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If you respect patterns, you can anticipate instead of reacting. That means sell when others are buying and buying when others are selling
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Dip Buyers will be encouraged by the bullish close of Friday to resume buying on Monday and perhaps Tuesday
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Start selling the trades that were set up Friday on Monday and Tuesday. At the same time restart accumulating hedges similar to the ones you closed during Friday’s Jackson Hole fears
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What are the catalysts for selling? Economic data, and Friday’s August employment. Powell clearly wants to see employment weaken.
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Wednesday’s Core PCE is the first hurdle, Friday (Sept 1) we have August Employment and the unemployment percentage. If the number is above 200K we could have another sell-off,
Remember – We try to anticipate, not react. Our goal is to buy as the selling reaches the nadir and sell as the buying reaches the zenith. We aren’t always successful, and sometimes spectacularly wrong (thank goodness not so much this year). No one is correct 100% of the time, you just have to be correct 51% of the time and minimize the losses (sell quickly) when you are wrong.
I reread my prognostication for last week and I got very close. Except Friday turned out better than expected.
Last Monday through Tuesday we sold the trades we started during Friday’s sell-off phase. While at the same time, we restarted hedging from Monday through Wednesday. We even took a downside bet on Nordstrom (JWN) which we covered during Friday’s reflexive dive after Powell’s address at Jackson Hole. The VIX never got low enough to hedge, at least for me. Some Group Mind Investors felt it got low enough on Friday to get long the VIX again. Meanwhile, I satisfied my hedging needs by shorting the Nasdaq-100 using Puts. My miss on Friday was that I expected that the selling would intensify from 9:30 am to 10 am Prior to his Jackson Hole address, it was then we planned to unload our hedges. I had thought that whatever Powell had to say he said 20 times already, and buyers would immediately come rushing back in. Instead, the buying just intensified, I actually added my cheapest put options of the Nasdaq-100 right at the zenith of the buying. My thought was, that perhaps the market is rallying this Friday and maybe even next week but September starts in earnest after Labor Day when everyone comes back from summer fun, and my “puts” can wait (the expiration date is Oct). Instead, the buying turned into fierce selling after Powell finished, the Nasdaq went from up over 1% to Down over 1% very quickly. It was then that we closed out our shorts and started buying some big-cap tech names to sell next week. Soon the selling reversed once again and we had a lot of equity in the plus column. What was the most popular of the big cap names that our Group Mind Members bought? It might surprise you because it wasn’t NVIDIA (NVDA), it was Meta Platforms (META)! I wanted the least controversial name as far as revenue and profits are concerned, and that had fallen enough this past week to bounce back creating a nice return this coming week. Let’s look at the chart.
This is a 5-day chart. META has fallen August 1 from about 320, I would be thrilled to sell out my call options anywhere close to 290. I believe I will get it since the week should start out positive again. Why would I say that? We had another strong, I would even say very strong reversal, that closed near the intraday highs this Friday. Let’s be clear, the medium term is frankly very bullish. The economy is nowhere near recession. There’s a really good chance that the current quarter will go above 3% GDP, inflation continues to cool, and even the weekly jobs number is below 200K lately. So perhaps buying at this level is justified. In any case, we respect patterns, patterns work until they don’t. In this example, the seasonal pattern of September is a really tough month for bulls and goes back decades. The current weekly pattern seems to be intact as well. I believe it will work at least one more time. Why do I say that?
Let’s not forget that we are still on “Fed Watch”.
We will remember that Jerome Powell would end his Jackson Hole address by noting the Fed is “prepared to raise rates further,”. This week we again have two important economic data reveals in the economic calendar. The Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation indicator (core PCE), is scheduled for Thursday morning while the August jobs report is expected Friday at 8:30 a.m. ET. I expect favorable housing data as rents have come down, but non-core food and energy, I believe, will finally show up. This could be a mixed bag, and perhaps the rent declination doesn’t make as powerful an entrance because government data gathering does not move with alacrity. To me that gives a 50/50 binary outcome to the PCE, perhaps a slight weight to a positive result, since housing cost is a big focus of the FED, and that lower number should show up by now in the PCE. The all-important August jobs number and the unemployment percentage on Friday. I’m leaning toward seeing a bit lower on the monthly jobs number, and probably the unemployment percentage going back up a tick. I think that is the majority view, though I haven’t seen any opinion polls on the matter. Last week’s jobless number cooling (over 230K) I think gives us the notion that jobs are cooling slightly. Of course, this week has a weekly jobless number too. If it is below 230K it could spark selling all on its own.
This Week’s trading plan approach will be very similar to last week’s
Close out all the tech-related trades on Monday and Tuesday as whoever is buying the dips should come in again and buy our shares, or Calls. While at the same time start building back the hedges, if they don’t work this week they should work next week. Look, all the senior traders will have to come into the office after cruising the Mediterranean on someone’s Yacht. They will be grumpy, and berate all the junior traders for being long, and once again we have the September swoon. Do you need a more sophisticated answer than that? I’m not sure there is one. The first test will be the PCE on Thursday, What about the ADP employment report? It has got to be stupendous in either direction for anyone to bother with it at this point. It is no longer trying to predict the BLS number, they are doing their own thing. I think the ADP report might actually be more accurate, but for now, it isn’t going to predict the August BLS employment outcome so no one cares about ADP. Let me not get off on a tangent with them, right now the Fed relies on the BLS number as byzantine as their methodology might be. So Friday is a big deal because Jay Powell says they are data dependent and every meeting, therefore, will be live and if the numbers this week are awful, batten down the hatches! This time I don’t think Friday would give us another positive reversal and the weekly pattern will be kaput. It was good while it lasted though.
What happens if we go through all the numbers and employment is cooling, PCE is coming down. Get ready for the recession “Greek Chorus”, they are waiting in the wings if cooling accelerates. I failed to mention interest rates, Will the 10-year break above 4.36% which I believe was the high of last week, and a multi-decade one at that? Yes, if we do see evidence in the PCE of inflation, or maybe just have the same numbers as last month, then that won’t do either. Of course the same would happen if Friday shows employment heating back up, even a smidge more than the estimate could ignite both the 2-year and the 10-year. Right now we really just want US treasuries to stop moving altogether, just stay where you are thank you very much, or if you must move just crawl a few ticks, ok? Accelerate to the downside and you have recession talk, and moving like they did last week might turn from reflecting growth to reflecting inflation concerns. These are things we want to leave in the rearview. Okay enough of that, what did I do last week besides the hedging
My Trades
Like I said I got long calls on META which I think a bunch of the members got in on. I also went long on some Alphabet (GOOGL) Calls, which I think will give me a few points on Monday and Tuesday for a trade. I also did a similar move with Snowflake (SNOW) Calls, they all already had profits on Friday, I have a strong conviction that the rally will continue early this week, so I got a little greedy. On the investment side, I added a bit to industrial names, I just started a position in Generac (GNRC), and if So. Cal. got hit with their first hurricane in 84 years, I think my timing is going to be good for GNRC. I added to my CNH Industrial (CNHI) shares since it fell back nearly 20%, and I added to my Terex (TEX) too. I also added to my Charles Schwab (SCHW) equity as well since it fell back to 56, I have an open order for SCHW at 55, and I will keep buying it if it keeps falling. Those are all my trades and investments. One word on hedging. It has never been easier to hedge, you just have to know when to use it, and when to close it out. We won’t be right all the time but having a hedge when things go haywire is very comforting. Some of my members prefer to hedge using ETFs, which is fine too. The biggest problem with hedging is if you just hold on to them, they will kill your performance, counteracting the gains in your portfolio. That’s no good. You’d be better off just having an investment account, and just staying long on your equity and loving your dividends. I do both. Good luck everyone!
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