Two Cent Technology Trade (XLK,GLD,FCX)
It’s looking increasingly like the toppling market we saw just a month ago is now regarded by investors as ancient history.
Yes, there was a retreat – of sorts – over the last week, but it was selective. And what emerges is that the leaders of this market – the big cap NASDAQ numbers – are stronger than ever. Stocks like Amazon, Netflix, Google, Microsoft, Apple and Facebook are either at their all-time highs or pushing strongly thereto.
It’s a phenomenal show of strength on the part of some of the most obscenely valued securities on the planet, and an equally remarkable show of faith on the part of those investors who are ready to jump the bid at these levels.
Shocking, but maybe we shouldn’t be so surprised.
A Moving Target
At this stage, we can say that the momentum for equities is upward. What will be in ten days or two weeks is anyone’s guess. A look at just a few of the aforementioned companies’ charts shows that whatever danger the market perceived a month ago has clearly subsided.
Take a peek –
These are six month samplings from Amazon, Microsoft, Netflix and Apple. And as you can see, all prices remains stubbornly above their salient moving averages, trendlines remain in place and new highs are still a daily affair.
Moreover, not-a-one of these stocks offers an overbought RSI read (not shown here).
And that’s because we’ve experienced ‘the pause that refreshes’ – or, to repeat: so it looks from the technical perspective today.
A new push higher will very likely shortly be upon us, and the fear that gripped investors over the last few weeks will likely become nothing more than a lost, odorless memory.
Have a look now at the VIX indicator, a gauge that too many people have put too much stock in, and that we feel has lost some of its cache, though it certainly offers a perfectly good indication of where we’ve been.
Here it is for the last five years.
What you see here is the most recent panic selling event (far right) that challenges some of the worst market anxiety of the last half decade, but that is clearly receding. The chart makes it clear that rising VIX readings that are indicative of even the worst fear (in red) rarely last more than one or two weeks, after which a reversion to more normative levels ensues.
We see a VIX of 12-14 over the next couple of weeks as a given.
And with new highs from a number of the above mentioned tech companies only inches away, look for the hype machine to begin gearing up and the bandwagon jumpers to start milling about looking for their chance to ride.
More than this, we see that Main Street sentiment remains in the doldrums. The following charts from the weekly sentiment survey of the American Association of Individual Investors (AAII) show that the hyper-bullish enthusiasm of early February has given way to a more timid perplexity, as bullish sentiment declined from its peak by nearly 40% and the number of ‘dunnos’ rose by close to 50%!
With bullish sentiment at 37.3, we’ve now returned to historical norms, and that’s likely an indication of middling to bullish energies for stocks going forward. Remember, January was a period of record inflows into equities, and a lot of money came from late arriving moms and pops who now feel like they took a licking. They’ll likely be reluctant to join the gravy train any time soon.
So who’s gonna buy?
Good question. And the answer is most likely corporate and professional investors.
By corporate, we refer to the vast number of S&P 500 companies that are flush with cash and now see a tremendous benefit from repatriating offshore profits after passage of the Trump administration’s tax reform package.
In the first month after the reform was passed, a full $97 billion in buyback activity occurred.
But there’s more.
The number of announced buybacks is on pace to set a blowout record.
Have a look here –
J.P. Morgan strategists are estimating a full year buyback binge on the order of $842 billion, and if they’re even close, we’ll see record annual retirement of equity, and, at the same time, much higher prices.
That’s where the pros come in…
Professional investors, of course, will be focusing on those companies with a strong history of share repurchases, as well as those who are odds-on bets to initiate or increase their buyback programs.
Among those with the biggest repurchase programs to date are Wells Fargo’s $22.6 billion, Google’s $8.6 billion, Visa’s $7.5 billion and eBay’s $6 billion.
We’ll return to those companies shortly.
But first, we have a single trade to attend to.
It was launched on January 2nd in a letter called Growing Cold and Crowing Gold. There, we urged you to buy the FCX January 18th (2019) 17 PUT for $1.73 and sell the GLD January 18th (2019) 116 PUT for $2.30 to pay for it. Total credit on the affair was $0.57.
The FCX PUT sells for $1.98 and the GLD for $1.69. Sell the former and buy back the latter and you come home with a full $0.86 on nothing laid out. Adjusted for minimal commissions offers you a 473% take in two months.
And that, friends, is just fine.
This week we’re going with the above named themes – technology stock leadership and buybacks – and we’re using the Technology Select Sector SPDR ETF (NYSE:XLK), a fund that includes the biggest tech leaders and a number of the more lavish buyback names.
Here’s a weekly chart of the stock for the last two years –
After tapping the upper end of its long term trend channel (in red), XLK dumped and is now finding its feet. RSI and MACD are also moderating after an overbought condition in mid-January (in green).
Immediate resistance is found at $69.50 and support emerges at $63.
And that’s how we’re playing it.
Bullish.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider selling the XLK September 21st 63 PUT for $2.03 and buying the XLK September 21st 73 CALL for $2.05. Total debit on the trade is $0.02.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew