Stock Market Stimulus

Stimulus Season.

This is the weekly article and Pod/Video Show 37 – Stock Market Stimulus Season

The markets have reacted well to the rate cuts so far and I suspect as we get toward the end of Q3 next week most of this is stabilized. With the election ahead of us the 4th quarter is going to present a lot of shakeups – Especially in energy related names which are hovering around waiting for direction. The PBOC cut rates and injected money into the system in China causing Chinese equities to ramp. You’re also seeing gold continue to take off at the same time that equities are making this a strange time – we’re going to talk about this and cross-asset trading in this weeks podcast.

Will be in Orlando at The Money Show Oct 17-20 – if you live near Orlando and want to meet up send me a message.

Q&A’s this week for this that want to skip

New Readers Here.

If you’re new here welcome, make sure to subscribe on YouTube and/or Spotify – you can get free daily market updates on LongVolReport.com.

We publish the article of the week every Friday here on TheLongVol.com and then the podcast/videocast is on Spotify and YouTube.

Three main topics for today’s show – as always, a life update then:

Articles of Interest from This Week
Cross-Asset Investing: Breaking it Down
Broad Market Review
China & Tepper Comments
TSMC Stock
Gold Miners
Q&A for The Week

If you are new here the article of the week comes out on Fridays with the show the same day. You can get trial the report AST Alerts portfolio here.

Quote of The Week

Favorite Articles This Week

How to think about portfolio construction and trading.

Cross Asset Trading & Portfolio Management

This week there was a video that I made a reply to about the benefits of Cross-Asset Trading and a long/short portfolio. If you’ve never heard this term I am going to break it down a bit in the article/show. This is what we do for clients and there’s a framework behind it that is beneficial even to the investor out there that has a DIY portfolio.

A few disclaimers as to prevent confusion:

It’s harder to do with a smaller portfolio and usually is intended for larger sums of money but I think even with $50/$100K some principles can be applied
This is not a precise framework and every advisor/manager has their own recipe within a similar framework

Why is This an Approach?

Diversification: Spreads risk across various asset classes.
Opportunities: Capitalizes on different market conditions.
Risk Management: Balances volatile assets with more stable ones.
Flexibility: Adapts to changing economic cycles and market trends.

Then a Strategy to Trade Cross Asset

This is where the discussion tends to get confusing so let me try to keep it as simple as I can. The way we look at markets is through multi-strategy approach meaning we use multiple strategies and overlays to first develop an investment thesis so let’s start there.

Macro: Paying attention to Central Banks/Economic Catalysts
Fundamentals: Analyzing balance sheet and/or management along with the sector
Technical: Analysis of ideas with a technical overlap to help with timing of execution
Absolute Return: The core idea is to be uncorrelated to the SPX/Nasdaq broad market as possible meaning we do things like…

Long/short strategy meaning we go long ideas and short ideas as needed to generate returns. Sometimes, that means focusing on stocks/situations like:

$PZZA (turnaround)
$BABA (macro/value)
$EXPI/$RDFN (event-driven/macro)

The idea is we go wherever, whenever to generate returns.

Read up on this more here

Trade Execution/Structure

80% of what we do is long or short the equity for clients with the occasional mix of options use from: DITM, LEAPS, spreads or just some directional expression here and there.

Where I think the DIY investor gets confused is that there’s this idea that stocks or options only is a strategy so they end up just trading one or the other not bothering to analyze the stock/sector they’re trading in there first place.

It’s just not efficient and this plagues amateur investors but there’s little help to this because most of what is discussed is technicals or generic concepts.

When we get an idea we analyze how to best express that view and not all the time is it just long/short equity sometimes it’s a mix and that’s important to understand.

Does that have to be like that for the average DIY/novice investor, absolutely not but I think it would be beneficial to consider even for the person who trades say a $15K account.

There’s not one that’s better per se but usually in money management you’re using the equity like I said the majority of the time because we’re analyzing the company and sector first before just saying “I want to be an options seller” or something to that effect.

This is where a lot of the disconnect occurs: the analysis of an idea is the first thing that is always done – if we can’t understand a stock/situation then it doesn’t even get to the phase of “How do we express this view?”

If you analyze Papa Johns and come to the conclusion that you want to use 30 day call options on it you’re not analyzing the situation properly.

Why? The stock is not a higher volatility security say as a $META or $SPY – it’s a situation here it’s a turnaround and if you analyze the situation you’d see that. So, ideally, you take that and either:

Buy the equity
Buy LEAPS
Use spreads

That’s where the decision process changes for us, situation by situation and this is where the DIY investor tends to falter.

Why? In my view because they need everything to be “a system” or the same and don’t see things through different categories.

Can it be systemized? You betcha!

There was framework I made in 2015 for novice investors (it’s still available) that focuses on the idea of trading high beta (stocks correlated to the indices) using intraday strategy only with a systemized approach. But, even then you have to get rid of the mindset that you’re analyzing a stock/sector and realize that you’re a trader running a system.

Get me? If not – listen to the podcast I’ll explain it there.

High Beta Equities Used as Tools for Intraday Trading
Long calls/puts with 14 days or less expiration

The issue is the novice investor with surface level understanding takes this idea of options trading and applies it to anything and everything. Take, $BABA as an example which we all just saw this week…the average investor will trade that with weekly calls trying to catch the move – v. the way we looked at it as a longer-term catalyst to see price rise +40%/+50% over time which requires less precision for the entry and usually less stress.

$BABA Long Leaps Summer 2024

Way below book value + a lot of cash on hand
Buybacks were incredible
Concerns about China kept the name sideways – but you like the name and potential
Execution becomes LEAPS for 25/26 as a small portion of the cross-asset portfolio

$BABA Long Leaps Summer 2024

Way below book value + a lot of cash on hand
Buybacks were incredible
Concerns about China kept the name sideways – but you like the name and potential
Execution becomes LEAPS for 25/26 as a small portion of the cross-asset portfolio

Concluding:

So, clearly there’s a difference between trading short-term options on high beta stocks intraday (which works) to the idea of running cross-asset trading to build out a portfolio, what we do for clients. I think if you can understand and then separate these views that it builds a core understanding of what it is you are doing and in my experience of talking with novice investors that’s what’s needed more than technicals, indicators or watching financial news.

Broad Market Analysis

China is back in play! Not my favorite place to invest but hard not too now given what’s transpired in just a few short weeks! Investing in China, for me, has always been hard because it’s hard to know what’s “real” and what’s trouble so it’s usually been through $BABA or the ETFs there to gain a bit of diversification and safety (or so that’s what I tell myself to sleep at night)

China cuts rates, $BABA and others rally.

Then again on Wednesday night there was reports that they were going to stimulate via $144B into the country’s banks causing a massive rally in their market as well as aiding to the use broad market rally.

Marketwatch article.

General Market Updates

This week was relatively straight-forward after rate cuts and saw names trade higher in tech and, still, gold/miners. Here were some of the key notes from issue 38 of the report.

Some risk off on Thursday after a gap-up but that’s expected given the run the last week. Hard to see too much risk off into end of the quarter so not expecting to make any new portfolio moves but as we head into election season we should get a lot of volatility, which we like!

Taiwan semi-conductor is back at it again and is close to a new all-time high. I introduced this stock maybe 4-5 months ago here.

We’ve owned the name and expect a strong earnings report coming again. Likely some consolidation here again before an attempt at taking out the all time highs.

According to WSJ there were talks of them building operations in the UAE.

Gold/Miners

Gold continues to make new highs aside the equity markets which makes us happy here. One of our ideas we discussed Wheaton Precious Metals made another all time high this week. They’re a very efficient metals streaming company out of Vancouver, BC with a management team that came from Newmont mining.

Gold Rush to continue thanks to Washington – Barrons article.

Also helps with share buybacks and dividend increasing. Short-term we expect some consolidation technically but this has been a good horse to have bet on in the race.

Final Word.

Conclusion:

End of Q3 so waiting it out to see where we finish before making any new moves
Metals/miners should continue to go
Final quarter for the year (man has it really passed by!)
Q&A for This Week

We’ll be on-boarding new clients to the firm for Q4 and chugging a long into 2024. For clients that meet the requirements please use the form here.

This is all opinion and not advice.

Next Lesson

Final Quarter of 2024 Stock Market

October 3, 2024