Current Outlook
1) Stock Market – Stocks declined for the week. We are likely mid-correction.
2) Bonds – Long-term bonds may have printed a bottom that will last for a while. We may be in the early stages of a new daily cycle.
3) Currency – The dollar is likely near a daily cycle low. A rising dollar will pressure gold.
4) Gold – Gold is likely nearing a cycle top at the same time that the dollar is near a cycle low. We expect a reversal in both assets soon.
5) Oil – Oil is declining into a daily cycle low that might now be complete.
6) We are currently holding a cash reserve of 30%.
Stocks, Trades, and Market Analysis
Everybody wants in on a good thing. So it’s no surprise that when Bitcoin was pushing $65,000 per coin people were borrowing money to buy more. A sad fact of life is that retail investors (you and I) tend to buy the most at market tops, and the least at market bottoms.
Since then, Bitcoin has shed nearly 40% of its value. While those with massive long-term gains might be able to shrug off the current market action as a mere pullback, those that bought at the top with borrowed money are not so lucky.
On Wednesday morning, bitcoin was down about 20% over the previous day. Now, you might wince at such a massive fall. After all, the price collapse brought prices down to where they were all the way back in... check chart… well, just a couple of months ago. If you bought your Bitcoin a year ago you will still be sitting on a triple, and if you have been holding for five years, then congratulations, you are sitting on gains over 6000%.
A raft of lending platforms helped trigger the meltdown. More recently, these lending platforms have been allowing investors to pledge their bitcoins for a high fee, but also use them as collateral to invest borrowed funds in other crypto assets.
Borrowing to buy more tends to happen the most at a market top. It takes a little while to undo the excesses of the previous bull run. The previous buyers are forced to become sellers as they unwind their leveraged bets that worked so well when the market was rising.
Wednesday's selloff came on high volume. Crypto exchanges processed about 265 million spot transactions on Wednesday, up from a daily average of 160 million. We suspect the unwinding of leveraged bets isn't quite over yet. When something falls that far, that fast, we usually expect it to take a bit before it is able to recover. Rather than attempt to catch a falling knife, it is usually better to wait for a bottom of some sort to form so you have something to trade off of.
For those of you who bought to hold, with an appropriate size of your overall trading portfolio, this week's price action is little more than market noise.
STOCKS
When things went sideways with COVID, corporation’s responded by hoarding cash. Many suspended or cut their dividends, warning of the need to preserve liquidity. But the Fed stepped in and solved the liquidity issue, and corporations are wasting no time in rewarding investors again.
The Wall Street Journal reports that already this year, US companies have authorized $504 billion of share repurchases. Looking at data going back 22 years, this year is the most generous, even trouncing the 2018 windfall when companies responded to the sweeping tax overhaul of late 2017 not by reinvesting in the company and its workers, but in those who owned their company's stock.
Corporations also ramped up their dividend spending in the first quarter. They increased their payments by $20.3 billion on an annualized basis. That is the largest increase in a single quarter in the past decade.
Yet, despite these generous payouts, the majority of stocks have gone nowhere for the past few months. A look at the Russell 2000 shows the difference between a trading environment where gains are relatively easy to come by, and an environment where the majority of stocks don't trend, making them difficult to profit from.
We've covered this topic for the past few weeks, but it is worth reviewing. When the index of 2000 stocks is going sideways, it suggests that the majority of the time, any trade we enter isn't going to perform. This is simple statistics. We can only enter from the pool of available stocks, and if they are going sideways, so will our portfolio. The thing is, we never know in real time when a rally is the beginning of the next trending cycle, or just a blip in a sideways market. Since we can't know in real time, we are forced to enter trade setups as they present themselves. We do this knowing in advance that some will go on to print nice gains for us, but many will turn into small losses.
There isn't anything glamorous about this type of trading, but by diligently avoiding large losses, and sticking with asymmetrical reward-to-risk setups, we survive the tough times so we can prosper during the times when the market is cooperating.
MMP Bought 15% $47.85, Stop $46.29, Target $54.44
Magellan Midstream Partners, L.P. engages in the transportation, storage, and distribution of refined petroleum products and crude oil in the United States. It operates refined products pipelines that transport gasoline, diesel fuel, aviation fuel, kerosene, and heating oil to markets. The company also provides pipeline capacity and tank storage services to shippers.
MMP declined slightly for the week, but remains within its normal trading range. We don't see anything in particular of concern with MMP other than the risk of a larger correction in oil. We continue to be bullish on the sector as a whole.
MDLZ Bought 15% $61.19, Stop $59.79, Target $67.00
Mondelez International, Inc. manufactures, markets, and sells snack food and beverage products worldwide. It offers biscuits, including cookies, crackers, and salted snacks; chocolates; and gums and candies, as well as various cheese and grocery, and powdered beverage products.
MDLZ is a classic break out play. It made steady upward progress this past week. As of now, we see no reason why it shouldn't be able to achieve our price target for it. This one is hold as we let it do its work for us.
Move stop up to $59.79 which is just a bit below both the breakout level and the quickly rising 50-DMA.
TKR. Bought 10% $88.42, Stop $82.20, Target $99.89
The Timken Company designs, manufactures, and manages engineered bearings and power transmission products and services worldwide. It operates in two segments, Mobile Industries and Process Industries.
TKR is an ascending wedge and another classic breakout play. Last week, we warned that it is common for the price to fall back and test the breakout, and that appears to be what we are dealing with right now. The stock is above the January high, above the rising 50-DMA, and above the uptrend, all of which should help act as support on any pullback.
MMM. Bought 15% $200.88, Stop $194.95, Target $218.10
3M Company develops, manufactures, and markets various products worldwide. It operates through four business segments: Safety and Industrial, Transportation and Electronics, Health Care, and Consumer.
MMM continues to spend time in the former gap range. It is establishing a higher price level and slowly but surely working its way towards our target.
MSFT. Bought 15% $247.46, Stop $237.90, Target $269.95
We all know what Microsoft is, but I'll give it a short introduction anyway. Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide.
MSFT is a classic KISS-50 play. Occasionally, MSFT will pull back even deeper to its 200-DMA, but if the current pullback is similar to the last couple, we would expect the bottom is likely in. MSFT almost hit our stop on Wednesday, but has since recovered in spite of a weak tech sector and looks poised to resume its rally.
STOCKS TO WATCH
[When we have charts that we are interested in and are close to triggering solid setups we will add those here. This DOES NOT mean that we will always make every one of these trades. Any trade decision has to do with multiple factors, and it is always possible that a trade setup will look good individually, but will not work well based on the current portfolio or other market conditions at the time.]
Livent Corporation manufactures and sells performance lithium compounds primarily used in lithium-based batteries, specialty polymers, and chemical synthesis applications in North America, Latin America, Europe, the Middle East, Africa, and the Asia Pacific.
LTHM appears to be in the second phase of a giant cup pattern. It printed a fresh buy signal, and looks poised to work its way higher. The reward-to-risk ratio is skewed towards reward if a bit below the 50-DMA is used as a stop, and the previous high is used as the target.
GOLD
Again, gold had a solid week. It managed to close above its downtrend line and its 200-DMA, both of which are bullish developments. On the bearish side of the ledger, though, is cycle timing. Specifically, we are entering a timing band where a decline into a cycle low should occur very soon.
Gold is likely nearing its cycle top at the same time as the dollar is declining into a clear cycle low. We suspect over the next couple of weeks, there will be a reversal higher for the dollar and lower for gold.
Cryptocurrency
Bitcoin is hovering around $35,000, 40% off the highs of two weeks earlier. The low on Wednesday's wash out was $30,000. It's very common for a significant low like this to be tested a second time before a durable rally can occur. Any new buyers should be prepared for a drop to $29,000, and buyers in waiting should watch closely for that to happen, followed by a reversal back above those current lows.
INTERESTING READS THIS WEEK
Wanderer Life
I hate to talk about a credit card, but as a world wanderer, sometimes it is nice to have a little extra help in your pocket. I have the Chase Reserve card which I signed up for a few years ago when they were offering 100k free points, equating to $1,500 in travel. Since then, they've dropped that to 60k as well as raised the yearly fee, but I still find them worth it.
A few weeks ago we had a rental car that got a tiny ding in it while we were grocery shopping. Clearly a ding from a cart. The company hit us with a $630 bill. Since we had paid using our Chase card we decided to turn in a claim to them, despite this particular type of damage not being listed as part of their rental car insurance benefit. A few days later they told us they'd taken care of it for us.
A year earlier I'd bought new batteries for the boat right before COVID hit. A week later I saw they were 20% off back in the States (I was in Puerto Rico). The store in PR had closed for the pandemic so I asked Chase if they could adjust it. Sure enough, a few days later a $700 credit appeared.
Anyway, while not an exciting travel post, I thought it was worth mentioning. If you've never taken a look at your credit card's benefits, do so. Ours has refunds for TSA pre-check application fees, free subscriptions to Lyft's preferred membership, free Door Dash deliveries, and the list goes on. Best of all, they seem to have no problem solving expensive problems for me. Which is a good thing when you're as rough on rental cars as I am.
The Week Ahead
| DATE | TIME (EST) | EVENT |
|---|---|---|
| Tuesday | 10:00 AM | CB Consumer Confidence |
| Tuesday | 10:00 AM | New Home Sales (Apr) |
| Thursday | 8:30 AM | Core Durable Goods Orders |
| Thursday | 8:30 AM | GDP (QoQ) (Q1) |
| Thursday | 10:00 AM | Pending Home Sales (MoM) |