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Technical Tuesday – A Healthy Pullback or Down with the Sickness?

"Looking at my own reflection

When suddenly it changes

Violently it changes (oh no)" – Disturbed

Is the downturn anything to worry about?

Markets need corrections.  Every once in a while, even in the greatest rally, some people need to actually take their profits off the table and realize some of those gains.  It's often in the support levels we find during these sell-offs (when a volume of buyers show up), that we are finally able to discover the true price range of a stock.  Apple (AAPL), for example, has goine from $125 in early June to $150 last week, which is up 20% and, according to our fabulous 5% Rule™,  we expect a pullback of 20% of the run (weak) or 40% of the run (strong) so 5-point retracements to $145 or $140 and that's exactly what we're getting:

$150 for AAPL is over $2,500,000,000,000 in market cap.  The 20% run added $500Bn to AAPL's PRICE (not value) and that's more than the TOTAL market cap of all but 12 companies on the planet.  Did AAPL gain a Visa ($528Bn) or a Samsung ($462Bn) last month?  It took those companies decades to climb to that valuation but AAPL can gain or lose it overnight?  No, that's silly – the market is silly – don't take it seriously.  This is a runaway market and not following the normal rules of investing.

Which is why we have our hedges (see last week's portfolio reviews).  While the market was diving, we checked in on our paired Long and Short-Term Portfolios and found:

Well, the STP is sure working:

Value Change Today: $62,298
Security Value:  $90,505
Cash on Hand:  $159,569
Total Value:  $250,074
Portfolio Ret.:  25.0%

We're still net bearish, which is good as the LTP took a hit:

Value Change Today: $-36,766
Security Value:  $774,017
Cash on Hand:  $1,080,646
Total Value:  $1,854,663
Portfolio Ret.:  270.9%

That's what's supposed to happen in a sell-off when you're bearish.  Although much smaller, the STP gives us a lot of bang for the downside buck and we are very well-hedged for up to a 20% drop in the market so, on days like yesterday, we get to simply sit back and relax and see which of our stocks stay strong in a drop and which ones look scary enough to consider dropping.  Most importantly, we have plenty of time to reflect and decide – no panic selling.

You'll notice we also have PLENTY of CASH!!! on the side of our portfolio positions and that too is a hedge.  Having cash means we are able to make adjustments and, as long as there are no positions in your portfolio you wouldn't be happy to double down when they are 50% lower (there shouldn't be) what that means is a portfolio with 1,000 shares using 50% of the cash can become a portfolio with 2,000 shares and still have 25% of the cash left over.  For markets that dip and recover like we had in March of 2020 – that strategy can make you a fortune.

This strategy does not work so well for high-flying stocks like TSLA – as we don't know what real value they have but, when you have value stocks like AAPL, DIS, F, GNW, GOLD, KO, M, WBA and WHR – like we have in our Butterfly Portfolio, you KNOW that 50% off would be ridiculous and, eventually, they will come back.  Unless the World ends – in which case we assume there will be more pressing things on our mind than our portfolio's value.  Our KO position is such:  

KO Long Call 2022 21-JAN 45.00 CALL [KO @ $55.73 $0.00] 15 5/28/2020 (185) $9,300 $6.20 $4.85 $4.08     $11.05 $0.00 $7,275 78.2% $16,575
KO Short Call 2022 21-JAN 55.00 CALL [KO @ $55.73 $0.00] -15 5/28/2020 (185) $-3,525 $2.35 $0.69     $3.04 $0.00 $-1,028 -29.1% $-4,553
KO Short Put 2022 21-JAN 42.50 PUT [KO @ $55.73 $0.00] -5 5/28/2020 (185) $-2,250 $4.50 $-4.03     $0.47 $0.00 $2,015 89.6% $-235
KO Short Call 2021 20-AUG 55.00 CALL [KO @ $55.73 $0.00] -10 6/18/2021 (31) $-1,300 $1.30 $0.35     $1.65 $0.00 $-345 -26.5% $-1,645

The crux of the position is the Jan $45/55 spread that's at the money and we sold 5 short puts so, IF KO falls below $42.50, we will be forced to buy 500 shares at $42.50 ($21,250).  We spent net $2,685 (we took a loss on July short calls) on the $15,000 spread so our upside potential is $12,315 (458%) in 6 months if KO holds $55.  On the downside, if KO drops 50% to $28, we would be forced to buy 500 shares at $42.50 and we'd lose our $2,685 (assuming we took no action).

Of course 50% off KO would drop their market cap to $120Bn for a company that has $35Bn in sales and $9Bn in profits.  It's Coca-Cola, so we think even at the end of the World people will be drinking it so we'd happily double down, spending $14,000 for 500 more shares and then we'd have 1,000 shares at net $37.935 per share.  Of course it would be at $28 and we'd still have a loss but, if KO comes back to just $45, we have a $7,000+ profit.

If we don't want to own 1,000 shares of KO at $37.93, we have no business committing to 500 at $42.50, right?  That's how you should look at every investment you make.  Are you ready, willing AND able to increase your position if it's down with the market (as opposed to being down for a specific, good reason)?  If not, why are you buying the stock in the first place?  

Markets do crash 20% and 40% and even 60% – we've seen it happen twice in the past 13 years, 3 times in the past 21 years so why should we be surprised when it happens and shame on us if we're playing the markets without a contingency plan for when (not if) that happens again.  

So how do we know WHEN the market is going to crash?  We don't.  But we do know when it's over-valued and this one is VERY over-valued.  That means it COULD crash any time or it could get much sillier – that's why we hedge.  As long as Joe Biden and the Fed(s) keep throwing money on the fire – it can burn brightly for a very long time but it doesn't take much to spook and over-priced market – as was demonstrated yesterday.

Our 5% Rule™ let's us know where primary support and resistance zones tend to form and we saw weakness in the Russell (small caps) last week and we moved more of our hedges there – just in time.  Not only is the Russell now at the May lows but so is the Nikkei, Euro Stoxx and Germany's DAX and China has already failed their lows so it stands to reason the US is simply lagging in the sell-off and we have more carnage ahead.  


For the Nasdaq, back to May is a 10% drop, only 5% for the S&P and only 3% for the Dow.  Below that would be a total nightmare as this market hasn't formed any proper support since the fall of 2020 and that was Dow 28,000 (-17.5%), S&P (-17.5%) 3,500, Nasdaq 12,000 (-17.5%) and Russell 1,600 (25%).  That's why we doubled our Russell shorts – further to fall!  Given those bases and using our 5% Rule™, we can discover where support should be on the way down.  

  • Dow 28,000 to 35,000 is 7,000 points so 1,400-point retraces to 33,600 (which we hit on the nose yesterday) and 32,200.
  • S&P 3,500 to 4,400 is 900 points so 180-point retraces to 4,220 (yesterday's low 4,224) and 4,040.
  • Nasdaq 12,000 to 15,000 is 3,000 points so 600-point retraces to 14,400 (14,445) and 13,800.
  • Russell 1,600 to 2,350 is 750 points so 150-point retraces to 2,100 (on the nose!) and 1,950.

Remember, the 5% Rule™ is NOT T/A – it's just math.  Just like science that people can't understand seems like magic, math that people can't understand seems like T/A but T/A is just as ridiculous as magic – remember that.  I'm not going to get into the reason it works so well as we've done that before (see our Education and Strategy Sections).  Suffice to say it's based on the predictable actions of trading algorithms, which is how we can be 4 for 4 predicting index pullbacks.  

More useful now though, is how do we identify whether this was a mild pullback that's over or we're pausing for the next move down?  We do that the same way we calculated the pullbacks though now we look for bounces off the pullback lines.  If we get a strong bounce by day 2 (tomorrow) that holds (without breaking) for 2 full days – then the sell-off is over.  

  • Dow 35,000 to 33,600 is a 1,400-point drop so 280-point bounces to 33,880 (weak) and 34,160 (strong) 
  • S&P 4,400 to 4,220 is a 180-point drop so 36-point bounces to 4,256 (weak) and 4,292 (strong).  
  • Nasdaq 15,000 to 14,400 is a 600-point drop so 120-point bounces to 14,520 (weak) and 14,640 (strong)
  • Russell 2,350 to 2,100 is a 150-point drop so 30-point bounces to 2,130 (weak) and 2,160 (strong)

Weak bounces are pretty much a given as we're in a very strong uptrending market and the FREE MONEY keeps pouring in every day so it's hard to stay down but the nature of this sell-off is a re-adjusting of economic expections for the rest of this year and, without EVEN MORE STIMULUS, we're not likely to find support so easily near the recent highs.  

A strong market will make the weak bounce lines today than then test the strongs tomorrow.  A weakening market will fail the strong bounces (or, even worse, fail the weak ones) and head back down to yesterday's lows, consolidate there and then fail and move on to the strong retrace lines but, below there and we have to then calculate the strong and weak bounce lines from the previous support (WAY LOWER) and hope that they hold.

Fortunately, we're hedged for that!  


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  1. Good Morning

  2. Good morning! 

    Off to the races already and past the weak bounces – what a racket…



    • The decline in Treasury yields continues, which is making things tougher for equity dip-buyers.
    • Index futures pared gains into the open. The S&P 500 (SP500) +0.2%, Dow (DJI) +0.2% and Nasdaq (COMP.IND) +0.2% are up slightly after Monday's selloff.
    • IBM is lending a hand to the Dow with its price move as analysts boost price targets.
    • The 10-year Treasury yield is down 4 basis points to 1.14%, reversing earlier gains that pushed the yield up to nearly 1.22%.
    • It hasn't been below 1.1% since January.
    • Michael Purves, founder of Tallbacken Capital Advisors, who boosted his S&P 500 target to 4,800 from 4,250 today, said on Bloomberg a lot of recent stock market volatility "is really a function of trying to understand the narrative of what the bond market is trying to say."
    • "I look at the 10-year Treasury as much more a reflection of Fed policy over the next several years rather than an indictment of economic growth in the next 24 months," he adds.
    • Check out the stocks making the biggest moves this morning.
    • Carnival (CCL -5.7%previously announced plans to sail 15 of its 23 ships by the end of October and is currently sailing 3 ships from the United States. Now, it intends to have its entire fleet return by the end of 2021, increasing operating capacity to 75%.
    • Carnival's European and Asian brands have already begun minimal sailing and Carnival expects to have 63 of its ships owned by other brands sailing by the end of 2021, up from its previously announced plans of 54 ships.
    • "With strong ongoing demand for cruising, we look forward to serving our guests with additional ships announced across eight of our brands and nearly three-quarters of our fleet capacity returning by the end of this year," said CCO Roger Frizzel.
    • Cruise line stocks dropped yesterday among fears that the COVID-19 Delta variant would push back the sailing recovery timeline.
    • UnitedHealthcare (NYSE:UNH) says it is working with Peloton Interactive (NASDAQ:PTON) to provide millions of Americans with access to fitness classes that can help improve their overall fitness and well-being.
    • The programs will be included as part of benefits for millions of fully insured UnitedHealthcare members. New and existing Peloton Members are eligible to enroll.
    • Nearly 4M UnitedHealthcare commercial members will have the option to access Peloton’s fitness classes via the Peloton App, giving people enrolled in qualified fully insured employer-sponsored plans a 12-month subscription to a Peloton Digital Membership or a four-month waiver for a Peloton All-Access Membership at no additional cost.
    • Shares of Peloton are up 6.77% in premarket action.
    • Read more details on the Peloton deal
    • Shares of Simon Property Group (NYSE:SPG) rise 1.3% in premarket trading as Stifel analyst Simon Yarmak sees an attractive entry point after its recent share decline.
    • SPG has pulled back 14.8% since June 8 vs. the Morgan Stanley REIT Index's 0.4% dip during the same period.
    • Yarmak upgrades SPG to Buy from Hold, with a $132 price target, or a 5.75% cap rate.
    • Yesterday, shares fell 5.8% vs. the Vanguard Real Estate ETF (NYSEARCA:VNQ) (-1.9%).
    • However, on a Y/Y basis the total return for SPG (+98%) is ahead of Realty Income (NYSE:O), VNQ (+36%), and the S&P 500 Index (+34%), according to the chart below.
    • The price target implies ~13% upside as of yesterday's close.
    • In the note, Yarmak reasons that, with "a well-covered 4.8% recently raised dividend, the stock provides 17.5% potential total return over the next 12 months."
    • The Buy rating exceeds the Neutral Quant rating (top rating on Profitability and worst rating on Growth), and agrees with the Bullish average author rating (1 Very Bullish, 3 Bullish, 2 Neutral) and the Bullish Wall St. analyst average rating (6 Very Bullish, 3 Bullish, 11 Neutral).
    • SA contributor Mark Roussin seems to agree with Yarmak on the attractive discount in the stock price as he believes "SPG has long been the gold standard when it comes to Mall REITs."
    • IBM (NYSE:IBM) reported second-quarter earnings yesterday and demonstrated "improving execution" and stronger demand, says Morgan Stanley in a note raising the price target from $152 to $164 while maintaining an Equal Weight rating.
    • The firm highlights the investment-driven Cloud & Cognitive Software growth, which backs IBM's "ability to reach sustainable mid-single digit revenue growth" though it limits short-term profit upside.
    • Citi (Neutral rating) raises IBM's price target from $140 to $150, praising the results but noting that "one good quarter does not make a trend." The firm also questions "if the overall economic recovery is helping all peers."
    • IBM shares are up 2.3% pre-market to $141.15.
    • Background: IBM tops Wall Street forecasts on strong cloud business revenue
    • BofA Securities clients aren't ready to give up on the reflation trade, buying sectors last week that were particularly hard hit in Monday's selloff.
    • Overall, clients were net sellers of U.S. stocks for the fourth week in a row, according to the latest survey. At $2B, it was the biggest net sale in five weeks.
    • Instiutions and hedge funds sold, but retail investors were the largest net buyers in four months.
    • Despite a swoon in rates that continued this week, Financials (NYSEARCA:XLF) saw the biggest inflows since March 2020. Clients also bought Industrials (NYSEARCA:XLI), Energy (NYSEARCA:XLE) and Materials (NYSEARCA:XLB).
    • They sold growth, with the outflows in Info Tech (NYSEARCA:XLK) and selling in Communication Services (NYSEARCA:XLC) continuing at a record pace.
    • "Clients bought last week’s SMID cap laggards with record flows into mid caps (since 2008) and the biggest inflows into small caps since October 2020 while selling large caps by the most since mid-January," strategists led by Jill Carey Hall write in a note. "We continue to prefer small over large caps."
    • In "a reversal to recent trends, clients bought single stocks for the first time in over two months and sold ETFs for the first time in nearly three months," Hall adds.
    • UBS also defends the reflation trade in the face of falling yields.

  3. June housing starts jump more than expected, but permits unexpectedly drop

    • June Housing Starts: +6.3% M/M to 1.643M vs. 1.590M expected and 1.546M prior (revised from 1.572M).
    • Housing starts rose 29.1% on Y/Y basis.
    • Single-family starts in June were at a rate of 1.16M, 6.3% higher than the revised May figure of 1.091M.
    • Building permits: -5.1% to 1.598M vs. 1.700M expected and 1.683M prior (revised from 1.681M).
    • On a Y/Y basis, building permits increased 23.3%.
    • Single-family authorizations were at a rate of 1.063M, up 6.3% from the revised May number of 1.134M.
    • Privately-owned housing completions in June were 1.324M, up 1.4% from May and 6.5% above the June 2020 rate.
    • Blue Origin's (BORGN) New Shepard is on the pad and ready for liftoff at 9:00 a.m. Eastern time.
    • The New Shepard rocket will carry Jeff Bezos, Dutch teen Oliver Daemen, Mark Bezos and Wally Funk on board for the suborbital rocket ride above the space boundary of 62 miles above sea level, which is higher than Virgin Galactic's (NYSE:SPCE) flight from earlier this month.
    • Shares of Virgin Galactic jumped 7.29% yesterday in front of the Blue Origin flight. Bernstein issued a rosy forecast for space tourism revenue to help lift sentiment a bit.
    • Check back for live updates.
    • 8:29 a.m. Blue Origin reports that all systems are a go.
    • 8:42 a.m. The astronauts are in the hatch and preparing for the final countdown.
    • 8:56 a.m. The flight is on a hold for an unspecified reason.
    • 8:58 a.m. The hold is lifted and launch is set for around 9:12 a.m.
    • 9:12 a.m.  The New Shepard takes off successfully and rises to 30K feet in less than a minute.
    • 9:15 a.m. The astronauts are weightless after the separation of the capsule from the booster rocket.
    • 9:20 a.m. The rocket boosted landed successfully.
    • 9:22 a.m. The space capsule also land successfully after rising to an apogee of 351K feet.
    • New Jersey Governor Phil Murphy said Tuesday that there are no current plans to bring back a mask mandate in the state, though he acknowledged that he would support such a move if it became necessary.
    • Speaking to CNBC, Murphy urged people to get vaccinated, saying that the recent rise in COVID cases has largely afflicted people who have yet to receive the vaccine.
    • "This is now in New Jersey a pandemic of the unvaccinated," he said.
    • Asked what it would take to reinstate mask mandates and other restrictions, the Democrat said the state would "need to see a wholesale deterioration of the health data."
    • Looking ahead to the school season, Murphy stressed his desire to bring students back on a normal schedule, with kids attending school in person five days a week.
    • As to whether New Jersey would require state employees to get vaccinated, the governor said he preferred that people choose vaccinations willingly.
    • "I would continue to like to see people get there of their own free will," he said.
    • The governor's comments come amid concern about the Delta variant and as recent data shows a resurgence in infections and hospitalizations related to COVID.

    • Bank of America thinks says it was impressed with the presentations at L Brands (NYSE:LB) virtual analyst day on the long-term growth strategies for the Victoria's Secret and Bath & Body Works businesses.
    • Victoria's Secret is noted to be planning for mid single-digit revenue growth, margins in the mid-teens and high single-digit EBIT growth.
    • Meanwhile, key growth drivers for Bath & Body Works include product extensions, digital growth, and international expansion. BofA notes that longer term opportunities include clean, natural, and organic extensions in its existing three categories as well as new adjacent categories such as skincare, hair care, and other home and wellness products. Analyst Lorraine Hutchinson expects natural products to benefit customer acquisition as these attributes resonate more with younger consumers.
    • The firm maintains a Buy rating on L Brands on the expectation that the August 2 separation creates value.
    • Shares of L Brands are up 1.25% in premarket trading to $70.89.
    • See more details on the L Brands investor event.
    • Ahead of the fiscal third quarter earnings report, UBS raises Apple's (NASDAQ:AAPL) price target from $155 to $166 and maintains a Buy rating.
    • Analyst David Vogt raises the firm's revenue and EPS estimates for the quarter from $71.3B and $0.95 to $74.7B and $1.01, about 1% above Street consensus, expecting stronger iPhone and Mac sales in a seasonally soft quarter and amid component shortages.
    • The firm raises its FY21 iPhone unit estimate from 225M to 227M and the FY22 forecast from 220M to 225M largely due to aggressive carrier promotions.
    • UBS checks suggest a product mix supporting "slightly better" average selling prices. The firm raises its June quarter ASP forecast by 2% to $825 and FY21 by 1%.
    • Apple is expected to report FQ3 results at the end of the month.
    • Apple shares are up 0.8% pre-market to $143.52.
    • Recent news: Apple reportedly looking for Hollywood production hub for streaming content
    • Halliburton (NYSE:HAL) +2.2% pre-market after reporting better than forecast Q2 earnings while revenues were roughly in line with analyst expectations.
    • Q2 operating income totaled $434M vs. a year-ago loss of $1.91B, and revenues rose 16% Y/Y and 7% Q/Q to $3.71B.
    • Q2 completion and production revenue rose 22% Y/Y and 10% Q/Q to $2.05B, and drilling and evaluation revenue gained 9% Y/Y and 5% Q/Q to $1.66B.
    • Halliburton says completion and production division margin reached a three-year high, while drilling and evaluation division margin outperformed expectations, "setting both divisions up for robust margin growth this year."
    • North America revenue jumped 50% Y/Y and 12% Q/Q to $1.57B, and international revenue increased 4% Q/Q while finishing roughly flat vs. a year ago at $2.1B.
    • "The positive activity momentum we see in North America and international markets today, combined with our expectations for future customer demand, gives us conviction for an unfolding multi-year upcycle," the company says.

  4. Blue Origin – It looks like a giant…..


  5. Wow, punching right back now: 



    • LTP:  Value Change Today:$35,613
    • STP: Value Change Today:$-31,551

    Works both ways!  

    Doesn't actually matter what we hit but what sticks but this market is so strong – sell-offs are what never stick.

  6. Gotta say – I do really like the tech/trading support with TOS — it takes under a minute to speak with someone and it has always been a smooth process.  I had a tax lot question and the rep walked me right through everything in about two minutes.  He said TOS will always show FIFO even if you switch it in TOS for the trade – but the TD website will have the correct info the next day and then TOS will follow suit once the trade is settled.  Did not know that…

  7. The problem is, today's volume up is 1/2 of yesterday's volume down – that indicates some serious problems underneath:

    Date Open High Low Close* Adj Close** Volume
    Jul 20, 2021 425.68 432.42 424.83 432.05 432.05 71,499,615
    Jul 19, 2021 426.19 431.41 421.97 424.97 424.97 147,669,000
    Jul 16, 2021 436.01 436.06 430.92 431.34 431.34 75,784,700
    Jul 15, 2021 434.81 435.53 432.72 434.75 434.75 55,126,400
    Jul 14, 2021 437.40 437.92 434.91 436.24 436.24 64,130,400
    Jul 13, 2021 436.24 437.84 435.31 435.59 435.59 52,911,300
    Jul 12, 2021 435.43 437.35 434.97 437.08 437.08 52,889,600
    Jul 09, 2021 432.53 435.84 430.71 435.52 435.52 76,190,300
    Jul 08, 2021 428.78 431.73 427.52 430.92 430.92 97,595,200
    Jul 07, 2021 433.66 434.76 431.51 434.46 434.46 63,549,500
    Jul 06, 2021 433.78 434.01 430.01 432.93 432.93 68,710,400
    Jul 02, 2021 431.67 434.10 430.52 433.72 433.72 57,679,000
    Jul 01, 2021 428.87 430.60 428.80 430.43 430.43 53,441,000

  8. "serious problems underneath"  notice the VIX still close to 20, which is 2 points above last Friday when SPY was at these levels

  9. Curious about everybody's thoughts on this:

    Sell 1 Jan 22 SPY $250 Call for $187

    Sell 1 Jan 22 SPY $500 Put for $71

    Collect $25,800 in premium today.

  10. swampfox, at SPY $431, you're getting paid $181 in intrinsic value on the call at $69 of intrinsic value on the put.  You aren't getting $25k in premium, you're getting $800.  So no way!

  11. SPY/Swamp – You are collecting $258 ($25,800).  You make $800 if the stock expires between $250 and $500 but we're at $431 and there's no limit to your losses if SPY is higher (or lower) and, 6 months ago, on Jan 20th, SPY was $385 so up $45 since then doesn't put $500 out of reach.   I don't see the reward as worth the risk – remote though the possibility may be.  

    I have seen many people play these strategies over the years and they seem very clever and they get very excited about their winnings until the inevitable black swan event comes along and wipes out all their gains.  

    And what JPH said.  

    I can sell 4 VIAC 2023 $25 puts for $2 and get the same $800 and I'll sleep a lot better at night… In a PM account, you may have no margin selling the short strangle but that could change if the market drops 20% and then you could get margin-called at just the wrong time.  The short VIAC puts are also so far out of the money that they don't use any Portfolio Margin – no advantage there.