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By Jeffrey Cohen, Investment Advisor Representative US Advanced Computing Infrastructure, Inc. Today we are wondering why there is so much movement in the market around the committed downturn in stock prices. We see economics-driven stocks (business cycle stocks) like Citibank, Freeport McMoran, Cleveland Cliffs crashing, but then we looked today and they always go up and down 2-4x, or 1/2 to 1/4. This is what they do as the economy goes from boom to bust. We see whole industry subsectors of stocks go up in after hours trading, just to fall in pre-market trading. In certain industry sectors, the stocks that go up in after hours go down pre-market, and vice versa. This is movement to scalp pennies, or dimes, on share prices, or to fine tune positions. The overall trend is negative and down. Two stocks are dropping that give us pause, and we will do some due diligence. DB and CS are down, and I am concerned there may be a banking problem in Europe. There is no real economic news today in the headlines. Just commentary. Interest rates look to fall today based on the futures, which brings US Treasury Bond and Note prices lower. Could be a small flight from US investments in fixed income. New lows to new highs maintained a 29:1 ratio today in both corporate equities and corporate fixed income. For every one company stock or bond that hit a new high, twenty nine hit a new low. Be careful out there. Don't lose sight that we are in a downturn and whatever stock you hold that is exposed to the economy will most likely be lower in a few weeks. Hold if you can / must, and sell if you are unsure. The first person who sells into a recession wins. The first one who buys at the bottom also wins. Best regards and good luck today. GLTA Jeff
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By Jeffrey Cohen, Investment Advisor Representative US Advanced Computing Infrastructure, Inc. #recession #stocks #market #analysis #news #stockmarket #portfolio #stockstobuy #stockstosell #contagion We discussed four points today in great detail. 1. Most stocks we follow are trading near their 52 week lows. Many new lows were hit, both in US equities and fixed income. This 'contagion' is also hitting in US Agency debt, which is largely invested in mortgagers. 2. The major indices are in a down trend. They are following very clear and straight trendlines. The way up was marked by a similar straight line, but the candles were smaller. The way down is equally straight, but the candles are larger (more movement on the way down each day). Please be careful out there, the market is in a decline pattern. 3. There are signs of bets being made based on recession fears. Commodities are down. Long-term interest rates are falling (from last week's highs). Stocks in companies that make things (e.g., FCX, CLF, MT) are down. 4. We shared our game theory model. Hope you enjoy the video. By Jeffrey Cohen, Investment Advisor Representative So, where does that leave us in pre-market today? The US equity futures are up this morning. Bets were made while we were sleeping and before the market is open. Makes it hard to invest in this market because the 'action' is all decided by others before the market opened. Not investment advice.  Hope you enjoy this morning's video. We enjoyed making it. We reflect on recessionary fear bets, the overall market direction, and our take on what is happening out there. Net-Net: almost all the 'bell-weather' stock industries we track are trading near 52-week lows. We are taken by surprise by this, and think most investors are unaware of this fact too. By Jeffrey Cohen, Investment Advisor Representative US Advanced Computing Infrastructure, Inc. We noticed a few important things yesterday. 1. The market move happened before the market opened. The market opened gap up. Retail investors could not participate. Once the market opened, the moves up and down were slight ripples. This means, to be precise, that stocks you might want to buy were already up in pre-market so you would be buying them at the open, or in the first hour, at their already 'runner' prices. We see this today with the lower open expected. Pre-market stocks like $COIN Coinbase are already down more than 8% pre-market. If you wanted to ride Coinbase lower, you already missed that move. It is the same across our 'indicator' or 'canary in a coalmine' industry sectors. They have already moved in pre-market. 2. We also see a significant number of new lows in yesterday's 'UP' market. This is very surprising to us. We also see the average stock is lower than it was over the past 2.5 months, and over the past 10 months. There is still a weakness in individual stocks and bonds. Corporate bonds (91:1) new lows to new highs (not a typo, ninety-one to one) Agency bonds (16:1) new lows to new highs (largely residential mortgage holdings) US Equities (10:1) new lows to new highs. What this says to us is that the market is not 'throwing good money after bad' and is leaving many companies behind. This does present a buying opportunity in certain companies with strong valuations that are down-trodden. However, those stocks likely will be less expensive in a week or two. Probably better to wait. 3. We see commodities like Copper showing weakness, approaching $3.90 from ~$4.50 when we first starting tracking it. However, big picture, copper has traded for a long time around $2.00, and rose (similar chart as the Russell 2000) from the Covid-19 pandemic lows to more than double. This is a return to a normal, historical level of pricing. We would also expect copper miners like Freeport McMoran $FCX) to fall with it. 4. We see weakness in the mortgage backed securities MBS market, both in Freddie Mac, Fannie Mae, Ginnie Mae and FHLB. This is likely due to the rise in long term interest rates. Yes, short-term and long-term interest rates are rising. This makes everything in our economy more expensive. Companies that borrow short and lend long, or that take in deposits and make investments in long-term fixed income, will not have a good Q2/2022 according to the data we are tracking. When we looked, the banks have dropped from 20% to 30% over the past quarter with the adjustment in market rates. Good luck in the markets today. It looks like a RED or down open for US equities, and the move is already well underway in pre-market. I hope that if you have a trading idea, it is still there when the markets are open and not 'already played.'       Thank you to the websites we are using for our data and analysis.
https://finra-markets.morningstar.com https://app.koyfin.com https://finviz.com https://www.marketwatch.com https://www.mortgagenewsdaily.com https://finance.yahoo.com https://www.chicagoquantum.com https://www.cmegroup.com Stocks quickly rose this morning (they gained most of their advance pre-market). I noticed that 1-month US Treasury Bills yields fell dramatically to 1.02% today. Not sure why, but this would explain why financial stocks are doing very well today, and overall the market is higher. This is a riskfree rate, and a rate that you peg to for interest-bearing savings accounts. When the riskfree rate drops, stocks are actually worth more, and banks are expected to earn more.
The longer term UST did not rise (yields did not fall). This is only on the short-end of the stick (or yield curve). VIX fell 5% today. I guess people are no longer worried about stock market volatility, or at least are not willing to pay to protect against it. Russell up 2.0%, S&P up 2.6%, and NASDAQ Composite 100 up 3.0% today as we write this at 1442 ET.
There are a few ways to gamble on a market recovery or a market decline that are efficient, lower cost and relatively easy. There are some ETFs that deliver multiples of the underlying index on a daily basis. You can buy and sell them like stocks (they are exchange traded funds), and they tend to behave well on a one-day basis.
$TNA - for up days $TZA - for down days Are we in a recession? We don't know. There is no confirmation. However, credit quality will give clues:
Game theory suggests you should sell stocks before a recession is confirmed (tweet below).
US Equity Futures: still greenBy Jeffrey Cohen, Investment Advisor Representative US Advanced Computing Infrastructure, Inc. June 20 2022: 2120 ET (updated) Key take-away: we should not buy financial assets (stocks, bonds or bets on commodities) if we are in a recession. However, we can only know that after the fact, once the media/government tell us. By then, it is too late. Game theory suggests that the markets are falling precisely because we are in a recession, and you just don't know it yet. Or, it does not matter, because the losses are so bad, it is profitable to act like we are in a recession, especially before you do, and sell everything that is not nailed down, before prices fall. The marklets are down significantly over the past year, although the comparables are tough. A year ago we were enjoying the post COVID-19 pandemic rise in stock prices. These falls are off that recovery. Also, the riskfree rate is higher in our model than it was a week ago. Notice the forward looking market return is 3.5% on a fully diversified basis. The trend is not our friend in the markets right now. Riskfree rate = 1.50% Actual SPY return = -12.16% Use floor S&P500 rate = 5.00% Actual IWM return = -26.55% Use floor Russell 2000 rate = 5.00% Actual QQQ return = -20.08% Use floor NASDAQ 100 rate = 5.00% =========================================== Market return = 3.50% We ran our models on Friday night and spent the long weekend celebrating our family. We went out, visited a museum, and walked along Lake Michigan. We were together. My daughters gave me cards and sent me texts while my sons bought me a Home Depot gift card. We saw grandma. All is good in the world. However, we do feel a little tight financially. Not only are gas and food more expensive, but so are insurance, property taxes and almost everything we spend money on. We are stretched across the extended family, and it is likely that you are too. So, is this the week that the market goes up? Our model says to invest in a leveraged ETF that should outperform the S&P 500 significantly, and to pair it with one or a few high BETA stocks. The model also suggests that the largest S&P 500 tech stocks and large money managers are some of those consolidating the most, and may be ready for a run higher. That seems ridiculous to us on a holiday when people seem worried, but it is not 'people' or retail that determines stock prices in the short-term. It is the large-scale money managers, pension funds, wealth funds, and asset managers. As investment managers, we are not sure that you should buy anything on Tuesday. This is the purpose of today's post and tomorrow morning's video. Should we wait to turn bullish, even if it is just for a week to catch a bear rally? How to answer the question: The question is to decide whether we are in a recession, which is a period of negative 'real' economic growth over a 6-month contiguous period. Real means after inflation, which has been running 8-12% over the past 6-months. So, has our economy been growing, in constant prices, at 8%-12% over the past six months? We are not sure. Growth seems weaker than that based on anecdotes, direct observation in our small corner of the world, social media, news, and our 'feelings.' We heard retailers bulked up on inventory that nobody wants, that cannot be helpful. However, we can look at specific factors. Supply
Demand
Stock Market signals:
Credit Quality: This is our 'truth stone' in this market. If the US consumer cannot pay their bills, the economy slows down. Banks and credit-providing businesses will take losses, and restrict credit at a time of higher interest rates. Crypto and Bitcoin: These 'assets' or retail bets are down considerably over the past 2 weeks, when they broke below support levels around $30,000 and fell $10,000 or more. We saw prices as low as $18,300 this weekend. Currencies: The USD / Japanese Yen price is again climbing (Yen is weakening vs. US Dollar), now over 135.14. However, the EuroDollar is almost $1.06 which shows the Euro strengthening vs. US Dollar, likely because the European Central Bank will start raising interest rates as well. War:
OK, so what are you going to do on Tuesday?We truly don't know. We have restricted our cash in our trading account so any moves would be very small. We will likely just double down a bit more if prices move against us significantly. We will reevaluate this at 0700 ET tomorrow and discuss it in our livestream video at 0730 on youtube. GLTA It's Tuesday morning and things are still not clear.We know that US Equity Futures are green and up significantly (1.78% to 2.00% across the three indices we track). This is a big morning move, and should send equities rocketing higher. We just don't buy it this morning, unless there are some internal moves happening.
What would we be looking for:
There is no real news. Asian markets ex.China are up, China markets are down. Not sure if Asian equities strength is due to views of US economic demand for imports, money flows, or just a sunny, positive day with Japan leading the way with quantitative easing and 'cheap money.' CNN was absolutely boring. ZeroHedge largely irrelevant except for Lithuania enforcing the sanctions on Kaliningrad. I think this is great, BTW. European integrity and consistency in action. Russia is so angry they are turning more red than they already are. Link here. By Jeffrey Cohen, Investment Advisor Representative US Advanced Computing Infrastructure, Inc. Today is options expiration day. The markets should be volatile today as positions are closed out and options (and the underlying asset) prices are moved around to maximize trading profits. We also expect the market to digest many changes from yesterday's action: - Bank of Japan gave up the JGB yield cap of 0.25%, which boosted the YEN, which has now come back to its previous highs of 134.50 - US equities opened lower yesterday (gap down) and traded in a range, ending down ~4%. This is a significant drop. - US Federal Reserve raised interest rates by 0.75%, and short-term yields rose - High number of new lows in both Agency and Corporate fixed income, and US equities. New lows dominate the decliners (about 40% of all stocks or bonds that declined broke through new lows). On the opposite side, ~4% of advancers broke through new high levels. However, this morning US equity futures are up around 1%, and all looks calm. Foreign exchange markets look normal, crypto seems to be setting into its new, lower range. BTC/USD ~$21,000. This confuses us, we expected more action this morning. We spoke in support of rational stock market pricing today. We went back to the $CLF or Cleveland Cliffs discussion from twitter yesterday. The price of the stock is down ~50% recently, and we support the company's mission of domestic iron ore and steel production. The stock is down because the futures on their primary inputs are up, and the futures on their 'best, highest price' output is down. Also, we should expect higher energy and labor costs to tighten their margins further. This stock is dropping because public information suggests their profit margins may evaporate. We saw one key indicator this morning flash RED.  Short-term interest rates are rising. This has an immediate impact on our quantitative model, the Chicago Quantum Net Score. It lowers the expected return to risk assets, which lowers the benefit of risk, which then increases the benefit of reducing variance. If you hold risk for expected return and that return falls, then you should hold less risk. There is a lower risk-return trade-off. (there, we finally said it). So, our model picked more stocks to hold (spreading out investments) to get a smaller edge on the S&P 500 Index ($SPY is the ETF we use). As a reminder, the overall indices are much lower than they were a year ago. Year through: 2022-06-16
QQQ: 271.39 339.38 IWM: 163.90 227.43 SPY: 366.65 416.62 Riskfree rate = 1.50% Actual SPY return = -12.00% Use floor S&P500 rate = 5.00% Actual IWM return = -27.94% Use floor Russell 2000 rate = 5.00% Actual QQQ return = -20.03% Use floor NASDAQ 100 rate = 5.00% =========================================== Market return = 3.50% CQNS negative net income stocks variance: 0.0004616010737782597 Expected Return = 5.64% CQNS positive net income & positive cash flow from operations stocks variance: 0.0001598 Expected Return = 4.31% $SPY S&P 500 Index ETF variance: 0.00014970911 Expected Return = 4.5464% In other words, by picking money losing companies to invest in, your expected return for risk increases by 1.33% and you take on ~3x the price variance. That risk/return trade-off is getting less attractive in a negative return, increasing risk-free rate environment. The risk/reward trade-off by holding the $SPY is better than for any individual stock in our run. You still can find an edge by holding (10,16) stock portfolios, evenly weighted. That edge is 2.3x10-4, which is less than half the edge we were finding a week ago. This market is getting unpredictable. By: Jeffrey Cohen, Investment Advisor Representative US Advanced Computing Infrastructure, Inc. Updated intra-day 1421 ET We ran our models last night and made a few tweaks based on the Federal Reserve Bank raising interest rates. We thought it would not make a significant difference. We watched the futures last night and everything looked Green/UP. This morning, our analysis suggests something different and the US equity futures and UST bond and note futures are RED/down. What do we see? 1. We raised the 'risk-free' interest rate in our model last night to 1.5% from 1.0% and it made a big difference.  Thank you Bankrate.com. June 16, 2022 at 0716ET. These are Federally Insured savings accounts with a $1 minimum balance to earn. This is most US citizens' risk free rate of return.  Thank you MarketWatch.com US Treasury Bill, 1-month yield, for the past 5 days (a true risk-free yield). You may remember in school when people said 'rising interest rates make people sell stocks and put their money in the bank.' We do. I also remember people saying that inflation is the enemy of stocks, and interest rates are bad for stocks, and there is competition. We see it today. 2. Many new lows were hit in US Corporate bonds (fixed income) and US equities even though the indices were up yesterday. This makes sense if you remember the adage "do not catch a falling knife" or "bottom pickers get stinky fingers" or "hey you, get out of the way." Stocks that have been weak in this market continue to weaken further. It isn't the hedgies or big money guys or 'The Man' betting against your favorite stock. These companies are worth less every day due to something that is likely very real. Retail sales were negative on a REAL basis in May, and were flat for the entire year (May 2021 - May 2022). 35% of stocks and 80% of bonds that declined (the quantity of declines) were new lows.   3. There are many analysts that speak about trading strategies and big events. There are two that I remember from reading last night (after market close). Friday is OPEX or options expiration where I believe ~$3T in options (at nominal values) expire. Also, supposedly there are investment funds that will be buying stocks at month-end. 4. Our model gave very different results today. Watch the video to see if we share more of this new, cutting edge insight (or if it just goes to clients who pay for our runs). GLTA. Enjoy the video. Intra-day update (1421 ET)
A few key industry sectors:
Update at market closeThe markets continued to fall throughout the afternoon. Notice the slight uptick, decline, and uptick into the close during the last hour of trading. We will likely discuss how 2,886 stocks hit new lows out of the 7,259 that traded lower today, and how 66% of participants were bearish. The market opened lower, likely due to large bets already set in motion at the open. This was not retail driven and the day saw little strength. Tomorrow about $3T in nominal value options expire, then the cycle starts up again into July.  By: Jeffrey Cohen, Investment Advisor Representative US Advanced Computing Infrastructure, Inc. June 15, 2022 We noticed something. There were many new lows in a relatively flat day in the market. Fixed Income (Agency and Corporate) US Equities. We also speak about the Federal Reserve FOMC meeting ending today, and the upcoming press release. Hear us talk about it this morning. Lots of data shared. By Jeffrey Cohen, Investment Advisor Representative US Advanced Computing Infrastructure, Inc. Good morning. Yesterday was a really RED day in the US equities markets and US Corporate and US Treasury fixed income too. The markets are down hard over the past year. We could show charts and graphs to prove it, but you already know.
Year through: 2022-06-13 QQQ: 275.41 339.61 IWM: 170.20 229.25 SPY: 375.00 418.80 SPY Variance: 0.00014462534 Riskfree rate = 1.00% Actual SPY return = -10.46% Use floor S&P500 rate = 5.00% Actual IWM return = -25.76% Use floor Russell 2000 rate = 5.00% Actual QQQ return = -18.90% Use floor NASDAQ 100 rate = 5.00% =========================================== Market return = 4.00% Net-Net: Invest regardless of market levels. When stocks go down, it is a chance to add to positions. Trade based on the market. Don't fight the trend. Bulls make money, Bears make money, but Pigs get slaughtered. Trade carefully. Video coming up! Jeff |
AuthorJeffrey Cohen, President and Investment Advisor Representative Archives
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