Category Archives: Weekly Wrap

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.

Tether all the way down, Weekly Wrap 1/21-27/2018

Macro and Markets

Investors were undeterred (encouraged?) by the turmoil in bond and currency markets and continue to bid up stocks. There are signs that we have entered a parabolic phase which if continue unabated will reach S&P 3500 in April.

To be clear, this early a blow-off top is NOT the scenario I had been expecting. I established my options position in two large tranches, first in Jun-Aug, and then Oct-Nov of last year. All were Jan’19 expiry LEAPs with the hope of realizing long term capital gains from the long call side. Peaking in April is too far from the 1-year anniversary that it’s uneconomical to try to use protective puts to tie me over. So I’m mentally preparing to take the gains early if necessary. It won’t be the first time. It’s exactly what I did with cryptos. I had wanted to wait till March but the price action didn’t allow that luxury.

That said signs of excessive optimism are everywhere. One example is the equity put/call ratio being at extreme lows. The most recent Epsilon Theory letter also covered this topic.

I’m still holding the $UVXY calls. VIX was flat on the week even as stocks made new highs, indicating a degree of nervousness out there. Everyone is looking to the FOMC meeting for some direction. The $UVXY calls are a very small position as I’m expecting only a minor pull-back.

Muni CEFs sold off this week while the interest rate hedged multi strategy CEFs held steady — no surprise there. I’ve made the decision not to make any changes on the fixed-income side until a clear sign that the credit cycle has turned; however the discount in $NAC is looking mighty enticing. In general I expect money coming out of bonds into stocks should further fuel this rally.

Cryptocurrencies

The chatter around Tether is growing louder. The sub-Reddit (/r/Tether) is becoming a hang-out for concerned people. YouTube is another source (search Tether). I bought a few puts on Overstock ($OSTK, Mar 60), a crypto proxy. In December I made some quick money in its calls.

I actually quite like Overstock’s idiosyncratic CEO, Patrick Byrne, but this is not about personal likability. $OSTK was at mid 70’s this week, still up a hefty amount from mid teens back in August when it announced keeping the cryptos that its customers paid, and later establishing its own cryptocurrency. I’d say there is still plenty of “fluff” in that stock price should the whole cryto complex implode.

The supposed defense that Bitfinex/Tether put out actually implied egregious accounting misconduct: at a minimum co-mingling of funds belonging to separate legal entities even if the principles are the same. I suspect Tether is “printed” to purchase BTC which should have been sold for USD to back Tether but was not. Were I to feel generous, I’d assume that Bitfinex hands Tether fiat for that BTC. At any rate, Bitfinex/Tether is probably holding a massive amount of BTC giving them further incentive to prop up its price. But should BTC continue to fall, e.g. breaking $10k again, they will be under pressure to liquidate and it’ll be like a dam bursting. Trading has been unusually calm in the last couple of days. It’s hard to tell real vs. wash trades to give volume analysis any confidence.

History tells that when one has a weak hand and everyone else knows about it, the outcome seldom goes one’s way. A recent example was Amaranth when every hedge fund went against its position; Long Term Capital was a more distant example. Everyone who holds crypto will be affected when this thing implodes. You are forewarned.

Portfolio

Oh how I wish I held onto $LABU a little longer, that was another 15-20% that I missed. I’m still short $XBI puts so still have exposure there. Other trades this week were to move up strike prices on the short put positions. I also continued to add to PM miners.

Current portfolio composition is as follows: PMs 11.2%; equities 51.6%; FI, 22.0%; cash equivalent, 5.8%; and other, 9.5%. The “other” category is composed of 3X ETFs, 0.4% and options, 9.1%. Effective exposure from options is equal to 95.9% of total portfolio value for a leverage ratio of 10.6X. The portfolio is 147.5% long equities (not beta-adjusted). Options value and effective exposure both increased along with that of the underlying. Gamma remains positive. Options had and will continue to have outsized returns as long as this bull market continues.

YTD the active account is up 20.04% and the total portfolio 13.59%, vs. 7.39% for SPY and 4.08% for 60/40. About 2/3 of the gains have come from options, i.e. about +4.5% from everything else.

Good Reads

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

Hedging with UVXY Calls, Weekly Wrap 1/14-20/2018

Macro and Markets

While most people are celebrating yet another week of records in the stock market, I’m increasingly concerned with the short-term froth. “There is now almost $4 in long funds for every $1 in inverse funds, a record exposure level.” reports SentimenTrader.

The ProShares Ultra BIX Short-Term Futures ETF ($UVXY) has been called the worst instrument devised by men due to its continuous erosion of value from the VIX term structure (contango). But it works fine as a short-term hedging instrument since every time the S&P dips the volatility jumps and it spikes higher.

On Friday, I picked up some $UVXY calls. This is part of a new VIX related strategy I’m exploring this year — seeing that crypto is no longer a profit center. This particular play is based on sentiment measures, not the US government shut down, although the latter may provide an excuse for the market to correct. Speaking of which, I was at lunch with a group of colleagues last week, one of them remarked it was like “the mother-in-law threatening to leave” which brought a chuckle.

As discussed in the previous post, a quick pull-back (3%? one can only hope for so much in this environment) is definitely healthy at this point, and may even be necessary for the durability of this bull market. This trade with $UVXY calls was meant as an experiment since the size was tiny compared with my total exposure.

Cryptocurrencies

I thought I wasn’t going to write about cryptos for a while but the issue with Tether got me riled up. I provided links to two Reddit threads in the previous post. Also check out Tether’s marketcap from CoinMarketCap and see the jump after April’17. This link shows $100 million worth have been created for each of the last six days (as well as the millions before). I’ll let the readers draw their own conclusions.

Portfolio

Other transactions include selling some puts in Diageo ($DEO), and swapping $JNUG for $LABU for my 3X leveraged ETF trade. I finally caught a 25% run in $LABU after everything $XBI related gave me nothing but pain.

Current portfolio composition is as follows: PMs 11.0%; equities 52.6%; FI, 23.1%; cash equivalent, 5.9%; and other, 7.3%. The “other” category is composed of 3X ETFs, 0.4% and options, 6.9%. Effective exposure from options is 85.2% of total portfolio value for a leverage ratio of 12.3X. The portfolio is 138% long equities (not beta-adjusted). Options value and effective exposure both increased along with that of the underlying. Gamma remains positive. Options had and will continue to have outsized returns as long as this bull market continues.

YTD the active account is up 12.26% and the total portfolio 8.43%, vs. 5.08% for SPY and 2.63% for 60/40.

Good Reads

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