financial news – Enlightenment Investing

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.

Today’s stock market is turning out the way I expected

As of 2:20 pm, at the time of this writing, the SPY is up 1.2% and IWM is up 0.5%, with VIX down 16.7%.

Yesterday I made a post about how I expected a rally off of the sell off that took place in the market.

The rally has been quite strong today, and I think it could continue into tomorrow as well.

Why did I think the market would rally?

SPY and IWM were heavily sold off yesterday. If you use RSI, you can see that it was entering heavily oversold territory on the intraday charts.

Markets tend to rebound off of big moves, and yesterday was a large gap down and a slow bleed off throughout the rest of the day.

Today’s rally was a relief rally, or an opportunity for investors to take a breather and see where we go from here.

Was this the dip to buy?

I don’t think so. I think the market will continue to move lower over the next few weeks, with whipsaw days occurring during that time period.

If you’re a day trader or a swing trader, you could find some opportunities in long positions, as long as you keep your stop loss exits pretty strict. If you’re looking for good long-term investments, this isn’t the dip to buy quite yet.

Didn’t you say volatility would explode yesterday?

I thought it was possible, given the news about the US accusing China of currency manipulation, coupled with the futures selling off 1.5% in the opening minutes yesterday evening. However, the futures markets quickly rebounded off those lows, and a test of these locals didn’t seem likely today.

I do still believe there is the potential for volatility to explode given the political backdrop. Tariffs, trade negotiations, Yuan devaluation, dumping of treasuries by China, and their ripple effects all pose a risk for this market right now. VIX could explode. If you play a volatility play, keep it very small (NNT’s barbell approach).

Why should you expect market volatility to rise in the coming days?

Whenever the Federal Reserve holds a meeting, markets are on edge.

So many investment models must take into account risk-free discount rates, those rates based off Federal Reserve policies. As a result, pricing adjustments always take place around important Federal Reserve meetings.

Investors adjust those models based off what they believe discount rates will be in the future. This month, many investors have priced in a rate cut.

Speculation

If the Federal Reserve doesn’t cut rates I think the market will be disappointed and will sell off.

If the Federal Reserve does cut rates, I think the market will be optimistic (more than they already are), stocks will get a boost, and treasuries and gold will surge.

I don’t believe volatility will stay low this week. VIX is sitting at 13.2 as of now just before market open on July 23rd 2019.

In July, VIX bottomed out around 12.4. It’s bounced off this support line a couple of times this month. It’s surged over 14.5 on a couple of occasions. I think following the Federal Reserve meeting VIX will climb up to 15 or possibly over 17 by the end of the week.

That’s what I think. How about you?

When I stopped trying to be right, I became a better trader

I began my journey trading stock options in September of 2018. When I entered the trading arena, market volatility was picking up. This was the environment I traded and adapted to over the three months from October to December of last year, 2018.

During this time period I learned to trade options in an extremely volatile environment. I was able to successfully gain over ten thousand dollars on my small account in December by being short on the market.

I primarily bought put options on bank stocks and other stocks that were experiences drastic declines at the time. My portfolio saw outsized gains which I had experienced up until that point. Enjoying the outsized (mostly unrealized) profits that I reaped up to Christmas Eve, I continued to buy put options on the market.

This turned out to be disastrous.

The subsequent decline

All through January until April, I had the thought that the market shouldn’t be going higher. I absolutely knew what was going to happen next. Or so I thought…

At the time, I was following Fintech Twitter. I wanted to know what was “happening” in the market, and took to Twitter to see what people were saying.

90% of the people on there seem to be bearish during the first quarter of this year. This influenced my investing and my perspective of the market.

The illusion of being a good trader

It took a while, but at some point I realized that being right, or the illusion of being right, doesn’t put money in the bank account.

I called it!

On Twitter it’s easy for people to create the illusion that they called many good trades. It’s easy to do. All you have to do is post a bunch of charts calling bullish or bearish, put them on Twitter, let the market play out, and then delete your tweets that were wrong. Then you can easily pin your tweets where you “called” the market top or Market bottom.

I got caught up in the Twitter atmosphere and my trading suffered. Being right doesn’t matter.

Hedging instead of guessing

In recent weeks I’ve developed better hedges on my trades.

I like to build up large put options positions at times when I believe the market could go down over the next few months.

In the first quarter of this year, I built up put option positions, and lost a significant amount of the value that I put into those positions. It’s only after reflecting and experiencing the pain of those few months then I realize how important it is to hedge my trades.

I was concerned with effectively predicting what was going to happen in the market. I wanted to be right, and I would only enter trades on one side of the mark get out of time. This was stupid. I lost out on a ton of games I could have gotten all throughout January and February and even into March and April.

Current endeavors

I’m currently building up put option positions on SPY and IWM. I’m hedging the position by buying shorter-dated call options, debit spreads actually, and then collecting profits when the underlying stock price land somewhere in between the two strike prices of my debit spread. This has been a much more effective strategy and has kept my portfolio more even overtime while I continue to build up a larger put option positions.

Ideally, call options on the S&P 500 and the Russell 2000 Index will continue to gain value in excess of the value that I lose on those longer-dated put options while the market continue to rip higher. Then, when the market does turn, I’ll have built up a decent size put option position to benefit from larger price declines.

Conclusion

I believed I had to try to predict the market and be correct. Instead I have to be flexible, I have to adapt, and I have to head to effectively on my positions.

No China trade deal soon, as expected

trumpxi

As expected a meeting between the United States and China to resolve the trade war won’t be taking in March or April. Instead, the South China Morning Post reported on Friday that a trump-Xi meeting may be pushed back to June.

As I said last week in a blog post, and as I’ve been saying the past few weeks on Twitter, I didn’t believe that we would get a China trade deal. If you read into comments made by representatives by those on the side of the United States and those on the side of the Chinese, it didn’t sound like we were close to resolving some of the key sticking points to getting a deal done.

Listen to the negotiators, not media pundits

In my opinion, if you want an honest assessment of where a trade deal is at, you have to look at what both sides are saying. Don’t listen to media pundits (this means don’t listen to me either). Listen to what the actual negotiators on both sides of the table are saying.

On Thursday a news story broke that’s an official state visit by President Xi Jinping would only happen in the event there is a trade deal with the United States already in place. This fits into with what I mentioned earlier about President Xi maintaining the appearance of strength for China.

I think that the Chinese officials are nervous about what would potentially happen in a meeting between Trump and Xi, especially considering the events that unfolded during Donald Trump’s meeting with Kim Jong-Un in Vietnam.

The Chinese don’t want to be in a position where they don’t have the upper hand. Showing signs of strength are extremely important for their economy and to maintain respect from their citizens.

China is taking desperate economic measures

China is getting desperate. China’s economic growth in 2018 was 6.6%. This was the slowest pace of growth in China in 28 years.

On Friday the Chinese government enacted additional monetary policy measures to try to help support economic growth. Officials even said they would cut “it’s own flesh” to help finance large-scale tax cuts to spur further investing.

This comes even after China rolled out measures in January 2019, such as cutting the bank’s reserve requirement ratio (RRR) to ensure there is liquidity in their financial system. They slashed this ratio by 100 basis points in January, which was the fifth such cut in the past year by China. China’s Banks doled out a record 3.23 trillion yuan in new loans in January, but the stimulus doesn’t seem to be working if they’re looking to slash taxes two months later.

What’s next from here?

The Chinese are doing everything they can to try to maintain a 6% to 6.5% GDP growth rate in 2019. I believe at this stage of the game the United States has the upper hand. However that could quickly change if the stock market comes crashing down. We are all aware that Donald Trump places high importance on the performance of the stock market as that is his barometer of success. And he made this completely transparent when he said a trade deal with China could boost the Dow Jones Industrial Averages as many as 2,000 points.

According to Robert Lighthizer, deal or no deal, trade negotiations will end within the next few weeks. The real question is, are we going to raise tariffs on China if we’re unable to come to an agreement on a deal?

To be a good trader, ignore what other people say

I have a problem. I spend too much time and have given too much attention to financial news and to what Twitter gurus say about the market.

Every morning when I wake up, I check the financial news to see if anything has happened overnight. Every day for the past two months it’s been the same old story: a potential US-China trade deal lifts the market. Every single day, the same headline is regurgitated.

It doesn’t feel right

Surely this can’t be right. I had a sense that we weren’t going to get a China trade deal soon after listening Donald Trump’s trade advisor, Robert Lighthizer’s testimony to the Senate. I also don’t think this a unique observation.

I’ve grown frustrated with this narrative, and I don’t believe that’s what is powering the market up words. According to a recent story from the South China Morning Post, a potential Trump-Xi meeting probably isn’t going to take place until June at the earliest.

Fast Money

At night I like to see what the “gurus” on CNBC’s Fast Money say about the market. As an independent trader, this is one of the way I can get an idea of what others are saying about the market. But this didn’t leave me satisfied.

Finding reason on Twitter

In an effort to find out what is with really going on in the market, I turned to Twitter. I began to follow a lot of Twitter “gurus” to see their thoughts. While they give a good effort, many of these guys have been very wrong too. Fact is, a ton of perma-bears have decent followings on Twitter. I’ve been following a few of these bears over the past two months as the market has ripped higher and higher.

Manipulator in Chief

Many of these bears complain about how the market is manipulated, blame the plunge protection team, and blame Donald Trump for influencing sentiment following algorithms with his tweets and headline-making quotes.

I have no doubt that Donald Trump is more obsessed with the stock market than any other President that we have ever seen (at least publicly). However, I find it hard to believe that he is single-handedly manipulating the market when you consider millions or possibly billions of players in the market today.

Even if I’m wrong about this, it doesn’t change what is happening in the market. I must better learn how to roll with the punches.

Even if Trump manipulates the market, it’s up to me to see that and use it to my advantage to make money.

To succeed, you must trade the market that is given to you

At the end of the day, to succeed in the market, I must understand that the market can stay wrong longer than you or I can stay solvent.

I think you can gain some insight from reading financial news and hearing people discuss the market on Twitter. But it’s important that you develop your own instinct of the market and use this mental model to come up with an honest assessment of the market. It’s important that your mental model fits your personality and your beliefs about the world.

It’s possible for two people to have two different approaches to the market and still make money. It’s happened for years and will continue to happen.

No more “gurus”

It’s very easy to get caught up in the convincing charts that perma-bears post on Twitter every single day and fool yourself into believing that your short position is the right position to be in at this specific moment in time. I know because that’s what I’ve been doing to myself. And that’s on me. I own that.

It’s a fool’s errand if you rely on gurus to give you hidden insight into the market. At the end of the day, we’re all players in the giant ocean that is the stock market. The most important thing you can do is watch the movements of the waves and try to catch the ones that you believe in the most.

For this reason, I’m working towards ensuring I don’t give too much attention to financial news or what individual people think of the market, because I find that it has been skewing my own perspective and my own beliefs about the market.

More signal, less noise

We live in a world where there is so much noise, and separating the signal from the noise is one of the hardest things to do. The solution to noise isn’t by adding more noise but to take noise out of the equation.

From this day forward, I’m going to make an effort to give less of my attention to the financial news and instead focus on those few things that really matter and move the market today.

This isn’t mean to be self-righteous, but more so a reminder to myself (and for your possible benefit) to develop a system and expectations of the market, carefully track those expectations from day-to-day, look for any divergences between those expectations and what’s actually happening in the market, and adapt accordingly. Because at the end of the day the markets and gurus don’t care if I make money. That’s on me.

Do or have you watched any financial news or Twitter gurus? Are you a recovering news follower? Let me know with a comment below.

I’m perplexed by Boeing’s stock action today

I’m baffled.

I’m baffled by the price action of Boeing today.

Earlier today, President Donald Trump ordered Boeing to ground their 737 Max Fleet. As expected, this had an adverse effect on the Boeing stock, which went from $374 down to $364 between 2:27 pm and 2:50 pm.

What happened next perplexed me. Boeing stock made of V shaped recovery, and by 3:15 it was trading over $374 again.

Why did Boeing stock increase after the announcement that its fleet would be grounded?

Did Boeing decide now was a good price point to buy back the stock? Are the algos running wild?

Or is there something more going on? What do you think? Let me know in the comments below.

What is the next catalyst that will move the stock market?

This week in the stock market has been a very slow news week.

We had a big news story with Boeing’s new 737 Max 8 crashing for the second time in six months. As a result numerous countries have grounded the 737 Max as a precautionary measure.

Also in this week’s news, Jerome Powell, Chairman of the Federal Reserve, spoke to 60 Minutes on Sunday evening to discuss the Federal Reserve policies and the current state of the economy.

With the exception of these two news stories, there hasn’t been a ton of newsworthy items this week.

What happened to a China Trade deal?

One of the most popular news stories from past two months was the promise of a China trade deal. If you look at this week’s headlines, there is little to no new information about a trade deal. This makes me believe we’re not going to have a China trade deal anytime in the next month or two.

So, with a slow news week it seems as though investors are waiting for some catalyst to move the market in one direction or another. Today, the S&P 500 Index touched the $2817 price level for the first time since October. I see the S&P 500 Index hovering around this level and continuing to consolidate within the $2780 to $2820 for the time being.

So with all of that in mind, what’s going to be the next Catalyst in the market? Which way is the market headed next?

Potentially positive catalysts for the stock market

Favorable trade deal for the US with China

If we are able to come to a trade deal agreement with China that is favorable to the United States, that would be great for our stock market.

For a trade deal with China to be favorable to the US it would need to protect our intellectual property rights and would also have some sort of a trigger for automatic tariffs if the Chinese don’t comply with the agreement. This would be the absolute best case scenario for the United States.

However I don’t think an agreement like this will come to be anytime soon. Xi Jinping, President of the People’s Republic of China, wants to maintain an appearance of strength for China. For this reason, I don’t think they’re going to make any concessions to United States any time soon.

According to Robert Lighthizer, we’re still a ways off when it comes to a favorable trade deal for the US.

Better than expected earnings

The second potential positive catalyst would be a positive earnings cycle in the first quarter of 2019.

Fourth quarter earnings from 2018 turned out to be better than expected and I believe this gave investors some confidence to continue to ride the market up in January and February.

If first quarter earnings are better than expected in the market this could be a positive catalyst for the market as well. It’s possible first quarter earnings go well, as some of the economic numbers we’ve seen are not quite as disappointing as expected, namely fourth quarter GDP growth, suggesting that perhaps Wall Street overreacted to slowing growthg. The worst economic numbers we’ve seen thus far of those of the non-farm payrolls added in February.

Personally I’m not too optimistic of either of these two scenarios playing out.

Potentially negative catalysts for the stock market

Worse than expected earnings

The first potentially negative catalyst would be if companies have worse than expected earnings in the first quarter. If we see earnings numbers come in below expectations this would likely drag the mark down.

Earnings estimates for the first quarter have declined for the S&P 500 as a whole, with estimated earnings for the index at -3.4% as compared to the previous year. In addition, there have been 76 companies in the S&P 500 Index that have issued negative EPS guidance as compared to 22 companies issuing positive EPS guidance. (Only 103 companies in the S&P 500 have issued guidance).

It’s important to pay attention not just to EPS results, but to the guidance we get from companies going forward into the second and third quarters of 2019.

Trade talks sour, and the US slaps more tariffs on China

Another potentially negative catalyst could be if the United States growing frustrated with the negotiations with China and decides to raise tariffs. Remember that President Trump delayed automatic tariff increases that were scheduled to kick in on March 1, 2019.

If this were to happen, it’s very likely China would raise their tariffs on American products as well. Much of this has to do with how well the negotiations go and if the two sides can at least agree on some sort of a framework of a trade deal moving forward.

Economic data is disappointing

A third catalyst would be if economic data continues to point to negative growth and growing in unemployment. If we begin seeing unemployment numbers rise, that could spook investors as rising unemployment tends to be an indicator of potential stresses in the economy.

In addition, the Federal Reserve Bank of Atlanta projects first quarter GDP to come in under 0.5%, which surely would be negative for investors.

Federal reserve raises interest rates

Finally, a fourth catalyst could be if the Federal Reserve does decide to raise interest rates this year. As I mentioned in my previous article, many investors are pricing in a rate cut this year.

If the Federal Reserve decides to raise interest rates, it would be due to the threat of inflation in the economy while unemployment rates remain low.

Conclusion

Overall, I believe the potentially negative catalysts are more likely to occur and impact the market. I believe that we’re going to see a downside move within a month or two, given that the recent market rally has been a little too hot in the current global economic backdrop.

However, it’s not outside the realm of possibility that we get positive news that could drive the market to all time highs before beginning to hit some resistance.

These are just a few of my thoughts on what I believe could impact the market moving forward. What catalysts are you watching out for in the market?

What has caused the market to rally from December through today? (It’s not the promise of a China trade deal)

If you’ve been paying attention to the stock market since the Christmas Eve bear market, the S&P 500 is up 19.5%. Much of this rally has taken place in January and February 2019. If you’ve been reading the news headlines, a lot of the rally was contributed to the promise of a China trade deal. In my opinion these news headlines are wrong. Let me explain why.

Enter the Federal Reserve

Investors have a tendency to pay very close attention to the actions of the Federal Reserve board. If you’re not familiar, the Federal Reserve primarily has the task of influencing interest rates.

To illustrate this point, look at how the market reacted in the times where Jerome Powell discussed the interest rate policies of the Federal Reserve.

On October 3rd an article by CNBC, Powell said we were a long way from a neutral on interest rates. This was an indication that more rate hikes were to come.

Jerome Powell said that interest rates were extremely accommodative and that this was necessary when the economy was weak. We no longer needed low interest rates anymore. He went on to say that interest rates were still accommodative but they were moving to a place where they can finally be neutral.

What happened next?

Following these comments by Jerome Powell we saw the S&P 500 index drop through the month of October (see the red arrow above). The S&P 500 continue to experience high volatility through November and into December.

Interest rate policy uncertainty

There was a lot of fear in the market when it came to the interest rate policies of the Federal Reserve. The Federal Reserve continued to hike interest rates in December which set off a wave of selling in the market.

From December 3rd until the low point on December 26th the market dropped 16.1% of its value. This came after a slight bounce back in November following Black Friday shopping.

Jerome Powell continued to say that interest rates needed to get back to neutral. He said that the Fed was relying on the data to tell them when to stop raising rates.

The language used by Jerome Powell scared the market because they believed that the Fed would continue to raise interest rates two or three times in 2019 along with the interest rate hike that they had just completed in December of 2018.

Fear and pressure from the President

A lot of investors took this language as being quote “hawkish”. What this means is that the Federal Reserve is using tighter monetary policy which would raise interest rates and help cool down the economy and keep inflation in check.

There was a lot of fear in the market in December and Donald Trump wasn’t a fan of Jerome Powell raising interest rates.

In my opinion I think Jerome Powell faced a lot of pressure from investors and our President to take a more neutral stance on interest rates. As a result the Federal Reserve went from being hawkish to what they called dovish.

For this reason I don’t believe that any of this rally has to do with a China trade deal. I think the rally from January until February and now going in March is entirely on the back of the Federal Reserve.

I believe that a lot of investors are pricing in an interest rate cut at some point in 2019.

The Fed’s dovish opinion on interest rates combined with short-side investors getting squeezed, algorithmic trading, day traders, have all contributed to this most recent market rally.

What comes next?

We are at a level in the market that we have struggled to get over time after time.

There seems to be a lid on the value of the S&P 500 Index around 2,800 to 2820 price level. We’ve touched this price level multiple times and have only broken through the level one time since last February, when the market rallied over the summer.

It will be interesting to see how the market plays out over the next few weeks. I believe many investors have priced in the Federal Reserve decreasing interest rates at some point in 2019.

If the Federal Reserve decides increased interest rates one more time this year I think it could be extremely detrimental to the market and how they perceive things.

I don’t think an increase in interest rates should have such a drastic effect on the market, but because investors are expecting expecting a cut in interest rates instead of an increase, this could set off some pretty drastic, expected action in the market.

I believe that Jerome Powell wants to continue raising interest rates and try to get back to a more neutral level, I just don’t know if the political pressure will allow him to do so.

The case for raising interest rates is to allow the Fed some more room to cut interest rates if and when we do eventually enter into a recession in 2020 or 2021.

Conclusion: Don’t pay too much attention to headlines

Don’t believe what you see in the news. I don’t believe the market is rallying on the back of a China trade deal. I don’t think the market believes we’re going to get a China trade deal in the next two months.

I think the market is hyper focused on the behavior of the Federal Reserve and that has caused much of the volatility from October through December, and the Federal Reserve’s complete 180 on interest rate policy has also caused the market rally up to this point in 2019.