Jackson Hole Was Expected Per My Last 2 Articles
Market participants held tight to the notion of a Fed pivot, and I had no earthly idea why.
The resilience of the market over the last 2 weeks was surprising both in response to inflation data and especially in response to the Fed meeting minutes. Clearly, most other market participants heard some things that I didn’t, namely a Fed pivot. The minutes and Powell’s statement somehow strengthened the notion that the Fed was softening, while I heard the exact opposite. Even as Fed presidents were unanimous in their hawkish attitudes. Ever since I have been warning that there has to be a discounting of the hard-line Powell was outlining. It had gotten to the point that some of my readers commented that I was a Perma-Bear! Imagine that…
In order to effectively manage a portfolio, you have to try to anticipate market moves
Part of a Cash Management Discipline is to manage risk by raising cash in anticipation of upcoming occasions that will pose a greater risk. We don’t use a Ouija board to predict when that will happen, instead, we try to anticipate the “known unknowns”. I may have mentioned this before but Donald Rumsfeld, a name reviled by many, introduced into the common lexicon the concept of categorizing risks as the “known and unknown” and the “unknown unknown” risks. We knew well ahead of time that the Fed minutes would be publicized in early August, and in anticipation, we raised our cash from about 6-7% (that is the median low-risk goal) to 15%. That 6% to 7% is to give some room to maneuver if that unknown, unknown event does occur. In any event, the market shook off what we thought were quite hawkish minutes. Instead of quickly redeploying that cash we instead urged the community to maintain 15% with an eye toward going even higher as the start of September looms. We did that because the next known unknown event was Jackson Hole. Even though we didn’t get the expected event last time we didn’t throw in the towel. A discipline requires adherence, otherwise, it isn’t much of a discipline.
Jackson Hole Day of Reckoning
So when Friday did come around, we were well prepared. Jay Powell no longer left anything to the imagination, he promised: “to bring some pain to households and businesses”. This was our known unknown, and many of the community members had in addition to holding cash, executed hedges. Today hedging is so much easier to set up with all the leveraged inverse ETFs there are. Now before you, all pile on, yes leveraged ETFs should only be day traded. Since we had a date certain for Jackson Hole this hedging tactic was not going to hang around long enough to be an issue. We also used put options, last week I introduced this notion of quick trading to the downside of stocks that had an extended rally. For example, the news that Electronic Arts (EA) was going to be acquired by Amazon (AMZN). Aside from the fact that I think AMZN would have a hard time making that deal happen I quickly threw on some “In The Money” Puts on EA. Why would I take such a risk? First of all, these are extremely small amounts, just a few options. I made my quick 40% and got out. I did it because I know that we are in a moment where the market is heavy and because Friday was coming. I did this a couple of times. Since these are quick trades, if they don’t work within 2 trading days, I close them out. So for example on August 23 Blue Apron (APRN) had a moment in the meme world and the stock shot up. At the same time, Ryan Cohen bailed on Bed Bath & Beyond (BBBY), so I threw some Puts at it, and it quickly showed me 25% which I was too jaded to close out. As my punishment for being greedy, that moment came and went, I gave it a day and closed it out for 0.15. I didn’t wait for a bigger payoff this time. On another occasion Signify Health (SGFY) was in play with several bidders including AMZN, and UNH. It popped on the news. I quickly went to the short side via Puts and scalped a quick 33%. Again I risked a small amount to scalp a small amount. A quick 33% and 40% here and there and sooner rather than later it adds up. I don’t recommend this for the trader or investor that can’t watch the market assiduously and have the discipline to keep a trade a trade. I do put these trades on alert the moment before I execute. Finally, I added some new energy names related to LNG, Navigator (NVGS), and a Coal name Peabody Energy (BTU). With China no longer having access to its hydroelectric power coal and LNG will take more market share of power generation in China.
My Trading plan for the week
Part of Cash Management Discipline CMD is to slowly trim old positions over time. So even stocks that I love, even stocks that are widely acknowledged as the best names Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL), are now 1/4 of the size they once were when I started trimming. In this sell-off I will start layering back in. If my average price for a stock is still lower than the price we see Monday morning, I will only add a few shares this week. When it comes to GOOGL, for example, my average price is $107. GOOGL closed at $110, and I think we could well see $107 even on Monday. I intend to buy back all the “Tech Titans”. I already know exactly what stocks I am going to buy and for what prices, and I suggest you do that same. Make sure these are well-known names that have free cash flow if not profits. This is because we don’t know how long this selling jag will last. A less well-known stock could retreat under pressure. However, there is a lot of money on the sidelines and I expect buyers to come in as soon as late afternoon Monday before the close. If not Monday then I suspect buyers will step in fairly quickly on Tuesday. In addition to MSFT, AMZN, and GOOGL, I will look to add to my position in Meta Platform (META), Intuit (INTU), Adobe (ADBE), and ServiceNow (NOW). I would like to watch Salesforce (CRM), I think there is a possibility that it will test its 52WL, and not hold.
Powell set the table for a hawkish regime, Oil and NatGas prices will sustain it
I shared this thought in my last article; that September can come early. With this past Friday’s sharp sell-off I think you may now well understand what I meant. I think that WTI established their new level of 92 to 95. Now that NatGas seems to be leading and could easily move to 12-13 at this point, it will drag up oil with it. Either way, WTI could move towards 100, and with it ginning up inflation fears. That in turn should push up the 10-Y and the VIX, and put more pressure on the market. We saw a bit of panic Friday, any new confirmation of inflation will cause something similar. So what I am advocating is some quick moves this week. If stocks can be well bought this week, they should be able to hold their value. I still believe that the market will not find new lows. I suspect that 3800 to 3900 might be revisited but not for any sustained periods.
My summary, be mindful of risk and use cash to manage that risk. I will use hedging sparingly, especially as additional market moving events are coming. Since the market will have continued moments of headwinds that could pressure stocks, I will be mindful to look at opportunities to short stocks that have spiked momentarily. I think market participants will be quick to take profits.