market update: on the next 900% rise in UVXY & the last 2 months of flat prices in oil & stocks

Last night, one client basically asked “what’s going on in the last few months?” I address that below with a few charts.

Another brought up this inquiry: in the US “30 million people are facing eviction. Yet that doesn’t effect the confidence of the market? Unemployment is going up again and people don’t have money. And yet still no effect on confidence?”

I will come back to measures of investor confidence in a moment. First, I actually was wondering if the announcement on Friday evening (by President Trump) would spark a notable rally in stocks today. While some stocks have rallied, the NASDAQ index was down by more than 1% a few hours ago.

So, so far… there has not been much of a sudden surge off of that news. Why wasn’t there a big surge today off of “great news?” Let’s keep that question in mind as we explore the broader topic of confidence.

 

There are many measures of confidence (consumer confidence, surveys of bullishness, plus – most valuable of all to me – measures of actual purchasing activity). Confidence drives purchases and purchases drive prices. In other words, prices reflect confidence (as in measure it).

When new buying (as in new confidence) is in excess of new selling (as in new caution), that produces a rising market price. When new caution (as in new selling) is in excess of new confidence (as in new buying), that results in a falling market price.

Further, most of the measures of investor confidence are clearly correlated with “the vast majority of people consistently being wrong- sometimes immediately and sometimes eventually.” In other words, many people are most confident in a market “reactively,” like when prices have been rising for a while and when they are already heavily invested. High confidence often practically means this: “not much more buying power left to continue the prior trend.”


The opposite is also true. When the masses have low confidence in a market, that means they are minimally invested in it or not at all. There may be a massive amount of buying power available to reverse the prior downtrend (sometimes slowly and sometimes quickly). When confidence in a market is low, the masses have been dismissing a market or discounting it (as in selling it cheap). 

 

 

So, as you may know, much of the US stock market peaked just over two months ago (as shown in the charts below). On the whole, not much has happened since then. 

I have been waiting for the next big move down in US stocks, which may be weeks away or may have just now started with the drop in the Nasdaq in the last hour. Why I am waiting? I have referenced the background data in most every “update” that I have sent. Here are a very simple points.
For one thing, the small dip in US stocks in early June produced a 60% rise in UVXY in 4 days. I consider UVXY to currently be by far the best mid-term opportunity in terms of probability and profitability. I will show a couple charts related to that below.First, just below in white is the widely-publicized Dow Jones average of 30 stocks. As of this moment, it is just barely under the prior peak on June 8. While some sectors are down since early June (energy sector in pink or financial sector in blue), there are also several US stocks that are up quite a ways since then. 

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Below is the same chart above plus one other instrument: UVXY. As noted above, the sudden rise of about 60% in 4 days (in orange) is far more intriguing to me than the relatively flat movements of most US stocks. Plus, in my analysis, most stocks not only have rather limited upside potential, but significant downside potential… like a dam with rising waters and a wall that is clearly cracking and can rapidly collapse.

While UVXY clearly can also lose a fair chunk of value over the course of weeks and months, it is quite resilient relative to the stocks of Hertz rental cars or JC Penney, both of which lost far more than 50% in recent months and are unlikely to ever recover to their prior levels.

 

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Last is a chart I have shown repeatedly. It shows a gain of over 900% in about 3 weeks early this year in UVXY. I anticipated this rise at least as early as January 22 (when I published clear forecasts of it). It was nearly a month later before it manifested.

 

The current conditions in the US stock market are more extreme than as of January of this year (and more extreme than at prior points of notable highs such as in 2007 or 2000). To me, the gain of over 900% shown above is still just a “minor move.” There is a potential for a major move that would dwarf not only the size and duration of the rise in UVXY shown above, but the size and duration of the related shifts of 2007 (when stocks in most of Asia last peaked) and in 2000 (when stocks in most of Europe last peaked).

To me, it is not intriguing or important to gain 10% or 20% in a few months. The more valuable target is to anticipate the most significant shifts (in size and duration) and to position in such a way as to make significant gains from those shifts.

The important thing for some trades is not when to get in. Getting in some time in December or January or early February would have made very little difference to the profits produced in the > 900% rise of UVXY early this year. Far more important would be to get out within several days of the peak in UVXY’s price.

To get out too early would miss the biggest profits. To get out too late would also significantly reduce the total profit produced. But getting in a little early or very early would have made a very small difference.

Am I interested in things like 4-day gains of 60%? Sure! But not to the point of missing out on things like 3 week gains of 900%.

Another market that I have frequently mentioned is crude oil (a global market). It has also done rather little since June 8th (marked with a purple arrow). Current price levels are very slightly above the June 23rd high (highlighted in orange). So, while not much has happened in the last 6-8 weeks in that market, that does not shock me.

My comments have been in this direction: “limited upside potential in the mid-term plus significant downside potential over the long-term.” The momentum of the rally of the last few months has greatly flattened. That does not ESTABLISH an imminent reversal, but it does reflect an increase in a probability that was already rather high.

 

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So, I have also clearly been “imprecise” about a few other markets in recent months. I expected a big drop in the EUR:USD forex rate to manifest from near 1.13 or 1.14. There was instead a rather small drop, then a continuing rise (to near 1.19, followed by a drop to 1.175 as of right this moment). While I still expect a rapid drop in that forex rate to below 1.06, it obviously did not happen in the last few months.

But that does not shock me. It just means my short-term expectation was wrong. The same long-term issues that were the foundation of my forecast months ago are still in place- and indeed at greater extremes than a few months ago.

Back to my primary focus on UVXY, that focus is not to exclude any other opportunity. However, most opportunities in other markets (like crude oil or gold or EUR:USD) attract a fraction of the interest that I have in UVXY. Indeed a big part of why I track oil and EUR:USD is because those markets often give signs that are useful for forecasting the much more interesting moves of something like UVXY.

 

The “fear of missing out” drives many mainstream investors. They focus on markets that have done well recently (and, in large part, because that is what mainstream media publicizes).

They don’t want to miss a 10% rise in gold, but may end up missing a 900% rise in UVXY to get in on a 10% rise in gold. They never know that they missed the 900% rise in UVXY because they are not looking for opportunity. They are looking for recent rises in price. If the masses did at some point begin to flood in to UVXY, that would likely signal a good time to greatly reduce exposure or totally exit.

Plus, the key issue for the mainstream is that they do not base their choices on long-term market conditions. They simply react to short-term and mid-term developments.

They regularly focus on avoiding what is discounted (actually, totally ignoring it usually) in order to flood in to things that have declining opportunity and multiplying risks. And when markets move contrary to their hopes and expectations, they tend to respond first by “freezing” (and then justifying their past choice and looking for a “crowd” that encourages them to keep doing what they have already done). By the time that the mainstream investors panic and begin to pour out of a market, then that is when “prudent investors” begin to get interested in buying those discounts.

But after the mainstream investors panic, they are unlikely to rapidly re-enter the investment that they just dumped. They may have lost quite a bit of money and again are not focusing on opportunity relative to risk, but on how much they lost.

So, after Hertz and JC Penney filed bankruptcy, that legal process resulted in a huge improvement in the financial positions of those companies. Prior to the bankruptcy filing, they had way too much debt and not enough assets. The filing of a re-organization bankruptcy can dramatically reduce their debt load and protect their assets from creditors.

Yet, mainstream investors tend to dump and then avoid stocks of companies that just filed bankruptcy. The mainstream invest no attention in assessing the sometimes terrible financial situations of the companies that they are buying (simply because prices have been rising).

When the financial situation of a company is dramatically improved after filing bankruptcy, the mainstream would not know. They are not paying attention to that. So they entirely miss the 1400% rise in the value of Hertz but suffer the 80% or 90% decline.

And while the recent 1400% rise of Hertz is certainly impressive, it was also rather brief.

Hertz & JC Penney across the last 3 months:

 

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across the last 6 months:

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So, there are several clarities that are useful in forecasting and investing. It is very valuable to understand the social psychology that drives the perceptions and actions of the mainstream. It is also very valuable to know specific instruments and strategies that benefit from a basic understanding of the social psychology of investors. Of course, it is also important to understand some of the realities of basic accounting, finance, and law. However, to understand the latter details without understanding the “core issues” can seem favorable for years or even decades, but then suddenly “fail to be favorable” in a big way.

Current market prices are measures of current confidence. Current market prices are not measures of emerging value, emerging risk, or emerging opportunity.

Here is a final chart. It shows the awful performance in recent months of the US airline sectors (JETS). While I am not optimistic about the prices of that sector in the near future, I am even less optimistic about the other 3 items shown.

In yellow, the price of Tesla Motors peaked a few weeks ago. Remarkably, investors have driven up prices of TSLA to exceed the value of Toyota, which is remarkable because Toyota is a huge company that is reliably profitable from selling a massive number of a variety of vehicles. In contrast, TSLA sells to a niche market, has lost an enormous amount of money in the last few years, and could lose it’s almost all of it’s small market share if fuel prices fall and stabilize below $1.50 per gallon in the US.

Much of the optimism about TSLA is a result of the 2008 price surge in fuels globally. Diesel prices soared above $11 per gallon in the UK and Germany. However, with Europe’s economy in decline for the last 20 years or so, plus a destabilizing global economy, Tesla Motors may or may not be in business within a few years. It’s recent success as a stock is a distinctive example of investor euphoria.

In blue, the price of Amazon peaked a few weeks ago also (and has been quite flat since then). Naturally, the forced shutdown of so many retail businesses in the US has been favorable for Amazon’s finances lately. The price movement of Amazon is notable in that it fell very little early this and was one of the first stocks to begin to recover.

However, while Amazon might be a better long-term investment than JC Penney, maybe not. (And I don’t care much either way because my analysis is that neither present anything close to the opportunity of UVXY).

JC Penney is 50% cheaper than a few months ago. Amazon is 50% more expensive. While both may trend with each other across the coming years and months, what is very clear is that Amazon has much more room to fall and JC Penney has ample room to recover.

The last item in the chart above is the pink line of AAPL (Apple). It is big, established company (unlike TSLA). So, it has continued in recent weeks to attract investors away from other parts of the US stock market. But that can end rather abruptly.

I honestly do not know the current market data for most companies (such as ratios like price:earnings or price:book value etc). I do not generally track them individually. I mention them in these posts because I expect many readers to be familiar with them.

When is the last time that AAPL predictably rose hundreds of percent in a few weeks? I presume that it has never rose that fast (though Hertz and JC Penney recently did).

But from a perspective of the ease of making a mid-term prediction, predicting the massive rise in UVXY was quite easy. Predicting the exact moves and timing of individual companies is not impossible, but also not very appealing to me (relative to other opportunities).

Will UVXY rise 900% or more in the next few weeks? I’m not sure. Maybe it will rise but only 500%. Maybe it will not begin to soar for a few more weeks. However, the balance of upside opportunity and downside risk is historic… similar to the levels that I documented back in January (as well as late 2018 etc).

 

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