As I’ve Learned Over The Year, You Can’t Fit Everything In The Title
An important ingredient that I left out is cash. As you may have picked up in my previous articles, cash is a major aspect of how I manage trading. That aside, I have also noted having cash for the investing side as well. I have mentioned several times, certainly more than once, that if you are still allocating investment money, you may want to set some aside for the Fall. We are in mid-August and Fall is right around the corner. I have a ton of open orders right now, with prices well below where some stocks are trading right now. I have Nvidia (NVDA) bids at several prices in the mid to upper 80s, and Amazon (AMZN) at 158 as well. So today, if you have been holding back cash to invest, start putting in bids, look at the 3-month charts and see how low your favorite stocks were trading then, and put in opening bids. Use small share amounts, since we haven’t had a real correction in a year. If we are going to have one, it should happen next month or mid-October. Let history be your guide, does the market sell-off at that time every year? No, once in a great while it doesn’t, that’s why it can still happen. If it was a sure thing, everyone would be doing what I am telling you I am already doing.
Powell Is Cutting Rates, Why Would The Market Sell Off?
There isn’t really a cogent and logical reason as to why the fall is the worst part of the year. Perhaps it’s because most investors have already allocated all the money to their investment accounts by now. Perhaps this year there will be a lot of corporate buybacks that will support the market and the Fall will be just fine. However, we still have the debate of whether the Fed easing will be enough, or perhaps the Fed still doesn’t need to ease at all. This past week, we had several strong pieces of macroeconomic data showing the US economy is chugging along just fine. Despite poor numbers from all sorts of retailers, July Retail sales jumped 1%, much better than the 0.3% estimate. Also reported last Thursday, weekly jobless claims totaled 227,000, a decrease of 7,000 from the previous week and lower than the estimate for 235,000. A stronger job market means a stronger consumer going forward. Earlier last week, we were treated to data (PPI and CPI) showing that inflation eased slightly in July. The last piece of information here is key, that inflation is falling and has been for months. Naturally, the Fed, if they feel assured that the inflation boogeyman is dead, can cut rates. However, they don’t have to, unless the economy is in danger of falling and causing jobs to crash. We had that sharp sell-off in early August because we had one piece of employment data that appeared weak, and boom we were treated to paroxysms of selling. We then experienced a vertiginous rally that gained back all the losses in just a few days. Below is the 3-month Chart of the S&P 500 ETF (SPY).
Rarely, according to my admittedly shoddy memory, do I recall such a sharp sell-off and recovery without more of these periods of volatility to come? I suspect there will be more situations where market participants will ask if the Fed really has it right. That the economy is not about to falter and send employment over the cliff. Or that the economy is running perfectly well as it is and there is no need to cut after all. Or perhaps, inflation numbers pick up again. Unfortunately, we are still at the mercy of the Fed and the macroeconomic numbers, that don’t always cooperate like they did last week.
Let Me Put A Finer Point On It, We Could Have A Sharp Sell-off After The Next FOMC
I could see a build-up to September 18, the last day of the FOMC meeting, economic data has been benign, and inflation is still slowly retreating. In exactly one month from now when in my opinion, Powell will likely announce a .25% cut. Powell then reasserts the notion of data dependency, which most market commentators are already decrying. Then further states that they are likely going to take a very slow approach to cuts, and the market sells off. Then, if there are any less-than-perfect economic numbers, the selling will accelerate and there you have the correction that we have managed to avoid so far this year. If that happens, I will certainly get my NVDA in the 80s or maybe lower, as well as all the other magnificent 7 stocks that I don’t have enough of. I guess I am playing armchair psychologist, but I don’t see Powell making deep cuts and providing guidance to a loosening of monetary conditions unless something dire is already going on. If that is the case, the stock market is already correcting, and I will still get my 80-dollar NVDA.
Mind you in the weeks leading up to the FOMC meeting we could have some euphoric buying that takes us up over the previous high of 5669.67. This past Friday we already reached 5554.25 we are less than 116 points from making a new all-time high. Doesn’t that cause a little caution in your hearts? It does in mine.
Consider This Week As A Dress Rehearsal For 30 Days From Now
I already feel like we have gone too far too fast, Just look at that SPY chart above, doesn’t that look like too perfect a recovery? I see this week as a bit of a dry run for September 18, since we have the Jackson Hole conference. Powell is widely expected to give his blessing to a .25% cut in September in his address at 10 am this Friday. Everything he says will be overanalyzed, and even his tone and expression will be interpreted on whether the cut might be .50%, or how rapid a cutting cycle it will be. Is he still concerned about inflation? On and on, to me, the chances of a sell-off this Friday are pretty good.
So I will be setting up my trading to take advantage of the likelihood of a buoyant week for stocks, at least in the first 3 days. I will be closing long trades, setting up short ideas, and holding cash for Friday. Then, depending on how much selling there is on Friday, perhaps starting to close out the short ideas and hedges somewhat. If the selling is really hard on Friday it might carry through to Monday, so perhaps I will be disciplined and not go completely long on Friday. I fully expect the VIX to break below 14 this week, and I will surely get long on the VIX as a very good hedge. This past sell-off, the VIX jumped above 65, which is a very extreme level, and I am not expecting to see that any time soon. Still, the VIX with a 13-handle is a great level to start a hedge. I already have a Long Put on Starbucks (SBUX), I think Mr. Niccol is a brilliant operator, and if anyone can turn SBUX around it’s him. He didn’t even start yet, and the road is long, yet the stock jumped more than 20%. I think SBUX will retreat this week, and certainly by Friday if I am correct. Going into next month, I will make a practice of looking for more short ideas, and begin to hedge. Certainly, if we get above 5600, I will look to hedge the Nasdaq-100 and the S&P 500.
My Trades
Right now, besides SBUX, all trades are on the long side. I am long Call options on Direxion Daily Semiconductor Bull 3X Shares ETF (SOXL) at the 38 strike. This is an indirect way of participating in the AI chips, like NVDA, but also Broadcom (AVGO), and Micron (MU). I added a bunch of AVGO, and MU equity to my long-term investing account in this latest sell-off, and I have standing orders to buy at much lower prices in preparation for the Fall’s Falls. Why do I set these prices so far in advance? Because it’s better for my mental state to set these purchases up well ahead of time and wait for the prices to come to me. Another long Call Option I did this week is Vertiv Holdings (VRT). It’s an AI-adjacent name that hasn’t recovered as much as NVDA and I think it could improve this week, as NVDA gets into the high 120s. I’ve been having a lot of fun with Palantir (PLTR), it’s almost as if it has just been discovered. Check out this chart, I first drew it a week ago this past Thursday and it just keeps coming. I keep marking out the breakout extensions (black line is the latest)
How much higher can it go? I don’t know, but I have been trimming my calls and have just a few left. I’m at the 29 strike now, I already rolled it up from 27. It keeps making 52-week highs, but at some point, probably soon, it needs to consolidate. I’m likely to close it out before Friday and hold the cash until Monday. I’m also Long Call Options on 2 cybersecurity names SentinelOne (S) because as great as CrowdStrike (CRWD) is, they will lose some customers to S. It might not make much difference to CRWD, but it will do S. I am not throwing shade on CRWD, I added to my long-term holding of CRWD this sell-off. The other name is Rubrik (RBRK). They are in the sweet spot of Ransom hacks. They are a new IPO, and they sold off hard recently, I expect them to recover, certainly at the next ransom/hack event. Remember to set aside Cash, trim your longs but stay with them, and start developing your hedges and individual shorts (using options).
Ok, that is it, good luck everyone!
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