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Thursday Thoughts – Correction Complete or Halfway There?

"We've got to hold on to what we've got
It doesn't make a difference if we make it or not
Woah, we're half way there
Woah, livin' on a prayer" – Bon Jovi
We're at a critical inflection point in the market.
The S&P 500, as you can see, has fallen back from 4,800 to 4.560 (a bit lower now) but that's only a 5% correction while the Nasdaq has fallen closer to our predicted 10% (15,000 was our goal) and the Russell has fallen from 2.400 back to 2,065 and that's 14% and no one cares what the Dow does as it's a ridiculous, price-weighted index whose movements are meaningless (yet followed closely by most of the World).
As for the Dow, it is down from 36,500 to 35,000, which is 4% so I'm fairly certain we'll be seeing the rest of that 5% drop before we're through and, more likely, a full 10% drop is ahead of us – all the way back to 32,850, which is where we were in March of last year.  The Russell is 200 points BELOW where we were last March – so perhaps it's the canary in the coal mine for all of the indexes.
The Russell below 2,100 is BAD – there's no doubting that and, if it persists, we can expect the other indexes to turn BAD as well.  The Russell ran up from 1,600 in November of 2020 (where it had fully recovered to 2019 highs) to 2,400 without even pausing at 2,000 to pretend to consolidate – that's why it's so weak up here.  That 800-point run has 160-point pullbacks at 2,240 (weak retrace), 2,080 (strong retrace), 1,920 (strong bounce) and 1,760 (weak bounce) – so there's no support at 2,000 other than psychological so, if that breaks – expect a quick dive back to 1,920, at least.  
Kevin Siers cartoon: Biden's first year | Charlotte ObserverSo that's the path we're on and then we have to think about what's going to save us?   The Russell took off in November of 2020, when Biden was elected because Joe was going to look out for the little guys and get us another $2Tn in stimulus, etc.  That did not happen and, as of yesterday's failure on the Filibuster Reform – it's not going to happen, either.  There will be no money for small business, there will be no voting rights for small business owners, there will be no campaign finance reform and there will be no saving this planet from Global Warming – the weak shall suffer and the rich will move – end of story.  
So Joe Biden isn't going to save the market.  Jerome Powell isn't going to save the market – he's one of the ones killing it (he has to) in order to fight off inflation, etc.  That leaves Earnings – Earnings have to save the market and, fortunately, we're getting a lot of reports this week and next so let's pay attention but, so far, a lot of misses.  This week already we've had misses by SCHW, FMBI, GS, SI, UCBI, BOKF, CBSH, USB, COLB, DFS, UMPQ, AAL, BKR, RF and SASR – and that's just 2.5 days of reporting.  
It's about double the usual rate of misses and we'll see how the trend continues as earnings season heats up.  Guidance is also very important but most companies are simply kicking that can down the road and refusing to give it, due to the "uncertainties of Omnicron".  That is NOT a positive….
China saw no positives ahead of their New Year (Feb 1st) and they have already thrown in the towel and cut rates at the PBOC in order to boost housing demand for their faltering property industry.  The move to push down borrowing costs follows a raft of economic data released by China on Monday that showed slowing growth in the final months of last year, as domestic consumption was hit by new Covid-19 outbreaks and turbulence in the country’s property sector weighed on sentiment.  
Last month, the Communist Party’s top decision-making body, the Politburo, enshrined stability as the “top priority” for China’s economy in 2022, in a meeting chaired by Mr. Xi.  On Sunday, China’s top law-enforcement body issued a rare warning about the political implications of domestic economic weakness, warning that, “with the economic downturn, some deep-seated problems may surface.”  Other countries are indeed terrified of becoming another United States…
Economists at investment Bank, Nomura are worried about the rising economic and social costs of China’s zero-tolerance Covid containment strategy, as well as the weak property market and slowing export growth. They say that a much more aggressive easing policy is needed to keep the economic recovery on track.
If our Fed is tightening and China is easing, the Dollar may get stronger and that will put pressure on stocks and commodities going forward.  The Dollar is also at the halfway mark – back to 102, where the market bottomed out in December of 2020.  

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  1. Phil – 3M reports on Tuesday. Any thoughts? Thinking of selling some puts now…

  2. Good Morning.

  3. it sure looks like they are delaying the oil report till 11am so they can pump the markets higher before it comes out

  4. Good morning!

    Got a little pop at the open but nothing matters if it doesn't change the box colors:

    • 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 15,000 has bounce lines of 15,300 (weak) and 15,600 (strong) 
    • Russell 2,400 to 2,080 has bounce lines of 2,144 (weak) and 2,208 (strong)

    Even after a 238-point pop, the 15,300 line is only back to black, 2,078 on the RUS is clearly red and 4,573 on the S&P AFTER popping 48 points this morning is nothing to be proud of but the summary of the moves is "NOTHING has changed since Tuesday".   I think tracking the bounce lines like this is one of the reasons I've learned to be so patient in these market moves – it puts things in perspective and you realize that a 300 point "rally" in the Dow can be as meaningless as a 300-point drop was the day before and neither one is a reason to go changing your positions.  

    The key to our success is we don't really care which way the market goes – as long as time keeps chewing up those premiums we sold….

    MMM/Rn – Who did Biden buy those masks from?  MMM only made about 2Bn per year so it's a nice bump if he bought it from them but we don't have the facts.  Overall they are a solid company and we have played them when they were lower.  $177 is $103Bn and they are pushing about $5.5Bn to the bottom line so call it 18x earnings and growth is slow and steady so nothing at all wrong with 3M BUT, given my expectation the market will correct a bit – there's no reason to expect they'll be spared in a sell-off.  Earnings are binary so I'd rather hope for a miss or a broad-market sell-off and NOT jump on short puts now.   On the whole, $150 is a good floor at about 15x and those 2024 puts are $15 so net $135 is a great entry-point or you can sell the $135 puts for $10 to net in for $125.  We cashed out our old MMM play so I would consider this a top item for the Watch List if they do get cheaper.  

    API last night showed a 1.4Mb build in oil, a 3.4Mb build in gasoline and a draw of 1.2Mb of Distillates.  Not very impressive.  EIA should be out at 11am.  




  5. Gotta love the 5% Rule with Nasdaq bouncing off the 15,000 line we predicted a month ago.  So we're dealing with a 1,500-point drop so 300-point bounces is weak at 15,300 and strong at 15,600 – trouble at the weak bounce line is no bueno.  

  6. Damn, I knew I picked ATVI somewhere – it was on our 12/30 Watch List:

    • Activision (ATVI) is a huge gaming company that is down 36%, mostly because they are involved in a sexual discrimination case in California because, who would have guessed, gamers and coders apparently don't know how to behave properly around women.  Does this affect their gamer audience?  My oldest daughter is a radical feminist and she hasn't closed her Warcraft account so I think they'll be OK.  ATVI makes $3.90 per $52 share you buy, which is a p/e of 13.33 and they haven't even had a big release recently but the Metaverse will open up a whole new frontier for gaming companies and who has all the top coders?  

    I was just double-checking to see who is still playable (most have gained too much already):

    Those are still cheap.  

  7. EIA has small build in oil but huge build in Gasoline (low demand):

    CL1:COM +0.93%Jan. 20, 2022 11:00 AM ET4 Comments

    Certainly not supportive of $85 but we're at $86.50 anyway. 

    EQNR +1.03%Jan. 20, 2022 11:04 AM ET6 Comments

    • Henry hub natural gas prices are down 5% this morning, (NG1:COM) (NYSEARCA:UNG) despite a forecast from the National Weather Service calling for below average temperatures across much of the Northeast next week.
    • An uptick in wind and increase in oil-to-electricity in New England is helping put downward pressure on natural gas prices; though supply of the fuel is expected to hit a record in 2022, and could contributed to muted pricing this year.
    • This weeks inventory report from the DOE showed larger than expected inventory draws, although balances remain near the 5yr average.
    • Internationally, China made news this week as State-owned Sinopec tendered for the resale of 45 LNG cargoes in 2022, taking advantages of consumers caught short, as gas prices set records in Europe.
    • China coal production hit a record in December 2021 after stagnating for almost a decade, indicating a willingness for the Government to swap coal for natural gas, and help the world manage its ongoing energy crisis.
    • Though China LNG sales and warm temperatures brought European natural gas prices to the low $20s/mmbtu this week, Turkey's Botas has reportedly issued gas curtailment orders, suggesting the international gas market is by no means oversupplied.
    • A report overnight showed producer prices in Germany spiked 24% YoY in December; the head of the ECB followed the release suggesting that energy prices will ease in 2022, and no bold action is required.
    • Natural gas producers in the US are likely to benefit as continued growth in LNG exports stimulates demand, though seemingly endless supply could put a lid on pricing (NYSE:RRC) (NYSE:EQT) (NASDAQ:CHK).
    • Conversely, producers outside the US are seemingly unable to find incremental natural gas resources to produce, and could benefit from continued shortages as policy makers close coal and nuclear capacity in hopes of accelerating the energy transition (NYSE:EQNR) (OTCPK:STOSF) (NYSE:VET) (NYSE:NRT) (NYSE:RDS.A).

  8. NG range-bound again, any prospect of under-3.00 by spring?

  9. /NG/PMan – $3?  I very much doubt it.  Should put in a floor at $3.50.

  10. WBA/Phil Bought back my 5 short WBA Mar '22 $50 calls for $4.14 on a dip (sold for $3.07). Holding:

      30 '23 $40 calls ($8.8)

    - 25 '23 $60 calls ($4.8)

    - 5 '23 $35 puts ($6.4)

    Would you roll them out to say June $55s or $60s?


  11. Phil – Did you get my email last night?

  12. Future is Now Portfolio Review:  $202,419 is down $16,178 from our Dec 22nd review and that was $34,102 off the highs so the Futures is certainly not yet.  We've been suffering with the Russell for the most part but still up 102.4% just past our 2-year anniversary (12/12/19) in our newest portfolio.  Let's see if we're still believers in these long-term trend plays:

    • NAK – This was always speculative but, since Biden can't get anything passed – maybe he can't stop them from developing either?  
    • CIEN – Way over target 

    • COIN – We just got more aggressive with them, not working so far but I think this is a great value.

    • COWN – They got hammered in the past month and we were aggressively long.  Waiting on earnings but financials have had a rough Q4 so far. 

    • CRSP – Just added these guys.  

    • DAL – Holding up so far and earnings have passed, so no major worries ahead.

    • ERJ – Also flattened by Covid concerns.

    • F – Miles over target
    • FF – We are aggressively long.

    • GPRO – Got rejected at $12, which is our target.  I'm concerned that $10 is failing again but it's a weak market so 2/3 earnings will tell the tale.

    • IGT – At target already.

    • RKT – Rising rates freaked people out but I don't think it's a long-term issue as growth is their main story.  Too early in the trade to worry. 

    • RWLK – We just doubled down on the stock and we'll have to be patient.   These guys are pre-earnings but I expect great things over the decade.

    • SPWR – You know I love these guys.  $20 should hold and then the fun begins.

    • THO – Another pretty new one.  Still a great entry.  

    • WTRH – They get no respect but I say give them a year.

    Well, I see what the problem is.  These stocks are not going to stand against a downturn so we have to have faith and be patient.  As we're up 100%, I'm not going to worry about a bad quarter but the last few months did give us quite a hit and we're below 50% cash – so we can't be too complacent but there's nothing here I don't want to be holding in two years – so we wait. 

  13. RWLK – The $2.50 puts expire tomorrow. Are we planning on being assigned? Or rolling?

  14. WBA/Wing – They are back at $54, you can't go making adjustments every time the stock twitches.  Well, I guess you can if you want to live that kind of life, but I don't….  They already had earnings, they were good ($1.68, beating by 0.34) and outlook is good and that was Jan 10th and now it's Jan 20th and we're up from $45 to $54 in 10 days.  Have you since lost faith?  Why not let the chart stop going up at least before you start shorting it?  

    The June $60 calls are $1.25 – that hardly seems worth selling.  The June $55s are $2.90 but that seems like a tight cap so, I guess if you can sell the June $60 calls for more than $2, that is worth considering but you have 25 short Jan $60s already and they are $3.10 and you sold them for $4.80 so what I would do (if you are asking) is cash my 30 Jan $40 calls for $14.50 ($43,500) and pick up 50 of the 2024 $50 ($9.25)/$65 ($4) bull call spreads for $5.25 ($26,250) and they you'd be taking $17,250 off the table and you'd have a $75,000 spread covering the short calls and you could put a stop on 10 of those at $4 ($4,000) and 5 at $4.50 ($2,250) and 5 at $5 ($2,500) and then you'd have a clean $75,000 spread, that's looking very good and still $8,000 in your pocket.

    Email/Prakash – Yes but I had to send a note to Doug, waiting for his reply.

  15. RWLK/Future is Now Portfolio, Dave – Thanks, I missed that.  We just bought 10,000 more so no need for another round.  Options only go out to July but let's roll the 50 short Jan $2.50 puts at $1.35 to 50 short July $2.50 puts at $1.50.

  16. Here is the link to the replay of this week's webinar

  17. Hey Phil – How's Andy doing?

  18. ATVI  / Phil    Your premise was correct, they got cheap and MSFT snapped them up.  I took the profits and ran, but to add to the story I saw this opinion piece: Netflix could be Activision’s Plan B     

  19. WBA/Phil Do you mean to set up the new '24 $50/65 spread, sell my long '23 $40 calls but KEEP the short '23 $60 calls? Then buy them back if they hit $4, $4.50 and $5 to let the premiums expire more (if so I have 25, not 20 of them)?

    Not sure why you'd think I've lost faith .. knew I had to roll the 5 short March $50s, already in the red, (sold at your suggestion) so bought them back low and would re-sell them after WBA runs out of steam.


  20. Why is THO down $8+ today?  I couldn't find any news.  Thanks.

  21. THO…. they suspended manufacture of all products due to sagging demand

  22. THO… my bad.  No clue.  Thought you were thinking PTON

  23. Phil, all

    Any thoughts on the drop in LOW today? Nothing that I can find


  24. And down we go again.  At least oil got sensible.


    As I said, as long as you can afford to ride it out – it's fine…


    I only threw up a little…

    ATVI/Stock – Works for NFLX too but with MSFT it's just cash from the pile, NFLX would have to finance it – not as easy.

    WBA/Wing – Yes, that's correct.  Only buy back the short $60 calls if the stock keeps going up and yes, I know 5 would be left but inconsequential at that point.   As to the rest, I'm saying of course they will hit resistance after a 20% run but then it's a $1.80 weak and $3.60 strong retrace to be expected before heading back over $55 – no reason to change anything, on the whole but, since I expect a weak market (in progress), I'd take the long cash and move to a lower-delta spread using the old short $60s for cover until we see where things stand.

    THO/Rookie – I see nothing.  That's harsh!  

    PTON/Wilsons – Yeah, that's not good!  

    LOW/8800 – I think things are just selling off and we're heading for the next leg down in the market (as we expected).  As I have kept saying, in a low-volume rally, when people try to sell certain things – they often find there are no buyers at all and things can drop like rocks.

    Simply selling where there are no buyers.  

    Andy/1020 – He feels better but still tested positive yesterday.

  25. WBA/Phil  Thanks, very helpful!

  26. This is really alarming action on the Russell.  Hit 2,100 at about 11 and now close to 2,020 – it looks like a time machine….  It also looks like an index in freefall with no buyers at all.  Of course, as I said this morning – there's no support because of the way it blasted higher in the first place but to see it play out this quickly on the way down does not bode well.

    Down 20% in two weeks is no bueno…

    It's an illusion, it's a game

    Or reflection of someone else's name

    When you wake in the morning

    Wake and find you're covered in cellophane

    Well, there's a hole in there somewhere

    Yeah, there's a hole in there somewhere – Genesis 

    RUT 2020 Baby!  

  27. NFLX picked the wrong day to report. 

  28. Wow, that was painful to watch but, on the other hand, the STP is up over $100,000 since TZA is our primary hedge and we grew our CASH!!! to $326,803 with Tuesday's changes – exactly what we like to have so we can press our bets on all these beaten-down positions (the Future is Now Portfolio dropped 20% since we reviewed it!).  

    • 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 15,000 has bounce lines of 15,300 (weak) and 15,600 (strong) 
    • Russell 2,400 to 2,080 has bounce lines of 2,144 (weak) and 2,208 (strong)

    We lost two greens on the Dow and two on /ES and the Nas went all red.  THAT is what a bad day looks like.  

    So only the Dow, which is useless, is keeping us from having to press our bearish bets.  And even then, it's right on the line.

  29. Interesting that a few stocks held recent lows relatively well (CRSP, BJ, RBLX – surprise, MSFT – sort of).

    Sleep well … a little gallows humor.

  30. NFLX not going to help things

  31. Target to get out of oil?

  32. I was looking for $78 but, at this point, I'm probably being really greedy… I also regret not adding more contracts up at $87 because that was part of my trading plan.  In essence, I entered with a plan and completely ignored it for the past few days.  If I don't really lose my ass on it, it is luck.

  33. /CL/Eca, JPH – The whole point of doubling down is to get 1/2 back out when you are even and then you have a lower (or higher for shorts) basis going forward.  Going from $87 to $83 in one day is simply shameful if you didn't get some off the table.  Our "target" on any DD is simply to reduce the basis so, if we add more at $86.50 (our last add) then we should be THRILLED to get out that half at $85 or better as it raises (in this case) the net strike for the remaining half by $1.50 (from $82.50 to $84),