Archives January 2021

Founder's Trading Journal

Rougher Waters Ahead

AF Thornton 0 Comment

Navigator Algorithms - 100% Cash

Looking at January, not to mention last week, what we can say is that the market rejected further gains above December’s high. Of course, this also means that we are coming back into the megaphone channel and dropping below the weekly wedge pattern. 

From a weekly perspective, the market rejected four weeks of gains last week, ending January essentially flat. This leaves the broad market flat for the year.

As the saying goes, “so goes January so goes the year.” It is a nice saying but unsupported by actual statistics. Nevertheless, the market sorely needed to digest recent gains and work off the froth. GameStop risk (with counterparties behind the curtain) triggered the sell-off and reminded investors just how leveraged this market is (with record call options) and how it might behave when you roll the tape backward.

Does that mean this is THE top or a major top? Of course, I don’t know but reverse “V” tops are rare. Topping is a longer process, at least in the absence of an exogenous event. For now, I am viewing this as a first down leg, which may turn out to be part of the topping process for a deeper intermediate correction that ends mid-February. Outperformance by defensive sectors last week underscores that opinion. 

But as I have stated, a major market top would more likely present towards the end of spring based on the predominant, 18-month cycle. Between now and then, the topping process could involve a lot of lateral action, meaning the January high would not be exceeded. We are in cash for now, and we will remain on bottom watch, culling through our lists.

On a positive note, the Navigator core model was up 55% for the month. We were stopped out of my brief foray into the XLE Friday, though oil held its ground firmly. Unfortunately, the XLE got caught up in indiscriminate selling associated with the GameStop hedge fund fiasco. The hedge funds, along with some banks, clearing firms, and other counterparties, were forced to sell other securities to maintain short positions and cover margin calls. With Robinhood further limiting sales of up to 50 securities, market participants got spooked and fled to cash.

My initial target of 3650 on the S&P 500 futures has been tagged tonight, and the market bounced. At this writing, the S&P 500 futures have reclaimed 3700. That is a net positive, as are the fear gauges showing that a short-term bottom should be close at hand. At least some of the froth is off the markets for now. Further gains will depend on what the Europeans do later tonight. At least the Asians are buying.

Notably, the Weekly Expected Move based on Friday options expiration has nearly double from last week, with the low end of the range at 3600 and the high end near 3900. Clearly, market makers are expecting considerable volatility this week, given a 300 point range.

I would expect the market to bounce here, then fail about halfway back before moving down into the next nominal 40-week cycle correction slated to trough around February 15th. We should zig and zag a bit until we finish. As pointed out in the 2021 outlook video, 3500 is looking to be the worst case for now – and we would be lucky to tag it for a nice, bottom entry point. I always keep an open mind about all possibilities and will continue to trade what is in front of us, regardless of forecast and opinions.

Given the systematic risk associated with the GameStop phenomenon and the high correlation right now among all S&P 500 sectors, I don’t expect energy stocks to counter the market forces, even though oil is performing well. So we will use a more generalized market bottom to reenter this important sector and inflation hedge.

Next week is the impeachment trial, and rancor dominates Washington, D.C. The Reddit crowd is now setting their sites on silver. So the road ahead will be rocky for a while, and the markets are likely to reflect the same.

As always, stay tuned.

A.F. Thornton

Founder's Trading Journal

Stop Hit on XLE

AF Thornton 0 Comment

While oil prices are holding up well, the XLE is getting caught up in the negative pale of the stock market generally. So we are exiting the position with the move today below the 50-day Exponential Moving Average. We will stay on the sidelines until the market is at a discernable bottom.

Founder's Trading Journal

Four Legs Bad – Two Legs Better

AF Thornton 0 Comment

I grew up in “America as Founded.” Get used to hearing that new phrase, as it defines the “us” versus “them” (communist revisionists) mentality enveloping the cold, civil war in this country. Having grown up as such, and with traditional education, we were required to read books. One of those books was “Animal Farm,” by George Orwell. Upon reflection, Animal Farm seems the more appropriate analogy to our current demise than Orwell’s equally prescient book, “1984.”

Animal Farm was the story of the struggle between the animal kingdom and humans. Anyway, Snowball – an intelligent, though bit detached from reality pig, who shared the power with Napoleon and Squealer right after the Animal Revolution, came up with a short phrase to describe the animal community’s Seven Commandments issued by Old Mayor. The commandments were too long and too hard to understand for most of the Animal Farm (like the political mechanism or stock market is purported to be too complicated for the “little people” in our time). So, comparing the animals to people, Snowball came up with the simple phrase “Four Legs Good, Two Legs Bad.”

Snowball lets the least intelligent animals like sheep learn this phrase by heart and take it as their motto. He is right somehow: the pigs had to build their government and spread the ideas fast. They didn’t have the time to teach everyone to read beforehand. This phrase protects the farm population from the outer enemy – the humans who oppressed them and had two legs. Humans are bad, therefore not allowed to rule over the Animal Farm. But this simplification backfired spectacularly. The animals were perfectly protected from the enemy from outside, but when Snowball’s conflict with Napoleon reached the climactic point, he was proclaimed the “inner enemy” of the Farm.

The very existence of Snowball and his henchmen now allows Napoleon to change the Commandments, pretending that it is needed for the defense of the Farm. Snowball (who is long dead by that time and analogous to Trump exiting as President) becomes an excuse to do anything. Moreover, when Napoleon sees that the Commandments’ minor changes go almost unnoticed and is perfectly capable of shutting up the rare ones who protest, he changes this very phrase. Now it’s “Four legs good, two legs better,” and the change is made when the pigs start walking on their two legs. Orwell uses this image to mock the leaders of the Communist party who nominally were equal to any other citizen. Still, they lived in luxury and had almost unlimited power to use and oppress the rest. Sound familiar?

While not the most perfect introduction to the concept of corrections, most corrections have two legs. They have the first leg down like Tuesday, then a pause for a few days. The correction usually resumes to complete a second leg down equal to the first to finish the decline, and the market resumes its course. This type of correction is normal, healthy, and preferred. If that were to occur now, the chart below illustrates the possibility. The 100% projection of the first leg down is in the 3667 range on the S&P 500 futures chart below:

There is another type of correction. One that is more insidious. It is a correction with three, or, heaven forbid, four legs. That is where the market gets in serious trouble.

I am not expecting a three or four leg correction here. It is not really due cyclically. Believe it or not, the cycles and corrections, in magnitude and scope, are reasonably predictable.

I never cease to be amazed that people like George Orwell or Ayn Rand could have such a vision about how the future might unfold more than 50 years after their writings. Over the past few days, individual Reddit and Robinhood stock traders are now “stock insurrectionists.” Unbelievable! Add this slander to the new Orwellian description for those who question election fraud: “election denialists.” In fact, the elite power brokers are even saying that the “election denialists” are some of the “stock insurrectionists.” This is pathologically outrageous!

So what is the moral of this story? These elite idiots sent us all home for a strong political power grab. Maybe that was not such a great idea. The hedge funds have been raping common people for years. They have no scruples whatsoever. But they financed the election of the new regime in Washington D.C. It is not difficult to predict that the hedge funds will get anything they want.

This latest oppression by the ruling elites will leave the Country further divided. Even more shocking, Janet Yellen, the new treasury secretary, will be in charge of solutions to stop the stock insurrectionists. The very losing hedge funds whining and requesting “protection” have paid Yellen millions in speaking fees. Shades of Hillary Clinton’s Wall Street speaking fees, right? The fix is in. I hope I can still trade and do what I do. Worst case, we start a hedge fund.

If you want to know how Wall Street, the Financial Press, and the Hedge Funds really work, read this award-winning expose by Mark Mitchell from the mid-2000s.

For now, and for the correction at hand, I agree with Napoleon from Animal Farm. Four Legs Bad, Two Legs Better!

A.F. Thornton

Postscript

To understand the Reddit phenomenon, read this open letter from a Reddit trader to Melvin Capital, one of the Hedge Fund whiners losing money:

I was in my early teens during the ’08 crisis. I vividly remember the enormous repercussions that the reckless actions by those on Wall Street had in my personal life, and the lives of those close to me. I was fortunate – my parents were prudent and a little paranoid, and they had some food storage saved up. When that crisis hit our family, we were able to keep our little house, but we lived off of pancake mix, and powdered milk, and beans and rice for a year. Ever since then, my parents have kept a food storage, and they keep it updated and fresh.

Those close to me, my friends and extended family, were not nearly as fortunate. My aunt moved in with us and paid what little rent she could to my family while she tried to find any sort of work. Do you know what tomato soup made out of school cafeteria ketchup packets taste like? My friends got to find out. Almost a year after the crisis’ low, my dad had stabilized our income stream and to help out others, he was hiring my friends’ dads for odd house work. One of them built a new closet in our guest room. Another one did some landscaping in our backyard. I will forever be so proud of my parents, because in a time of need, even when I have no doubt money was still tight, they had the mindfulness and compassion to help out those who absolutely needed it.

To Melvin Capital: you stand for everything that I hated during that time. You’re a firm who makes money off of exploiting a company and manipulating markets and media to your advantage. Your continued existence is a sharp reminder that the ones in charge of so much hardship during the ’08 crisis were not punished. And your blatant disregard for the law, made obvious months ago through your (for the Melvin lawyers out there: alleged) illegal naked short selling and more recently your obscene market manipulation after hours shows that you haven’t learned a single thing since ’08. And why would you? Your ilke were bailed out and rewarded for terrible and illegal financial decisions that negatively changed the lives of millions. I bought shares a few days ago. I dumped my savings into GME, paid my rent for this month with my credit card, and dumped my rent money into more GME (which for the people here at WSB, I would not recommend). And I’m holding. This is personal for me, and millions of others. You can drop the price of GME after hours $120, I’m not going anywhere. You can pay for thousands of reddit bots, I’m holding. You can get every mainstream media outlet to demonize us, I don’t care. I’m making this as painful as I can for you.

Founder's Trading Journal

GameStop – Market Slop

AF Thornton 0 Comment

Just a quick note on the markets tonight. Most of this morning ended up as short-covering. We hit the buy point I had targeted tonight at the Weekly Expected Move low around 3769 – but the market is still going down, at least as measured by the overnight futures.

Every correction begins with a catalyst. Perhaps GameStop is it. More is being revealed every day, but the leverage and risk involved in this and other stocks shorted is starting to have pangs of the mortgage crisis in 2007. Remember all of the Credit Default swaps? Well, there are more put options on GameStop than the company has outstanding stock to purchase and cover the shorts. Some of those options expire tomorrow.

It won’t be long before investors begin to focus on Gamma risk generally. This is the risk of options leverage across the entire market. The rigged, favored, and whining hedge funds already have the SEC ready to outlaw individual investors. It is an absolutely disgusting display of oligarchy, privilege and arrogance. It is the Wall Street version of the rigged game already engulfing Washington D.C.

Friends and family, this is not going to end well. So we will stay in cash for now, nibbling here and there as we did with calls on the Energy Sector ETF (XLF) today. But even those could be taken down further if the market destabilizes. Hedge funds stand to lose about $80 billion dollars here, and that may be the tip of the iceberg. Don’t forget, the first $4 trillion in Fed funds last March went to bail out four hedge funds.

I am thinking I will start another hedge fund. I like this “heads I win, tails you lose” investment strategy. These paltry stimulus checks and PPP are nothing compared to what I could get in a hedge fund bailout. What do you think? Tempting, right?

How are we going to survive all of these arrogant, pompous crooks?

A.F. Thornton

Founder's Trading Journal

Whiners

AF Thornton 0 Comment

Navigator Algorithms – 100 Cash

Revenge of the Nerds

No doubt you have heard by now that a bunch of day traders in a Reddit social media group just cost a couple of prestigious hedge funds about $18 billion. The hedge fund managers then went on CNBC whining for regulations to stop these kinds of traders. The Biden administration promised to look into the matter.

Before the day was done, Reddit had shut down the trading group for “hate speech.” But they were back up by yesterday evening – though the group is now private. Perhaps the group cut a deal with Reddit to stay alive by remaining private. But the whole situation reeks of the same dangerous virus overtaking the country. Free speech is under attack, and communism is rising fast. “Shut up!” “Obey!” say our new leaders in Washington D.C.

But let me make sure I get this right. First, some hedge funds shorted a company called GameStop (GME). Shorting means that the hedge fund makes money if the stock drops in value. As usual, the hedge funds went on with their favorite CNBC hosts (co-conspirators) to slam the company and drive the price down without regard to whether it destroys the company or its workers. Hedge funds do this all the time – it is a rigged, insider game but perfectly legal.

Except for this time, there was a melding of gamers and new day traders. Gamers love GameStop. And while GameStop is a brick and mortar company somewhat on the ropes, the company has just come out with a new strategy to move into an online model. The hybrid gamers/day traders got mad at the hedge funds. So they started buying the stock and bidding it up – the opposite of what the hedge funds needed. The next thing you know, the stock is up 700% in a day, and the hedge funds were brought to their knees.

The Reddit trading group has 2.5 million members. With scarcely a few hundred to a few thousand dollars each, they beat the hedge funds at their own game and left GameStop with a fighting chance to implement its new strategy. So the hedge funds are crying on CNBC, whining to the Biden administration, and begging the SEC to get involved. Yet, there is nothing illegal about what the Reddit Group did any more than it is illegal for the Hedge Funds to short a stock and talk it down. I am not talking morality here. After all, this is Wall Street,

Some talking heads (CNN, of course) were quick to blame Trumpism. Naturally, this misses the point. Simply put, everyone is tired of the rigged game. Trumpism is a symptom, not a cause. It does not matter if you are talking about bailed-out bankers, greenie weenies in their Lear Jets, perceived stolen elections, or the insider’s game on Wall Street; people are tired of it.

And if you have not seen the chain link fence now surrounding the capital with razer barbed wire curled around the top of it, you are missing a sight to behold. My vote is this. With the 5,000 National Guard troops in D.C., along with the new fence, all they need to do is throw up a few guard towers, and we now have all of these politicians in prison, which is where most of them belong.

In the meantime, our exit from the market was a true squeaker on Tuesday. We exited the S&P 500 at 3851.50, and it fell all the way to 3700 yesterday and overnight. In fact, the market sliced right through the 21-day EMA and the Weekly Expected Move, finding support at 3700, which also is the 50-day moving average. 

You have to go all the way back to October to find a similar negative launch day. At this writing, the S&P 500 is back to the Weekly Expected Move at 3767. That likely has a few options market makers breathing a sigh of relief, as that is the level they need to maintain to avoid significant losses at expiration tomorrow. Maybe they can get some help from the Reddit group?

At this point, we are getting the correction I expected, and I will look for a bottom and entry point. It would be highly unusual to have two market crashes start two years in a row on at around the same time. I cannot exclude the possibility, but it is not what I would expect here. 

For now, I am expecting something contained at 10% or less, with 3500 or so being the worst case, as I outlined in the 2021 forecast video last week. The next, large, crash-like correction should come from the 18-month cycle, which would bottom around late May. It would be a bit early to start into that correction now. That is my best guess anyway.

Yesterday, the Federal Reserve met and left their policies intact while conveying deep concerns about the virus and the economy. Likely, that backdrop served as incentive for the sellers yesterday.

For now, hat tip to the gamers. It looks like they are destined to make a habit of this. The control freaks in Washington D.C. wanted everyone to stay home, right? Apparently, they need to be careful what they wish for! The Reddit Group’s new targets are AMC Theatres and Nokia. It is fun to watch, but don’t be tempted to participate. 

The $18 billion hedge fund losses were similar to Hillary losing the Presidential election in 2016. The establishment was caught off guard – and their cheating algorithms were inadequate. The hedge funds are not stupid and are not likely to be caught off guard again. Like the establishment globalists, the hedge funds control the media. In this case, they control the financial media.

The game is rigged – just like Washington D.C. We made 896% last year keeping it simple. We are up 55% so far for the month of January. No need to play games or into the hands of the Wall Street crooks. I ran a hedge fund in the 1990’s. I know their games well.

A.F. Thornton

Founder's Trading Journal

Good to the Last Drop…

AF Thornton 0 Comment

Navigator Algorithms – 100% Cash

What may be good for coffee is not always good for the markets. We squeezed another 40 points or so on this last round trip on the S&P 500 index, and we are off to a great start for the year. But as I have been mentioning, we are stuck in the corner of a rising wedge pattern.

 Unless the market goes completely vertical (and nothing would surprise me at this point), I don’t think we can squeeze another drop out of the market without waking up one morning very unhappy. This morning would have been a case in point. We were out yesterday at 3851.50 for a 39 point gain. The S&P 500 futures are down about 52 points from our exit at this writing.

In addition to the Navigator exit signal yesterday, the charts below (courtesy of David Larew – Twitter Handle @thinktankcharts) illustrate the point:

Valuations remain lofty. The earnings momentum we expect into year-end will help right the apple cart, but it does not hurt to briefly revisit the issue:

The momentum divergences I mentioned yesterday can be seen in this chart:

Breadth divergences are also making an appearance at this last high as can be seen below:

The sentiment still indicates a generally giddy crowd, and most of the crowd are retail amateurs. Truly, the market is a zero-sum game. We just took 40 points from someone:

This is not my first bull market, but these are the lowest levels I have seen in the put/call ratio in my 34-year career:

You know the old saying: “pigs get fat, and hogs get slaughtered.” The S&P 500 futures are back to the daily mean this morning – let’s see what happens.

As a side note, President Biden joined Grammarly’s view and signed an executive order outlawing the term “China Virus” yesterday, at least in the federal government. So if I use the term “Covid-19,” you will know why. Would someone please pinch me and wake me up?

A.F. Thornton

Founder's Trading Journal

Sell Signal

AF Thornton 0 Comment

We have a Navigator Core Model Sell Signal which we just communicated to the Founder’s Group at 3851.50 on the S&P 500 mini futures. The market is struggling to hold the ground above 3850 today. Various breadth indicators are not confirming the recent run off yesterday’s lows. With the risks attendant to these levels, we think it best to return to cash for now with a nice profit from our last signal.

Founder's Trading Journal

Earnings and Volatility

AF Thornton 0 Comment

Navigator Core Algorithm Status

Narrative

There is not a lot to add to yesterday. Caution remains the rule of the day as defensive sectors led the markets yesterday. Sentiment remains giddy as retail investors continue their record call buying. A slew of earnings announcements will rule the remainder of the week. The companies reporting include Apple (AAPL), Advanced Micro Devices (AMD), Microsoft (MSFT), ServiceNow (NOW), Facebook (FB), and Tesla (TSLA).

Yesterday’s morning swoon and volatility ended up attracting the institutional crowd by the end of the day, handily beating Friday’s volume. As I pointed out yesterday, what looked like a harsh distribution day taking shape in the morning ended up being a liquidation break and a constructive outside day for the Nasdaq composite and S&P 500.

Miraculously, the Democrat States starting opening up right after last week’s inauguration. In an equally amazing coincidence, the CDC announced yesterday that Chinese Virus related cases and deaths had been overstated by ten-fold. If that is not enough good news for you, cases and deaths apparently peaked last week and are now falling dramatically. Even California and New York have announced that they are ready to march back towards normality. Next thing you know, we will hear that the Chinese Virus really isn’t much worse than the flu. Go figure.

Despite all the great news, both the NASDAQ 100 and the retail sector (XRT) charts looked like blow-offs as prices threw over their top channel lines and reversed. Take a look at the retail sector below and the faint red spike from yesterday. Blow-offs lead to corrections – so we need to be careful here.

In a sense, we are squeezing the last drops out of this latest run. I am looking to take profits around the 3890 level, assuming the S&P 500 can break through the 3850 resistance level that has been binding the index over the past few sessions.

Meanwhile, we are still using a close below the 5-day EMA as our stop. A good stop level then is 3835.50 this morning.

A.F. Thornton

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