Author Archives: NoRegret

The Bounce Cometh, Weekly Wrap 2/11-17/2018

Macro and Markets

Stocks bounced back sharply. The S&P was up all five days for a total gain of over 4% for the week. I gave a weak endorsement last week for such a move but was positioned to take maximum benefit. Sentiment readings (from SentimenTrader) showed clearly the extremes in both “dumb money” and “smart money” at the depth of the correction. Note that the “dumb money” sentiment has bounced back with the market while the “smart money” became even more constructive. I added to $DIA calls during the correction but didn’t trade this week. My target for the peak of this bull-market remains 3500 on the S&P ± 200. Timing wise, May, October and 2019 are what I’m eying for the peak with an estimated probability ratio of 15/35/50. Some may think this is a game of tumbling as close as possible (but not going over) to the cliff edge, but in reality there is a lot of flexibility to scale partially in or out.

My one out-standing prediction with an unequivocal price target and date is 7792 on the NDX in April. The chart below shows the channel slope increase in September relative to that of the summer. Another acceleration in January came to a screeching halt with the latest correction. There may be a retest of the 50 day MA next week but to reach my target there needs to be an immediate resumption of the rising channel. The chart pattern may seem outlandish now — let’s see how it turns out. I’m not betting on the strict timing, only positioning to benefit from the upward direction in general.

Even though I expect to make most of the gains this year from equities, in the overall scheme of things, the stock market is but a side show. The main question last week was: “Did the Fed blink?”, how else would one interpret the $11 billion in MBS repos? Jay Powell is scheduled to give his first Humphrey Hawkins testimony on Feb 28 – Mar 1, will he announce the “Powell put”? The US will likely sell $1 to $1.5 trillion in treasuries this year, will Fed be able to put a lid on the rates on the long end? What degree of slope in the yield curve will they allow? How will the dollar react? How the market reacts to these questions will shape our economic future not just the next 12 months but likely the next 3-5 years.

Cryptocurrencies

Bitcoin made a stand at $6K and was back above $11K on Saturday. I thought it could test the upper rail in the downtrend around $12K. There are strong horizontal resistance bands at $11.7K and $12.4K. Overall, I’m still convinced we’ve seen THE high in bitcoin. I believe blockchain as a technology will survive but applications need to be developed — with the time line of any regular software startup. I held onto my $OSTK puts even though I anticipated the bounce in BTC. That’s another part of my trading that I need to improve.

Portfolio

The short Diageo puts expired out of money. I didn’t make any trades. MTD the active account is down -5.25% (10% improvement vs. last week) and the total portfolio -3.88%, vs. -3.12% for SPY and -2.26% for 60/40. YTD the active account is up 10.27% and the total portfolio 6.69%, vs. 2.34% for SPY and 0.60% for 60/40.

Current portfolio composition is as follows: PMs 11.4%; equities 52.3%; FI, 23.8%; cash equivalent, 3.5%; and other, 8.9%. The “other” category is composed of 3X ETFs, 0.3% and options, 8.6%. Effective exposure from options is equal to 124% of total portfolio value for a leverage ratio of 14.4X. The portfolio is 176% long equities (not beta-adjusted).

The increase in equity exposure from options came from both the strength in the underlying and the additional $DIA calls picked up during the correction. I’m running multiple mental scenarios to prepare for the next correction. The plan is to take profits in the $DIA calls to pay for hedges consisting of puts and long vol positions.

Links

None of the above is investment advice, the standard disclaimer applies.

Volatility Returns, Weekly Wrap 2/4-10/2018

Macro and Markets

By now I expect everyone has read about the demise of $XIV. My $UVXY calls were put on with those exact considerations in mind. In fact, I was using a technical indicator on $XIV as the main timing signal. But I got out way too early and have been kicking myself every day of this week. I got only a double as opposed to the potential 10+X in profits. The trade was indicative of the last two weeks: I was far too complacent, expecting only a 3% pull back as conditioned by calmness of 2017. In retrospect, the parabolic rise should have given reason to be wary. The intra day volatility was breathtaking this week and may be signaling a new volatility regime. It doesn’t necessarily imply an equity bear market however; as the post 1995 experience shows (see exhibit 1).

After a week like this it behooves us to take stock of where we’re over a multi year time frame. The recent rise out of the ascending channel looks particularly glaring on this scale. The last two weeks simply took us back into the middle of the channel. Friday’s low poked below the 200 MA. Both Tuesday and Friday, the two up-days this week, had higher volume. I’m leaning towards having putting in a bottom — sentiment and breadth indicators more than confirming, but after this week I don’t know anyone who’s willing to go out on a limb and make that assertion.

Here’s a summary of longer term views on the stock market from analysts that I highly respect compared with my own:

  • Gary Savage is calling for a V-shaped recovery and a parabolic top in April-May. However, if that doesn’t materialize, he’s willing to default to Chris Ciovacco’s view.
  • Chris Ciovacco has been very consistent on us being in a 15-20 year bull market.
  • Jeremy Grantham’s melt-up missive gave examples of tops in mid to end 2018 in illustration, although in the text he also acknowledged the possibility of topping in 2019.
  • In contrast I have placed the top in 2019 since before March 2017. Nonetheless, I also see potential pull-backs in May-June and October of this year.

The common denominator is to expect new highs this year, which was why last week I called the current correction the last low-risk buying opportunity. Even though I completely underestimated the ferocity of selling, coming into this week I had planned to buy on further declines, and buy I did. On both Monday and Friday I added considerably to $DIA calls. I would be lying to say I felt no fear at the Friday lows, nevertheless I’m glad about sticking to the plan.

It’s obvious that the trauma in the short $VIX products would lead to margin calls, as was the effect of higher stock and bond volatility on risk parity funds and their brethren (source). One disadvantage of the systematic funds is their future transactions can be common knowledge and front-run. I’m not good enough to figure out when the selling will subside, but I also felt it must be directionally correct to take the other side of a forced liquidation as long as I could withstand further drops.

So what if I’m wrong and we’re at the start of a new bear market? While the possibility is always there, that is a “meta” part of the game and letting it enter day-to-day decision making leads to “paralysis by analysis”. For now I have a clear bullish stance and positioned consistently; if and only if my views change based on facts, will I make adjustments.

Precious Metals

Gold was reasonably steady, silver took a dump and miners were absolutely slaughtered this week. I’m not sure how much is due to selling by risk parity funds. They hardly benefited from the snap back in equities on Friday (which will fuel rumors about the PPT I’m sure). We’re still in the bottoming process into what I believe will be the yearly low. COT started turning but not yet enough. I take a long view here so unconcerned with the day to day or even week to week.

Portfolio

There’s no other word than UGLY to describe this week. MTD the active account is down -15.4% and the total portfolio -11.06%, vs. -7.24% for SPY and -4.75% for 60/40. YTD the active account is down -1.54% and the total portfolio -1.28%, vs. -2.01% for SPY and -1.96% for 60/40.

Current portfolio composition is as follows: PMs 11.9%; equities 54.1%; FI, 25.7%; cash equivalent, 3.8%; and other, 4.5%. The “other” category is composed of 3X ETFs, 0.3% and options, 4.2%. Effective exposure from options is equal to 98% of total portfolio value for a leverage ratio of 23.3X. The portfolio is 152% long equities (not beta-adjusted). There was a pretty drastic decrease in options market value. But the effective exposure was stable due to additional $DIA calls.

My options are providing additional equity exposure equal to the value of the entire portfolio and I’m done with taking on additional positions for now. If stocks bounce back to new highs, I’ll be more aggressive with profit taking and hedging. The speed and depth of the current correction should have reduced the probability of a top in May but I’m not trying to catch the exact peak either.

Links

None of the above is investment advice, the standard disclaimer applies.

Last Low-Risk Buying Opportunity, Weekly Wrap 1/28-2/3/2018

Macro and Markets

I want to start this weekly wrap by looking at an interesting chart from Tom Lee, by way of the Fat Pitch blog:

http://fat-pitch.blogspot.com/2018/01/weekly-market-summary_27.html

The title of the figure is “the full year return when S&P500 made a parabolic rise”. Of the 8 such scenarios identified, 6 ended higher in the next 12 months. My own equity price model predicts a small pull back in January, a more severe on in May-June and then a sharp one in October, before topping out some time in 2019. Of the 8 sub-plots, my forecast most closely resembles that of 1951. However, knowing that parabolic phases are highly unpredictable, I see reasonable chances for the top occurring in May, October and next year, at something like a 15/35/50 split in probability.

The preceding lays the background to address the elephant in the room: stocks had a terrible week ending with 2% down on Friday. However, if you believe new highs are still ahead, this dip may well be the last low-risk buying opportunity.

RSI(5) just entered oversold territory. My model predicts a January dip equal to or milder than the one in November. Other indicators like equity put/call ration and the CNN Money fear and greed index are pointing to short-term oversold conditions. I added $DIA calls, the majority on Friday. I can’t guarantee the market won’t drop further next week, but if it does, I’m ready to buy more.

The drop in stocks was precipitated by the rout in the bond market. I feel obligated to update my $TNX chart (Last shown Nov 5). Trend lines were draw in the same way as before. My expectation back then was 2.8% in the first half. The 10-year yield ended last week at 2.85%. With RSI(14) entering overbought territory and the first trendline approaching, I expect a near-term top, possibly as soon as next week. It’s too early to say whether a double top similar to 2H2013 and 2016-17 is in the cards. At any rate, I don’t expect bond yield to be allowed to grow out of hand. As such, I added to $NAC this week as discounted widened above 10%.

Precious Metals

The dollar bounced with increase yields and PMs fell. Referring to the 13.5 months cycle, its last low was Dec’16 which implied another low just around now. Note the yearly low in 2017 was in early July which was the mid cycle low, the present low could very well also be the yearly low for 2018. That said, equities are where the main action is for now. Looking at the $SPX:$gold ratio on a weekly chart, if it were a stock I’d buy without hesitation.

I highly recommend the 5-part podcast series on the US dollar at MacroVoices for a very relevant long term view.

Portfolio

Other than the $DIA calls and $NAC already mentioned, I closed the $UVXY calls early in the week. They were intended as hedges and I made a quick double. But there was a “fat finger” moment at the end of Tuesday and I sold my last bunch too early. I would have made more had I kept some until Friday. Overall, I consider this first test of my VIX strategy a success. I now have a better idea of the appropriate position size and leverage.

Current portfolio composition is as follows: PMs 11.5%; equities 53%; FI, 24%; cash equivalent, 4.9%; and other, 6.6%. The “other” category is composed of 3X ETFs, 0.3% and options, 6.2%. Effective exposure from options is equal to 98% of total portfolio value for a leverage ratio of 15.7X. The portfolio is 151% long equities (not beta-adjusted). There was a pretty drastic decrease in options market value. But the effective exposure was stable due to additional $DIA calls.

MTD the active account is down 5.95% and the total portfolio down 4.16%, vs. -2.29% for SPY and -1.62% for 60/40. The month is still young and I firmly believe the market will recover and my portfolio to further outperform due to leverage and buying on the dip.

Links

None of the above is investment advice, the standard disclaimer applies.

BTC = 0 Is A Possibility

My warnings on Tether and cryptocurrencies in general have come to pass. $2-4K was my original downside target but I have now came to the conclusion that 0 is not as implausible as it sounds.

I have always seen bitcoin as a series of bubbles, each built on a new crop of buyers. The most recent buying climax coincided with the crescendo of financial media coverage just prior to the launching of CBOE/CME futures. That was the tell-tale sign. Without that level of sustained or ever increasing coverage it’s hard to attract new buyers. Bitcoin may be the largest bubble in human history, but its demise is/will be exactly the same as all others — by running out of buyers.

Bitcoin miners must extract fiat from the system to pay on-going expenses. This Bloomberg article dated Jan 9, 2018 provides a nice breakdown of mining costs in China: from about $3869 to $6925 per coin depending on electricity rates ($0.03-0.13). It implies a fixed cost of $2952, and electricity costs of $917-3973 per coin. It goes without saying that Chinese miners are not the marginal producers globally.

Overnight, bitcoin price dropped to $7540 on GDAX, and has rebounded to a range of $8400-9100. I believe the decline is likely to resume after some consolidation at this level. It may even attempt to bounce but former support has turned into resistance. The next support is likely to be around $5000, at which point BTC price will have come below the running cost of marginal miners, putting them out of business. As hash power declines, the difficulty should re-adjust; however, it also opens up the possibility of a nefarious actor acquiring hash power on the cheap and mounting a 51% attack on the whole network. Trust in the system would have long eroded before reaching that point.

My previous downside target was based on price action alone and did not include this dynamic of ever increasing mining costs. When the whole network consisted of a bunch of PCs in dorm rooms, it was OK for the price to linger. Such is night and day from the current reality of industrialized mining. Bitcoin has become a bubble that, if not inflating, will quickly implode upon itself.

Bitcoin has been a great trading vehicle. Whatever the technical merits of blockchain, it does not rise to the level of the internet. Pretty much all the promises of internet made during the DotCom era came true eventually, but the bubble still collapsed. To-date, the real benefits of the blockchain have been largely ethereal (pun intended). I still roam around Bitcointalk and Reddit forums to observe the human drama. Little by little, the sentiment is turning. It will be a hard lesson for many people. The only consolation: most of the riches weren’t there in the first place.

Disclosure

My full crypto trading record can be found here. I do not currently have, nor plan to start in the near future, any positions in cryptocurrencies, long or short. I currently hold a small number of $OSTK puts.

Performance Tracking January 2018

For calculation methodology see this post.

It was one of the best Januaries for stocks in history. Despite a pull back in the last couple of days, $SPY finished up 5.64%. Its chart now has all the appearance of a parabolic rise. Bonds took a hit however, as rates rose with inflation fears with the economy heating up. $AGG was lower by 1.13%, bringing the 60/40 down to a still very respectable +2.93% for the month.

My passive account was up 3.5%, without PMs it would have been up 3.61%. In other words, PMs were again the source of a small amount of drag. Stable value funds definitely helped with the returns in January. Small cap and total international underperformed while EM did slightly better than $SPY. The active account gained 16.38%, propelling the total portfolio to a monthly gain of 11%. This is the fourth record in as many months, and by a wide margin. The main return driver was options which were responsible for nearly 3/4 of the dollar gain.

The individual stocks were +6.67% for the month, +1.06% relative to $SPY and +5.17% since last April. The FI CEFs took a hit of -1.19%. While the multi-strategy funds benefited from interest rate swaps and foreign positions, the muni CEFs took it on the chin. The flattening of the yield curve squeezes leveraged funds from both ends. The FI CEFs were -0.07% relative to $AGG this month and +6.98% since last April.

Transactions: added $NAC as its discount widened to 10%. It’ll be a good trade as long as rates stabilize somewhat. This month I executed my first volatility based trade with $UVXY calls. This is a new, long-vol strategy based on a technical indicator and readings. It has the added advantage of being negatively correlated with my equity and other option positions. Indeed I could afford to take a much larger position than I did. Other transactions included adding $OSTK puts, $DIA calls and moving up other short put positions.

End of Month Portfolio Composition

PMs were at 11.3%, equities 51.9%, fixed income 23%, cash 5.1% and other 8.6%. The “Other” category was composed of 3X ETF 0.4%, and options 8.3%. Exposure from options grew to equivalent of 97.8% of the total portfolio, for a leverage ratio of 11.8X. Total portfolio equity exposure increased to 150%.