Cold War Part One
My guys formed around me as I looked at the map. I wanted them to understand that this afternoon was going to rate as an experience somewhere in a range from awful to very awful. Maps can be less than trustworthy in the rain forest. The land changes. Land always changes in permanently wet climates. There is nobody in the jungle save for a few natives to notice. They don't care about our maps. Time passes. This is way before the inventions of such luxuries as GPS and Night Vision. Map says this swamp thing to our front is huge. Could be two or more klicks before we step on something solid. No idea how deep it gets. Then again, trying to walk around this thing might take forever, certainly overnight. Jungle comes alive at night. If we have to do it, I would really prefer not have to do so in three or four feet of disgusting water containing all kinds of critters. Somebody's going to get bit by something nasty. Getting medevaced out of here could get real dicey. The canopy is thick. Smoke might not make sense, and I'm not popping a flare. I'm not letting the Army Rangers we're competing against know where we are.
What this was in fact was a competition. Twelve teams. Long range reconnaissance. Twelve objectives no larger than a shoe box, covered by foliage. Not everyone had the same objectives. Mixed branches. As long as it takes. The Rangers were all Pathfinder qualified. This is what they do.
That's it. We'll cross this swamp. Piranhas? They don't like this kind of water. Right? Snakes. There goes one now. Ignore the snakes. Caiman? We're bigger than they are, mostly. The marsh became so deep in spots that we had to walk on roots. In places, it became necessary to swim, keeping gear as dry as we could. Everyone turned the same shade of muddy brown. Everyone wore the odor of rot.
We came out of the jungle within sight of Fort Sherman. To our horror, about three hundred yards to our front was a squad of Rangers who themselves were about 100 yards from the finish line. I formed my squad, and said "Very quietly, double time march, let's beat 'em." They noticed us as we closed in, and then they themselves double-timed. They beat us by less then 50 yards. It was then, that I found out that they had come in second, not first, and we had come in a close third.
It was something to remember later with a good laugh. We had only the roughest of idea on how deep the muck would be, as well as just how far we would have to travel in order to step on something that felt like earth, but we did step on earth again. The last team came in the next morning. Why tell you this story now? Simple, the markets put it back in my head on Monday afternoon. How deep? How far? No GPS. No Night Vision. No map you can depend on. Just what to do? Not a competitive jungle patrol, but with people depending on us nonetheless.
Cold War Part Two
Tuesday morning. Most of New York sleeps and will continue to do so for hours. I watch the spread in amusement. The 30 day US T-Bill yields 2.07%. The 30 year bond? 2.31%. How did we ever get here? To the point where 29 years and nine months looks like nothing more than marking time. That same one month debt actually gives up 51 basis points more than the US five year note. If that doesn't shake the very foundation of core human logic, than we truly have reached a place that we never should have gone.
No need to tell you that all of the broad market indices took a pasting on Monday. You lived it. You know that. You did not have to be a genius to know that they would come after the Information Technology sector first and foremost. We knew that the semiconductors would be at the most risk. That group had shown some strength in July, and is highly exposed to Chinese demand. We knew that they would come after software/the cloud because that's where the trading profits are. Heck, many of these names are still priced too far above net basis for many traders to add. The surprise may have been the level of gusto with which they came after everything else. Even the "safe haven" bond proxy type sectors such as Real Estate and the Utilities surrendered a percent and a half or more.
Yes, the action was driven by algorithms. That's a given in 2019, and has been for years now. There was a difference though. Often, as traders when we don't like the action, we can blame keyword readers or momentum runners, and to be frank, we are often spot on when we say those things. We can not go there at times like this however. When the S&P 500 and the Nasdaq Composite both surrender their 50 day SMAs on the same day, and trading volume finishes above it's own 50 day SMA for both for a fourth consecutive day, there is no way to sugarcoat the action. Funds have been liquidating equity positions. The uptrend that technicians would have confirmed as late as last Wednesday, or even Thursday around mid-day, is now clearly a market in correction.
The Beat Goes On
For now, the PBOC has stabilized the yuan versus the US dollar by signalling that it would sell yuan denominated bills in Hong Kong. This has allowed European equities to open close to unchanged, and permitted U.S. domestic equity futures to trade in the green. Yields further out on the U.S. yield curve are off of their lows. Make no mistake. The game at hand is still afoot. (See what I did there.)
Overnight, the U.S. Treasury Department labeled China a currency manipulator in response to the Chinese central bank permitting Monday's collapse in the yuan (along with China suspending all purchases of U.S. agriculture) that came in response to President Trump's threat to impose tariffs upon all remaining Chinese imports that came in response to China having reneged on agreement already made. It goes on. This is how gang wars happen. Both sides repeatedly respond.
Tuesday morning... more news. Apparently China will "not stand idly by" should the U.S. move ahead with the possible deployment of intermediate-range missiles in allied territory across the Asia-Pacific or Indo-Pacific regions. Now that the U.S. has withdrawn from the arms control treaty first agreed to by President Reagan and Soviet Premier Mikhail Gorbachev in 1987, due to Russia's non-compliance, all is back on the table, and this is no game. We know that long-time Sarge fave Lockheed Martin (LMT) , according to Defense One, is building a new facility in Alabama just to accommodate demand for its Joint Command Air to Surface Standoff Missile. In fact, you may have noticed, not only Lockheed Martin, but Northrop Grumman (NOC) , General Dynamics (GD) , and Mercury Systems (MRCY) all more or less hang on to their respective 50 day lines. Not every defense contractor is outperforming the broader market, but a select few that either produce these kinds of missiles or sell military hardware to U.S. allies certainly are.
Understanding Panic Points
Many smart (and not so smart) folks publicly analyze equities. Many place target prices on the equities they analyze. I am the only one I know of that also publishes what I call "panic points." Often, I receive questions on just what this means. Gladly, I'll tell you. A panic point, just like a target price is adjustable. In my world because I really trade/invest my money, I can't just say I "like" a name (like half the crowd you'll hear from on TV today). I really have to buy it and/or sell it in order to make money.
As part of my mission statement (All accounts must have a mission statement. That was one of the first rules I taught when I came to Real Money), I will never willingly take more than an 8% loss on any position. Now, a panic point is anything but a panicked sale, it's a plan that works in conjunction within a set of pre-defined disciplines that prevent disaster. (When it's your money, and there is no base salary, preventing disaster becomes very important.) I promise myself that I will never take a hit of greater than 8% unless it happens due to an overnight gap. At that point, the issue becomes an exercise in risk management, an area that I consider a personal strength.
Panic points can be moved, and are not always meant to provoke a complete withdrawal from a name. They are always meant to provoke the taking of action. By moving panic points higher as stocks move higher, partial profits are taken as stocks move lower. This creates cash that can be redeployed should the investor decide to reengage. Even if the reentry is poorly timed, that investor has still extracted capital that would have otherwise been lost from the position. Got it? The 8% rule is also adjustable for both low-priced stocks, as well as highly volatile names. but there still has to be a stated panic point.
A simplistic example would be an investor buys shares a $100, with a $125 target and a $92 panic. The target can not be adjusted until $125 is breached. Should the shares rise to $110, the panic point rises with it to $101.20 (or $101, let's be real). Now, the trader has for all intents and purposes... locked in a profit on at least a partial. The absolute panic point might still be $92, but should that investor make a partial sale at $101, and buy those shares back at $95, only to still wind up selling the whole enchilada at $92, the trader still benefited though the exercise of personal discipline.
When to do this work? That takes time. My workweek starts on Sunday afternoon. After reading everything I need to read (which is a boatload), and doing all of my work on the week's macro, as well as the week's earnings, I then re-chart every single stock that I have a position in, or are considering. Daily and weekly charts. Those that fall asleep at the wheel would be surprised just how much a chart can change for some names almost on a dime. Not doing one's homework over the weekend, and not understanding the difference between daily and weekly homework is really to be driving backwards. Possible, but not for very long.
Perhaps no stock is as exposed to the trade war with China than is Apple (AAPL) for a multitude of reasons. Now, like many of you, I am directly exposed to this name through an overt long position in the name. Like the rest of you, whether you know it or not, if you own any number of ETFs or simply have money put away for retirement, you too are exposed. In fact, everyone who might be reading a market note on a Tuesday morning is probably exposed.
Now, understand that Wall Street was largely satisfied with last Tuesday's earnings results. The share price peaked above $221 last Wednesday. After Jerome Powell's botched press conference that same day, the shares closed above $213, having failed to take the key (very key) level of $215 in spectacular fashion. Then came the president's tariff tweets and the rest was history. AAPL closed Monday night at $193.34. Never mind that most have a net basis that is much lower, and that price is 9.2% lower than the Wednesday close. Notice that the selling accelerated as the 50 day SMA (now $197.36) was crossed. I know that a lot of folks tend to poo-poo certain moving averages. That misunderstanding is born of an ignorance on just what portfolio mangers react to. Of all indices, the 50 and 200 day SMAs provoke more action taken than all of the rest if only because they are expected to. Understand? These two indices matter.
If one has taken nothing off of this long since Thursday, I would not automatically do so at this point. Right now, futures are trading well above fair value. However, should AAPL fail to retake the $196 level, then I think a trader would be foolish not to at least respect the $189 Fibonacci retracement of the rally that came off of the cup's handle throughout June and July.
My absolute panic point is currently is currently $166. You can bet your tail that I won't be around at $166. In fact. I'll be completely out by that $189 level. This game is just as much about protecting profit as it is about creating profit, and I don't like spending for protection. That only increases net basis most of the time. In a normal market, I would add on a take and hold of $196. That said, this is not a normal market. This is a cold war.
Since late Thursday, I have exited many of my retail names, as taking profits across the space seemed the obvious move that night. That's with two exceptions. One... Kohl's (KSS) because while that name has never hit target nor panic, it trades below my net basis and I am a stubborn old man. Two... My feeling is Amazon (AMZN) becomes that much more valuable in this environment that pressures most of the retail world still dependent upon now uncertain cheap imports. Amazon does no business in China, and I am less certain after earnings that this name will be the long-term winner that sustains my thesis. That said, I was a buyer of this name on Monday, late Monday in particular. My long position in Amazon is now larger than it has been in many years. I will not hesitate to reduce if the market shows me the money this morning.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 4.5% y/y.
10:00 - JOLTs Job Openings (June): Last 7.323M.
16:30 - API Oil Inventories (Weekly): Last -6.024M.
The Fed (All Times Eastern)
13:05 - Speaker: St. Louis Fed Pres. James Bullard.
Today's Earnings Highlights (Consensus EPS Expectations)