July 5 2020 - Buffett Throws In The Towel Waiting For Crash, And Buys...

Don't get "at me" but Warren was very wrong on airlines. He might be wrong on pipelines.

Really, this is about what ending his drought means for the larger market. I maintain that this Buffett buy does not justify new highs.

If not new highs then we are still in a consolidation phase, and a break higher could actually foretell a break lower, on exhaustion.

I chart out a double-top formation, just as the "smart" money comes rushing in on the heels of.Buffet.

Be the "Smarter" Money and sell a chunk as we reach toward 3200.

I set a jaundiced eye toward this deal having a larger meaning for the overall market

Buffett buys Dominion Energy NatGas pipeline and storage for about B with an assumption of debt. That's huge, right? That means Buffett thinks stock prices are "cheap" - cheap enough to buy. So we buy. Well, maybe, but with an eye toward the exit. I think we are about to hit an interim top, and a sell-off to test that 2900 handle and see perhaps 2850...

Far be it for me to critique the “Oracle of Omaha.” I bristled at “Davey Daytrader” Portnoy when he said that Warren Buffett was through. How dare he! Now, I’m not so sure. Look, everyone has a slump, or makes a mistake. Also this is not a real market, not with all the government largess being piled on. Also, the largess was called for, this is not a “moral hazard” of bad actors, acting bad knowing that the government will bail them out. On the contrary, it was the government that pulled the rug out of this economy. So all these trillions are necessary and obligated. So perhaps Buffett has not lost his touch. Perhaps his vision has been temporarily clouded. However, if we give him this mulligan, then we must also take this purchase not so much of a indicator for a renewed bull...

Just the facts…

Buffett sold the airlines at a massive loss, and at the extreme bottom. One could dish that off to a one-time miss. If the airlines at least stayed stuck at the bottom for several months, it would even be justified as an opportunity cost. Instead, they shot up almost at the moment Buffett sold. Is it really so shallow of me, so unfair and even churlish to now have disdain for Buffett's seemingly throwing in the towel now? Is NatGas in a momentary nadir and ready to soar? Hardly. This is a fleeting time of some firmness in NatGas since we are in the midst of a summer heat wave, and fracking is on the back foot temporarily. As soon as WTI oil firms just a few dollars, more the drilling will restart and NatGas craters once again. So, while I would normally see this big buy as the all-clear signal for the overall market. I don’t see this as a sign of renewed highs. On the contrary, I'm looking at the charts and still cautious.

Beware the Double-Top that is forming. Use the Buffett announcement and near-term vaccine/treatment excitement to trim positions

My last piece addressed the possibility of a double-top while also acknowledging the extremely bullish chart formation -- the “Cup and Handle.” I asked you to keep these separate and seemingly opposing ideas in your mind at the same time. I admit that I did not take into account the bullish result over the last two weeks would come with extreme volatility. We moved up in a lurching fashion with wide swings. Still, here we are, back firmly above 3100, and looking toward 3200. We could arrive there by mid week. I expect the rally to temporarily fail just around that level to mark out the double top.

Let’s look at the chart to see what I mean and also perhaps map out where we should deploy our cash reserve here.

In my last piece I talk about a bullish cup-and-handle which failed and now we have a sine-wave that reflects indecision, and really the sideways consolidation that I prattled on about for weeks. In the last month we finally see it. I don’t think it ends just yet. I drew in what I think happens next, a leap to the previous 3220ish level and then a retreat that could take us to stronger support somewhere above 2800. Let’s zoom out a little to see what I mean here.

A lot of chartists that I respect believe that we will slam down to 2800 even, also this is the SPY not the S&P 500 futures, so the numbers are a little off. The point is a double-top is a very strong bearish signal. In this case, I think it only means that we are going to widen the sine-wave of sideways consolidation and not a big breakdown of the bullish rally. No one can deny that there is a lot of froth in the market, and a lot of “smart” money that has been sitting on the sidelines, Buffett is not the only one. I think the pull of FoMo (Fear of Missing Out.. OK boomer) will be so strong that we have a buying jag that takes us to this interim top. All we will need then is the flap of butterfly wings to start a hurricane of selling. The “smart” money will experience buyer’s remorse as the evident double top marks out a failure in the rally.

Do not despair, instead rejoice!

Forewarned is forearmed. Don’t throw all your money at this rally. At least be mindful of where we are, ride it to 3200 and then start getting to cash. Sell calls. The VIX is still in the high mid-20s. You could make some good premium writing calls against current positions, and even executing “Buy-Writes” on new ones. Don’t know what a “Buy-Write” is? Go to your broker-education section and watch a webinar on it. You could even sell puts at 15% below prices if you want to buy shares on a discount. Just wait for the sell off first, and the VIX to explode on the downside. Please don’t do any of this blindly. You do so at your own risk, knowing that options are not a toy. However if you get a handle on it, and if I'm right, then you could create some very nice alpha. What if you sell a put and it never gets executed? Well you don’t get the shares you wanted at a discount, but as a consolation you get to keep the premium. Why are you getting paid? Because you sold risk, you took on the obligation to buy a stock if it passes your agreed-to price. You created something out of nothing, and you got paid for it. Except it was not nothing, it was something very much in demand. This is the same as selling calls (or writing calls), except you are offering your shares at a higher price. The risk for you is, if your stock that you own gets “called” you have to sell it at the agreed to price. If you have a taxable account you will create a taxable event. In this case you are also creating some risk on your part, but you are selling opportunity. For creating this opportunity you get a premium that you get to keep if the stock goes nowhere, or falls. This is why it makes sense to sell calls, when the VIX is elevated and the market looks toppy. Again, I am just laying out the hypothetical. If you decide that you want to create a revenue stream by selling risk you need to educate yourself. Education is the best investment. Once you have perused all the available material, and you seem to be reviewing instead of learning, maybe you’ll be ready.

I'm signing off this evening, and seeing the futures rocketing higher. Of course enjoy the rally, just please keep an eye on the S&P 500 futures, and look to lighten up as we break 3200. If I'm wrong, then you just took profits. It's never bad to take profits. If you decide on a hedging strategy by selling calls toward the highs, or selling puts toward 2850ish, you do so at your own risk. You feel confident that you have studied the relevant material and understand it. One last thing, never sell a naked call, always sell a call as part of a call spread or writing in against shares that you own. Also don't ever sell a stock short, or use margin to trade. If you get a stock "put" to you, realize that the premium you sold is part of the discount you are getting on those shares. Make sure you really esteem the stock you sold that Put for and not just looking for the premium. Again, know your material, and trade at your own risk. I'm just a source of information, not a financial advisor.

If you don’t feel confident, just paper trade it. Write down the prices you would have gotten, and see how it plays out. Make sure you do this at the proper levels. If you don’t see a 2800 handle then I will have been wrong in magnitude, and maybe we see the low 2900s. If we break to 3300, I will have to issue yet another mea culpa. Bon chance...