Random Thoughts – 9.3.2020: Has it Begun?

I have been suspecting that we would get a significant correction in the market.  I will admit that it took longer to materialize than I suspected.  There were several days that I said to colleagues “this market is crazy?  Why is the Nazz up 1.5% on no news?  This is batshit crazy!”  On those days you just have to take your lumps, trim some positions and modify others.  Last week I was trying to build some longs in the portfolio and for the better part of this week I was pressing shorts as the market ticked up.  Today, I am taking some profits, building some cash and watching some big bets go from red to green.

A short review of the setup:

7.9.2020 – Link is here.  No need to read the post, I will recite the best part of that post “We are on the cusp of earnings season and it will be interesting to see how the numbers and revisions play out.  Numbers go up or go down?  If we do not get a V recovery then it will be a mess at the backend of this year going into 2021.  A former PM wrote to me this afternoon “Q3 will get revised up as well. Then by definition Q4 and next year have to get revised up. But the upward revisions to Q3 and out will be a function of the higher base established coming out of Q2. However, I think that is where the fun ends. Q2 will look like a little V, but by the time Q3 and Q4 happen, I think we will be seeing the shape of that curve really flatten. The sequential trajectory coming out of Q2 will just show slowing. This is what the mo-mo guys hate. Small chance of the sharp V continuing into next year. Too much damage done for next year and the years after that to turn into what the market is implying.“

7.21.2020 – Link is here.  This is the point that I started shorted the Nasdaq.  I am still down on that position, but I steadily built the short and it will go green soon at this pace, but I am cautious as I could take it off with minimal pain at this point.  It took six weeks to start to move.  This was also the time that I started to build a VOL position.

7.27.2020 – Link is here.  Continued to build the VOL position.  I was long Crude which I ended up selling and buying back a few times.  It played out okay.  I started building the value longs at this time.  No doubt I missed some runs in the FAANG stocks and some stock splits.

8.12.2020 – Link is here.  On this day I wrote “If you were big time long, like Robinhood long, into the market yesterday it was great day.  Up until about 3:10 in the afternoon.  After that, it sucked.  I am long some stocks, but I would be very careful with longs after watching yesterday’s late day reversal.” I also wrote at the end of that post “You what will drive the market down?  Margin calls and credit stress and that is why I think being a big buyer of equities up here might not be a good play, but it is very risky as best and the risk is skewed to the downside.  I think the prudent approach is buyer beware and keep a reserve of capital to play with.”

I know the definition of hubris well enough to know that good day can be followed by a bad day.  I will look to cautiously add and press some longs like PG, SBUX, VZ (raised Dividend today), GS, CSX.  I sold HON, but would like to buy it back with BA.  I also sold USCI and will watch it.  All the service provider CAPEX exposed names are shorts.  They are going down for awhile because the economy sucks and political leaders are locked in their homes too scared to reopen the world.  That is not bullish.  With that I am going to stay long vol, but in time it will revert and I will take profits, but I will press emerging markets shorts.

If you like the historical correlations, I saw this on Twitter from Sven Henrich “Today in history: September 3rd marked the top in 1929 following a furious rally fueled by wild optimism, excessive retail speculative behavior and markets disconnecting far above the fundamentals of the economy.”

Where do we go from here?  Well, there is significant technical damage being done today, but for me I need to see some follow through.  I will let the positions roll into the close and see what the effects are tomorrow.  Today is a one day sale, or the start of something more significant.  We have an election, an economy that is being destroyed and those will leave marks.

As always, my thoughts on these matters might be completely wrong.