The Crisis every investor is waiting for. What you gonna do? #2
What to do in the next 6-9 months with existing risk factors?
Educate yourself to come to a conclusion.
Do not blindly follow "experts". In the current situation we are facing several risks to the stock market. I listened to a lot of so called experts. They tell you what sounds great, what you want to hear. Most of them get paid for being on the show even it is a ZOOM call without pants. They talk anything and get paid. Do they do any research or do they collect opinions off FB and Twatter? My experience is stop listening to background noise. Improve your own skills and do research and LEARN economics and financials. The Market commentary will always be totally diametric. As a seller of an asset in a trade and the buyer of the same asset have both diametric expectations of the market. So find your own.
There are a few good YouTuber out there I listen regularly in but even though I like them and they put positive thoughts into my head do not trade what they say. You can take the idea but you MUST do your own research. It is said that any stock pick of an "expert" is as got as letting a chimpanzee chose any trades. The outcome for the Chimps is better by a bit.
If you killed your account in the process come back and let me know how it worked out. Or after you lost your first account of $20,000.00 and you got up again, we can talk about your baptizing. All good traders lost a huge amount of money before they made it right.
Having said this I can only encourage people to get financially literate. Brokers and charlatan educators rigging against you. They make huge money and you lose 90% of the time 90% of your money within 90 days.
Please be advised, I am not a financial adviser. I am not recommending any trades. I might be just a crazy guy with a wild brain.
If you want to see the picture to the story, you have to go to
hedgingstocks.blogspot dot com/2021/08/what-to-do-in-next-6-9-months-with.html.
As a content provider I should not pay for images. I do not take money either.
I listed the risk factors already. This is only my personal opinion.
What factors could that be.
Inflation
Wage Inflation
Money Supply
Money circulation
Housing bubble
The Warren Buffet indicator
China Regulations
China Currency Manipulation
China Delta Variance of Covid the huge wild card!
WE MUST ADD WAR WITH CHINA to the equation, Taiwan
And I wrote about a few of them.
I made a research on the housing market and if we are in a bubble that is about to burst. I do not think so for the near future. But this is a very long analysis with lot of graphs that made me conclude that the housing bubble will NOT be the IED, not the roadside bomb that will bring the market down.
My biggest candidates for now are
For those reasons without explaining them any further I want to explain my perspective and the focus of my trades for the next six month.
I concluded that
1. The down side risk is growing and buying dips is getting too risky. I am closing my long positions slowly.
2. Tapering might start October and being announced in September during the FOMC Two-day meeting in September 21-22.
3. This will take money out of the stock market and put it into the Bond Market. It will increase YIELDS and decrease Bond Prices.
4. The FOMC said that they will start tapering with both, reducing the artificial demand for bonds and MBS.
5. MBS, Mortgage Backed Securities are basically mortgages of smaller banks that their head quarters put together in a DEBT security and sold them to the FEDs. This is a 12 billion Dolla business per month increasing the debt burden of future generations. The banks convey the default risk to the Feds /tax payers and some interest from the mortgages. The original bank keeps a portion but very little risk. If the Feds stop buying those MBS they will give the risk back to the local banks and they will have to tighten their lending rules to reduce the increased risk of defaulting. Also this will reduce revenue with the loss of selling those MBS. Financial sector will cool down during tapering.
6. The Bond market will cool down too. Yields will rise. The Feds will reduce buying Bonds and hence the prices will fall. Since the prices of these assets are falling their yield (state guaranteed interest rate) will increase. When the yield of an assets stays the same but you pay less than face value of that asset then your yield goes up. The yield /(interest) is NOT bond to the selling price of that asset but to the face value printed on that NOTE or BOND. Thats why it is said when the Feds keeps buying bonds it keeps the prices artificially high, they are manipulated, to keep the yield down. And of course the smart money goes into the stock market. There is much more to make. Got it?
(Images are available on my other blog)
Here is the 10 years Bond yield
7. The Stock Market will crash with a conflict with China. Foreign countries will take their money out of China stocks and the Asia region and flee to the US Dollar buying bonds. This bond buying might counter the yield a little. But all transactions will be conducted in USD. A conflict with China will shock the Asian markets.
8. An conflict with China will force the Feds to print more money to finance war efforts, especially if they continue over a longer period of time. It will put additional pressure on inflation during and after the war. A smaller regional conflict will not have a huge impact, as we experienced already. See image.
9. Either way, with tapering the US Dollar will rise due to the above mentioned traditional reaction.
10. With an increase of Interest rates, next year as the rumors are, the banking sector will do better. increased interest rates always benefit the banks.
11. A war over Taiwan and may be an attack on Israel by Iran or vis versa, will bring the oil and all commodity prices up big time. this will have a positive impact on oil prices and a negative impact on air travel, hotels and cruisers.
12. A review of 20 major geopolitical events dating all the way back to World War II showed stocks had fully recovered losses within an average of 47 trading days (10 weeks) after an average maximum drawdown of 5%, according to a CFRA study.
(images not possible here)
An attack on Taiwan I consider more like of the level of the Iraq invasion or Pearl Harbor. It will send shockwaves through the market and reorganize priorities. China might be out of the window. It will have a huge impact.
12. In the case of a conflict with China, not small Iran or their proxies, the US Dollar will gain in value. Why is that? Shipping routs will be interrupted. Heavily needed Commodity Prices will rise. Oil prices will rise and so do chemical products. The US dollar would rise because it is the reserve currency of the world, and a hedge against uncertainty. Almost all petrochemical contracts as well as oil and other commodities are denominated in the US dollar. The sole exception to this rule is China. A rising Dollar will be anti inflationary.
13. Contradicting this approach will be the wild card of the China Delta Covid. If there are more shut downs coming, more port closures and transportation chain bottle necks, inflation in the PPI and later in the CPI will increase. But the cocaine operation of the Feds (buying MBS and printing money) will continue and tapering will not start. Keep doing what we are doing, buy the dips. Then inflation will start to increase the pace, rate of inflation will rise.
Conclusion
We have four levels. and each of them requires different actions
1. Inflation and hence the start of tapering by the Feds.
2. Cooling of the Money Velocity, M2V, and the increase of interest rates.
3. The Delta Variance, the huge wild card!
4. Chinas attack on Taiwan.
1. Inflation and hence the start of tapering by the Feds.
Go long USD, buy UUP ETF, US-Dollar ETF
Go Short AUD, Australia has a huge lockdown in place and its economy also is 20% depending on China. Shorting the Aussie looks good to me.
Find an Currency ETF you can trust, USD / AUD and go long, not the other way around.
Sell Bear Call Credit Spreads since the markets will rise slower and the strike might not be triggered. I chose Short Call 3 Standard Deviation OTM on the QQQ and SPY then Long Call for hedging $10 above that price. Maybe with tapering you could sell at 2nd standard deviation. I am not sure about this yet.
2. Cooling of the Money Velocity, M2V, and the increase of interest rates.
Go long USD, buy UUP ETF, US-Dollar ETF, rising interest rates are good for the USD.
Go Short AUD, Australia has a huge lockdown in place and its economy also is 20% depending on China. Shorting the Aussie looks good to me
Sell Call Bear Credit Spreads since the markets (QQQ, SPY, IWM) will rise slower and the strike might not be triggered. I chose Short Call 2 Standard Deviation OTM on the QQQ and SPY then Long Call for hedging $10 above that price.
Buy Diagonal Put Debit Spreads. Go long PUT 1 standard Deviation OTM, 3 months DTE and to lower costs with buying the same PUT BUT with a shorter DTE (maybe 1 month) to cover costs, assuming that the strike will not be hit until in one month. Or Sell Calendar Spread 1 standard Deviation OTM.
3. The Delta Variance, the huge wild card!
If lockdowns are announced and the economic recovery seems to slow, stagflation, the Feds money will continue to flow. Inflation will rise and the Stock Market will rise. I will do the same as above but move my strikes for the credit spreads to the third Standard Deviation and reduce DTE from 45 days to 30.
Additionally to what is said you can do the following. Maybe the better choice in short term.
Buy a Call Diagonal Spreads with two different Strikes and Expiration Dates. Buy Call with a DTE, maybe one month. Buy it OTM, one StandDev.
Sell a shorter term Call, maybe two weeks, further OTM, maybe 5$ for the QQQ to reduce costs. You expect the short position to expire worthless at date of Expiration and the long Call still continues in the money, ITM, for the next two weeks.
Buy Calendar Spreads with the same strike but two different Expiration Dates, maybe one month and 14 days. Buy it OTM with one month DTE, Sell a shorter term Call further OTM, same strike to reduce costs. You expect the short position to expire worthless at date of Expiration and the long Call still continues since the strike price is not yet hit. So be careful choosing the Strike!
4. Chinas attack on Taiwan
Go long Oil ETF, COG, CABOT OIL & GAS CORP; NRT, NORTH EUROPEAN OIL ROYALTY TRUST;
Refining companies
(Lists not possible to post here)
Integrated Oil
(Lists not possible to post here)
Sell shares in Chinese ETFs or companies, they will instantly lose value. Be conscious about the spread. Be careful not to buy options, they might not be respected. You can google them. Go large caps.
(Lists not possible to post here)
Buy USD. It is said USD will rise and so inflation. A war with China there will be no doubt that they will pump money into the system. Inflation will rise and uncertainty of foreign countries will seek save harbor in the USD
How to set up a Bear Call Spread will follow. I just cannot put this all into one article.
At least here is a guide line. Technicals are secondary but important.
Now we could look at the charts and look how to set up the trade since we know what to look for and we will listen to the news and watch the indicators to confirm our assumptions. Be careful at those times.
SPY, S&P500 market index ETF
DIA, Dow Jones Market Index, ETF
IMW, Small Cap Russel 2000, ETF
QQQ, NASDAQ, ETF
VIX, Volatility Index, reacts inverse to S&P500
AUM, AUD in USD Index
UUP, USD, ETF
AAPL Stocks as leading indicator for QQQ and SPY
Educate yourself to come to a conclusion.
Do not blindly follow "experts". In the current situation we are facing several risks to the stock market. I listened to a lot of so called experts. They tell you what sounds great, what you want to hear. Most of them get paid for being on the show even it is a ZOOM call without pants. They talk anything and get paid. Do they do any research or do they collect opinions off FB and Twatter? My experience is stop listening to background noise. Improve your own skills and do research and LEARN economics and financials. The Market commentary will always be totally diametric. As a seller of an asset in a trade and the buyer of the same asset have both diametric expectations of the market. So find your own.
There are a few good YouTuber out there I listen regularly in but even though I like them and they put positive thoughts into my head do not trade what they say. You can take the idea but you MUST do your own research. It is said that any stock pick of an "expert" is as got as letting a chimpanzee chose any trades. The outcome for the Chimps is better by a bit.
If you killed your account in the process come back and let me know how it worked out. Or after you lost your first account of $20,000.00 and you got up again, we can talk about your baptizing. All good traders lost a huge amount of money before they made it right.
Having said this I can only encourage people to get financially literate. Brokers and charlatan educators rigging against you. They make huge money and you lose 90% of the time 90% of your money within 90 days.
Please be advised, I am not a financial adviser. I am not recommending any trades. I might be just a crazy guy with a wild brain.
If you want to see the picture to the story, you have to go to
hedgingstocks.blogspot dot com/2021/08/what-to-do-in-next-6-9-months-with.html.
As a content provider I should not pay for images. I do not take money either.
I listed the risk factors already. This is only my personal opinion.
What factors could that be.
Inflation
Wage Inflation
Money Supply
Money circulation
Housing bubble
The Warren Buffet indicator
China Regulations
China Currency Manipulation
China Delta Variance of Covid the huge wild card!
WE MUST ADD WAR WITH CHINA to the equation, Taiwan
And I wrote about a few of them.
- Inflation
- Wage Inflation
- Money Supply
- Money Circulation
I made a research on the housing market and if we are in a bubble that is about to burst. I do not think so for the near future. But this is a very long analysis with lot of graphs that made me conclude that the housing bubble will NOT be the IED, not the roadside bomb that will bring the market down.
My biggest candidates for now are
- The China Delta Variance of Red Covid 19 the huge wild card!
- Chinas potential attack on Taiwan.
- Inflation and hence the start of tapering by the Feds.
For those reasons without explaining them any further I want to explain my perspective and the focus of my trades for the next six month.
I concluded that
1. The down side risk is growing and buying dips is getting too risky. I am closing my long positions slowly.
2. Tapering might start October and being announced in September during the FOMC Two-day meeting in September 21-22.
3. This will take money out of the stock market and put it into the Bond Market. It will increase YIELDS and decrease Bond Prices.
4. The FOMC said that they will start tapering with both, reducing the artificial demand for bonds and MBS.
5. MBS, Mortgage Backed Securities are basically mortgages of smaller banks that their head quarters put together in a DEBT security and sold them to the FEDs. This is a 12 billion Dolla business per month increasing the debt burden of future generations. The banks convey the default risk to the Feds /tax payers and some interest from the mortgages. The original bank keeps a portion but very little risk. If the Feds stop buying those MBS they will give the risk back to the local banks and they will have to tighten their lending rules to reduce the increased risk of defaulting. Also this will reduce revenue with the loss of selling those MBS. Financial sector will cool down during tapering.
6. The Bond market will cool down too. Yields will rise. The Feds will reduce buying Bonds and hence the prices will fall. Since the prices of these assets are falling their yield (state guaranteed interest rate) will increase. When the yield of an assets stays the same but you pay less than face value of that asset then your yield goes up. The yield /(interest) is NOT bond to the selling price of that asset but to the face value printed on that NOTE or BOND. Thats why it is said when the Feds keeps buying bonds it keeps the prices artificially high, they are manipulated, to keep the yield down. And of course the smart money goes into the stock market. There is much more to make. Got it?
(Images are available on my other blog)
Here is the 10 years Bond yield
7. The Stock Market will crash with a conflict with China. Foreign countries will take their money out of China stocks and the Asia region and flee to the US Dollar buying bonds. This bond buying might counter the yield a little. But all transactions will be conducted in USD. A conflict with China will shock the Asian markets.
8. An conflict with China will force the Feds to print more money to finance war efforts, especially if they continue over a longer period of time. It will put additional pressure on inflation during and after the war. A smaller regional conflict will not have a huge impact, as we experienced already. See image.
9. Either way, with tapering the US Dollar will rise due to the above mentioned traditional reaction.
10. With an increase of Interest rates, next year as the rumors are, the banking sector will do better. increased interest rates always benefit the banks.
11. A war over Taiwan and may be an attack on Israel by Iran or vis versa, will bring the oil and all commodity prices up big time. this will have a positive impact on oil prices and a negative impact on air travel, hotels and cruisers.
12. A review of 20 major geopolitical events dating all the way back to World War II showed stocks had fully recovered losses within an average of 47 trading days (10 weeks) after an average maximum drawdown of 5%, according to a CFRA study.
(images not possible here)
An attack on Taiwan I consider more like of the level of the Iraq invasion or Pearl Harbor. It will send shockwaves through the market and reorganize priorities. China might be out of the window. It will have a huge impact.
12. In the case of a conflict with China, not small Iran or their proxies, the US Dollar will gain in value. Why is that? Shipping routs will be interrupted. Heavily needed Commodity Prices will rise. Oil prices will rise and so do chemical products. The US dollar would rise because it is the reserve currency of the world, and a hedge against uncertainty. Almost all petrochemical contracts as well as oil and other commodities are denominated in the US dollar. The sole exception to this rule is China. A rising Dollar will be anti inflationary.
13. Contradicting this approach will be the wild card of the China Delta Covid. If there are more shut downs coming, more port closures and transportation chain bottle necks, inflation in the PPI and later in the CPI will increase. But the cocaine operation of the Feds (buying MBS and printing money) will continue and tapering will not start. Keep doing what we are doing, buy the dips. Then inflation will start to increase the pace, rate of inflation will rise.
Conclusion
We have four levels. and each of them requires different actions
1. Inflation and hence the start of tapering by the Feds.
2. Cooling of the Money Velocity, M2V, and the increase of interest rates.
3. The Delta Variance, the huge wild card!
4. Chinas attack on Taiwan.
1. Inflation and hence the start of tapering by the Feds.
Go long USD, buy UUP ETF, US-Dollar ETF
Go Short AUD, Australia has a huge lockdown in place and its economy also is 20% depending on China. Shorting the Aussie looks good to me.
Find an Currency ETF you can trust, USD / AUD and go long, not the other way around.
Sell Bear Call Credit Spreads since the markets will rise slower and the strike might not be triggered. I chose Short Call 3 Standard Deviation OTM on the QQQ and SPY then Long Call for hedging $10 above that price. Maybe with tapering you could sell at 2nd standard deviation. I am not sure about this yet.
2. Cooling of the Money Velocity, M2V, and the increase of interest rates.
Go long USD, buy UUP ETF, US-Dollar ETF, rising interest rates are good for the USD.
Go Short AUD, Australia has a huge lockdown in place and its economy also is 20% depending on China. Shorting the Aussie looks good to me
Sell Call Bear Credit Spreads since the markets (QQQ, SPY, IWM) will rise slower and the strike might not be triggered. I chose Short Call 2 Standard Deviation OTM on the QQQ and SPY then Long Call for hedging $10 above that price.
Buy Diagonal Put Debit Spreads. Go long PUT 1 standard Deviation OTM, 3 months DTE and to lower costs with buying the same PUT BUT with a shorter DTE (maybe 1 month) to cover costs, assuming that the strike will not be hit until in one month. Or Sell Calendar Spread 1 standard Deviation OTM.
3. The Delta Variance, the huge wild card!
If lockdowns are announced and the economic recovery seems to slow, stagflation, the Feds money will continue to flow. Inflation will rise and the Stock Market will rise. I will do the same as above but move my strikes for the credit spreads to the third Standard Deviation and reduce DTE from 45 days to 30.
Additionally to what is said you can do the following. Maybe the better choice in short term.
Buy a Call Diagonal Spreads with two different Strikes and Expiration Dates. Buy Call with a DTE, maybe one month. Buy it OTM, one StandDev.
Sell a shorter term Call, maybe two weeks, further OTM, maybe 5$ for the QQQ to reduce costs. You expect the short position to expire worthless at date of Expiration and the long Call still continues in the money, ITM, for the next two weeks.
Buy Calendar Spreads with the same strike but two different Expiration Dates, maybe one month and 14 days. Buy it OTM with one month DTE, Sell a shorter term Call further OTM, same strike to reduce costs. You expect the short position to expire worthless at date of Expiration and the long Call still continues since the strike price is not yet hit. So be careful choosing the Strike!
4. Chinas attack on Taiwan
Go long Oil ETF, COG, CABOT OIL & GAS CORP; NRT, NORTH EUROPEAN OIL ROYALTY TRUST;
Refining companies
(Lists not possible to post here)
Integrated Oil
(Lists not possible to post here)
Sell shares in Chinese ETFs or companies, they will instantly lose value. Be conscious about the spread. Be careful not to buy options, they might not be respected. You can google them. Go large caps.
(Lists not possible to post here)
Buy USD. It is said USD will rise and so inflation. A war with China there will be no doubt that they will pump money into the system. Inflation will rise and uncertainty of foreign countries will seek save harbor in the USD
How to set up a Bear Call Spread will follow. I just cannot put this all into one article.
At least here is a guide line. Technicals are secondary but important.
Now we could look at the charts and look how to set up the trade since we know what to look for and we will listen to the news and watch the indicators to confirm our assumptions. Be careful at those times.
SPY, S&P500 market index ETF
DIA, Dow Jones Market Index, ETF
IMW, Small Cap Russel 2000, ETF
QQQ, NASDAQ, ETF
VIX, Volatility Index, reacts inverse to S&P500
AUM, AUD in USD Index
UUP, USD, ETF
AAPL Stocks as leading indicator for QQQ and SPY
Related publications
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