Lee AdlerAs gold works on completing an important intermediate low our last round of mining picks are swinging higher. I have added stops to the newer picks and adjusted stops on existing picks to protect profits but give them room to run.
The Fed continues to fund roughly 85% of new Treasury issuance. It affirmed at last week’s FOMC meeting that it won’t cut QE for the foreseeable future, and it will add, if needed. That means that if the Treasury needs to borrow more, the Fed will add more QE.
But it’s now apparent that the Treasury won’t borrow more for the foreseeable future. The new stimulus bill that we now know is about to pass will cost $900 billion. But the Treasury has $1.6 trillion in cash on hand.
This has huge implications for the stock and bond markets.
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Oh boy, bears are not going to like this setup. It’s bad. Really bad.
The 10-12 month cycle continues to trend upward against its supposed cyclical down phase. What happens when the next up phase starts?
Short Term Chart Picks – Trailing and fixed stops took out 2 shorts and one long last week. That left 7 open picks on Friday. I’m closing out one of them as of Monday’s opening price.
Including both the closed and open picks, the theoretical average gain (100% cash, no margin, no options) was +4.3% with an average holding period of 11 calendar days. This week I have 6 new picks, 5 of which are buys. Only one is a short. This will leave the list at an extremely lopsided 11 longs and one short.
Scary.
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These reports are for informational purposes, aimed at a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.
The Fed’s policy remains stable at about $170 billion per month in QE, give or take a few billion depending on the level of MBS replacements. The balance sheet is growing on trend. The stock market is tracking with it, as usual.
This will lead to a huge problem when the economy begins to react to enlarged stimulus.
This report discusses how to position trading strategy to take advantage.
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As gold’s pattern looks more promising, I’ve added 5 new picks to the chart pick list of the miners.
The Fed publishes a huge pile of data on the dealers’ holdings, transactions, and financing each week. It’s organized in a way that’s completely useless for our purposes. It’s granular to the nth degree, not aggregated as we need it to be.
Over the past couple of weeks I’ve thought about how to aggregate the data in a way that would make sense, and perhaps tell us something.
I managed to make some sense of it. It’s not the holy grail that I was hoping for, but it’s interesting. And again, it shows just how insanely leveraged the system is. The Fed simply can’t allow a selloff in the bond market. It would be catastrophic.
Here’s the chart that shows why. There’s a lot we can learn from it about just how much danger we face.
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The futures are attacking resistance here in the wee hours Monday morning. This is the second attempt since the opening in Asia on Sunday night. This is a critical level and what happens here will set the tone for the swing trade outlook, and the longer term. This report tells you what to look for today and this week.
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9 of the 14 swing trade chart picks hit their trailing stops during the week. That was intentional as I tightened stops to harvest profits. There were 7 profits and two losses. The profits ranged from 3% to 30.8% and averaged +17.3%. The two losses averaged -3.5%.
Including those and the remaining open picks, the theoretical average gain (100% cash, no margin, no options) was 11.3% with an average holding period of 3 weeks, i.e. 21 calendar days. The average gain the week before was 10.3% with an average holding period of 18 calendar days. Two weeks before it was +4.8% and 11 days.
This week I’m again using trend analysis to adjust trailing stops and fixed stops to proactively take out selections where I think the move is probably done, or not going the way I expected.
Looking at the output of our stock screens of 600 large cap stocks, I’ve come up with six picks for this week (table below). I will track these assuming that the buys open above their stop prices, and the shorts open below. If the stops are violated at the open, it would suggest that the trend probably isn’t going where I think. I’ll wait for the next streetcar.
There are six new picks, half long, half short. That’s a big change from the past few months when shorts were few and far between.
I will assume starting prices for tracking purposes based on the notes in the table below (table for subscribers only). I’m hoping for better entry prices than simply arbitrarily picking the opening price. This is based on the pattern I see in the first couple hours of European trading. A lot can change between now and the New York open. We’ll see if it’s worth the extra effort. Probably not. 😄
If all six are opened, that would leave us with 11 open picks. 3 would be shorts and 8 longs. That’s still a heavily bullish bias, but less so than for the past few months.
I noted last week that the lopsided bullishness was a likely sign of end stage exuberance. This slight tilt supports that, but we must not get locked into any conception of what the market “should” do. I will follow the indicators, wherever they point.
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These reports are for informational purposes, aimed at a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.
Withholding tax collections were relatively stable through November. But the 5 day average ticked a hair below November’s low here in early December. New lows would suggest that December’s jobs data will be awful, which will add to the likelihood of more stimulus, both fiscal and monetary. Whether that’s bullish or not depends on the Fed. The wrong fiscal/monetary balance could ignite a conflagration.
The Wall Street captured media constantly feeds us the BS that the vaccine is the Magic Bullet that will save us. But while we wait for that shot, the talk about more, more, more stimulus will continue to be the narrative that drives the pundit excuses for why the markets are doing what they’re doing. “Market Rises on Stimulus Hopes” will be the near daily headline.
This is mindless nonsense designed to divert us from paying attention to the financial markets’ real problems.
We have become inured to these $200 billion monthly budget deficits. But this data has catastrophic implications which I get into in this report.
And this is BEFORE any new stimulus.
As more and more Americans get the virus, and more people know someone who has gotten it, or worse, died, the economy sinks.
The eConomic establishment sees the vaccine as the magic bullet. But we now know that it won’t be available for widespread distribution until next summer, thanks to the Don Trump waving off a bigger, sooner deal with Pfizer.
That means that the US will be dependent on social consciousness to reduce the spread of the virus for at least the next 7 months. Good luck with that. 74 million people believe that the election was stolen, and the virus is a hoax. Consequently they refuse to wear masks and proudly engage in superspreader behavior. That won’t change after January 20. So we face months of worsening economic conditions and ever bigger deficits.
Until then, the only magic bullet is more stimulus. It may or may not cushion the catastrophe besetting many American households. And its consequences for the financial markets will only be guessable when we know the size of the package and the size and shape of the Fed’s response. We know what the Fed needs to do at a minimum, and we know what will happen if it doesn’t do it.
Here’s what to look for.
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Signs of an intermediate low have joined last weeks indications of a short term bottom. New mining picks got off to a good start, but there are obstacles.
About a year ago I began offering both long and shortsale swing trade chart picks as a (potential) value added feature to the usual general market analysis and forecast in these reports. That service has grown as I’ve honed the methodology and gotten better results. This week, I want to share some thoughts not only with subscribers who support the service, for whom I’m eternally grateful, but also with non-subscribers. So please “bear” with me.
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The lesson of the chart picks this week was this. It’s good to be good, and better to be lucky, especially if we learn from it.
List performance for the week was both good, and lucky. It had one of the best performances since I began offering chart picks last year. With an average holding period of two and a half weeks – 18 calendar days – the average gain rose to 10.3%. That’s on an all cash basis, equities only, no margin, no options.
You could juice the return by playing with fire, oops, I mean options, or you could use margin, which works great when they give you free money and you’re generating consistent profits. It works the opposite of great when you’re not.
Now, I don’t like risk. I like to boost returns over the long haul by reducing risk in the short run, avoiding the slings and falling earnings turds of outrageous fortune whenever possible.
In addition to earnings turds we also have the more pervasive problem lately of lousy entries. All the massive gaps we’ve had on the open in New York since early November have made it virtually impossible to get a good entry price on Monday mornings after these reports are published. So a couple weeks ago I instituted a few changes in how I would open chart picks, recounted as follows:
11/30/20 That [+4.8%] compared with an average of just a 1% average gain as a result of the disastrous entries on Pfizer day, November 9. New York opened on a huge upside gap that day and spent the rest of the week backtracking.
The list has now recovered from that bomb in the pond, but massive opening gaps have become the norm, rather than a rarity. Therefore, I’ve instituted some changes in how I open these picks. I now use a price bracket, shown on the table, outside of which I will not add the pick to the list. Also, I now use 9:45 AM as the entry time price, rather than the opening. There are exceptions, which are noted in the table.
Another difference this week is that the buy picks will not be opened on Monday as usual. Liquidity analysis suggests weakness until Thursday. I’m allowing that to influence my thinking on entry. This is something new. Normally, I stick purely to the technical. It may or may not work out. We’ll see.
When the game changes, we want to change with it. There are only a few immutable rules, like Rule Number One- “Don’t fight the Fed.” And Number Two- “The trend is your friend, don’t fight the tape.” The other rules keep changing, to mess with our heads. So we need to be adaptable.
Being adaptable, and making small tactical changes, helped us dodge a bullet last week. But I can’t take credit. It was pure luck.
Here’s how that went down.
One of the picks (SPLK), which stands for “splat,” or worse, dropped a surprise turd on the Street with its earnings call after the bell on Wednesday. Our planned entry time was 9:45 AM Thursday with a Do Not Enter Stop of 192. It opened Thursday way, way below the stop price. At 9:45, the planned entry time, the stock was trading around 153, after closing on Wednesday around 205.
Phew! We dodged that! Had we entered on Monday, the loss as of Friday’s price would have been 23%.
But what about stops you say? Stops are no defense against earnings turds. These things trigger such rapid, explosive market diarrhea that the price gaps the stop. We’ve already had that experience once before.
In view of that, I propose an entry rule designed to avoid earnings turds. The model will check to see if a prospective pick has an earnings call scheduled within 10 calendar days. If it does, I’ll avoid it.
My swing trade chart picking philosophy is technically based. TA is not perfect. It does not know everything. Shit happens. TA often does not foreshadow bad earnings surprises.
Besides, we’re not trying to trade earnings calls. I have no way to guess who’s going to have great earnings, and who’s going to drop a turd. Other people may do that and do it well. It’s not what I do. So I’m going to stay away from that kind of inordinate, unpredictable, uncontrollable risk. I’ll do so by avoiding bets on who may or may not have good or bad earnings coming within less than the typical minimum holding period of successful picks.
Meanwhile, the decision to delay entries and use a price bracket for whether to enter or not isn’t perfect either. Besides helping to accidentally dodge a bullet, it also cost us some gains. Had we entered SNPS on Monday, we would have been ahead 5.1% on that at Friday’s close. Ditto PKE, up 9.4% from Monday at 9:45 to Friday’s close. But these would not have been enough to fully offset the splat in SPLK.
Here’s a summary how it went for the stuff we avoided.
From that small sample, the verdict is to avoid stocks that are due to report earnings.
There’s a good reason for taking a close look at this. We need to know what we missed out on. We need to know what worked and what didn’t, to make a judgment on whether to keep following this strategy, or to make changes.
I’m sorry, but trading models are not immutable. A system can get hot. Then it’s not. Even the best hedge funds with the greatest AI run algos and fabulous supercomputing setups have missteps where they lose money for a period.
Without massive backtesting, I don’t know if this is the best way to handle this, but my gut says it’s better than the alternative. We know that stops can’t protect us. They get gapped when this stuff happens. By avoiding these 15-20% overnight crashes the best we can, such as not entering any position where an earnings report is due imminently, should work better.
OK! We avoided getting hit with the falling turd on this one. Accidentally. So it’s good to be good, and better to be lucky. Not only should we learn from our mistakes, but also when there are lessons inherent in our good fortune. Next time it won’t be luck. It will be use of the knowledge gained from that luck.
To review, for the week, the average gain rose to 10.3% with an average holding period of two and a half weeks – 18 calendar days – as of Friday.
Amazingly, UAL, the one stock left from Pfizer day when we had forced entries on enormous upside gaps, has not only recovered, it has done quite well. I was hoping just to minimize the loss. Now the goal is to protect the profit.
It’s also time to think about harvesting profits, so I’ve tightened stops based on cycle line projections on the charts. I have also added information to the list on the amount by which to increase the stop level each day (PPD-points per day). This tactic will keep those picks open that are still within the trend, and close out those that break.
The current performance compares favorably with the previous week which showed an average gain of 4.8% with an average holding period of 11 calendar days. As the average holding period grew this week, the gains accelerated just a tad.
When trends start going parabolic, we must think in terms of, “Gee, this feels close to a top. Let’s add some shorts.” We’ve done a few shorts along the way, and they haven’t worked. This week the screens gave me nothing on the short side. Sorry about that.
There were a few stocks in the screen output with short term sell signals, but virtually all of them came from strong uptrends. So thanks, but no thanks. I want to short stocks that do not feature rising trend support. These uptrends tend to make shorting those stocks a very rough ride at best, if not an exercise in abject futility.
There were 77 potential longs to view from the screening of 600 big cap stocks. Of those I chose 4. They look like late cycle picks, and this could be the end of the line for them, a possible sucker play. I’m prepared to scalp or take losses, hopefully small, on these, but I will let the trend and cycle indicators do their work without imposing my feelings about them.
New picks table for subscribers only.
I’m adding the 4 new picks conditioned on being above their stop prices as of 9:45 AM Monday. I’m foregoing limit prices this week. If all 4 picks are above their stop prices, it will leave us with 14 open picks, all but one of which will be longs.
It certainly seems like end stage exuberance. But that can last for a few months.
Not a subscriber? Follow Lee’s weekly swing trade chart picks with Lee Adler’s Technical Trader, risk free for 90 days!
These reports are for informational purposes, designed for a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.
