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Turnaround Tuesday – Markets Hold the Line for the Holidays

Ho, ho, ho – the Dow is up 300 points this morning.  

It's the same 1% we lost yesterday morning and only 200 points below Friday's close at 35,365 (so far).  Does it count as a Santa Claus Rally if all we are doing is recovering lost ground?  Santa's running a little late this year becase 15% of his elves caught Covid and there are supply chain issues and he had to raise wages so don't expect flashy toys this year – things are tough.   

That's why, at PhilStockWorld, we learn how to make our own profits in any market conditions.  We took advantage of yesterday's dip in our Live Member Chat room and added adult toy distributor, Best Buy (BBY) to our Long-Term portfolio by selling 5 BBY 2024 $70 puts for $10.25 ($5,125) thanks to a suggestion by Yodi, who noticed the sale at 12:42 which was, so far, the dead bottom.  

At $95.77, BBY has a $23.35Bn market cap but even in 2020, they made $1.54Bn in profits, giving them a P/E of 15.16, which is fine for a retail store (and this was during a disaster).  Last year they were back to $1.8Bn but BBY keeps a fiscal year that ends in October, so they are 3 months behind what traders are used to so Covid affected them heavily in their 2021 earnings as well.  This year, which has just started for them, they expect to make $2.5Bn, which means they are trading at about 10x expected earnings – a very good deal.

We are able to turn that into an even better deal by selling the 2024 $70 puts for $10.25 – as that gives us a net $59.75 entry, which is another 37.6% below the current price.  So our worst case is we buy 500 shares of BBY for net $57.75 and that's our break-even and anything above that is a profit – up to $5,125 – just for promising to buy 500 shares of BBY at a 37.6% discount.  Aren't options fun?

Another way we make money during slow holiday trading is in the Futures market and yesterday, in our Morning Report (subsribe here so you don't miss out), I said:

Oil (/CL) is back down to $67.50, which can be played for a bounce into Wednesday's EIA Inventory Report (tight stops below).  Oil demand is at 99Mb/d, which is 2Mb/d below the pre-pandemic levels and oil traders tend to watch very short-term charts and don't realize holiday travel plans are not that likely to be cancelled in the US – as we're still in that denial phase.

As you can see, we're up around $4,500 on two contracts this morning and that's enough to take a non-greedy exit as we test the $70 line (you can always get back in if we go over and use that for a stop on the new play but why risk it?).  Congratulations to all who played along an, of course, you're welcome!   The same goes for our usual Natural Gas (/NG) long trade that makes a dime at $3.85 so those are also off the table with a $1,000 per contract profit (again).  

On the whole, our bounce chart is exactly the same this morning as it was yesterday though, at noon, the only green we had left was the weak bounce on the Dow – so a complete comback from yesterday's mornng dip but we're certainly not out of the woods yet with two red boxes on the Nasdaq (and we made a new low yesterday too, though not lasting enough to change the chart).     

  • Dow  36,000 to 34,200 has bounce lines of 34,560 (weak) and 34,920 (strong) 
  • S&P 4,700 to 4,465 has bounce lines of 4,512 (weak) and 4,559 (strong) 
  • Nasdaq 16,500 to 15,675 has bounce lines of 15,840 (weak) and 16,005 (strong) 
  • Russell 2,400 to 2,080 has bounce lines of 2,144 (weak) and 2,208 (strong)

Weakness in the Nasdaq directly relates to weakness in the S&P these days since just 5 stocks (MSFT, NVDA, AAPL, GOOGL and AAPL) are responsible for 50% of the S&P 500s gains since April and for 1/3 of the entire year's gains (300 of 900 points).  “If those companies, for whatever reason, stop performing, there’s nothing to support the market,” said Peter Cecchini, director of research at hedge fund Axonic Capital.  Expectations that stock prices will fall over the next six months jumped to 42% earlier this month, the most bearish reading in more than a year, according to a weekly sentiment survey conducted by the American Association of Individual Investors.  New York Stock Exchange stocks closing above their 200-day moving averages, dropped as low as 41% earlier in December, a 17-month low.  

There's little to be determined from this low-volume holiday trading so let's just sit back and relax and enjoy the show.

Santa rally won’t restart due to Covid risks & profit-taking, top investor says

Morgan Stanley: Our "Ice" Scenario Will Be Worse Than Most Expect

Oil Edges Higher After Two-Day Drop as Investors Assess Demand

U.S. Sets 55-Mile-a-Gallon Fuel-Efficiency Standard for 2026 Models

Traders Sent $30 Billion Into the Dip and This Time Got Bruised

Small Caps Pummeled as Omicron Spread Clouds Growth Outlook

Stagflation Is Coming To A Theater Near You

Omicron Cancellations Starting to Pile Up: Here’s a Short List

Nike Gains as Growth in U.S. Helps Overcome China Collapse

China Ordered Amazon to Delete Reviews of Xi Jinping’s Book, Reuters Reports

SEC Demands Chinese Firms Bolster Risk Disclosures for Investors.

The Slow Meltdown of the Chinese Economy

Turkey’s Borrowing Costs Soar as Crisis Enters New Phase

 

"Here we are now, entertain us

I feel stupid and contagious

A denial, a denial, a denial, a denial, a denial

A denial, a denial, a denial, a denial" – Nirvana

 


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  1. Natural Gas Prices Hit Fresh Record Peaks



  2. ‘An event canceled is better than a life canceled,’ WHO chief warns


  3. As Inflation Rises, Cost-of-Living Raises Gain Popularity


  4. Why U.S. giants keep caving to China




  5. Embraer flying taxi unit Eve, valued at US$2.9 billion, to list on NYSE


  6. Battery Storage Soars on U.S. Electric Grid



  7. I think we have to be very fast to sell some covered call, by lunch the /ES is in minus territory again???


  8. BBY I hope you guys acted yesterday. 


  9. Good Morning.


  10. Good morning! 

    Yodi is right to be nervous, this is a weak-looking market and Morgan Stanley makes a good case above to be worried.  

    Needless to say, with a 2022 year-end price of 4,400, the answer is negative and as Wilson notes, he remains concerned about valuation all year with a particular focus on it in Q1 when he favored cyclicals and reopening plays. Since then, the most expensively priced equities have faltered as shown in the second chart above, and have yet to recover even though long term interest rates have come back down leaving real 10 -year yields near all time lows! This jibes with Wilson's view that the re-rating is now happening via the equity risk premium (ERP) channel rather than rates as the equity market is smart enough to know that using current levels of either nominal or real rates to discount cash flows far in the future may be a colossal mistake given the pace of inflation and the Fed's changing reaction function. "This re-rating in ERPs could have much further to go," Wilson warns.

    Needless to say, growth stocks would be more vulnerable to that tapering than defensive ones given their much higher valuations. Since November 15th the market has de-rated growth stocks as shown above. More importantly, as shown below, defensive stocks have been the best performers by far — in line with Wilson's recommendation. This preference for defense, according to the MS strategist, is due to both Fire (central bank tightening) and the oncoming Ice (growth slowdown) that could be worse than most expect. Two of the bank's overweight sectors (Healthcare and REITs) have been the top performers and it continues to favor both. Staples are also looking more interesting where Staples are favored over Discretionary (see below for more on this trade).

    In short, the MS strategist is concerned that the Ice will turn out to be chillier than most expect is increasing. And while Omicron is part of that concern in the near term for certain activities, Wilson is more focused on the risk of supply picking up just as consumption is fading from a payback in demand, higher prices and demand destruction. Keep in mind that consumer confidence remains at recessionary levels mainly due to higher inflation and that is expected to start to show up in consumption in Q1. In fact, as we reported last week, November retail sales faded after an earlier than normal holiday shopping period ramped in October.

    This new found wealth, as we noted before, remains large but concentrated in the upper quartile income cohort. Now, with the Build Back Better bill in jeopardy of not passing at all, these lower end consumers are likely to struggle, while the wealthy decide to reign in consumption if asset prices continue to falter.

    United States ›

    That's a shame.  It is always a fun game in NYC to find the best $1 pizza.

    A patriotic mural showing Soviet pilots from World War II, based on a photograph of the Victory Parade in 1945. The sign in Russian reads, “The saved world remembers you!”

    https://www.nytimes.com/2021/12/21/world/europe/russia-military-putin-kremlin.html

    Over the past eight years, the Russian government has promoted the idea that the motherland is surrounded by enemies, filtering the concept through national institutions like schools, the military, the news media and the Orthodox Church. It has even raised the possibility that the country might again have to defend itself as it did against the Nazis in World War II.

     

    Now, as Russia masses troops on the Ukrainian border, spurring Western fears of an impending invasion, the steady militarization of Russian society under President Vladimir V. Putin suddenly looms large, and appears to have inured many to the idea that a fight could be coming.

    A mural in Moscow showing members of Yunarmiya, or Youth Army, an organization associated with the Defense Ministry. 

    An instructor showing children how to use air rifles at the training center in Noginsk.

    An award ceremony for a patriotic club last week in Vladimir, Russia. Students from around the country competed in activities like map reading and shooting.


  11. Phil, I'm curious if it's time to add to NAK holdings?


  12. AVGO with a little pullback finally (we have short calls).

    NAK/Swamp – There's a very real danger they will get a hard no on their project from the EPA and then they'll have to wait for the next Republican administration (3 years by the look of things) so I don't see the point of adding now.   Not to mention 3 more years would guarantee they need more money to keep going and we all get diluted. 

    Northern Dynasty Comments on Environmental Protection Agency's Statement on Future Actions Regarding Alaska's Pebble Project

    "While it is not yet known what action, if any, the EPA will finally take, we are cautiously optimistic about their commitment to consider new information that has become available since the 2014 Proposed Determination and to make science-based decisions," said Ron Thiessen, President and CEO of Northern Dynasty. "We do not know which new information they may use in their decision, but we believe that the strong administrative record of the overwhelmingly positive Final Environmental Impact Statement of 2020 that was prepared by the U.S. Army Corps of Engineers should be an important part of it."

    "We are also pleased that the EPA has established a timetable for their review, with the recent extension through the end of May of 2022. This action suggests their intention is to comply with the regulations and not let the Proposed Determination languish, therefore attempting to regulate by inaction. We do caution, however, that we understand that the deadline can be extended further at the EPA's option," Mr. Thiessen added.

    Biden EPA moves to end development of Alaska's Pebble mine

    Northern Dynasty Minerals: Years Of Court Battles Likely Upcoming


  13. Hi Phil, any interest in ENDP for future is now ?  Or all that debt makes it too broke to fix?  If memory serves me, you liked them years ago. 


  14. ENDP/Des – Their big problem is Vasostrict just went Generic and they are being investigated for anti-competitive practices AND they are still in opiod lawsuits.  Vasostrict is about 1/3 of Endo's sales and I don't know what their pipeline is like but that's a big hit.  On the bright side, you can buy the whole company for $900M at $4 and they made $184M lst year and expect to make $669M this year so, even if 1/3 of the sales go away, they are still not in terrible shape but $8.5Bn in debt would need several blockbusters to make this an exciting stock.   

    Endo International: Bankruptcy Seems Like The Only Practical Option

    The thing about "penny" stocks like ENDP is they only trade about 8M shares a day so $24M and the whole market cap is $800M so 35 trading days (two months) to turn over and most days there's a fairly equal amount of buyers and sellers but the "promoters" of the stock are constantly releasing bullish articles and notes and starting rumors, trying to attract new buyers and, when they do get some, it doesn't take very much to push the stock upward – especially if the promoters stop selling and create a shortage of available shares on the floor.  

    So let's say they get someone like you to decide to put in $100,000 – then you need to buy 25,000 shares, which is 1/40th (0.3%) of the day's total trading and if the article you read is read by just a few other people – the stock can be off to the races for no reason at all.  

    So the whole thing is sort of a joke with sub -$1Bn stocks that are thinly traded.  IMAX, by comparison, turns over at 1.3% – 4x the rate of ENDP and it's followed by professional analysts though also a $1Bn stock.    

    Notice they both pretty much just follow the Russell anyway:

    Speaking of IMAX – Spider Man just showed how fast movies can come back with $260M this weekend.  That's more in the opening weekend than any film has totaled since the pandemic began.  $600M Worldwide total was great too (other countries are more closed than we are).  Spider Man hasn't actually opened in China yet.  More specifically, IMAX did $36.2M this weekend, the most since Endgame ($91M).  IMAX total revenues for the year were projected to be $226M – this should pop them about 10% so a huge beat in store for Q4.

    We have a complicated spread on IMAX in the Butterfly Portfolio:

    IMAX Short Put 2023 20-JAN 20.00 PUT [IMAX @ $18.38 $0.82] -10 6/2/2021 (395) $-4,000 $4.00 $1.20 $-7.71     $5.20 - $-1,200 -30.0% $-5,200
    IMAX Short Put 2023 20-JAN 20.00 PUT [IMAX @ $18.38 $0.82] -10 9/29/2021 (395) $-5,100 $5.10 $0.10     $5.20 - $-100 -2.0% $-5,200
    IMAX Short Call 2024 19-JAN 25.00 CALL [IMAX @ $18.38 $0.82] -20 10/19/2021 (759) $-9,500 $4.75 $-1.00     $3.75 - $2,000 21.1% $-7,500
    IMAX Long Call 2024 19-JAN 17.00 CALL [IMAX @ $18.38 $0.82] 30 10/19/2021 (759) $22,950 $7.65 $-1.05     $6.60 - $-3,150 -13.7% $19,800
    IMAX Short Call 2022 21-JAN 20.00 CALL [IMAX @ $18.38 $0.82] -15 10/15/2021 (31) $-3,600 $2.40 $-1.80     $0.60 $0.15 $2,700 75.0% $-900

    The underlying premise is we think it will be over $20 at the end of next year – that makes sense.  The spread is $17/25 (2/3 covered) and we sold 15 (1/2) short calls that expire in 30 days.  Seems about right.  As it sits, it's a net $1,000 spread that's about $4,000 in the money on the long side, but we need the aggressive puts to come in at $20.  At $25, it's a $24,000 payoff and we collected $3,600 selling calls with 8 more quarters to sell so we could, if all goes well, make more money selling calls than we collect on the spread – I like this one!


  15. There are still optimists some one just paid me 2100$ thinking GOOGL will go over 3030 By Jan22. Hope he is wrong!!!


  16. Interesting how BABA gets up every time. 7.50 up to now.


  17. Speaking of the Butterfly Portfolio, the sell-off has been good for it and we gained about $23,000 since Friday.  

    Butterfly Portfolio Review:  $1,391,389 is up $40,137 since our Nov 19th review.  This is our oldest portfolio (1/2/18) and we left it running to demonstrate how this strategy, as it matures, becomes a crazy little cash machine – especially as we started with just $100,000 and added $100,000 from the STP during the March dip last year (as it was such a great buying opportunity). 

    We are still at $1,006,937 in CASH!!! so no worries here and this is a very low-touch portfolio – we hardly even make additions to it.  The goal is to make a quarterly income selling short-term puts and calls against long-term bullish positions and we trey to find stocks that have strong range-bound patterns we can take advantage of over time.  As a result, any trade here is good for a new trade as it's more about generating the income than making profits off the spreads (though doing both is nice).  

    • AAPL – This got very large because, when we are wrong about our short calls, we sometimes add more long spreads to cover a 2x roll of the short-term short calls and that has happened several times with AAPL.  Very fortunately, we recently cut back the short-term calls to 25% covered so we are "only" down $68,680 on those but now our 2023 $120/150 bull call spread is net $360,000 out of a potential $480,000.  The bull call spread with the current short calls cost $48,480 so we're in VERY good shape and we've already cashed in a lot of profitable short puts and calls along the way.  
    • Don't forget the short Jan $145 calls at $26.50 ($106,000) are protecting our $200,000(ish) gains on the spread.  Let's roll those to 40 April $155 calls at $21.50, spending $5 ($20,000) to roll up $10 in strike.  If AAPL heads lower, we can always sell more calls.  The spread itself is 100% in the money and will pay another $120,000 if AAPL just stays over $150 for the year – that's what we're protecting – the whole $480,000 potential of that $48,480 spread.  

    • AMZN – Big money on such a small number of contracts.   We caught a huge break here on the pullback so let's not risk it and roll the 2 short Jan $3,500 calls at $61 ($12,200) to 2 short April $3,700 calls at $107 ($21,400) and the short calls will go worthless so let's also sell 2 April $3,000 puts for $86 ($17,200).  That will be net $26,400 in additional premium collected this quarter and see – we don't even care that our spread is net $120,000 after buying it for net $91,800, less all the premiums we've already cashed in since January.  No wonder this portfolio is a giant cash machine!  

    Notice the lovely channel AMZN is trading in.   Notice our Jan target was $3,300/3,800 and that's pretty much been the channel and we still have a year to trade – this is a perfect Butterfly Play.  Here, in the bottom of the channel, we buy back the short calls with a 50% profit and we sell some outrageously expensive April calls and some April puts to increase our collections.  Can't lose on both ends, right?  

    • DIS – DIS, on the other hand, fell out of it's channel.  Earnings were a disappointment and now Omicron may shut the parks down again.  The good news is we sold $27,500 of Jan calls that will go worthless and the April puts should be fine or we'll just roll them along.  How do we take advantage of the dip is the question?  The short 2023 $200 calls are up 80%, so we'll buy those back and let's roll our 75 2023 $170 calls at $11.10 ($83,250) to 50 of the 2024 $140 calls at $33 ($165,000) so we're spending $117,750 on top of the net $27,500 we had in the spread is $145,250 so our goal is to sell at least $80,000 worth of short calls, hopefully the 2024 $180s, which are now $17 ($85,000) or something higher and drop our net to $65,000 and then we sell $65,000 worth of short-term calls over 8 quarters (easy) and we're in a $160,000 spread for net free.  That's our plan, we'll see how it goes….

    • F – This spread got complicated!  It's really two spreads is why.  We added the 2024 $20/27 spread recently.   We have the short 2023 $20s at $3.53 and the April $20s are $1.93 so we should definitely spend $1.60 to move to short calls that expire 3 quarters sooner.  It's only a 1/3 sale so I'm not at all worried and we'll sell puts if F goes lower – as well as more calls.

    • GNW – See how nice and rangey our plays are?  The Jan $4.50 calls should go worthless and we'll see about adjusting then.  This is an excellent learning play to practice on as there's little cost, margin or risk associated with it.  It's just net $2,010 on the $10,000 spread so $8,000 upside potential plus the short put and call selling is not a bad profit for a little trade.  

    • GOLD – We're very aggressive and that's fine by me.  Great for a new trade as we wait for a new channel to form.  

    There's danger on the edge of town
    Ride the King's Highway, baby
    Weird scenes inside the gold mine
    Ride the highway west, baby
    Ride the snake, ride the snake
    To the lake, the ancient lake, baby
    The snake, he's long, seven miles
    Ride the snake – Doors

    • IMAX – Usually way more stable but the virus is knocking it around.  The short Jan calls should go worthless and I don't want to sell April this cheap, so we wait.  

    • KO – These guys have been range-bound for 50 years so perfect for this portfolio.  We sold Jan $57.50 calls and $55 puts and we nailed the target so far.    It's a big bonus for us when we thread the needle on our strikes.   If all goes well we make $5,525 on our short calls and our $25,000 spread is in the money – very well indeed. 

    • MJ – Here the long spread is truly just a placeholder that lets us sell premium.  The Jan calls will go worthless ($10,560) and we don't like the MJ ETF enough to even bother improving the 2024 spread – it's just there in case MJ pops on a law change and we get burned on our short calls.  Meanwhile, we have 4 more 6-month sets to sell for $10,500 ($42,000) against our net $20,000 spread (really a $30K credit with the original expiring short calls).  

    • WBA – We were nicely aggressive here,  What we did was buy the new 2024 spread without closing the 2023 calls as we thought they were too cheap.  Still too cheap so we wait.    Of course we're going to hit resistance at $50 but do you see weak or strong retracement?  If it's weak retracement, we're probably consolidating for a move higher – especially when it holds up well in a downturn. 

    • WHR – I was getting nervous but back on track for the short March calls.  Not counting the older puts from the original spread, the new spread was a net $8,000 credit and, if the March calls go worthless after 4 months, we have 20 more months to sell and we collected $25,000 for the March calls so 5 more sales would be $125,000 and, if our $90,000 spread ends up in the money – that's a nice bonus but this portfolio is all about selling that premium!  

    Even now, the WHR spread is net $6,062 and it returns $90,000 at $250 in Jan, 2024 and another $125,000 of potential premium sales along the way.  See – great for a new trade! 


  18. GOOGL/Yodi – Up 10% from here is $200Bn in market cap.  What would cause GOOGL to gain that in 30 days?  Especially with no earnings pending (first week of Feb for them).  People just don't understand that there are real valuations under these prices – they are not just numbers on a page or lines on a graph that can dance around at will.

    BABA – I hope this is the bottom, finally.

    Recoveries are going nicely:

       

    Oil made it to $71 but I bailed earlier. 

        




  19. The Pandemic Has Made Everyone Richer





  20. Sorry, site was down this morning.

    Getting post up shortly.