SPX: Where The Bodies Are

Sarge’s Trading Levels
            Usually, in this spot, I would lay out day trading levels for the S&P 500 and the Russell 2000. When markets make levels that tend to be seven to nine points apart ridiculous, I will simply not publish my levels as I do not think they would be helpful, and might even be harmful. Those levels are tactical in nature. Today’s charts are meant to be more strategic in nature.   
This is a Fibonacci Fan chart based off of the rising trend through early January as if that trend remained unbroken. Know what? The very last line of rising support really is not broken at all. The line has been pierced twice, but has held on both occasions. It sure looks like it is this line, and not the 200 day SMA (2593) that is where support is coming from, does it not?
                       If so, the S&P 500 closed darned near support on Friday, and on an upward momentum day, could sail clear up to numbers around 2660 before hitting something solid.
                     Now for the danger spots. Should this support that now runs (2570-ish) well below that 200 day SMA actually break, we all see that there should be some algorithmic activity in the 2530 area. On a model starting with the 2016 election, depending on momentum, and let’s face it.. the news flow.. the next line of strait Fibonacci support shows up all the way down at 2477.

Bar Fight

                  The story begins with the President of the United States announcing punitive tariffs on as much as $60B worth of products imported into this country from China. China has been playing outside of the rules ever since December 2001 when the country became a member of the World Trade Organization. China would impose far larger tariffs on US goods exported to China than were imposed the other way around. China would also force US firms looking to compete for the Chinese consumer to share technology, or seek partnerships with Chinese firms just to gain entry. That’s called extortion. Then there was the broadly suspected theft of intellectual property rights, which China has denied.
                This US president, like his predecessors is trying to do something to even the playing field. A trade war, if one ensues will be costly to business, and to US consumers. The very idea is not market, nor business friendly, and almost seems odd coming from what has been a very pro-business administration. That is of course, only if you have paid no attention at all to this president over the last two years. The trade balance obviously irks him. My thought is that sometimes maybe you do stick up for yourself.
                Part of the problem is that Americans don’t save. Not the government, Not very many businesses, and not very many people. Savings must then be imported in the form of trade imbalances. Our trade partners have taken advantage of this. It’s not their fault. The best interest of any government should be to pursue the best deals they can on behalf of their people. I think the president understands this. I do not think that the president thinks that he can completely level the playing field. I do think that he thinks that maybe he can improve what we now have.
Bar Fight 
                 China’s Commerce Ministry responded overnight. Targeted are $3B in US goods that include both fruit, and pork, as well as recycled aluminum, and steel pipes. This is less than 2% of all US exports to the nation. I have been asked a couple of times this morning if this was it. Did we win? I laugh. Not likely. This is round one. China understands that they have taken advantage of weak US leadership in the past, even if they will not say so publicly. China also understands that they share a symbiotic relationship with the US. We need them to help finance the US Treasury department. They need us to buy their stuff. Are they likely to pull the rug on their participation in US treasury auctions? Uhm, no. That would hurt their own investment. They are not stupid.
                What China is doing with this response is buying time, which is exactly what president Trump is doing with this comment period. President Trump leads with confrontation, then negotiates back to an acceptable position. He’s not stupid either.
                Did you ever get into some trouble in a bar late at night? Who hasn’t?  You might talk tough, but you delay. You delay until you think you know how many friends the other guys has, and where they are. That’s what China is doing. Slowing things down, while talking tough. Seeing who joins the fray. After all.. you might remember those just implemented US tariffs on Steel and Aluminum. At first they seemed broad. The president allowed for comment. Hmm. Canada,and Mexico, our NAFTA partners were then exempt. Now suddenly the list includes Argentina, Australia, Brazil, every EU country, and South Korea. All of this leaves only China, Russia, and Japan impacted by those tariffs. seems targeted to me, though that was not how they were presented.
                If all fails, the Chinese did leave plenty of room for escalation, and not just in the field of agriculture. This will last a while, gang. So adapt. Understand where the headline risk in your portfolio is, and either reduce that risk to where it does not cost you sleep, or hedge it somehow. By the way, Boeing (BA) is up 8 bucks this morning.

A Look Preliminary Q4 GDP

Headline Growth
                The Bureau of Economic Analysis released their preliminary snapshot of US economic growth for the fourth quarter this morning. Simply put, this is the first revision to the Advance Estimate that printed one month ago. In one month’s time, we’ll get our second revision, or Final estimate, which in no way means that the figures can not be further revised at some later point in time should more information become available.
                The headline estimate for annualized growth printed at 2.5%. That’s down from 3.2% for Q3 2017, and revised lower from 2.6% from the initial release. Sifting through the data, certain important items were left unrevised, such as Final Sales of Domestic Product, and Final Sales to Domestic Purchasers. Gross National Product, and Disposable Personal Income were also left alone.
                There was one glaring (in my opinion) upward revision buried within the numbers. That would be Net Exports of Services. That particular item was revised all the way from -3.3% to -1.9%, forcing overall exports up from an initial 6.9% to 7.1%. Perhaps that weaker dollar is doing some good, at least fro this line item.
                 Several items sported downside revisions. The smart money looked for that kind of do-over for Personal Consumption Expenditures after the weaker than previously reported holiday season. Oh, there was weaker than previously reported growth for both Durable and Non-Durable Goods. However, better than previously reported results for Service sector kept consumption in place. Surprisingly, it was government spending at the Federal level in general, and defense spending is specific that were revised significantly lower than in that Advance release in late January. Come to think of it, a couple of my defense holdings (LMT, RTN) did run sideways from October through December.

Waiting: Sarge on Discipline

             I sat in my car last night. I was waiting outside of a Seven-Eleven convenience store. The most beautiful woman that I had ever seen was inside the store buying what she likes to call “coffee stuff”. I was thinking about the day’s trade… thinking deeply. Yesterday, we all saw the Dow Jones Industrials move rather robustly to the upside, while the S&P 500 for the most part remained flat and the Nasdaq Composite was simply taken out to the woodshed. Within the Industrials, it was the Transports that really took off. Within the Discretionaries, it was the multi-line retailers, and within the Financials, it was the banks. Shazam.
            On the other side of the coin, it got ugly… real ugly. Big-cap tech names. particularly the semi-conductors were rejected… in size… by the masses. Dare I even bring up what happened to the FAANG names? I took some profits earlier in the day in some of my semi-conductor names when I saw support levels failing. I also did some bargain hunting (We’ll see how that works out) when certain stocks that I do like at certain prices were clearly trading in a technically oversold state.
I Marveled
            I sat in that car, and marveled. I had the idea in my head that I had suffered a brutal beat-down on the session simply because I had focused on the stocks that had hurt my P/L. I scrolled through my numbers, and suddenly realized that because I was well-diversified, I had not suffered a beating at all. Much like the S&P 500, I was very close to flat for the day. I held enough shares in the retailers, in the banks, in the transports, and let’s not forget the energy shares to counteract the ugly performance turned in by some of my favorite 2017 stocks. Wow.
           Another case of time-honored, well-worn disciplines actually saving me from myself on a dangerous day. Thank goodness I shipped out to Parris Island when I was 17. Outstanding. The story continues. The crowd (also in my head) cheered.
           My wife returns to the car with her “coffee stuff”, and we head for home. It is now late, perhaps around 9pm. She goes her way. I head for my office. I have long since missed “Mad Money” on CNBC, but fortunately I DVR that show because I consider it essential preparation for the next day’s trading. That’s whether you make a living in this field professionally or not. Where did Jim Cramer go in his opening monologue last night? That’s right. Diversification. Man, was it nice to hear Jim zero in on precisely what I had been thinking about just minutes earlier.
           I often stand upon my soapbox, preaching the virtues of discipline in one’s approach to investing. I tell almost everyone who will listen. Usually though, I stress the importance of having an idea of what you are investing in, and what you are trying to accomplish. I often speak on price targets, and panic points. I speak on when you are allowed to change those levels, and how important it it to obey the levels to the exclusion of all emotion.
          I do not speak often enough on the value of diversification, though it is clearly just as important a discipline to be strictly followed as any other. Diversification prevents one from having too many eggs, or too much dough in any one basket…. and diversification saved my tail yesterday.


Good Evening,

The Gate Keeper

                        Kind of a tricky day, gang. Seemingly quiet. Seemingly. The action across equities markets was almost sort of dull outside of the energy space. That sector backed up more than one percent broadly, while major indices and most of the other sectors stayed fairly close to home. I could talk about Amazon. maybe I’ll leave that for tomorrow’s Recon.
                        The problem today was weaker WTI Crude. The commodity settled at 58.11, down 1.4% on the day. The positive take-away would be that the $58 level, which is one of those swinging gates that I often speak of had held. Unfortunately, the level has been pierced in after-hours trading. The next swinging gate to the downside is $54 in my opinion. Some smart folks see it as $55.
So, What’s The Problem?
                        Coming off of the holiday week, most in the business felt that an announced extension to the OPEC/non-OPEC deal would be forthcoming from Vienna this Thursday. Russia is supposedly on board with an extension. Supposedly. Reuters is reporting a planned significant increase in production from Russia’s Sakhalin-1 project come January. On top of that, analysts at Barclay’s  today warned that even if an extension were to be announced on Thursday, that the levels of production may not be agreed upon until much later. What the ?? That’s an uncertainty that caught quite a few traders by surprise. Oh, did I mention that the domestic rig count is screaming? Uh oh.
Defending Myself
                    What’s the kid to do? You know he already said he liked energy on national TV. Now, he’s got to figure it out. Three long positions in the space. One highly profitable … VLO. Bought that one is response to the hurricanes. That one had to be sacrificed to pay for the rest. Sold to you. Take badge 986.
                    Deep in the hole … SLB. Down small …. APA. Have been in the green on that one… twice. Sold some. Like the name a bit too much to sell it all. Need a cold winter so Natty Gas can do some of the lifting. Otherwise….
                    Doubled down SLB. Rounded out APA. Gonna need some love. Got an idea better than love. We’re going to have to sell (write) some options against these trouble-makers. Just to sort of diffuse the bomb.
Hate Risk?
                     You can knock off almost $1.30 off of your net average price by writing SLB March 65 calls. You can also sell APA April 45 calls for nearly 1.60. That’s some serious food for thought kids. Don’t mind taking on some more risk?  SLB December 15 60 puts are going for 75 cents, and similar APA December 15 38.50 puts are dragging in a rough 65 cents. Get paid to worry about buying stocks you already like at a discount. Life could be worse.
                     My preference when writing puts is to keep expiration dates close. I don’t mind throwing the long ball when selling calls. The only risk associated there is lost profit, but a put exercised against you can pour on the hurt. No promises, but I’m leaning toward selling some calls shortly after tomorrow’s opening bell. I may get crazy though. We shall see. Rock and roll.

Playing Ball, or Earnings… Safely.

Good Afternoon,
                          Just an idea, gang. Use it now. Use it elsewhere. Really, this is simply an effort to educate the folks who do something else for a living. Many of my home-gamer pals have indicated to me that they are not comfortable using or trading option. We’ll occasionally do stuff like this, until you are comfortable, my friends.

When You Don’t Have A Position

                Who doesn’t love video games? Well, recently … investors, that’s who. I am going to assume that you’ve seen the action in Activision Blizzard (ATVI) since that firm beat expectations last week for both Earnings per share, and revenue. The stock is a mere 9% off of the pre-earnings high. How about Electronic Arts (EA)? That stock remains almost 7% below the highs of late October. The difference there is that EA did not even bother to beat projected revenue, and guided weakly into their third quarter…. aka the holiday season.
                 You’ve heard of Take-Two Interactive. Rock Star Games? 2K? These are their labels. The end products? Grand Theft Auto, Max Payne, Midnight Club and Red Dead just to name a few. We could get into the fundamentals of this corporation, but that is not what this is about. This is about the cold-hearted mercenary that lives inside each and every one of us fighting the good fight with two fists, and trying to turn a buck in a risk controlled environment.
But, Still Want To Play Ball
                 TTWO reports after today’s close. There are twenty analysts that follow the name. They are looking for EPS of $0.74 on revenue of $510 to $512 million. Guess what? We don’t give a rat’s tail. We just want the stock to react. So, if the stock were to react by 5% to 9% overnight, that would imply a stock move of somewhere between 5.25 to 9.45, or a move down to a range of 96 to 99, or up to 110 to 114. A little hopeful? I get it, but how do we manage the risk while exposing ourselves to the potential of an overnight move?
Bear Call Spread
                 If you don’t like the stock, you could lay out the 3.60 for a 105 put that expires this Friday evening, or….what if you could expose yourself to some benefit in the case of the stock moving lower, while minimizing the downside risk inherent in the trade. Sounds good, right kids. Let’s illustrate.
Going into the close:
TTWO November 10 105 Calls are quoted around 3.40
TTWO November 10 103 Calls are trading around 4.40
      If one were to sell (write) the 103’s at 4.40, and purchase the 105’s at 3.40, that trader would:
1) Pocket a credit of $1.00 on the premiums paid.
2) Have to buy the stock at 103 if TTWO remained above that price.
3) Be able to buy the stock at 105 if if TTWO went even higher. In other words, the risk is limited to two bucks, but you already netted a dollar, so the risk is really just that single buck. The most you can profit or lose on this trade is a buck. The edge is that in this case, I suspect that the stock will go lower. The trade works similarly in the other direction if you feel differently.
      This is not the strategy of a home run hitter, gang. This is a singles hitters’ trick that does not allow you to get your face ripped off while regularly producing some revenue. Use only when you think you have an edge.

We All Bleed Red

Situation Misery

                     There will be no economics discussed in this space today. No investment strategies, not even political overtones.  I don’t want to hear your justifications. There are none. You are frustrated. Poor baby. So am I. So is everyone else. You’re angry, you’re scared. Okay. Do you know someone who isn’t? There is only one way this gets better. No excuses. Listen to the guy on your left. Listen to the gal on your right. They disagree. Their experience is different. Work together. Grow up.
                     The problem is, gang…. that we all bleed red. We are Americans. We are the great mosaic that results when different people of different viewpoints embrace freedom…. together. We are all entitled to our lives, to liberty, and to pursue happiness. No one person has the right, or the justification to deprive anyone else of those rights.
                     We have to try to understand each other, and when we can not, we have to accept that we will do so without losing mutual respect. To deprive someone else of their life, or to attempt to, is the ultimate show of disrespect, and the ultimate act of selfishness.
What Can We Do?
                  I don’t think anyone among us would deny that we have seen the progress of technology in our daily lives advance rapidly over the last fifty years or so. Many daily functions that at one time required social interaction, now require far less human on human contact. Is that a bad thing? I will remain non-judgmental on this, but I think that it’s easy for me to see a decline in aggregate social skills across our society since my youth.
                 There was a day that when you passed someone traveling in the other direction, that you had to acknowledge each other. Tip of the cap. There was a day that in order to communicate in real time, you had to speak. Nice weather we’re having. Is it possible that the lack of constant human contact has allowed the forces of hate to grow from a smoldering ember into a blazing inferno? Don’t get political on that point. Look inside.
                 We can make an effort to love. We have to. To look the disheveled homeless guy in the face when you pass. To shake the hand of a known enemy. To pray for each other with honestly positive intention. To care. We have to care. That flag has thirteen stripes, and fifty stars. It represents every single one of us across an entire nation. Almost all of us or our ancestors were kicked out of somewhere. Let’s genuinely worry about each other.
                 Let’s be that shining beacon on the hill that I know we truly are. Let’s become that perfect example of decency. Today.
                 Let us not be …..

Smack-Down Recon (Special Edition)

From the Dark

               Ever feel like you are being followed? Ever know it? You probably knew it was out there this week. Always is. Always watching. Quietly. Waiting for the right day. Then … Unleashed. The “Ugly Stick” is out, and it’s angry. Blood in the streets, or should I say “Blood on the Street”.
               Yes, the catalyst is obviously the abundant political risk. One story heaped upon another. Which straw will be the one that breaks the camel’s back? There are some that truly wish to find out. They certainly must not be long the equity market. There has been a certain level of faith out there, that things will get better, and that faith has been evident in our monthly consumer surveys, home-builder surveys, and regional manufacturing surveys. The soft data got this market to the point where earnings could take over, and helped sustain equities even through some rather rough macro. Auto Sales, Retail Sales, Consumer level inflation, even housing starts have all under-performed expectations.Bottom line… You put the whammy on sentiment, and pal, you have a problem.
               Down go the broader equity indices. Okay. Buying opportunity? Sure, I did buy small today, in some names that I felt the risk was indeed minimal. By no means did I try to do any more than get on base though. There will be no swinging for the fences this afternoon. Let’s pick this apart, and try to make some sense of the mayhem.
                 Actually it’s not just us, Europe took one in the teeth today as well. Proceed with the ugliness.
Financials. Whoo Doggie. Where ugly begins. I was starting to doubt my wisdom in dumping JPM. Now, I’m wondering why I held onto C and KEY. So, why this particular slice of pain so acute? Just take a look at the ten year, or any series of US Treasury debt products. Yields are collapsing. Probabilities of a June rate hike are collapsing. Every time that I think about cutting my portfolio bond allocation (currently 15%), I end up being glad that I did not act. Anyone else using a post-it to cover their P/L on their computer screen?
Small Caps. The little guys are US-centric, and for the most part, pay higher effective tax rates than the big boys. That is to their detriment of late, and especially today. A US dollar that is weakening against it’s peers,and the loss of faith in the ability of the Trump administration to push it’s agenda are no friends to the Russell 2000. Carry on.
Transports. Know what economic growth brings? Goods move. Resources move. People travel both for purposes of business, and pleasure. Commerce happens. When commerce happens, truckers truck, railroads hum, and shippers ship. Again, the loss of faith in the agenda is evident in this space. Dow theorists will note that this trend of under-performance by the transports has been in place well before today’s massacre.
Technology. Simply where there were fat profits to be taken, or protected. A place to raise cash. Add to that the now all but forgotten repatriation story, and obviously a re-pricing of these assets became a market story.
Industrials, Materials, Discretionaries. Down, down, down. Ditto. Ditto. Ditto.
             What looks good today? Gold, that’s what. Gold (7.5% allocation) is rocking it’s safe-haven status today. as for the rest of the commodity complex, Crude, Corn, and Wheat amongst others are just glad that the dollar is getting smoked. That safe haven status is also being extended to the already mentioned Treasury market, and to the bond proxies as well. It’s a beautiful day for the Real Estate, and Utility sectors. defensive minded Staples are also holding their own .. just barely.
              This is not the end of the world, but this may be the spot where traders are separated from those who can not. Being long names that increased in value while you owned them was the easiest thing in the world since early November. Back to normal, gang… but perhaps not yet. Now that political risk is expected, this becomes headline risk, and this will matter every day. I hope you enjoyed low volatility, and a microscopic VIX. I am no fortune teller, bit those days. for now… appear to have passed into history. Keep in mind, if you are having a rough day, that somebody else is dying of cancer, or dying of hunger, or simply dying of loneliness. If today’s market action is the worst that you have to deal, then count your blessings, for they outnumber your woes.
Sarge Out.

Market Wrap Tuesday

Good Evening,
                       A wrap of today’s market offered in response to specific request, but for all to share.
Fernando Valenzuela
                       Little bit of a screwy day. Not completely out of left field, but a little screwy nonetheless. The day began with UK Prime Minister calling for a snap election. This makes sense from her point of view, as she is dealing for the moment, from a position of strength. This also will push out the need for her to defend herself in another general election until 2022. That should make the Brexit negotiation that much smoother…. should…. unless the situation in Scotland becomes even more complicated. We’ll know more on 8 June. What we knew today was the Pound screamed higher, kissing 1.29 vs. the US Dollar at one point. FYI, the Euro, and the Yen also took flight against the greenback.
Nothing to See Here
                     The there were some disappointing quarterly earnings results. UAL dragged the Transports out back, while GS, and JNJ put the whammy on the DJIA. Should I mention HOG? Jeekies. Oh, the broader indices did fight back, and there were some notable winners, even among Dow components. UNH, for one responded very well to earnings. Broadly speaking though, the Financials took it on the chin with Health Care, while the Staples and the bond proxies stayed in the green.
Macho Man
                     The bond proxies? You bet your tail. With uncertainty in the UK, a tug of war in France, a planet mired in chaos, the reduced expectations for a June rate hike thanks to some lousy macro, and did I already say a planet mired in chaos?…. Treasuries ran wild, just like the late “Macho Man” Randy Savage used to. You know gang, every time I try to lighten my bond portfolio.. I end up getting cold feet…and every time… I’m glad for it.
                      It may be noteworthy, kids.. that both Oil, and Gold stayed near where they began despite all of that dollar weakness, and Crude had to make a nice comeback to just get there.
P.S. For all of you numbers junkies out there, IBM just reported a beat on EPS, and a miss on revenue. The stock is down 3.3% in the immediate aftermath.
P.S.S. I suddenly feel like a Slim Jim.
Positions in stocks mentioned: none. I left them out on purpose, but 4 for the top 9 on the Dow there, Chilly Willy.

Through the Window

               It was a cold January morning in 1983. What I saw through the window stopped me in my tracks. Still does when I think of it. The most beautiful girl that I had ever seen, or ever would see. Being loud, laughing, wearing a white T-shirt with black polka dots, and black jeans. It was as if I had been hit by lightning. Thirty-four years later, the image is as clear as it was that morning. That mental image still makes me hold my breath for a second. I went inside. I tried to talk to her. It wasn’t easy. I dated many girls back then, but this time …… I already knew the stakes were high. I could not screw this up. It would still take me four more years just to ask her out on our first date. That day was the first time I ever saw my wife. Want proof of God’s existence ?? There it is right there. I won’t get religious on you here, but there was something at work far greater than I.
              This morning I woke up on the right side of the dirt once again. I have a pretty good winning streak going in that regard. Today is the 28th anniversary of the day I married that girl. A purpose for life? You bet. For richer or poorer? Done both….. a couple of times over. In sickness and in health? Been there and back….. in spades. Children? Two young men that any man would be proud to call sons. To love someone…. To care for someone over a lifetime. What an honor !! What a responsibility !! I won’t bore you with a long note. I merely want to encourage young married couples to hang in there, if at all possible. Don’t give up, even when the world around you is an ugly place. Always remember that the girl (guy) you fell for, is still there. Right in front of you. Always was. Always will be.