Client Update October 27, 2020

Markets always contain some degree of uncertainty.  As investors we must accept risk to attain growth.   But then there are extraordinary times when we’re faced with a significant binary outcome that can’t be ignored.

We’ve arrived at the crossroads of great uncertainty for the next two weeks.   We have no particular edge whatsoever.  This is why we’re sitting with such a high level of cash.  We can be sure that we’ll eventually have an opportunity to invest heavily with high conviction, so best to keep our powder dry in the meantime.

Since we have the ability to get invested very quickly there is no need to bet on an election that could at best be a coin-flip.  No need to step into the fray where the outcome is a myriad of possibilities.

Will the election be declared on November 3?  Or, will it drag out into January?
Even if the election is declared and Biden/Harris are the winners, how will investors react because of taxation issues?

The issue with a Democrat victory is the possibility of a large retroactive tax hike on capital gains effective January 1, 2021.  Investors won’t wait and see come 2021, they’ll likely sell this year.

In any case, market price, volume and direction will be a “tell” as to which course is taken.

At present the Nasdaq composite has worked off its overbought readings reached at mid-month.  The behavior of market leadings stocks remains very healthy.   Yesterdays weakness emboldens buyers the following day with the opportunity to buy the leaders.

At present we own two stocks which may be a part of the next generation of social media leadership:  Snapchat (SNAP) and Pinterest (PINS).

SNAP cost approx $31.6 versus $41.3 today.

PINS cost approx $42.62 versus $55.58 today.

Both stocks are going to be given a wide berth going forward as their price rise is similar to other social media when growth began to accelerate.

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In addition, both companies were under-owned by large institutional investors which stamped into SNAP price be damned.

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To Sum It Up: The primary market uptrend remains intact.  But with a Biden/Harris win and Dem control of the House and Senate open the door for a large tax hike retroactive to January 1, 2021.  Investors may sell heavily in the 4th quarter of 2020 to avoid the tax hike.

Either way, I don’t invest upon opinions and my models will trigger to the downside should heavy selling takes place.  A large selloff wouldn’t be a bad thing in the long run anyway as it would set the stage for a better rally off a low pivot price in the future.

As Inspector Columbo once said:  “One more thing…

“2020” enough said.  Today is the first day I can head down into town in 11 days as life is returning to normal.  We consider ourselves incredibly lucky that our town and home didn’t burn.    We would look at the maps of the fires and find it astonishing that our little area was the hole in the donut of fire.

If you ask me, it’s all about climate change and especially drought.  Our wells don’t fill at the same rate they used to.   And, for the first time in 16 years that I’ve lived her our pond is dry.

Be Well. Be Kind.
Brad Pappas
October 27, 2020

Long all stocks mentioned.

Vegan Humane Investing

 

Client Update October 9, 2020

In the last letter sent 9/28 I mentioned the possibility of a Buy signal as it appeared the September selloff had run its course.

This is the chart sent on the 28th that showed the Nasdaq beginning to bottom out.

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A Buy signal did occur in the first week of October and we can see from the updated chart below a continuation of the 2020 rally.

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Not only are the markets moving higher – they are moving higher with very strong breadth. This generally implies that this rally is an initiation of a new leg higher in prices with sustainable strength.

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One should never allow politics into the investing matrix as it reduces your objectivity.

As in most instances when there is significant negative headlines – the negativity is already baked into the market. Hence more negativity has little effect.

It seems to me that about the time Trump polling began to disintegrate investors began to front-run a Democrat win for the Presidency and Senate. So companies that would benefit from a Democrat monopoly are moving higher and with ludicrous speed.

Looking at our holdings they are the “Greenest” ever.

For example:

Electric Vehicles: Tesla (TSLA) and Workhorse (WKHS)

Alternative foods: Beyond Meat (BYND)

CBD’s: Innovative Industries (IIPR) and Growgeneration (GRWG)

Solar: Soleredge Technology (SEDG) and the Solar ETF (TAN). I’d like to add Sunrun (RUN) if it will just give us a decent entry.

Market leadership is obvious at this point and its a new generation of market innovators and disruptors.

What is absent is the old leadership of Amazon, Apple, Facebook and Google. It would be my expectation that Democratic control would bring about potential Congressional legislation and oversight. While that would be years away should it occur investor capital prefers to focus on a new generation of winning companies.

Be Well. Be Kind.
Brad Pappas
September 28, 2020

Long all stocks mentioned except RUN.

Vegan Humane Investing

 

Client Update Sept 28, 2020

I must admit I’ve been cheering for the market weakness this month. A market break that generated enough fear that can be used to propel stocks higher in the coming months (see second chart below). Competition for stocks is almost non-existent with huge Fed support via 0% interest rates. We may now have an entry point where investing for a longer time horizon would be appropriate.# The month of September 2020 has been especially difficult for the stock market. From peak to trough stocks have declined by 14%. This decline negated the gains made going back to July. This is in contrast to our portfolios which declined by an approximate average of 3% to 4% due to a Sell Signal.

While no one really enjoys a selloff they are ultimately inevitable and healthy. Selloffs can create a significant amount of negativity which is necessary if the market is going launch the next leg higher.

Despite all the calamities of 2020 we remain in a Bull Market with an upside trend. A market that got a little too hot for its own good over the Summer and has now cooled off appropriately.

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While we remain on a Sell Signal for the stock market there has been significant positive movement in the model. This could result in a Buy signal this week which is the first since April. If a Buy signal occurs, we’ll ease back into the market rather than plunge. If the Buy signal proves to have staying power market exposure will increase. The market has to earn our increased exposure.

A Buy Signal with staying power will be an excellent entry point as we transition from a seasonally weak period from August to October to the strongest period of the year (November thru March).

Please keep in mind that markets are discounting mechanisms. Meaning they’re not reacting so much to what is happening now, but anticipating the future.

IMO in September markets began to assume a Biden Presidency. While most of you look forward to this (including myself) it potentially bode negative for Big Tech stocks. Perhaps not in Year 1 or 2 but there will be increased scrutiny and the potential for increased regulation. This is the best explanation I have as to why Big Tech (Amazon, Facebook, Microsoft, Apple, etc) were the downside leaders.

In addition the strength in “Green” stocks has been the greatest in years. At present Solar Energy is the #1 performing group. The #2 group are Auto’s, specifically Tesla and Workhorse. Companies that are great innovators are leading and I believe this is due in part to a potential change in the White House.

Earlier I mentioned how fear can propel a market higher. The big market players which are institutional hedge funds, commodity trading advisors etc are positioned extremely negative. In other words they’re betting that the market will decline further to the greatest degree in 10 years.

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It’s never wise to invest along when the crowd is disproportionately positioned such as they are now. At present they are net short which is not that common but notice how being net short tends to coincide with market bottoms.

Summary; We are on the verge of a Buy signal for stocks. It’s not a fait accompli at this point. I am presently monitoring what could be the strongest stocks to emerge. At minimum, the market’s inability to decline lower is a change of character which is a very positive step..

Be Well. Be Kind.
Brad Pappas
September 28, 2020

Vegan Humane Investing

Client Letter June 23, 2020

Dear Client

I wanted to take a moment here to explain why we have so much cash uninvested at the moment.

The rise in the Nasdaq index is masking significant weakness in the S&P 500 index and the Russell 2000. The strongest Nasdaq names have gone parabolic – meaning they will likely revert downward just like a rubber band snapping back to form.

In addition, the Nasdaq is very extended and 16% above its 200 day moving average (dma) which was the same divergence at the February peak. There’s no rule that says it has to turn down at this point. The 2000 Nasdaq peak was 35% above its 200 day moving average. But a +16% divergence means the risk right now is terrible.

Eventually the Nasdaq and its 200 dma will meet again. Either by a choppy sideways trend or more likely a broad sell o.

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In addition healthy bull market rallies will show an increasing number of stocks making New Highs for the year. Despite the Nasdaq being higher now than in February, there are far less stocks making new highs. This is not healthy at all.

The lack of a broad base rally without all stocks in the various Indices participating creates a vulnerable market prone to failure.

It’s not just the Nasdaq showing poor participation. The S&P 500 is showing its form of poor participation. A healthy rally from the March bottom would be showing at least 50% of stocks above the 200 dma. Right now its just 42%.

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If markets cool in the heat of the Summer I’d consider that a significant plus. I have no idea if the Nasdaq is putting in a long term top or not. A sell-o to its 200 dma could be an attractive entry point for Growth stocks.

In the meantime Banks (excluding Wells Fargo) and Value stocks, while extremely attractive, are languishing. The divergence between Growth and Value is remains the greatest since 1999. But it’s been impossible to predict a turn from Growth to Value. Whenever it does occur, the returns will likely be outsized.

Gold, which broke out of its trading range to the upside this week, would be vulnerable in any significant market weakness. When investors need to raise capital they’ll sell anything.

Summary: Expect significant market weakness soon. Many headwinds are likely ahead which are in the news on a daily basis. Last week’s 1800 point decline saw the Fed start the printing press again to prop up stocks once again. Regardless, markets need to revert lower for “the pause that refreshes”. Hence the risk right now is very high.

Be safe, Brad Pappas

Vegan Humane Investing

Market Crash Playbook

Hello everyone

Guessing from the feedback I’ve received, we’re in a very enviable position now just sitting in cash. I don’t expect that to change significantly in the near term. Besides, the last thing you really need right now – aside from a bidet and hand sanitizer – is the extra stress of market fluctuations. 

Last year we under performed because, if you were looking in the right places, there was an enormous amount of early warning risk being signaled. I spent most of last year writing about the warning the Yield Curve was signaling and how the Cass Freight Index was in recession – in November. The virus is a huge shove to push the economy over the cliff.  Things were already weak to being with and now almost all of 2019’s gains have disappeared. The game plan for crashes is as follows.  

1. Don’t give up drinking.

2. At some point we’re going to make what could be a crash low in the market. 

3. After the crash low we’ll likely see a multi-week rally. This rally is the Fool’s Gold of rallies. This rally will be used by investors, institutions etc. to get out of positions they were caught in during the crash. Hopefully we’ll begin to have some clarity on the spread of the virus too. During this period expect to see stories of companies that blew up like Worldcom, Enron, Madoff. It happens during every bear market. I’m also looking for the Metlife annuity ads with Snoopy trying to lure burned investors with guaranteed 1% returns. That will safely double your money in 72 years.

4. I would expect the stabilization rally to fail and we’ll likely revisit the crash low. While people remember the 2008 low in November, the retest low happened in March 09. I would expect the retest to happen a lot faster than 4 months this time.

During the retest I’ll be able to measure its volatility and intensity and compare it to the initial crash low. If we’re in the process of making a market bottom, the retest of the low will be milder. Instead of 2000 stocks making their lows for the year it could be 700. In other words, fewer stocks participating in the decline. This signals that the virus and recession are already priced into the market. What is not priced in is the economic rebound and that is where the opportunity is.

5. If the retest is successful, that will be the time to put money back to work. If the retest fails and we plunge to new lows, we start over looking for a new crash low and repeat the process.

Over the weekend, we read how the Fed cut rates to zero. When the time comes this move will fuel stocks much higher than where we are today.  However, we’re going to need a massive Fiscal package from the government as well.  

It’s very likely that we’re in the midst of an enormous opportunity because we’re in cash. Human nature being what it is only sees fear at this moment because so much is unknown. In time we’ll get some clarity and people we’ll be able to see how we’re going to emerge from this crisis. At that point in time investors will begin buying for the economic rebound and thoughts of the recession will fade.

Patience is key. No need to get invested too early.

I strongly suggest to completely tune out and ignore the financial media.  Especially anything coming out of the mouth of Larry Kudlow. 

During periods of financial stress it’s very common to see articles telling investors they have to now settle for lower returns. This type of “advice” is completely illogical and inaccurate. Bear markets are huge opportunities for investors to make above average returns once the market weakness is over.

Please be safe.

Brad Pappas

Disclaimer; Socially Responsible Investing

“Markets are never wrong, only opinions are” Jesse Livermore

“Markets are never wrong, only opinions are”
Jesse Livermore

January 27, 2020

Jesse Livermore was amongst the first great stock traders of the early 20th Century. One of his basic concepts is that we trade markets and individual holdings. An investor should have little concern for opinions and anything else that can distract from following price. If this current market proves one thing it’s: Markets and economies are two different things and don’t necessarily have to correlate.

If you think this means I’m not going to lay out my thoughts to you of what I think may happen, you’ll be right! All of my best performance years occurred when I kept my blinders on and didn’t listen to anyone. Instead I reacted to market signals and price changes when they occurred rather than trying to anticipate the future.

Last October the stock market proved that I was wrong with my belief that we were in the mire of a long term market topping process. This opinion was backed up by a substantial amount of weak economic data that under normal conditions should have led the US into a recession this year.

Keep in mind the data is still pretty bad but it has been offset by $60 billion per month and almost $400 billion in aggregate in Treasury assets (The Fed buys the Treasury security and pays the seller with cash, who in turn can buy stocks).

In my opinion there is an unholy alliance between the Fed, Mnuchin and the President to keep the stock market rallying into the election as if it were a matter of national security.

Markets and many stocks have gone “Parabolic”. I use the term Parabolic on occasion when necessary. One of my most important rules is: Parabolic moves in stocks, markets or any other asset are unsustainable and burn out quickly but the timing of peak price is unknown.

Assume its impossible to accurately predict when the parabolic bubble bursts – my intent is to play this move for all its worth and be prepared to exit fast. The decline from a parabolic move is usually quite deep. I would be looking for a decline of 15% to 20% sometime this year.

Tactically I’ve taken a middle of the road approach by using tight stop loss orders. So as a stock like Virgin Galactic or Beyond Meat may leap higher, my stop loss prices move accordingly just under the stock price.

Current portfolios have a solid group of core growth stocks that comprise the majority of our holdings. Stocks with multi-year uptrends and reliable earnings growth make this list. Holdings considered “core” include: Fair Isaac, Copart, Mastercard and Visa, Global Payments and Adobe, Cable One, etc. Since I’m not expecting a long term bear market, these stocks can be held and hedged should the market turn down.

Approximately 20% in aggregate of our allocation is devoted to the fast and furious movers like Beyond Meat, Virgin Galactic, Sea Ltd and Audiocodes, etc. These have already made large moves and will be sold quickly should they show signs of declining with the market selloff.

It used to be that market timing via Federal Reserve policies was difficult but still possible. But that’s a thing of the past as we are in the midst of the greatest amount of central bank cash infusion since the Great Recession 10 years ago. World central banks are trying to avoid a recession by swamping credit markets with cash. In doing so, much of the cash goes into the stock market as banks and funds lever up and push the markets higher regardless of the lack of earnings growth and a slowing economy.

January 27th, 2020: Seemingly out of nowhere at least three issues have emerged which are causing the stock market to roll over.

1. The rise of Bernie Sanders is polling. As you’re probably well aware, Bernie has moved ahead of Biden in many states. His popularity creates a stark economic contrast to what presently passes for economic policy. Investment markets are discounting entities – in other words, markets will begin to move one way or another till November depending on which candidate is the perceived winner. DJT’s policies are positive for stocks in the short term while Bernie Sanders presents a severe headwind for the future.

In anticipation of a Democratic winning in November, I would anticipate higher capital gains taxes in the future – this is one of the prime reasons for the core Growth stocks mentioned earlier. It is my hope they can be held in excess of a year to qualify for the long term capital gains rate.

If your account is in a non-taxable IRA or Rollover, these core holdings will still be a benefit long term – unless the Fed pivots from ultra easy policy to inflation-motivated tightening.

2. The Coronavirus: Aside from the obvious potential lethality and its effect on travel, trade and healthcare, the virus represents another hurdle for supply chains. Last year I wrote about how important supply chains are for manufacturing productivity. They have been significantly disrupted by the unending Trade wars. Now, the Coronavirus present another issue compounding the issue. Will this final straw to move US manufacturing out of China to someplace local?

3. The Fed has begun to reduce its capital flows. I’m willing to bet they’re thinking twice about that choice now. The rise in stock prices in the 4th Q of 2019 was not due to any economic rebound. It was due to the Fed adding massive liquidity (cash) to the banking system. Last week they started to ease off.

As I mentioned earlier, this government does now want to see natural price discovery for the stock markets as that would give the Democrats and edge. So I wouldn’t be surprised to see the Fed go back to their $60 billion goal should stocks get hit hard.

Sell Signal: My proprietary models are beginning to show that it’s time to sell a portion of stocks and use the cash balance for hedges. My goal is to minimize net losses for what may lay ahead. Considering the magnitude of the move higher since October this isn’t surprising but I would like to protect as much of our January gains as possible. At that point we can allow the selloff to evolve with some peace of mind.

Brad Pappas
January 27, 2020