Three Strikes and You’re Out? Not Quite

• Market down for three straight days… but not out
• Expect volatility to increase the next 3 weeks
• Bank of America trade filled!

Make that three “red days” in a row for the market.

But is it a case of “three strikes” and you’re out?

No. Not even close. 

And whilst it’s been more than a month since the major averages have dropped for three straight days – I would pay more attention if we see three (large) bearish weeks in a row.

Day to day markets are all over the place. 

And my advice here is don’t get too caught up in the “noise” (and why I only choose to look at weekly charts)

Today – they are reacting to tweets (when Twitter’s platform is actually up?)

As an aside (and not the focus of this missive) – Twitter was in some hot water today by blocking and removing a political post from the NY Post (the fourth most popular masthead in the US) — related to Hunter Biden’s business dealings controversy. 

Platform or publisher?

I don’t know… you tell me. 

Jobs Picture Remains Uncertain

Perhaps the most important data point to hit the tape today was what we see with first time weekly unemployment claims… 

Now over the past six months or so – the “good news” is approx 10-11M jobs of the 40M+ lost have been recovered. 

I use quotes as it’s only ~25% of the jobs lost (i.e. there a lot more work to do)

However, today we learned that first-time filings for jobless claims last week hit 898,000. That was the highest level since Aug. 22 and illustrates just how hard things remain in the labor market. 

Here’s the weekly first time claims report to watch (from CNBC)

My (optimistic) view – let’s start celebrating when we see these first time claims drop below 200K

This is what we saw in early March. 

But nearly 1M first time unemployment claims week after week (since this crisis began) has not quit. And over the past 12 weeks – there has been no meaningful improvement (not from my lens) 

Do the math and these total more than 50M claims.  

And then when we look across ‘the pond’ – COVID-19 cases appear to be on the rise in Europe. 

For example, some governments in Europe have reinstated pandemic restrictions to curb a second wave. France has declared a public health state of emergency and the U.K. is nearing a second national lock-down.

All of this clouds the outlook for the global recovery. 

Congress Divided -> GDP to Plunge

Adding to the market’s near-term uncertainty – is we have what we see with Congress on any fiscal aid.  

Treasury Secretary Steven Mnuchin told CNBC’s “Squawk Box” that “politics” may be getting in the way of an agreement being struck.

As readers will know – I think that’s exactly what it is. 

As an aside, Democrat Presidential candidate Andrew Yang tweeted this during the week: 

Just quietly – I was very impressed watching Yang in the Democrat debates.

Someone to watch in the years ahead for President!

Tens of millions are hurting (based on the weekly initial claims)… and they could be hurting all the way through Q1 2021 (maybe longer)

But from a market perspective – this will hamper the recovery and earnings. 

For example, we could see current estimates for Q4 and Q1 2021 GDP cut in half as a result (e.g., current estimates of 6% Q4 dropping to 3%)

What’s more – GDP could quite easily turn negative (i.e. a double dip recession). 

Volatility Likely to Pickup

When I think about what we see with Congress… the increased uncertainty with re-opening the global economy… investors should expect volatility to pick up. 

In fact, I talked to this a few weeks where I saw the VIX futures rising to the mid-30s for October (from around 27 today)

For example, take a look below at the weekly chart for the S&P 500 with the VIX shaded in grey

S&P 500 – Oct 15 2020

What’s interesting here is the VIX has barely moved lower despite the rally back to the highs. 

And so far this week – it’s been rising once more. 

Put simply – this is the market bracing for more volatility. 

And what’s more – I don’t expect the VIX to fall meaningfully between now and November 3rd (and potentially for weeks after in the event of the election result is not clear cut) 

BAC Trade Filled!

Before I close – yesterday I said I was looking to sell BAC Dec 18th $20 Strike Puts for 32c. 

This represented an annualized yield of ~9%. 

Good news is these options traded as high as 33c today – as the stock sold off further in the morning trade. 

So we will see how we go. 

Remember: my ideal outcome here to take delivery of BAC stock at $20 (which I think represents good long-term value for the stock).

And if I am unable to buy it for $20 between now and Dec 18th – then I stand to make 9% annualized on my risk capital. 

Trading this market isn’t simple. 

For example, on one hand we’re trying to read the economic tea-leaves (with things like jobs etc); and on the other – trying to figure out what Congress is likely to do (or not do as the case may be). 

And of course – we have the small issue of a US election. 

One side is obviously business market friendly (lower taxes and few regulation) and the other less so. 

So what does that do to stocks? Potentially a lot pending the outcome. 

Difficult! 

Put together – I’m not willing to buy stocks “with both hands” here; and equally nor would I dare short the market given what we see with zero rates and the backing of the Fed (not to mention the weekly bullish trend)

Therefore, my position has been cautiously bullish (and patient).

And my approach has been selling out-of-the-money puts (typically 40 to 60 days to expiry) – on quality stocks – at a price I am comfortable with – aiming for annualized yields between 10% and 15% (if I can get it)

For the past few months this (income generation) strategy has worked very well. 

But ultimately I want to buy stocks at the right price. Today – for me it’s difficult to find something which represents a compelling risk/reward. 

However that time will come.

It always does.

Regards
Adrian Tout