are priced for Nirvana!

It's a big list but, of course, they are pretty much all winners now, with PCLN the notable exception (so far).  Later that day, during Member Chat, we added:

  • Oil Futures (/CL) short at $109, now $105.50 – up $3,500 per contract.
  • USO April $40 puts at $1.30, now $1.70 – up 21%
  • SCO July $28 puts sold for $3, now $2.40 – up 20%
  • VXX March $20/23 bull call spread, selling $23 puts for net .85, now net $1.76 – up 107%

My comment on oil at 1:19 that day, as it rose to $110.50 (where we still shorted it), was "We finally got to the point where the price of oil is so ridiculous that VLO is going down!"  These are the kind of signals you look for to determine when the party is truly over – when people start getting hurt…  You know things are bad when I have to quote Sun Tzu to keep Members from panicking but it did turn out that $110.50 on oil was just a spike that reversed the same day and we took full advantage by buying back short SCO calls and short USO puts we had sold as part of spreads, leaving us more aggressively short on oil right at the top.  

If you know the enemy and know yourself you need not fear the results of a hundred battles. – Sun Tzu

That weekend, in chat, we had a great discussion about trend exhaustion that's worth repeating here:  

USO WEEKLY

I agree with not fighting a trend but trends end – otherwise Green Bay would have won the Superbowl this year. How could they lose? Humans are hardwired to recognize patterns – it's how infants learn, it's how we develop smarter behaviors so there are many places in our brain that "feel good" when we recognize a pattern and then our instinct is to follow it. That's why TA is so popular, it's monkey brain candy! It's very easy to look at a pattern and extrapolate that it will simply continue forever because it's exponentially more complex to look at the underlying causes of the current action and determine how long the prevailing forces can sustain the movement.

In absence of money coming in, markets go to zero. I would think that point would have been made quite strongly in 2008 but apparently it's already been forgotten by the monkey-boys. Anyway, so markets need fuel just like a car needs fuel and fuel is money coming in faster than it goes out. We have rising sentiment and cash coming off the sidelines and Central Banks pumping money into the IBanks who unleash their HFT Bots on the markets. That's going to make them rise but not forever – at a certain point, the market gets bigger and needs more and more cash every day to sustain its prices at which point (this weekend) we either get more money or the balloon begins to deflate.

NYMO

That's a simplification, of course, because you have the value of the Dollar and it's possible to game the indexes by pumping key stocks to ridiculous levels (not AAPL but AAPL is a good example of a key stock running the Nas and the S&P) but it all comes back to my VW example. So what if I sold 10 cars out of 100 to ever more excited people who just had to buy a $25,000 Beetle for up to $35,000 – does that make the next 90 cars worth $35,000? According to market bulls, it makes my next 90 cars worth $40,000, $45,000, $50,000 – doesn't matter does it because it went up before so it MUST continue to go up because, as we learned in science – "what goes up, must go up more."

VIX

Not only does that ignore the gravity of the situation but it ignores the FACT that the stock market hasn't gone anywhere for 12 years. It also ignores the FACT, that in order to buy my next 90 cars for even just $35,000, people need to have $3.15M to spend. I had planned originally on selling 90 cars for $2.25M ($25K each) but some idiot came in and gave me $35,000 for my last one so sure I will be tempted to wait a while to see if another guy wants to give me $35,000. Who knows, the pattern has been to get another $1,000 each day so maybe the next guy gives me $36,000 and I can extrapolate getting another $89,000 on top of that $3.15M for my remaining cars – so, unless I have to pay my bills – I'm inclined not to sell for less.

That's where we are now in the market, the Greater Fool theory dictates that each buyer assumes the next buyer will pay more than he did and no one envisions taking a loss but what if my original market research was correct and 100 car-buying people only had $2.5M to spend on cars ($25K each). Now I've fooled my self because, for whatever reason, 10% of my target audience had more money than I thought and were willing to spend more money than I thought on the cars but, after they spent their $300,000 for 10 cars, the other 90 people only have $2.2M and can only afford $24,444 per car – yet I'm pricing them at $35,000 just because the last guy bought it for that.

XLF WEEKLY

That's going to cause volume to dry up, right? As I said, after a while, I may need to sell a car to pay some bills and then I will drop my price but, if I need to sell 10 cars (the same volume that took me up) in short order – I am likely to see a very rapid drop in price.

What's going to allow the price of my cars to continue to rise? A) I have to have no reason to sell for a lower price B) I have to continue to find buyers at my new price level C) Even at $36,000, we reach a point (61 cars) where my population exhausts their $2.5M and I will have 29 cars left and no one will have money to buy.

So there's our gap. In order to keep selling cars for just the same $35,000 we got to now, we need to see a clear path to our buying public having more money. Does it come in the form of lower rates, Free Money from the Fed, more employment or raises for current employment? Do they take it out of their homes, did the price of other things come down or are people substituting one kind of purchase for another and favoring cars over, for example, vacations?

These are all the factors in determining whether or not the price of ANYTHING you are selling is sustainable and that's all stocks are – things that you sell. It's a piece of paper saying you own a piece of a company that, in theory, has some value. If the stock doesn't pay a dividend, then it's all about the earning power of that company now and in the future and you are in competition with many other things people can put money into.

Speaking of which, it should be noted that the EU plans to hit the $1.5Tn mark on the EFSF this weekend but they have yet to sell any bonds to actually fund it. When they do that, where will that $1.5Tn come from – it's almost as much as the US monthly $140Bn bond sales.

Anyway, lots of factors in REALITY that indicate things do not, in fact, go up forever. First you run out of gas, then you lose your momentum and then you'd better hope you're not on a hill (or a wall of worry) or you're going to have a very, very hard time making that last mile (just ask Sisyphus).
 
Of course, with stocks, that boulder gets bigger and bigger as it goes up hill with more and more effort required to add each additional market point (now roughly $40Tn in US equities so each % is $400Bn vs $300Bn in Jan). It can keep going – especially when your sampling (market volume) is so low – just like it was possible for ordinary homes to get to $1M – as long as most people didn't actually try to sell them…
 
That's why I don't like this rally – it's the most dangerous kind – the kind with no underlying support. Yes, I believe inflation will end up supporting these prices and much higher but we aren't there yet and the promise of money is not the same as actually having money. It's kind of like if the firemen put one of those air bags under a building but don't fill it with air and tell you to go ahead and jump and you say "but it's empty" and they say "inflation is coming" – what's the smart move?   

That's how we spend our Saturday's at PSW – discussing the bigger issues!   We also discussed American History, Consevatism, Work Ethics, Philosphy, Politics and Religion – we don't have taboos at PSW – better to get it out of our system on the weekends so we can concentrate on the markets during the week.  

Speaking of the markets:  We had a nice little move up in the Futures this morning as the Dollar was pressed down but it smelled like BS to me and we picked 5 ways to short the Futures in Member Chat at 6:43 as my comment to Members was:  

Nasdaq (/NQ) can be played below the 2,600 line, RUT (/TF) below 790, Dow (/YM) below 12,800, oil below $105.50 (/CL) and gold (/YG) below 1,690 so that's 5 to watch and 3 of 5 below is a green light to short the other two and 3 of 5 above would be a signal to get out. Dollar 79.775 at the moment so we're looking to take back 79.80 to confirm bullishness.

Euro at $1.3133 and below that $1.31 line is a critical breakdown that can lead to panic. $1.57 on the Pound it the same (now $1.5724) and the Yen is at 80.71, indicating they have too many Euros and not enough Dollars – it would be very bad timing for the bulls if they chose today to rectify that

Now it's 8:08 and we already have $105.08 on oil (up $420 per contract), and $1,680 on gold (up $320 per contract), 12,790 on the Dow (up $50 per contract), 2,601.50 on the Nasdaq (down $30 per contract), and 791 on the Russell (down $100 per contract) so, on the whole, the Egg McMuffins are paid for and we can stay bearish as long as the Dollar is over 79.80 (now 79.82) but I sure don't expect the Euro and the Pound to fail their lines without at least some kind of a fight so a quick round of take the money and running on the Futures is appropriate here as we'll likely get a bounce into the open (and maybe better entries to short).  

Of course Greece might be "fixed" again today and we'll see the ADP Report at at 8:30 and AAPL has their big IPad 3 event so plenty of reasons to be a little more bullish today so we'll see how things hold up – just because the market SHOULD go lower – doesn't mean it WILL go lower – surely we've learned that in the past few months….

Greece is, as usual, the biggest wild-card.  Despite all the arm-twisting that's been going on this week, as of this morning, there were just 81 Billion Euros worth of debt holders agreeing to the swap terms with a 3pm deadline out of 209 Billion Euros worth of debt (39%).  Not only is that obviously not voluntary, but how on Earth did they ever claim there was a deal in the first place?  

If participation falls below 75 percent, the second bailout is likely to fail and Greece could default, leaving its creditors — including the Troika of the International Monetary Fund , European Central Bank , and the European Commission — with hefty losses on its debt.  If Athens cannot sign up the required 90 percent of bondholders needed to push through the debt haircut and bailout, it may have to use new legislation for Collective Action Clauses, or CACs.  ARE you prepared for this?  

“Everyone knew it was going to default a year ago,” Peter Toogood, head of investment at Old Broad Street Research, told CNBC Wednesday. “Portugal and Ireland will need another bailout too. These are evolving programs of austerity and bailouts.

We shall see but I certainly don't want to be buying any dips until we see what the dips in Europe finally decide.  So good luck to AAPL and all that but we'll still be leaning short – although we did close yesterday's trading with and upside spread on the Qs, as we figured the Nasdaq would bounce off 2,900, at least.  

(all charts by the great and powerful David Fry!) 

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