Seeking Alpha
David H. Lerner
Short-term horizon, long-term horizon, momentum, Multiple Discipline

The higher we get, the more concerned I get for the overall health of the trading environment. For the S&P 500, 3,233 is the high-water mark.

If we break above, I fear a runaway hyperbolic melt-up that is not sustainable. The most vulnerable will be the newbie Robinhood traders who can least afford to lose.

In my experience, there should be some catalyst that causes enough turbulence to cause a retreat to a lower level in the trading channel.

This may seem paradoxical, but we really need a good sell off right here to remind participants that stocks can also go down, and to generate future buyers.

I actually went long the Silver ETF in call options as a hedge. I am also looking at the other precious medals as a hedge.

Why be so negative?

The title of this piece possibly brings questions to the mind of the reader. Why is the writer looking for possible catalysts to take the market down? This query is especially acute when all one needs to do is look at the futures, refreshed and looking towards tomorrow morning. If you would guess they’d be up strongly without first taking a look, you’d be right. Since the Sunday futures nearly always begin in the positive position for the last several weeks in a row, it's a pretty good bet.

So, if you’ve read the last several pieces I have written, even though it’s against my nature to be bearish, I have been looking for a move to the downside. I am not claiming that we are about to become a bear market. I am not looking for a change in the overall complexion of the market. I just believe that we are scraping along the upper range of the indexes at this point, and for the health of the trading environment we need to test out where support is.

This may sound --shall we say -- a bit metaphysical, but it comes from years of watching market moves. My great fear is that we have a capitulation of the bears, and the holdouts, and then they all rush in, taking us to hyperbolic ascent. That would be bad, especially for all the new Robinhood traders who have been told by certain irresponsible individuals that stocks only go up.

Hope is not a strategy, of course

I can hope that the market doesn’t melt up. This hope becomes flimsy, when you see market participants rush in on any little retreat the market exhibits. Look at Thursday and Friday’s action on the 5-Day chart of the S&P 500

Twice we see an attempt to sell down the market and twice the sellers were absorbed by the FoMo players. These are like Warren Buffett who sold out of the market at the bottom and likely have been sitting out this rally and looking to get back in. Yes, I am using my imagination to try and understand what is going on. In more normal days of yore, the market would not have rejected two attempts in a row, and would have gone lower and stayed there. Now, some of you news-hounds would retort that “hey, we had the Gilead (GILD) news about remdesivir and how it improved morbidity against COVID-19. Sure, but how many times are we going to squeeze juice out of that orange? So, okay, maybe this is the last time, but here we are getting very close to the previous interim high of 3,233, we will easily breach that level this week. What happens then?

I would like to explore possibilities that would take this rally down a notch, just so that we can maintain a ready supply of future buyers. I know this is counter-intuitive, why would I want the market to come down so that it can come up? There are times that everyone who intended to buy and had ready funds to buy essentially are "All In." Once that happens and up comes any little jog to upset the bullish market, that is when we crash down. Because everyone will be running for the exits all at once. The ones who will get hurt the most are the newbies who bought at the top, and expect prices to reach ever higher. These are our future investors, our future traders, and the future hope of capitalists everywhere. I don’t want them discouraged. What I want and what is inevitable are two very separate things. However it is just as likely that something will happen soon that will reset expectations in the form of negative information or market mechanics. So what are those?

Catalyst #1: Tesla (TSLA) reports another positive earnings report this week

Once it reports GAAP earnings TSLA will be put on the S&P 500. Being the 16th-largest company, and already worth north of $240 billion, a lot of other S&P stocks will have to be sold to make room. Conversely a lot of S&P 500 based ETFs, and Pension Funds that are closet indexers will buy TSLA. Since TSLA is already at an unsustainable level, it is quite possible that this whole exercise serves to hammer the entire index. Now before you come at me, I am a huge fan of TSLA, my close family owns Tesla vehicles, and they love them. I have ridden in them and they are stupendous. I even believe in TSLA the stock, but TSLA has a history of volatility. History tends to repeat. TSLA is priced to perfection, and even Musk himself said the stock was overvalued several hundred points ago. Would anyone be surprised if TSLA cracks back down 20%? Musk could himself say or do something that spooks investors, he has done it many times before. So, TSLA at over 1,500, maybe by the time all the ETFs finish buying TSLA it's at 1,700, and then I said it cracks down minus 20% to 30% that’s gonna leave a mark. Maybe market participants rush in and buy that drop, but we will get our dip, and it would be about time. Come on, just take a look at this one-year chart and tell me that TSLA isn’t already vulnerable to some kind of corrective phase…

At around 900 you can see any kind of support, or even 1,000, would be 30% below where it is right now. Wait until Standard & Poors announces that they are going on the S&P 500. What happens if they don’t make it? Look out below. That too will put a dent in the bull. In any case, TSLA is a possible catalyst for a correction and bears watching (pun intended)

Catalyst #2: Biden names his Vice President

The market has been whistling past the graveyard, or maybe participants think that a President Biden would be a better president for stocks, or maybe, the pump priming by the Fed, and all the fiscal stimulus has inoculated traders to the point that they aren’t paying attention. Maybe the stock market still believes Trump will win. Guess what? Biden naming a very viable candidate, who is female and a person of color will change that equation in ways too complex and impertinent to this discussion to enumerate.

One thing is sure, if you survey the field of VP candidates under consideration, none are capitalists supportive of stock owners. To prepare the ground so-to-speak Candidate Biden declared that the “Days of Shareholder Capitalism is over.” It is my understanding that Biden will announce his running mate next month, so with this catalyst traders can still party hardy for another few weeks. Then again, as the day nears I would think that the Biden campaign would float some trial balloons and that could give the market a reason to “check back” to the lower trading band. As an aside, the Obama administration was not a bad one for the stock market. Raising taxes and opening the floodgates of regulations will not harm the companies big enough to be public. It will actually be an advantage for those who can hire lobbyists, lawyers and accountants, it is the little guy who will get screwed. That is not our concern here, insofar as we are trading stocks short term. On the other hand, the reason why the stock market and our economy has been so resilient even under the tariff wars, and the bounce back from the COVID shutdown was because main street was doing quite well. An economy that is shackled by a deluge of regulation, and higher corporate taxes will have less abundant economic opportunity for business formation and the little guy. Not our concern...

Catalyst #3: Congress has their summer legislative session July 20 to August 8

This is really short and sweet. Both the Republicans and the Democrats want to have another fiscal stimulus bill. The Dems already passed theirs chock full of gimmies to constituencies that is DOA to the GOP. In the end they will come together. For Speaker Pelosi, the last thing she wants is rioting in the streets and making sure that people don’t become desperate is to the benefit of the Dems. The GOP controlled Senate, is fighting extinction and the last thing they want is to be seen as not caring about the people too. Also, and I mean this without a tinge of cynicism, these politicians really do care about people, they understand that the current situation is due to government mandated shutdown, basically it's a “You break it you pay for it” situation. All that said, nothing in congress gets done unless there is some brinkmanship. McConnell will make a big flourish of rejecting the houses profligacy, and then proceed to exhibit the Senate's version of profligacy. At that point the two old warriors will kabuki-dance once again and walk away from the deal, then 36 to 48 hours later Trump will have a bill on his desk for him to sign. It is that aperture in that 48-hour period that we could have a market sell off. Once again, this will likely be the first week of August and once again, we will still be able to party like its Dot.Com 1999 fever all over again.

The higher we get, the more vulnerable we are

I am sure there are a number of other catalysts, some further fall out regarding Hong Kong, or anything China related, while has not yet rattled the market, as we get closer that 3,233 level, the market can choose to be perturbed. On the other hand if we reach above that 3,233 level, that in of itself could cause some selling. Am I the only one, that is nervously watching this level and muttering, “how much higher can we go”. Or “This level is way out of whack to any rational valuation level”, or “Is the NBA really going to pull off getting all their teams together down in Orlando” wait that is the wrong rumination...Anyway, and I believe I said this before, keep one eye on the S&P 500 and the other on the exit. No one ever went broke taking profits. I am battling my own bullish nature and trying to keep 30% cash, and thinking of ways to hedge. More on that below.

It’s Earnings Season: This Week's Earnings Schedule

Monday, July 13:

PepsiCo, Inc. (PEP)

My Take: Pepsi will likely do very well with it’s snacks division. This is will read through to packaged goods and perhaps other epidemic plays.

Tuesday, July 14:

Citigroup Inc (C.PK), Delta Air Lines, Inc. (DAL), Fastenal (FAST), First Republic Bank (FRC), JPMorgan Chase & Co. (JPM), Wells Fargo & Co (WFC),

My take: Tuesday will answer the question about value stocks. When you pay astronomical prices for the go-go growth names are they worth it? Or has value in the form of financials finally found their level, and it is time to buy them. My suspicion is that now is not the time, even if the earnings come in better than expected and the loan loss reserves and other provisions to counter the risk of the current era are lower than expected. The economic conditions are still too challenging for the banks. Also if there is a change in politics, the Biden Admin won’t be making it any easier for them either.

Wednesday, July 15:

ASML Holding NV (ASML), Bank of New York Mellon Corp (BK), Goldman Sachs Group Inc (GS.PK), IBM (IBM), Infosys Ltd (INFY), Omnicom Group Inc. (OMC), PNC Financial Services Group Inc (PNC), Progressive Corp (PGR), U.S. Bancorp (USB), UnitedHealth Group Inc (UNH), Wipro Limited (WIT),

My take: ASML will give us a read on the health of the semiconductor industry. In this case, the chips industry are in the chips and ASML will be confirmatory.

Thursday, July 16:

Abbott Laboratories (ABT), Bank of America Corp (BAC.PK), Danaher Co. (DHR), Domino's Pizza, Inc. (DPZ), Dover Corp (DOV), Honeywell International Inc. (HON), J B Hunt Transport Services Inc (JBHT), Johnson & Johnson (JNJ), Morgan Stanley (MS.PK), Netflix, Inc. (NFLX), PPG Industries, Inc. (PPG), SunTrust Banks, Inc. (STI), Taiwan Semiconductor Mfg. Co. Ltd. (TSM), Truist Financial Corporation (TFC),

My Take: HON is very interesting to me, not for the smokestacks. HON is making a turn to software and even quantum computing. I will be paying attention to that conference call. HON might just shock a lot of technology snobs a few years down the road. Separately but in the same vein as ASML,I want to pay attention to TSM. TSM is the foundry to many of the most famous chip companies, and they are making Intel look bad in their manufacturing prowess. If TSM is doing well then tech writ large is doing very well as well.

Friday, July 17:

BlackRock, Inc. (BLK), Citizens Financial Group Inc (CFG), HDFC Bank Limited (HDB), Kansas City Southern (KSU), NVR, Inc. (NVR), State Street Corp (STT), Telefonaktiebolaget LM Ericsson (ERIC),

My Trades: I went long SLV Calls; my first precious metals ETF options. I am doing so as a hedge, I am looking at gold in some form whether the miners GDX, GDXJ or the GLD in options. I am concerned about the markets. I think that if there is a sell off, interest rates might get to historic lows and that in turn will raise the precious metal prices. I know that if this sell off degenerates into a full on panic then they will be sold off too. I don't think that will happen, so for moderate sell off, 7% to 8%, even 10% I think going long SLV or GDX should work just fine.

Disclosure: I am/we are long SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I went long SLV Calls, I am also looking at GLD, GDX and GDXJ calls to hedge my portfolio

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.