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.
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.
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.
- The Advent of a Cynical Bubble by James Montier of GMO: yes I’m a cynic!
- Strategic Faith by Daniel Egan: I’ve said this before, personal investing approach is a matter of faith.
None of the above is investment advice, the standard disclaimer applies.