Nightly Briefing 8/30/20


This megaphone pattern has had our attention for some time. We are at a potential sticking point for the SPX. It all comes down to how much money the Plunge Protection Team wants to continue to throw at the markets and at what velocity. 


A pullback to min. SPX 3,420 is likely the week of September 7th.


Apple is by far the single most important stock to the US stock markets. It is showing signs of fatigue.


If 3,520 SPX is exceeded, that would put 3,650 in play for either Sept 22nd or October 22nd, our next two peaks. What we feel strongly about is consolidation coming after September 1-2nd into the FOMC meeting. Consolidation can be a sideways chop or slight pullback. Some members email us panicking when we say the word pullback. Only when we use the phrase 'intermediate cycle low (ICL),' should you be concerned about a major drop. As of now, we forecast an ICL to begin October 22nd into early December - a large drop between 2,500 and 4,000 Dow points. Markets should remain supported into September 22nd with no steep drops seen, but modest congestion and consolidation with two sided back and forth action. Can September 22nd bring a higher high? Our vote is no, but they will try. We favor a double top, but new highs are possible.


Here is a snapshot of the weeks ahead. Day-to-day, markets are subject to noise: a new Trump tax cut etc can create deviations from our micro forecast. However, our macro view is intact. We would not put any hedges on until after the September 22nd peak. Leverage after September 1/2nd should be reduced and weak positions trimmed. Only a handful of stocks will lead this market higher. 


We do not expect the broad market, Russell, and small caps to join this party until late December 2020 into May 2021. There are only a hand full of mega tech stocks that are being bought that allow the major indexes to seek out new higher highs. If you are long story stocks we think most will struggle after Labor Day into early December. The anemic activity in small caps is shown above and not likely to change anytime soon.


Let us explain how most of the large funds conduct hedging. They are long individual large cap names that they think will outperform the market. Hedge funds and banks need to beat the SPX to keep their clients happy, so they become stock pickers attempting to pick the fastest horses on the track. They hedge with index puts/SPY puts with 1-3%. It must be noted that you cannot hedge a story stock by purchasing index puts. The theory is your hedge will disappear if you are wrong, like a good life insurance policy, as the common stock continues to accelerate higher. They view it as a cost of doing business. Everyone witnessed firsthand in June/July when the market started to rebound and restaurants, airlines, cruise ships, and hotels all lagged. If you are long a SPX, DOW or mega cap NDX stock you can hedge with SPY or QQQ puts. The simple reason is that if the SPX advances, it is more than likely your stock is going to participate in the rally. So if you are long a story stock like SPCE and you want to hedge, you need to simply buy a small percentage of puts in the same stock going out a decent amount of time. If you are long a story stock via options, the hedge will become less effective. So a 10% hedge with puts vs a larger call position is still something to consider in a story stock. We would not hedge the markets with SPY puts until after the post FOMC bounce into September 22nd.


Let's discuss hedging with the VIX now. The VIX moves with fear and rises sharply when the market drops very hard in a short period of time. It will bottom and start retreating before the final low in a share market correction occurs. Many market timers use it as a tool to pick bottoms. It topped near $80 mid-March before our March 23rd low actually occurred. Oftentimes, if the fear is expected to be just short lived, the Vix options will not respond to the spike in the VIX. It can be a sucker's bet more times than not. Everyone knows fear is like gravity and will eventually come back down. A long term view of the vix chart shows that if you sold every spike in the VIX, you consistently make money. However, there are times when a small risk bet in the VIX is appropriate. It should be done right before a large correction is expected. Looking at our forecast, Oct 21st would be the next date we would currently consider placing a VIX bet with December 31st VXX calls at the money.  The market is capable of drifting slightly lower into mid-October and generating a lower high, but the VIX will most likely be even lower than it is today. So it does not track the stock market. The VIX is not a hedging tool. Controlled, slow drops supported by the Plunge Protection Team often limit most VIX spikes, making it ineffective as a pure hedge. You need the panic and real fear of a quick, sharp 3-5 day plunge for the VIX to be a smart bet.  We will look at a VIX position in mid October, pre-election.


On September 2nd, we are looking at the dollar to have a sharp upwards reversal. Risk assets such as metals and stocks will come under pressure.


After the next pullback in gold and the metals complex, we will determine price levels for a rebound into October 1st. We will be on the lookout for an inversion this week - a less likely scenario if a low were to occur, then we would favor a spike into mid-September.


We may elect to sell X if our levels are reached this week.


Bitcoin is headed for a short term spike into mid-week.


We are looking for a price spike this week in the silver junior miners. We may look to take profit if a peak develops on schedule this week. We will know over the next 48hrs if we are going to get an inversion low into the FOMC or a metals spike. 


If you are a long term investor, DENN and BLMN should continue to recover into next year. The fall looks like mayhem to us with school closings, restaurant shut downs, riots, and protests - simply not a good environment to own restaurant stocks. We will look to sell DENN on this spike. The 200 DMA for both DENN and BLMN are great places to take profit. It is possible BLMN and DENN consolidate into the FOMC, then spike higher into September 22nd reaching $17 and $15. If you want it all, then just hold long term.

Oil is approaching a top September 22nd. We will look to be sellers into this date.

For members asking us to review some stocks they have in their portfolios, let us say we are happy to run large cap stocks (DOW, NDX, SPX), commodities, and forex all through our system. Thinly traded stocks, lower cap stocks, and alt crypto will not get a true forecast from our system and we simply cannot be helpful.


HFZ

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