March 27, 2023
Weekly Update
Despite ongoing banking fears, impressively the S&P 500 gained 1.26% last week, while the Dow rose by 1.48% and the Nasdaq added 1.14%. How this situation will play out this week is a complete toss-up, though I have to say I’ve been impressed by the resiliency of the bulls in the face of bad news … for now!
Stocks on Watch and What Traders are Saying
This week I am combining the “Stocks on Watch” and “What Traders are Saying” sections. This will make sense in the paragraphs to come ...
For those not familiar, the holy grail/must read for many stock traders is Reminiscences of a Stock Operator by Jesse Livermore. Livermore is considered the pioneer of day trading and at one point in the early 1900s Livermore had become so successful at playing the market he was thought to be one of the richest people in the world.
Here are just a few of the nuggets of wisdom from Livermore on the markets, which can be applied to the last several weeks of trading:
“Markets are never wrong – opinions often are.”
“Never buy a stock because it has had a big decline from its previous high.”
“Do not become completely bearish or bullish on the whole market because one stock/sector in it has plainly reversed its course from the general trend.”
So why do I bring up Livermore? Because that last quote somewhat explains why this current environment is so challenging … we are seeing countless leading stocks falling apart (banks), while others are breaking out (mega-cap tech/semiconductors), which is causing all types of confusion for traders.
And as @modestrproposal1 on Twitter sarcastically wrote this week:
“My favorite part of Reminiscences of a Stock Operator is when Livermore writes that if banks are crashing, he would just rotate into software and semis and wait it out.”
So the question becomes, do we continue to sell positions as there are clearly issues in the banking system, or do we ignore those worries and take the lead from stocks like AAPL/AMD/NVDA/MSFT all of which are within striking distance of recent highs?
To be honest, this is as confusing of a situation as I can remember. What I mean is I have countless candidates for new buys based on stock strength, but I could also see these banking/real estate worries leading to a test of the S&P 500 2022 lows, or worse. Or, perhaps the banks will lead this week and the mega-caps which have been working will then soften.
Finally, I have received many questions about the best way to play a banking sector turnaround. While I don’t feel there is any edge in buying that dip in the short term (“Never buy a stock because it has had a big decline from its previous high”), IF I wanted to take a longer-term shot, the trade below is certainly tempting:
Buy the Financial Select ETF (XLF) January 31 Call (exp. 2025) for $5.50.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week marginally lower at 22. I continue to be hopeful that the lack of a meaningful move higher in the “fear index” is a positive sign for the market, especially as the financials have melted down.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 5
Wednesday – 5
Thursday - 4
Friday – 5
Events for the Week to Come
Outside of the banking and real estate worries, there are plenty of other potential market-moving events this week including Treasury Secretary Yellen speaking publicly on Thursday, four Fed speakers throughout the week, as well as Consumer Confidence on Tuesday and PCE Inflation data on Friday. Buckle up!
And while there are plenty of landmines on the macro front, earnings season has mostly quieted down. Below are the most anticipated earnings releases of the week, led by Lululemon (LULU) and Micron (MU) on Tuesday and RH (RH) on Wednesday.
Open Positions
Long positions: BAC, DIS, FTI, JETS, IWM
Bearish Positions: SPY
Bank of America (BAC) April 36 Covered Call – BAC fell marginally last week, though it’s bid higher this morning in the pre-market. At some point I will roll to a new call sale, or perhaps just exit this position and move the capital into a fresher idea.
Disney (DIS) September 105/130 Bull Call Spread – DIS gained 1% last week and is mostly moving in-line with the overall market. Not much more to add.
TechnipFMC (FTI) April 14 Covered Call – At this point the April 14 calls that we sold for $1.02 are worth $0.20. We will continue to let this option decay.
Jets ETF (JETS) October 20 Call - The JETS ETF fell 1% last week. Much like our IWM calls, I am debating rolling our position to a call closer to the current stock price.
Russell 2000 (IWM) August 177 Call – On Wednesday of last week we rolled our position down to the 177 strike price to get better upside exposure.
S&P 500 ETF (SPY) September 400 Puts - For the time being we will continue to hold our lone bearish position that is doing a good job offsetting our remaining bullish positions.
