Dave Portnoy is playing the media like a fiddle

For those of you who don’t know, Dave Portnoy is the CEO of Barstool Sports, and has taken on the persona of Davey Day Trader since sports were cancelled in March due to coronavirus.

Dave’s an avid sports fan and sports gambler, and trading stocks have given him and many others an outlet as the sports world is put on hold.

Now that Dave has gone on a winning streak, he’s called out the likes of those in the FinTwit community, including calling Ross Gerber a “SIMP” and Warren Buffett “washed up” and an “idiot”.

At first, financial media thought what Dave was doing was pretty cute. Fast Money would have him on their program and their panel of experts would give Dave advice on stocks.

But now they’re fed up with him. Interviewers appear to be defensive. Portnoy continues to remain brash as long as he continues to make money in the market.

What the media doesn’t realize is that they are being PLAYED by Portnoy for millions of dollars in free publicity.

And you know the sad thing?

This is the same playbook that Trump used to get free publicity through his 2016 campaign. The media believed there was no chance Trump could beat Hillary, so they built up Trump as the candidate so they could rag on him every time he said something stupid. Then he won the election and it wasn’t quite so funny.

This was the same playbook used by Lavar Ball to get free publicity when his son Lonzo Ball was at UCLA and getting drafted by the Lakers. Lavar was building up his own brand, Big Baller Brands, and leveraged media attention to try to monetize this idea.

He used his son’s hard work and accomplishments to push his own thing. It only ended once Lonzo Ball rolled his ankles multiple time in Ball Baller Brand shoes causing him to switch over to Nike, and suing a former brand partner.

The media gets played so hard. They fall for these electric, brash, loud personalities who say whatever is on their mind. Then they get defensive and attack when those loud people don’t do what they want them to do.

That’s what’s happening with Portnoy. As he continues to brag about his stock market gains, financial media and those in the financial space grow more and more resentful of the man.

Thing is, Dave doesn’t care about making money in the market. Once the world goes back to normal, and sports come back into our lives, Dave will go right on back to running Barstool sports. Except now the Barstool sports brand has been exposed to tens of millions of people who may not have otherwise heard of them.

So, financial media, you are being played. You fed the beast, the beast has become bigger. Now you are upset that Portnoy is making a joke out of the financial industry.

To the mainstream media in general: you get played so hard repeatedly, and you don’t even realize what is going on. While your attention is on Dave’s trades, he’s busying enjoying all this free publicity at the benefit his brand.

Don’t like it? Stop giving him attention. That’s it.

The return of selling in the stock market

I believe we are about to see heavy selling in the market once again.

We have seen the return of some selling, with the S&P 500 down 4.7% this week as of my writing on May 14th.

Why do I believe this?

Coming into this week, I expected a calm week with usual options expiration (OPEX) week behavior. From my observations, market makers can usually move markets and control price action more strongly some weeks than other.

Market makers can influence markets especially in times when volume is low and volatility is low. This week, the market has seen more selling than usual during OPEX week from my experience.

Not only that, but we haven’t seen the drastic moves in the S&P futures contracts overnight. Last week, it felt like every day we were seeing moves higher after a day of selling off during regular trading hours. See tweet below:

on moves 5-14-20

The last time I remember feeling like this during an OPEX week was for the trading week ended February 21, 2020 and we all remember what followed over the next month.

What are gamma levels saying?

On May 11, 2020 I noted that $2.2 bn in positive gamma was coming off books this opex Friday.

tweet 5-14-20

Now these options could have been rolled out or closed altogether. We never really know. But I expected much of this gamma exposure to be moved in a manner that would bring us closer to zero gamma.

With all the selling this week, gamma levels have now turned negative across the board according to spotgamma. This is not good if you are bullish equities right now.

spotgamme 5-14-20

While component gamma is still positive, per Squeezemetrics, and DIX signals that Dark Pools continue their buying binge, I can’t ignore headwinds that we are going to face in the next week or two.

squeeze 5-14-20

What headwinds are we faced with?

Will we see a second wave of infections?

What businesses are going to go out of business for good?

How many of the now 36 million lost jobs will actually be recovered?

What will be the recovery time of those lost jobs?

What kind of demand shocks are we in store for over the next year or two?

How far is the Fed willing to go with their monetary policies?

Will the Fed buy equities?

With all of these questions unanswered, it’s very difficult to be bullish right now.

The World has Gone Mad – Ray Dalio Article Summary

Two months ago Ray Dalio wrote an article on how the world has gone mad with regards to monetary policy. Here is my short summary of Mr. Dalio’s article:

We are currently “pushing on a string”, a phase which Ray says we have never seen during our lifetimes. This is the situation where investors are flush with cash, and would rather invest it, not spend it.

The prices of financial assets have gone up as interest rates have plummeted. Low expected returns aren’t just driving up the prices bonds, but also equities, private equity, venture capital, etc.

Startups don’t have clear paths to profits, so they rely on selling dreams (Adam Neumann WeWork is a prime example) to get people to invest in their ideas. Investment managers are sitting on large hordes of cash and are looking for any place to park their funds, hence the overblown valuations of companies.

Government deficits are large and continue to grow. As a result, governments must sell more debt that nobody is interested in buying because the interest rates on these debts are so low. Central banks end up buying this debt by printing new money. (But don’t say they are monetizing the debt).

Down the road, as pension and healthcare liability payments come due, those obligated to make these payments will be unable to do so. How does this happen? Those institutions have expected returns of 7%, much greater than expected returns in the market in the coming years.

As these institutions are unable to make payments, unfunded liabilities will balloon as a result of suppressed growth. Teachers and governmental employees are those most exposed to this risk.

In sum, money is basically free (because of low to negative interest rates) for those who have money and creditworthiness. Money is unavailable for those without money or creditworthiness.

This contributes further to the wealth gaps we see today. Technological innovations are creating a way for companies to cut jobs further as well. The effects of low interest rate monetary policies are no longer “trickling down” to workers as a result. Thus explains how to we got where we are today.

It’s not if, but rather when will a market pullback happen

We’ve had an extremely long run up in the market over the past month and a half.

The S&P 500 is up 8.8% since October 8. The market has barely had much of a pullback since this rally started. It feels like the market won’t pullback at any point soon. But it will happen.

There are a lot of questions to think about though when it comes to timing a pullback in prices:

How much long will markets run higher before the market pulls back?
What will the depth of the pullback be when it does happen?
What is the likely magnitude of the pullback?

These are all impossible to know, but are at least worth considering.

My prediction is that we experience a pullback sometime after December 20, 2019. Why that date? It’s the infamous quad witching date. What’s that?

What Is Quadruple Witching?

Quadruple witching refers to a date on which stock index futures, stock index options, stock options, and single stock futures expire simultaneously. While stock options contracts and index options expire on the third Friday of every month, all four asset classes expire simultaneously on the third Friday of March, June, September, and December.

Source

There is large gamma exposure coming off the books on this date. To the order of $2.7 billion. Source

There are the potential risks that could be a tipping point as well. If any catalysts materialize, a pullback is likely.

Possible risks include:

No trade deal with China, or worse, a more tense U.S.-China relationship.
Issues in the short-term funding market where the Fed can no longer control short-term interest rates
Bad guidance on future earnings
Declining GDP becoming more known

I believe a pullback could see much of gains up to this point being wiped out. $2900 isn’t out of the question of being tested at some point in mid-December to mid-January. That’d be down 7.7% from where we are currently at.

A deeper decline is possible, but would need to be closer before any thoughts about it happening.

I think a pullback could be very quick, 3-4 days like August and May pullbacks. Some even say it could be like February 2018 pullback, but I’m not so sure that the magnitude would reach that level.

With that being said, my predictions are usually wrong. Follow Murphy’s Law: Whatever can go wrong will go wrong. So make sure you hedge your bets and spread them out intelligently over some specified time frame.

Just because you see risks…doesn’t mean the market will price it in (yet)

I used to believe that risks to the market get priced into the market.

This is based off the efficient markets hypothesis. Once information is known it immediately gets priced into the market.

However, risks don’t always get priced in (right away) for one reason or another. Perhaps those risks are further off the horizon than believed. Perhaps those risks are going to dissipate soon. Perhaps those risks are not as significant as I believed they were.

Whatever the case may be, the market doesn’t always price in risks to the market right away.

Lesson learned

In October, I saw numerous risks to the market and strongly believed we would move down another leg lower in the S&P 500. I placed my bets accordingly, and it did not work out at all.

What risks did I see? A hiccup in the overnight repo market, beginning in mid-September. Hong Kong protests taking place every weekend, and U.S. Government officials denouncing China and supporting Hong Kong protestors. No signs of a real trade deal of significance. Slowing economic growth across the globe. A collaterialized loan market that’s looking more and more frothy.

I saw all of the risks, and here we are with the S&P 500 up 8.8% since October 8th, when the Fed made it known they would begin expanding their balance sheet with the purchase of Treasury Bills.

Markets are not efficient

Information can be priced in right away. Information can be ignored for days, weeks, months, or even years.

Risks can be priced in one week, and completely ignored the next week.

Markets are manipulated. No doubt about it.

But blaming my poor performance this month on market manipulation is irresponsible and definitely not a recipe for success.

I must learn how to trade around uncertainty and market manipulation caused by institutions and central banks across the world.

Trade the market you have, not the market you want.

Did the Federal Reserve Kill the Volatility Trade?

On October 11, 2019, the Federal Reserve announced they would begin buying Treasury Bills in an effort to ensure there are “ample reserves” in the banking system through the end of the year.

fed treasury oct 11

On October 11, 2019, the Volatility Index (VIX) sat at 17.4. Today on November 26, 2019 the VIX has recently closed at 11.5. As you can see from below, it appears as though this not-QE program that is “organically” growing the Federal Reserve’s balance sheet has effectively killed the long VIX trade.

fed vix chart

The case made that supports this idea is that investors are engaging in more risk on behavior, because they are basing their decisions based on the Federal Reserve’s prior balance sheet expansion programs (QE 1-3).

Because the Fed is purchasing T-bills, they have eased some of the money market pressures. Liquidity in the market has proven to be a positive catalyst to the market.

Why do I believe this?

It can’t be the trade deal.

That’s the only other source that has been moving the markets higher according to many daily stock market new reporters. And I don’t believe these markets are pushing higher on hopes of a trade deal.

I think the Fed’s easy money policies have once again eased tensions. For now.

A lesson to me

This whole scenario has taught me a valuable lesson about position sizing. I’ve learned to not be so overconfident in my predictions.

Every trade made is a small bet. Each bet will abide by the Kelly criterion.

Never go all in.

Grow your money slowly and strategically.

Live to trade another day.

Read

Barton_options on Twitter has been a great resource for me to learn more about the Federal Reserve operations and how it relates to the Treasury and the overall economy.

He recently wrote about this in a newsletter you can read here.

This is what’s going to happen in the market this week

In this article, I’m going to review my past predictions and make some new ones.

On August 3rd, I wrote a post laying out what I thought would happen. Shall we take a look?

As I mentioned earlier, I expect IWM to pullback 5-7% since it broke the $153.50 support level earlier today.

IWM finished this week down 1.28%. I didn’t put a date on the 5-7% pullback, but this is something I expect to play out within the next two weeks.

This would give you a range of $144.95 all the way down to $141.90 coming into play.

At a minimum, I do believe that $145 will be retested. This is the level that IWM dropped to in May following the added tariff announcements. See IWM chart below:

iwm81019

SPY is a little trickier for me. It tends to whipsaw in price when volatility picks up, possibly due to algorithmic and HF trading. I think we see SPY revisit $285 range before the end of next week (Aug 9 expiry), but it’ll be a rocky ride.

SPY surprised me this week with the massive selloff that took place on Monday. I thought it would be a rockier ride to get down to $285, but we actually touched as low as $281.72 on Monday!

I was correct about the whipsaw though! Tuesday and Wednesday started off as days that looked like they were ripe for shorting, but the market ripped back almost 2% higher come Thursday, and 4% higher off Wednesday’s lows.

I believe that this upcoming week (August 12-19) will see SPY dropping as low as $279, retesting those levels reached around May 13 this year, in the midst of the May selloff that took place.

I’m also watching the $272 price level to get rested in the next two weeks. See SPY chart below:

I think VIX will also whipsaw next week, seeing a range with a low 14.7 and all the way up to 23.5. That’s just my guess.

This week, VIX saw a high of 24.8 and a low of 16.8. Not too bad of a prediction!

Next week I’m looking for a high of 26 on VIX and a low of 17. Keep in mind, when VIX is this high and with the current news, a much higher VIX is always possible.

I mentioned on my Twitter that I picked up some VXX call options and XLF put options to set up for whatever could happen next week.

These are a small part of my portfolio. I have positions both long and short in tickers or tickers derived from the ones mentioned above.

Reviewing VIX from August 9, 2019

SPY was down 0.69% to $291.60 on Friday, and VIX was up 6.27% to 18.

VIX bounced off the 17 support level that I outlined in this post here. Here’s what I said Thursday even, after market close:

VIX hit the support level around 17 that I had set out in my post yesterday as a level to watch for. I think this line will continue to act as support and VIX will bounce going into close tomorrow.

The VIX level of 17 was actually laid out by me on Thursday, which can be evidenced with my TradingView chart I posted that day.

(I’m not saying this to brag. I believe it’s important for me to document every prediction and recognize why I was right or wrong. It’s the only way I’m going to develop a better intuition about market behavior.)

As you can see above, VIX did bounce above the 17 support level I laid out after dipping just below it on Thursday. VIX bounced off the support level going into the closing minutes of Friday, setting up a situation where VIX could spike again this coming Monday.

Stocks have recovered too quickly

SPY was up almost 2% today, erasing all of this weeks losses generated on Monday. Not only did SPY close the gap, but at this point we are up 36 basis points from last Friday’s close.

After a decline of nearly 7% off of its high, SPY has gained 4.2%.

We have exceeded a 50% Fibonacci retracement, and are very close to a 61.8% retracement from the all-time highs set in late-July.

Overbought conditions were reached on the RSI indicator, using 30 minute candlesticks as seen below. Peak overbought conditions were seen today around 12:30 pm.

SPY was moving sideways for a few hours later in the day, but broke higher in the final hour of the day.

In the last two days alone, from it’s bottom at the open yesterday, SPY has gained over 4%.

In my opinion, Monday was sold off too quickly and this recovery this week has also happened too quickly.

VIX hit the support level around 17 that I had set out in my post yesterday as a level to watch for. I think this line will continue to act as support and VIX will bounce going into close tomorrow.

VIX didn’t really sell off much on the 6th which surprised me. Some say that big money was picking up volatility options at this time.

If so, VIX getting sold off would make sense to me if options traders were taking profits on their trades Monday and Tuesday. The reason I think it makes sense is because when those market makers buy the puts, they are also going to have to buy the underlying stock to remain delta neutral.

I think you see adjustments from market makers impacting the markets. I also believe that today was more of a short squeeze combined with unwinding of VIX call option/SPY put option positions which jerked the market around in these past couple of days.

As those positions are done unwinding, which I think will happen in the next day or two, I think it’s likely that the market will continue to selloff and VIX will spike once again.

The risk hasn’t changed in three days

We’re still in a trade war with China.

Tariffs are still slapped on China.

China still isn’t buying US agriculture.

The yield curve is still very much inverted.

Central banks are turning to easy money policies.

Risk isn’t off right now. Have a small position in volatility and protect yourself against the turmoil.

SPY and VIX – August 7, 2019

CHART TIME

I’m watching the $2900 support level on SPY in the coming days. We saw a strong rebound off the lows set on Monday. A move above $2900 would be bullish.

I expect SPY to bounce off $2900 as it will become resistance on the next leg down. What do you think?

spy8719chart

VIX showed a lower high on the current trading day. This is usually indicative of a reversal in the price action. I’m watching the 17 support level for VIX. If we break below that level, the next support level isn’t until 14.

I’m not sure if I’m overly influenced by the news lately, but I think there is still the possibility of VIX popping higher, 50% or more from it’s current levels to it’s highs. This would bring VIX up almost to 30.

I believe that the markets are vulnerable right now, and you should be careful trading out there!

vix8719chart