Over the weekend we published some important views on why AAPL may be on the precipice of a larger correction...what we're looking for, etc. That post is to get us ready for what we're referring to is the Big Short For anyone who may have missed it, you can view that here:
^ That post is not to be confused with our current swing-trade position. The AAPL Big Short will be modeled much differently than our current position. For those who are just chiming in, please review the latest alert here.
Our current AAPL May $175 strike puts are currently up near a +50% gain. AAPL is very oversold on the hourly chart as of now, so do expect a bounce anytime soon. We'll likely be adding further exposure on the short side on that bounce. However, if AAPL foregoes the bounce setup and heads lower from here...we may get close to selling our puts if we get near the $165 level within the week.
We’re now 125 points away from a retest of the S&P 500 red line of 2581 (February 8th low) that would signal a pending crash. The next two weeks are likely to bring plenty of volatility as Fed Chairman Jay Powell is expected to hike interest rates on Wednesday and President Trump is expected to announces Section 301 Chinese tariffs in response to Chinese IP theft. To make matters worse, yesterday's Dow -380 selloff has nothing to do with interest rates or tariffs. The selloff is hitting the Nasdaq tech sector especially hard as the G-20 advances its proposal for a streamlined 110-nation ‘digital tax’ that would eliminate tax loopholes throughout the world that have been exploited by the likes of Apple, Google, Amazon and Facebook. This proposal is being led by the EU’s largest members Germany, France, Spain and Italy in order to equalize the effective tax burden which currently stands at 23% for traditional companies and 10% for digital companies. Aggressive cross-border tax planning further drivers that 10% number down towards zero when firms choose business-friendly jurisdictions like Ireland for their European headquarters. This new plan proposes to tax digital media companies based on where they generate revenue, rather than where they have their regional headquarters. Well, that kinda makes a little more sense. But make no mistake, that will very likely spook the balance sheets around titans like Apple, who for over a decade now have leveraged such tax loopholes. Today we are adding QQQ puts to the portfolio watchlist as big tech may be forced to deal with profit contraction on multiple fronts.
Right now our top priority is to add exposure to downside momentum. We're already short AAPL, SPY, XHB. Later today we may be increasing our short exposure by adding QQQ and/or SWKS puts.
From a technical perspective, major market collapses in history share similar characteristics. Both the 1929 and 1987 market crashes began with mild 10% corrections followed by attempted recoveries that made up half the difference. In 2018, we’re witnessing the same kind of technical action occur after February’s 10% correction. The ultimate trigger for collapse will occur when the market drops below its previous low. In 1929, once the market retested its prior low it went on to experience a 42% crash over a 22-day period. In 1987, after the market retested its prior low it went on to experience a 28% crash over a 4-day period. The speed at which these selloffs occur is why we refer to them as crashes. Stocks tend to drop a lot more quickly than they rise. They key level to watch in coming weeks is the S&P 500 price of 2581, which marks the prior bottom from February 8th. If this level is breached because of Section 301 tariffs and Chinese retaliation, we will be at technical risk of a pending market crash. The S&P is currently 170 points above that red line.
Peter Navarro is making the rounds trying to assure Wall Street that tariffs are nothing to worry about. He’s touting recent successes from domestic aluminum, steel and washing machine manufacturers who have announced new initiatives to expand. The problem with Navarro’s reasoning is that the overall economic scoreboard of tariff retaliation and economic contraction will overwhelm these small success stories. Just because someone says something, does not make it true. The precedent of widespread tariffs qualifies as a major risk, no matter how Peter Navarro tries to spin it. A trade war with China is upon us. Could be days, weeks or months away. If we drop below S&P 2581, a crash could occur.
What happens to a stock when it's announced that their CFO or CEO... or even their CTO have resigned and there's no clear plan to fill the leadership gap? Void of leadership or a capable team ...we see strong pullbacks. Team synergy & communication is essential.
To date, the Trump administration has lost 26 people either by resigning on their own accord or being directly fired by President Trump. The dissonance of this administration will likely impede bull market prosperity, if it hasn't already.