Blue Horseshoe Loves Anacott Steel

Remember these headlines that came out yesterday on April 13th, 2020. Their #1 job is to keep your money in the circuit.

You would think they sell stocks to for a living.

If a fund/brokerage firm is liquidating, or wants to increase cash, they’re not going to tell or encourage you to sell ahead of them. In fact they’re more likely to encourage you (Main Street money) to buy they can off load higher to you.

  • If they're trying to accumulate they'll turn on "bear raid" tools @ their disposal.

  • If they're trying to liquidate in stages, they'll turn on the "all is swell!" bandwagon (analyst upgrades, bullish publications & headlines...they go on a media & awareness tour kind of like a candidate running for election & wanting your votes)

So after a 30% move off the lows already on the SPY, just yesterday Morgan Stanley says “Pullbacks should be bought” ...You don’t tell people to do that if your earnestly buying those pullbacks...that’s inviting unnecessary competition. It's like if you find a great deal on an investment property, you wouldn't want to make other investors aware of the opportunity because then you may have inadvertently invited them to bid up the price of the property.

In spite of today's rebound, the SPY is still forming a rising wedge, and is still very likely setting up for a peak & another sharp leg lower. The technicals still indicate that. We now have a rising wedge with 3 open gaps. Think of open gaps as wobbly footing. To strengthen that footing they get filled as a means of testing the resolve & conviction level of real buyers & sellers. Because it's actually easier for forces to gap prices higher in futures / pre-market. When we get gap-ups, the market wants to know if the spread in between the closing price & the gapped up opening price is something that would have really happened during a regular high traffic market day via the volume of market participants transacting.

Tech stocks, however, are acting as if nothing even happened. Tech stocks are going full 'bury head in the stand let's go back to the highs' rally as if there is no economic impact whatsoever from coronavirus.

It's important to remember that even before the COVID-19, the market had not went through a correction in over 7-months. What's more, when the market was at its highs just 8-weeks ago, it was getting pretty overvalued even without the virus's impact. Remember, we went short Apple via put spread at $315-$325 area all because of how overvalued the stock was at that point.

Apple sitting at $286 right now makes less sense than @ any other time I can remember. Apple is sitting at a 23 P/E ratio right now and earnings are very likely going to contract for the entire year. Again, at each previous bull market peak over the last decade, Apple peaked at 17-19. Generally, when Apple would hit an 18 P/E ratio, it had gone too far. It's now sitting at 23 P/E facing a very tough year ahead. It makes no sense at all. A rebound up to $260-$265? Sure. $285. Totally irrational.

This entire rebound in tech is starting to look exactly like January - May 2008 period. It looks like a full blown repeat of that era.

Remember, in 2008, tech sustained a 40% collapse in January-February 2008. Much of that was due to Bear Stearns collapsing and the mini/pre-financial crisis that took place during the period.

Right after that, stocks staged a massive rally and tech stocks went almost all the way back to their all-time highs by May 2008. Notice that unlike 2008 where tech stock weren't really impacted financially, this time there's a real financial impact to the coronavirus. In 2008, it was mostly financial. Apple's earnings went up 100% between 2008 and 2009. It was still growing at a huge rate at the time. So a 60% rally to go back to the highs in 2008 after that sharp 40% decline made sense back then. It makes absolutely no sense today. Apple made no sense at $327 without the Coronavirus. And the stock rebounding to $286 tells us the market is setting Apple up to retrace to the highs. That's what it is says. Either that or fail at $300. Either way, this rebound has gone way too far as Apple is concerned.

Amazon makes some sense. People are stuck at home and so it makes sense that Amazon gains a net windfall from this crisis. If you're stuck at home and can't shop, then you're going to be doing that on-line and that means gains for Amazon.

But Apple going to its highs in this environment? A 6-week bear market? That's total nonsense. The reason we have bear markets at all is to create opportunity. If Apple never corrects, then it is always overvalued and no real opportunity exists to buy it. In 2012 and 2015, what made Apple so undervalued is the time it took for that bear market to conclude. As Apple grinder lower or sideways for a year (in both bear markets), it gave time for earnings to catch up and for the P/E ratio to contract dramatically down to the 10-12 range. But in a situation where you get a crash and immediate recovery within an 8-week window is that the P/E has no time to contract and we're back to exactly where we started. Overvalued.

I'll make a prediction here. If this tech rally continues, we'll see a full repeat of 2008. If stocks get back to their highs, they're just going to see another full blown collapse much like we saw in 2008 when the market rebounded after the January/February 2008 swoon. That collapse will come either on a 2nd wave of Coronavirus or it will come as we head into the election. Back during the Financial crisis AAPL dropped -43% & then retraced nearly 88% of that entire move down retesting it's highs...fell short & then crashed -58% from that retest of the highs. So keep in mind that the SPY & AAPL retraced & corrected very differently during that whole bearish period. They all crashed, but AAPL (for example), retraced much higher & then crashed much lower then the SPY. Here is AAPL during the financial crisis:

Again, this is a tech lead rebound. The key difference between what we're seeing in tech and what we're seeing more broadly in the S&P 500 is that the S&P is still forming a rising wedge and still within its 50% retracement zone. Tech stocks broke above the upper trend-line and are moving well beyond the 50% retracement zone.

Apple is now not only well above the 62% retracement point, it has now broken way above its 50-day moving. Again, Apple is saying there is no economic impact whatsoever from Coronavirus by that type of recovery. We only see these types of recoveries when the market is saying "this was a mistake and we need to reverse course back to the mean." Yet, that obviously makes no sense at all.

Apple's earnings are set to contract and the company had to close down its entire retail chain -- completely unexpected -- and yet the stock is almost back to where it was when it reported its Q1 earnings and outlook. That is before this crisis even happened. The point is this. Apple at $327 was valued based on one set of future earnings numbers and based on the environment at the time which did not include a full-blown closure of society due to a world-wide pandemic. Furthermore, when it was at $327 just 8-weeks ago, it was overvalued. Retracing back to that number thus makes no sense at all. Not in such a short period of time.

We're going to continue to hold our SPY position until $300. That's our cut-off point where we would consider closing them out. After that we would probably wait in cash for an opportunity. If the SPY recovers to $300, it makes things entirely uncertain. At that point, we would treat this coronavirus opportunity as completely concluded and we would wait for the next trade to set-up.

Are we here? Is this a Bull Trap?

If I knew with 100% certainty then I'd most obviously be 100% short. That's why at this time we're only willing to allocate 15% to the short side at this time, our biggest position being cash. Be careful making this about an all or nothing play. Like being 100% short is absurd. We'll increase/decrease our allocation relative to our conviction & risk reward as we go.


Some of the greatest pearls shared by Jesse Livermore:

“Money is made by sitting, not trading.”

“The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.”

“Buy right, sit tight.”

“Nobody can catch all the fluctuations.”

“There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.”

“It takes time to make money.”

“Don’t give me timing, give me time.”