Know what? The action is still positive. Maybe that's a bit aggressive in the wake of a day where nearly nothing happened. Well, the energy sector did sell off a bit, as threats created by the storm passing through the Gulf of Mexico abate on a persistently strong dollar. The broader market did absorb this well. True as that is, trading volumes continue to ebb. Is it safe to call a top when every day seems to bring a new closing high, or something close enough to new records?
I don't really know to be honest, but I do know enough to watch for signs of trouble. As earnings season moves to a higher level on Tuesday, my feeling is that we soon will know a lot more about the health of our marketplace at increased valuations than we have previously. What do I watch? Remember the steep selloff in late May? Of course you do. Remember how I kept harping on seeing some kind of notable gain for the broader indices on increased volume before I would commit to the uptrend that we later confirmed? Did that dragging of the feet so to speak cost me much? Perhaps through the prism of late May into early June it may have. Over the course of multiple decades in an industry where careers can be short, this levels of prudence has saved a lot more than it has cost. Of that, I am sure.
For example, it was just six weeks ago that we spoke about narrowing portfolios and raising cash levels. (I just stopped writing and checked my cash position.) Hard to believe what was over 30% in late May is now under 14% (My cash position is always on the high side for a Wall Streeter. I use cash as a means to tamp down volatility when I do not like the markets, and as a reservoir of dry powder when I do. I truly hate to be forced to create capital in order to make a desired move.) Oh, took the time to count open positions. Still not as broad as it gets, but my most active portfolio now contains 60 open positions, up from I think was a rough 45 at the lows of May. So more capital exposed more broadly. Is it time for traders to work their way back toward a more defensive posture?
Similarly to what I watch at market lows, I watch for institutional participation at market tops, especially when volume visibly slows for a number of days as it has. We still have not seen a good reversal day, and when we do, that will not necessarily mean that it is time to ring the bell and run for the basement. There will have to be a second (or more) day that builds on a reversal within a few days of that top on significantly increased volume. Or at least that's one item I look for.
Besides slowing volumes at record highs, are there other signals that tell me not to run and hide, but to at least be ready to defend myself and my family's standard of living? Sure. For one, I watch Relative Strength. Take a look at the S&P 500.
See that RSI (Relative Strength Index). Most traders consider the 70 level to (in most simplistic terms) historically signal an overbought condition. The guys who write the algorithms, even if they have no clue what this means, watch this too. Every time the RSI for the S&P 500 kisses 70, the index, even if it's only temporary, sells off. Take a second. Look at the chart.
Based on that one slice of information, it would be time to get out of Dodge City. However, there is a chance, a good chance actually, that any short-term resistance might result in what becomes something of a necessary basing pattern. (We love basing patterns. They create predictability.) For further confirmation, not only do I watch for changes in volume, I also watch the CBOE Put/Call Ratio as something of a contrarian indicator. That is because it is human nature to be the most frightened when all heck is breaking loose, while also feeling the most exuberance when one feels wealthy. Take a gander at this chart.
Remember that 1.00 is a balanced market. Put volume equals call volume. Notice the extremely high Put/Call ratio of that late May market bottom. Yet, right now, this market appears balanced. That, means to me that I may not have an imminent selloff on my plate. In fact, the Put/Call Ratio, which tends to run below "One" more often than above over time, based on how normal people think, has not seen Put volume outweigh call volume to any significant degree in six weeks. This item is obviously not fail-safe, but it is one extra layer of intelligence gathering.
The best protection, in my opinion, is the one I preach all the time. Take at least some profit where you intend to. Add where you intend to... and sell something at pre-designated panic points. It was boxer Mike Tyson, who famously said "Everyone has a plan until they get punched in the mouth." Well, sorry Iron Mike, I am going to counter that argument, with "not everyone." All it takes it getting hit in the mouth one time without a plan to know you need one. Take that from a kid from Queens who means it, quite literally. There will be fights, and there will be fights (in the markets and in life) that you will lose (maybe often). Nothing, and I mean nothing, increases one's odds like discipline and training. While training might include a lot of physical work if one were to try to box a former heavyweight champion, in our world, the training means working toward the ability to be relentless. Never forget. Never...that somebody out there is trying to take something from you. They try to take from your spouse. From your children. They do so callously. It is never okay to let them win due to a lack of effort. I know you won't let your people down.
For those trading the FANG or FAANG names, and especially for those trading Facebook (FB) , Tuesday sets up as a day bearing exceptional levels of headline risk. First up to the plate will be Facebook. The Senate Banking Committee will commence with a hearing at 10 am ET that will primarily cover Facebook's newly proposed, and broadly backed digital currency known as "Libra." Representing Facebook at this hearing will be Libra co-developer David Marcus, who will do it all over again on Wednesday before the House Financial Services Committee.
For investors, the idea of a digital currency backed by a basket of fiat currencies meant to reduce volatility, then targeted for use at a fairly captive consumer audience seemed attractive, and certainly allowed for the stock to experience a technical break-out above pivot.
That said, the broad roadblocks toward Facebook realizing any benefit from a Libra launch seem to be mounting rather quickly, and appear to be bi-partisan at that, which is key. Treasury Secretary Steven Mnuchin was more or less stern on Monday. "Many players have attempted to use crypto-currencies to fund their malign behavior. This is indeed a national security issue." Mnuchin infers that perhaps with proper safeguards in place to defend against money laundering that such a launch could be possible, but adds "They've got a lot of work to do to convince us to get to that place."
This is not just the Secretary of the Treasury. At last week's twin testimonies before the same committees, Federal Reserve Chair Jerome Powell expressed "serious concerns" about Facebook's digital token, and Rep. Maxine Waters (D-CA), who happens to chair the House committee that will be in focus on Wednesday, has actually drafted legislation meant to inhibit Facebook's ability to operate such a product. What does Facebook have to say?
David Marcus, who will be in a tough spot over the next two days said this... "We know we need to take the time to get this right, and I want to be clear.. Facebook will not offer the Libra digital currency until we have fully addressed regulatory concerns and received appropriate approvals."
What does Sarge think? Yes, I am still long the stock. Yes, I am also long puts expiring this Friday that protect the entire position, even thought the expense added just over a buck to my net basis. If it's a false alarm, I'll barely notice that dollar. I'll be darned though, if I am going to let this Marcus dude lose me a boatload of cash. Nuff said.
But Wait, There's More
2 pm ET. Facebook fatigue? Uhm, maybe. Amazon (AMZN) , Facebook, Alphabet (GOOGL) , and Apple (AAPL) will all send representation, but not top level representation before a House of Representatives anti-trust panel hearing entitled, "Online Platforms and Market Power." Oh joy. Do these high-tech U.S. firms compete in anti-competitive ways? Do they inhibit innovation. Does that impair the abilities of the smaller entrepreneur? They will be asked for answers.
Though there is no timetable for potential legislation, and some predict that nothing happens toward that end either this year, nor next, markets will witness where political lines in the sand might be drawn, and though not represented, both the DOJ (Department of Justice), and the FTC (Federal Trade Commission) will of course be aware of today's events. There will almost certainly be headlines, and algorithms read headlines faster than you can. Just be alert to that potential.
Need A Date?
Just noticed Match Group (MTCH) nearing a potential break-out while doing my chart-work last night. Thought I'd bring it to your attention. The firm reports on August 5th, so there is time before a catalyst is forced upon investors. Note the firm has just launched "Tinder Lite" for Android which is aimed at emerging markets. I do not pretend to understand the modern world. My time was different. We might ask someone we were interested in if it was okay to call them sometime. Now, they do things like swiping left or swiping right. There are some times, very few times, but there are some times that I am grateful that I am old, and grew up before technology made such an impact on social behaviors. However, I do like to make money. Let's go the the chart.
Quickly we see the break-out of the cup with handle (which I missed at the time) that has led to the basing pattern outlined in blue, that also might be a double bottom. Regardless of whether you see this as a "W" or a Flat Base, the shares approach a pivot of roughly $75. Take and hold that spot? $90-ish becomes possible. The 50 day SMA of $69.70 would serve as my panic point if I were already sitting on a profitable move in this name, which I am not. Personally, I would rather buy this name after seeing $75 crack than to do so right here. $75 August calls will still run the trader nearly $4. Too expensive in my opinion. However, selling a $70 August put should still bring in more than $3, that could result in a net basis below the 50 day line. Just an idea.
Economics (All Times Eastern)
08:30 - Retail Sales (June): Expecting 0.2% m/m, Last 0.5% m/m.
08:30 - Core Retail Sales (June): Expecting 0.2% m/m, Last 0.5% m/m.
08:30 - Import Prices (June): Expecting -0.6% m/m, Last -0.3% m/m.
08:30 - Export Prices (June): Expecting -0.3% m/m, Last -0.2% m/m.
08:55 - Redbook (Weekly): Last 62% y/y.
09:15 - Industrial Production (June): Expecting 0.1% m/m, Last 0.4% m/m.
09:15 - Capacity Utilization (June): Expecting 78.2%, Last 78.1%.
08:30 - PCE Price Index (February): Expecting 1.7% y/y, Last 1.7% y/y.
08:30 - Core PCE Price Index (February): Expecting 1.6% y/y, Last 1.5% y/y.
10:00 - Business Inventories (May): Expecting 0.4% m/m, Last 0.5% m/m.
10:00 - NAHB Housing Market Index (July): Expecting 64, Last 64.
The Fed (All Times Eastern)
08:15 - Speaker: Atlanta Fed Pres. Raphael Bostic.
13:00 - Speaker: Federal Reserve Chair Jerome Powell.
13:30 - Speaker: Chicago Fed Pres. Charles Evans.
Today's Earnings Highlights (Consensus EPS Expectations)
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