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The Week Ahead – If At First You Don’t Succeed…

Try and try again.  

More stimulus, more "exciting" vaccine news, more money being tossed around.  This time it's M&A news with Oracle buying TikTok and NVidea (NVDA) buying ARM Holdings from Soft Bank (SFTBY) for $40Bn, giving both companies a nice boost.  Oil (/CL) is up again on hurricane news but still pathetic under $37.50 but Natural Gas (/NG) is popping back to $2.40, ending the bear move that took it back to $2.25 from $2.70, which was a 16.66% correction.

It's Quad Witching Week in the markets, when tock index futures, stock index options, stock options, and single stock futures expire simultaneously.  So we can expect the unexpected this week – especially with a Fed Meeting on Wednesday along with Powell's speech at 2:30 that day.  We also have Retail Sales on Wednesdy morning but, other than that, it's a pretty dull data week and I don't see what the Fed can do to help so I don't see this mornng's exuberance lasting, which means the Dow Futures (/YM) should be a good short at 27,750 when they cross below that line.

It's amazing to think that it's now September 15th and we are now beginning our 6th month in captivity since we finally began worrying about Covid on March 15th.  There were about 80,000 cases, mostly in China at the time and now there are 29,030,058 this mornng with 6,520,606 in the US alone and, this week, we will pass 200,000 American deaths from Corona.   29M is 362 TIMES 80,000 and it's been 180 days so we've added 2 China's per day of victims since March and we are still growing at that pace and the complacency of the markets is stunning sine any of those 362 80,000 units of infected people are, very obviously, capable of infecting 29M more more people.  

How much is 362 x 29M?  10.5Bn – that's more people than there are on the planet potentially affected in the next 6 months.  Of course we are, theoretically, doing a better job of containing the spread but by "we", I certainly don't mean America, which is very likely to leap forward in cases by the end of the month as our elementary school incubators begin to do their jobs and re-infect the nation.

6.5M people is more than 1 out of 50 Americans with the virus.  When we began our lockdowns only 1 in 100,000 of us had the virus, now it's 1 in 50 – that is not contained, is it?  As you can see from the chart, 2/3 of the people in the US that have contracted Covid have done so in the past two months and our dip in new cases (if it's even real as Trump has blocked data-gathering) stopped higher than the previous high and you TA people know what that means for future growth, right?

Think about how hard is is to avoid coming in close contact with 50 people if you go out to shop or something.  Now what happens if we have to avoid 25 people, 12 people, 6 people…  This is the problem with this kind of virus – it spreads like a virus!  We all know what happens when the kids come home with a cold and the whole house gets sick – and that is despite flu shots, which we've been working on for decades!  This is not a problem that's going away "soon" and it's not likely we'll have anything like the robust economy the markets seem to be indicating.  

Trade Workshop:

I still like our TQQQ hedge from our 8/22 Newletter, when I said:

While there are very good reasons that stocks like Apple (AAPL), Amazon (AMZN), Microsoft (MSFT) and Google (GOOG) are each trading over $1Tn (AAPL is $2Tn!) it's still kind of ridiculous and probably unsustainable so, as a proper hedge against the Nasdaq selling off between now and next year, I suggest the following hedge using TQQQ, which is a 3x Ultra-Short ETF on the Nasdaq.  That means, when the Nasdaq goes 10% higher, TQQQ goes 30% higher but, conversely, when the Nasdaq drops 10%, TQQQ drops 30% and, since TQQQ is already insanely high, -30% becomes a very big number indeed.  

See what happened to TQQQ in March?  It fell from $120 to $40, a 66% drop when the market dropped 20%.  Now it's up around $141 and even a 10% drop in the Nasdaq would knock it back 30% to $98.70.  We can take advantage of this using put options as follows:

  • Buy 10 March $125 puts for $26 ($26,000) 
  • Sell 10 March $95 puts for $15 ($15,000) 

That's called a bear put spread and what we've done is we've bet that TQQQ will be lower than $125 in March but we've offset the cost of the bet by selling the $95 puts to someone else who is foolishly spending $15 in premium for a put that's $45 out of the money.  No matter how low TQQQ goes, our puts will always be worth $30 more than the $95s but, above $125, both puts are worth nothing.

That net $11,000 is the cost of our insurance from now through March but we're most worried about the elections and the end of the year, so it's not likely we take a total loss and the spread pays back up to $30,000, $19,000 (172%) more than it costs so it's a good protector for a $100,000 portfolio that may lose 20% or so in a downturn.  

TQQQ went up first (making for easy fills on our contracts) but now well under $140 and the March $125 puts are now $32 ($32,000) and the March $95 puts are $18.50 ($18,500) which is net $13,500 and up $2,500 (22.7%) from our initial entry.  That's nice but the spread pays up to $30,000 so it's still goood for a potential gain of $16,500, which would be up another 122% from here so it still makes a nice hedge – especially as we now know we don't lose too much (net) as the Nasdaq goes higer so we have plenty of time to stop out with a relatively small loss if it looks like the Nasdaq will get back over 11,500 and hold it (now 11,250).

So small risk, big reward – that's the way we like to hedge!  

Have a great week, 

- Phil


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  1. Phil/ TAcovid

    TSLA and COVID are strangely synonymous to me,  both reflecting the absurd irrationality of large group behavior but also demonstrating the power of momentum. 
    I assume we're heading for a retracemnt in cases?! Somewhere around 61.8% ????

  2. Biden going big on tax hikes for the rich

  3. The GOP is staging chaos on the way to a coup

  4. Good Morning.

  5. Good stat:

  6. INTC CEO is a buffoon. Instead of spending 20B on BBs they should have acquired ARM. They will have to make a move which makes me bullish on potential targets, while possibly putting pressure on INTC stock keeping it cheaper for longer.

  7. good morning all

  8. Phil/CVS seems beaten down. any thoughts on an LTP oportunity?

  9. Good morning! 

    Retracement/Monk – Well viruses, being natural organisms are very subject to following Fibonacci Retracements, as are most things in Nature.  While the time-frame is off, TSLA went from $50 to $500 (post-split) in a year and the virus went from 3,000 to 6.5M in 3 months – so the virus is scarier than Tesla by a long shot!  

    See how well-behaved TSLA is within a Fibonacci series?  That's because it's not being traded on Fundamentals, just sentiment and that's causing it to simply follow a natural ebb and flow but it also means that sentiment can change and it will go down just as relentlessly as it went up.

    While we do have to use sensible stops over $380 in the STP, TSLA TA traders think that rising MACD is going to save them but that's the short-term line that's down – it's only reliable when the long-term trend is also down – like it was in early Aug.  This can turn into a nasty failure if that red line crosses under 13.40, like this:

    See what happens?  

    We'll be talking about WBA this week as we review our portfolios.  More please…

    Victorian workhouse inmates: Please, sir, I want some more — or else | News  | The Times

    We're bouncing off those 50 dmas at the moment but will it be strong or weak, that is the question.  Nas fell from the 40% line at 12,600, though it never quite made it there but we can chart it as the 30% line is 11,700 so we're below that and 35% is 12,150 and 25% is 11,250 and 20% is 10,800 so there's our range for /NQ:  10,800, 11,250, 12,150, 12,600.  

    So we didn't quite hit 10,800 and we didn't quite hit 12,600 – that seems fair.  In that case, what if we use 11,250 (25%) and 12,150 (35%) as our active range.  Does that look right?  I guess we can consider early Sept an overshoot and the next week and overshoot the other way so PRESTO! – we have a short-term trading range.  

    NOW we can apply the 5% Rule inside our 900-point range as we throw out the spikes over and under and that means the 900-point drop to 11,250 should get a 180-point WEAK bounce to 11,340 (where we are right now) and it's not until we hit 11,430 (strong bounce) that we're even going to be a little bit impressed with the move back up.  

    Even more so since 11,131 is the 50 dma so OF COURSE that's going to be bounce so a weak bounce off that line isn't impressive at all…

    What's fun about the 5% Rule is that we could have predicted all this any time.  The chart is just to illustrate the Rule, we don't need the chart – this is just math.  In fact, if you look at the Big Chart, the spreadsheet is my original 5% Rule – StJ started adding charts to it and that's been great (round of applause) but I went many years using just the spreadsheet as I could care less about the charts or their moving averages – the spreadsheet tells us all we need to know.

    College towns/StJ – Well that took about two weeks to become a disaster and this is week 2 for the elementary schools – what fun!  

    INTC/Kustomz – If they couldn't do what ARM is doing they would have bought them.  INTC doesn't react to timing pressure, they know what's coming out next year and for the next 5 years – people are just too impatient.  

    $50 is $210Bn so less than 10x earnings and we're going to point fingers like they don't know how to run a company?  More like people don't know how to invest!  Our recent moves on INTC were 7/24, when I said:  

    July 24th, 2020 at 9:51 am | (Unlocked) | Permalink |


    In the STP, let's sell 20 of the 2022 $50 puts for $8.50 ($17,000)


    In the LTP, let's sell 20 of the 2022 $50 puts for $8.50 ($17,000) and buy 50 of the 2022 $45 calls for $11 ($55,000) and wait for a bounce to sell short calls.  


    In the Earnings Portfolio, let's sell 10 of the 2022 $50 puts for $8.50 ($8,500) and buy 25 of the 2022 $45 ($11)/$55 ($6.50) bull call spreads for $4.50 ($11,250) and that's net $2,750 on the $25,000 spread that's $12,500 in the money so $22,250 (809%) upside potential is worth a toss. 

    It's still good for a new trade with the 2022 $50 puts at $8.10 and the $45 calls at $9.50 and that's because they opened at $10 that, day, not $11 – that was just my guess from the opening bell.  They bottomed out at $8 and hit $12 on 9/2.

    CVS/Stuart – I like them but like WBA much better.  

  10. INTC / Phil – I believe that they were worried that buying ARM would not pass anti-trust review. I cannot imagine that someone would let Intel have a dominant share of the only competing 2 CPU architectures. With NVDA competing mostly at the GPU level (although this is getting blurry now), much less of an issue.

  11. NVDA / ARM – this will be a tough slog with respect to anti trust  .

  12. GE / Phil – What are your thoughts on GE as a long term accumulate?  If we 'ever' get a green new deal, they'd be ideally suited to prosper in wind.  TIA!

  13. ARM / batman – Still easier than INTC!

  14. STJ – ARM – agreed

  15. INTC/StJ – Probably also a factor.  

    NVDA/Batman – I think it's still good for someone to be a serious contender to INTC.  AMD coming back a bit.

    GE/Jeddah – I used to be a fan but they are serial mismangers now.  I know they were counting on green and it died 3 years ago but where does that leave them.  They were also counting on jet engines.  Oops.

    We held the morning's gains.  Good way to start the week.  Still 100 points from 11,340 (weak bounce) so not at all impressive.  

    TSLA back over $410.