This is the free weekly update that is posted first to the OptionProfessor.com site each week. The Substack paid updates provide more specific detail.
June 26 2021 Option Professor Opinions & Observations
Welcome Back!….The drop under S&P 500 4200 a week ago was a gift and that gift is gone. Last week BEFORE the Fed meeting and Quad Witching; we sent out an ALERT that Volatility may spike due to a change in Fed speak & the expiration of the huge volume of expiring options ect.. We got EXACTLY what we bargained for on that one. We used the S&P 4180 as important support (the market ran some stops under to 4166 only to get right back above it).. We said we expected the decline to be brief and getting back above S&P 4200 would be the first signal that we are back on the horse…..EXACTLY what we saw this week. Now we feel that any closes UNDER S&P 4160-4180 and maybe even SP 4200 would indicate something is wrong especially going into the July 4th holiday….highly unlikely but nothing is impossible. Investors plowed into retail this week especially the digital marketers (NKE jumped on a 41% jump YOY in digital sales). We sent out an ALERT on the bank stress tests and of course they passed and now the return of capital game begins! This will come in buybacks and dividend hikes. We spoke of NVDA having an AAPL type run up going into the 4-1 split in July and a 200+ dollar rally has ensued. We are now looking at VIAC as an interesting property that could attract buyers as it has a low valuation, a studio and could potentially fill a void of a number of firms….it had a Fibonacci type decline of about 61.8% off its highs and has been climbing ever since it caught our interest under 40…there is a huge gap between 85-90 when it broke from 100 in Q1….WARNING….while the S&P 500 has made a record high; other large indices have failed to do so and it has been a substantial time since their highs (examples of indexes and time since their highs include Russell 2000-11 weeks, Dow Jones Transports 6 weeks, S&P 400 Midcap 8 weeks, DJIA as well). ALSO; companies like FedEX (FDX) let us know labor costs and other challenges are affecting them and with EARNINGS around the corner one must wonder if there will be any SURPRISES derive from MARGINS pinched by these challenges. We believe that by end of summer when positioning is complete; the risks from the FED & Inflation elevate-BE-AWARE
With the good news on banks and cyclicals stemming from an fade on inflation/higher rate fears; the value trade got off the canvas. The yield curve flattening has given way to a bit more steepening so the jury is still out as to the sustainability of a flatter curve. It time for a Summer of Fun as BKNG & CCl give you an idea that people are ready to move about. Energy, value, banks ,industrials and consumer discretionary al were the places to be this week and if analysts like Kolanovic at JPM are correct…that interest rates will glide a bit higher…these same sectors have potential. The ones that had run up lately MSFT AMZN GOOG gave up some ground after being bid up. We told readers BABA looked like it hit the lows around 205 as it wreaked of a FIB correction low and now we see 228 on Friday–accelerated. Lots of infrastructure plays got attention including Trex, Mantowac, HERC, AA SUM DE CAT CLF URI or one stop PAVE.
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In our portfolio roadmap we cover income producing investments such as short term corporate bonds, tax free munis, preferred, senior loans, emerging market sovereign debt and high yield among others. Our view has been that the taper tantrum happened in Q1 when Treasuries 10yr at 1.75% and 30yr at 2.55% were hit and prices dropped the most in decades. We saw TLT (proxy for 20 yr treasury) at 133 as grossly oversold and positioning extremely short. NOW we have seen a rally to TLT 146 area and now reversing as we may see a drift toward 2% on the 10 yr over the 2nd half of 2021as a strong economy, Fed removing emergency accommodation and inflation persisting as the culprits of change. Most areas have been stable except for emerging markets; they were blindsided on a stronger dollar than anticipated.
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US Dollar/International Markets
The Dollar Index (DXY) lost some steam this week after a great run up from the 88-90 area which shocked many but not us as we saw the Dollar oversold down there and the move ABOVE the 90.65/91 prices as a return to stability. Now we will see about durability as a move UNDER the aforementioned levels would put the DXY back into a tailspin that could take out the lows and cause stir in the metals markets going into Q3-4. The concerns on the commodity currencies remain (CAN$ & AUS$) with choppy commodity action and Europe is still a mess as countries target Portugal as a problem (also the Delta variant in UK which has a fair share of India ex pats). The Yen has been a joke. The big news in international markets in our view is the turnaround in China stocks (BABA KWEB FXI) which in turn has helped emerging markets….Europe is choppy but should be full steam by summer’s end. We are all over these markets.
Crude Oil Natural Gas
Crude Oil has been stellar as price exceeded 74 this week and many call for 80 and more. We feel that prices above 50-55 generate tremendous free cash flow for the oil companies and ergo could spell more upside but we have price levels that must be exceeded for us to dismiss the possibility of a correction from an overbought level. We are close but nee more strength this week otherwise a pause to refresh remains. We have been bullish on oil since -37 a barrel so we are trying avoid what we avoided in other markets that we got bullish on last year but thankfully refrained from joining the parabolic tops some have seen in recent months. Still demand is overwhelming supplies which is bullish. We told reader Natural Gas was turning at 2.50 (Now 3.53) and LNG at 70 (Now 87) so our compass has been fairly correct.
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Gold Silver Platinum Copper Crypto
The Gold & Silver Platinum markets all had big selloffs but as we follow GDX it may have ended last week as Gold stayed above 1700 Silver above 25 and Platinum above 1000 bucks. GDX peaked at 40 after running up from 30.64 or 9.36 cents X 61.8% = 5.78…we take 40-5.78 = 34.22 which was the low on Friday!! We will monitor this but if inflation persists…this ancient relic that has been a store of value for thousands of years may finish the year with a B_A_N_G! Copper prices (and our favorites FCX SCCO) have rebounded nicely as the reality is that demand dwarfs supplies and it is not easy to get the supplies humming again. Crypto (GBTC=BitCoin & ETHE Ethereum) are both still on the defensive HOWEVER our support zones (GBTC 22-28) still show merit. The tug of war between those who call it Rat Poison and true believers still exists but the road to the clouds go thru 32-38…so we look for more sustained strength for proof.
Soybeans Sugar Coffee
Looking at the 50 day and 200 day moving averages on all 3 markets we see the markets trading ABOVE the averages on Sugar (17-15.50 areas) Coffee (150-128 areas) suggesting we are just seeing pull backs and a possible resumption of the uptrend while Soybeans (15.00 -13.08) are trading UNDER the averages and need a rally above to re-engage.
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