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Amazon Destroyed! What You Need to Know $AMZN

As I suspected might happen, Amazon shares are being clubbed mercilessly after the company missed Q4 estimates and issued laughably broad guidance.

Amazon stock is down about 10% early and the chart is frankly sort of ugly. There’s a combination head and shoulders / Brooding Affleck Batman (the worst kind) forming. Yesterday’s rally was a cruel trap, driving shares into weak hands. There’s some support on Batman’s shoulder but the current shareholder base most likely gets scared out lower.

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Is it a buy? If you’re patient but you have to understand what that means with Amazon. Yesterday I showed a chart of Amazon stock pullbacks over the last 10 years. Her’s what the long-term looks like (hide the women and children):

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To capture Amazon’s gains you’ve have to ride it out periods like the 95% spelunking after the dot-com bubble burst. Doing so is all but impossible for most investors. Investors with stomachs made of iron (or who were lucky enough to forget about owning the stock entirely) have been insanely well rewarded for their faith:

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Amazon Has One Job

In many ways last night was quintessential Amazon. The company demonstrated total disregard for short-term planning in favor of growing the business. They don’t care about anything except customers. They never have. This tunnel vision often creates a cultural divide between execs and analysts during conference calls.

Here for instance is CFO Brian Olsavsky on what’s happening in China:

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To me that’s a perfect response. Every retail CFO should have exactly the same answer. As for estimates, Olsavsky cautioned that nuanced predictions of even the ongoing quarter are “impossible” then said Amazon will earn somewhere between $100 million and $700 million in Q1 versus $255 million last year. That puts the earnings growth rate for this quarter at somewhere between -60% and 155%. Best of luck plugging that into a spread sheet.

Amazon’s indifferent approach to guidance should have been exactly in line with expectations. Amazon has done precisely the same thing literally every quarter since its IPO. Here’s a clip from the Amazon S-1 in 1997:

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20 years ago Amazon set the goals of “(i) Extending its brand position (ii) Provide its customers with outstanding value and a superior shopping experience” then says achieving those goals will incur “substantial operating losses for the foreseeable future”.

Amazon has spent 20 years living up to that vision. Anyone who was surprised by the quarter or that Amazon is going to spend billions killing the shipping industry because same day shipping is the future (and Amazon is already doing it in 25 markets) simply hasn’t been paying attention.

Amazon is like the Grateful Dead or Opera. You either get it or you don’t. Even if you love it, and I freaking Love Amazon, you don’t need to be there all the time. I’ve been out of Amazon for a while but I’m looking to start to nibble. In other words, I’m following the plan I laid out at at the beginning of the year (from Jan 4):

Facebook

If not I’ll wait. They’ll be back.

Value-Trap?

The quarter was fantastic as far as I was concerned. North America revenue grew 24% to $21.5b in the fourth quarter. For the sake of comparison, Amazon started this year with about the same top-line as Target. Target is expected to do $21.9b total in Q4 which represents a growth rate of ~0% (zero percent).

Amazon gets a lot of abuse for being over-valued. Some of that is deserved and some is because Amazon is often covered by tech analysts who typically don’t know (or care to know) much about retail. Let me put Amazon’s US growth into context. The NRF says holiday retail sales grew a meh 3% in 2015. Online grew about 9%. Again, Amazon grew 24% year over year just in North America. Of the top-10 mass merchants in the country CostCo has the next fastest top line expansion. For the Holiday quarter Cost might grow 5%.

Amazon is playing a different game than the rest of the industry. There is no “correct” valuation for Amazon because nothing like this has ever existed. No retailer has ever been this big relative to the industry and still growing anywhere near this fast. Amazon’s numbers look like young Gretzky getting 200 points in one NHL season or Barry Bond’s “Big Head Era” stats. That’s just as a retailer. No one on earth knows what AWS could be worth but it’s a lot.

Amazon makes money. Not much but remember even really good US retailers are only netting 6 or 7 cents of profit on every dollar. Between breaking even while sucking up billions of dollars in market share a year or grinding out 5% growth and net margins I’ll take the former. Any valuation work beyond that is just doodling.

If you get a 50% pullback back up the truck. Anything less than that is almost noise as far as Amazon sees the world.

 

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Rally Hats! $SPX Price Targets

On Wednesday with the world crashing down upon our heads I wrote:

Screen Shot 2016-01-22 at 5.32.04 AM

For those of you who question God, the Plunge Protection Team or both I offer once again the full day chart:

Greatest Comeback since the first Easter
Greatest Comeback since the first Easter

 

40 S&P handles in 3 hours Wednesday afternoon. At the highs yesterday near 1890 the S&P500’s market cap had increased a cool $700 billion in 24-hours, give or take (100 S&P500 points is roughly equal to $890b). The consensus explanation (mocked in real time here) was ECB Capo Mario Draghi muttering something about Europe being open to the idea of additional stimulus.

In case I haven’t been clear on this point it’s ok to go ahead and assume every Central Bank on earth is going to do everything they can to keep their personal empires from crumbling. You can call it a conspiracy. I tend to think the explanation is far more simple. No one wants to go down in history as Nero or even Herbert Hoover*. Spending more of other people’s money to avoid such a fate is a small price to pay.

The idea of some Ayn Rand world where the government allows crashes to unfold “naturally” is crap. It’s the expression of a dream where everyone is John Galt and we all make our own roads, deliver our own mail and fight to the death for the natural spoils of earth.

Governments always intervene. If you expect them to stop because it doesn’t work you’re either insane or selling a newsletter.

Stocks already knew Draghi was ready to spend money he doesn’t have. Keep it simple. The market rallied because Bear markets are hard and the bears over-reached. Don’t dwell. Set targets.

 

Special Guest: Leonardo Fibonacci!

Fibonacci was the greatest mathematician of the Dark Ages. Dead for nearly 800 years, his theory of natural patterns is still used on a daily basis in trading pits. That wasn’t Fibonacci’s original intent but he’s been dead far too long to get a vote.

Per Leo as understood by traders, bear market rallies tend to retrace specific percentages of recent losses. Most notable among these levels for our purposes are .62 and .38. In this case I used the peak of 2080 on December 29th and the lows of 1812 for a total drop of 268pts. 38% retracement works out to about 1915-1920 (also the “official correction” level). 62% works to 1980.

Screen Shot 2016-01-22 at 5.29.36 AM

You can read about the details elsewhere.

For our purposes know this:

  • Not even Leo sets this stuff in stone. He was just a mathematician with odd taste in hats, not Moses. 1920 makes sense as a target but any idea that’s 800 years old is to be considered at least as much art as science.
  • Unless or until the above levels are recovered this rally is to be considered more a bounce than bottom.
  • We are still reliant on crude and China but going into the meat of US earnings season will be a useful distraction. Things just aren’t that bad in the US. If you want to add “yet” to that observation go ahead but it’s not a great trade.
  • 1850 is a great stop but it won’t save you on a gap lower. Just know a close below that level is still toxic to bulls.
  • Finally, and this is absolutely the last time I’ll reference myself this morning, I promise, screaming rallies are perfectly normal in literally every bear market in history. One last time consider the list of biggest intraday moves in history and note the Fall 2008 rallies. Citi was up 24% the day the SEC banned short-selling banks. To this day C is still down 90% from pre-crash peaks.
  • Nothing is over until Leo decides it is..

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* Both Nero and Hoover got a bum rap. We can discuss another time.

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Stocks Rally -1%! $SBUX on Deck

It could have been worse.

It also could have been much, much better. Sloppy close.

Real earnings are starting tomorrow. Starbucks reports. Starbucks is a grown-up American company run by a full-on Jedi Knight. They sell billions of dollars of legal, addictive stimulants all over the world. Howard Schultz loves to use his conference calls as bully pulpits. His January 2014 transcript is a first-rate eulogy for mall traffic. Brilliant stuff.

Does it hurt that the only chain with more caffeine per serving is called DeathWish? No. No, it does not. Doesn’t change the genius of Starbucks.

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Howard Schultz and Starbucks will give us real things to talk about starting tomorrow. He’s worth listening to and God knows we need something else to discuss. Because China is tiresome and Davos coverage is depressing on every conceivable level.

I know plenty of Global Thought Leaders. I’m going to listen to one on the Starbucks conference call tomorrow afternoonScreen Shot 2016-01-20 at 1.07.06 PM. Real leaders are too busy leading to take European ski vacations.

 

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Crash! Nowhere to Hide.

I’m not here to lie to you.

We’re pretty screwed.

As I type we’re at 1817 on the S&P500. That’s below the neckline of a huge head and shoulders pattern. It doesn’t matter how you personally feel about charts. Incremental selling will be done unless by some hand of God and the Plunge Protection Team we close back above 1850.

 

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In just a couple weeks the market has been kind enough to offer me grist for a brief course in Macke’s Personal Rules for Sell-Offs:

Here’s the core problem with Crude and Currency going crazy, boiled down as far as I can rend it, and why it might lead to the Worst. Year. Ever.

I think there’s a massive underlying problem with balance sheets. Cash has been thrown away buying back shares instead of making improvements in core operations. Both at Macy’s and IBM. Watch for this to become a bigger issue as margins get tighter and all that “cheap” debt becomes more expensive.

Here’s a Crash Survival Guide and some case studies of past misery.

None of which matters because China Has Us By the Balls.

 

Which reminds me of a story. Two guys are camping. They get hammered and leave some meat sitting out overnight. In the morning a bear is ripping open their tent.

While one guy frantically smacks the bear with a lantern he notices his friend lacing up his shoes.

“You idiot! You can’t outrun a bear!” screams the fighter as fangs sink into his hand.

“I don’t have to outrun the bear” replies the second camper. “I just have to outrun you”.

Point: Don’t try to make money here. Let other people lose money. Then we’ll pick through the scraps.

 

Stocks are collapsing as I type. My thoughts remain these:

  • The S&P500 needs to close above 1850
  • It doesn’t really matter where we close because the market is broken. No one will buy stocks when they can wake up to this type of selling every day.
  • This isn’t the time to learn how to short.
  • If you know how to short, I’m not going to tell you your business. But I will point out that the hugest, angriest, face-rippiest rallies happen in Bear markets. Consider the Fall of 2008:

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  • Bear markets kill everyone. 99% of investors should be liquid enough to not have night terrors. I’m serious. If you can’t sleep you’re going to puke up your whole portfolio at the exact bottom.
  • Respect the Panic. My show is called Panic out of respect, not advice. Sir Isaac Newton blew up investing in stocks. Really. Sir Isaac Newton was super, duper smart.
  • There will be opportunity. It will come. I like a lot of individual stocks at their August lows (Come to me at $72, Facebook).
  • No one knows anything. I’ve done this professionally for 2 decades. I know as much as anyone who will talk to you right now, on TV or in print, and I don’t know shit.
  • This market is a human flesh thresher turned up to 11. Just back away from it and wait.

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Buybacks Blow-up Macy’s. Psycho Mkt $M $SPX

S&P500: A Genuinely terrible chart…

 

There was a little bounce on Friday. Which is to say we didn’t close on the lows.

The bullish scenario is we’re oversold, sentiment is “wetting myself” and it wouldn’t be a bear market if it didn’t squeeze the hell out of bears every once in a while. We’re down 10% in a straight line. That doesn’t mean tomorrow is “due” to move higher. That’s not how odds work.

Market days are independent, for betting purposes. Like a roulette table. Sharp reversals can and do occur within larger trends but by definition they have to be random.

A face-ripping, explosion of a rally is coming but there aren’t any cheap ways to wager on it. Calls are still expensive. Stocks aren’t cheap, or even possible to value, in theory until oil stabilizes AND China gets done having to kick traders in the ass with jackboots to get them to buy stocks in the Shanghai Comp ($SSEC). (see: China Has Us By the Wontons).

Head and shoulders, only scarier...
Head and shoulders, only scarier…

 

You want to get long ordinary stocks? Yeah. All bullshit aside. It’s a terrible stock market. That’s an awful chart, even without the monster.

Buybacks Bite

The fundamentals are just as bad. I’ve been doing some work on buybacks. To bring you up to speed; companies have borrowing a lot of money to buy back shares. Corporations aren’t stockpiling cash, at least not in the US. They’ve levered up to inflate short term EPS. Leverage taken on to do buybacks is about to be a Big Freaking Deal. Other folks have noticed this (a couple in the comment section). It’s very bad.

Buybacks are this era’s Greenmail. Just a different way for activists to generate short term performance. They work in up cycles. As long-term plans buybacks are a short-sighted, indefensibly cynical allocation of capital to appease hedge funds. Since this opinion runs contrary to the Word of Saint Buffett of Omaha I’ve taken endless abuse for ¬†mocking buybacks of the last few years.

I’m about to be right in a huge way. Which sort of sucks.

Ive been looking at these things all weekend. I’ll use Macy’s as an example but they’re far from alone

Here’s what Macy’s has done in buybacks since 2011:

Screen Shot 2016-01-18 at 7.34.01 AM

 

Forgive my handwriting.¬† It’s a little sloppy. I’ve been looking at this stuff since 2am.

The scribbling says Macy’s spent $7.2b buying 148.1 million shares at an average of $48.54 from 2011 through last October 15. The stock is down 50% in 6 months, well below $40.

Some very basic accounting: Repurchased shares aren’t “bought and held”. They are retired to reduce the share count. Effectively the shares, and money spent on them are just lit on fire.

Because all repurchased shares go to zero (with the weird approval of investors) it technically doesn’t matter that Macy’s would be down $1.6b on its Macy’s position of repurchased shares. Again, if they had any value at all. That’s a loss of 22% against a 45% gain in the S&P500. Buybacks are tantamount to a group of executives running a hedge fund that buys only one stock, on which it has limitless inside information and Macy’s lost 22%.

The simple numerical fact of this makes the idea that buybacks “are an expression of confidence” laughably obtuse. When a buddy brags about his kid being a great athlete do you take him at face value? Of course not. CEOs always like their chances. That’s what makes them good CEOs. It also makes them shitty stock pickers.

Like most companies Macy’s always thinks its own stock is a buy. In the short term, buybacks boost earnings per share, often triggering CEO bonuses and delighting activists! For a while

It’s a predictable sequence

For a while EPS looks awesome because of the share reduction but net income lags. The whole time enterprise value is erodes. Long-term investors get a bigger chunk of a lesser business and no cash at all. Then the earnings (orange line) rolls over and takes the stock with it:

Screen Shot 2016-01-18 at 8.20.26 AM

Oh yeah. “Money is returned to shareholders!”

(Dispense with this quickly: When Wall Street tells you it’s giving you cash and you don’t see any money in your hand you’ve been had.)

Debt is a cruel mistress.

Retail is an insanely low margin business that requires constant investment. Macy’s has a 4.9% net margin. So when Macy’s borrows $500,000,000 at 3.7% to buy back stock it sounds cheap but it’s just about the company’s entire margin on $500,000,000 in sales in a growing economy.

Bookie or banker, loan givers don’t care about your personal problems. “No winter so coats didn’t sell? Screw you, give me my money. Bought your own shares at $50 and now you don’t have the shares or the cash? TS, give me my money.”

Now business has turned down, stores haven’t gotten any attention. Activists are prodding mercilessly. Macy’s is sitting on billions of dollars in winter coats in some sort of monumental inventory screw up that we’ll never know the full story on. Seriously, they could do hands across America tying coat sleeves together. It’s insane.

Oh yeah, Macy’s is on credit watch.

So earnings, both on a net and per share basis are going to end up much, much lower than expected. Shareholders have no cash. Macy’s has no cash. They just have 80% of the world’s down and impatient bankers.

The activists have the cash. Because they sold their shares to Macy’s and the rest of the muppets.

Macy’s and its shareholders have been conned. Everyone buying into buybacks has been. Corporate America borrowed cheap and bought itself. According to FactSet as of Q3 180 S&P500 companies have spent more on buybacks than they’ve earned in the last 12 months.

It’s not a story across the whole market yet. It will be.

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Market Panic! Your Action Plan

Women and Children First

 

Stocks are falling. You know that. We’re going into a 3 day weekend. If you are very uncomfortable at the moment the feeling will most likely get worse between now and Tuesday.

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I don’t believe in worst case scenarios. The sun will explode someday but it’s a lousy trade. That said, I do believe in market panic. I understand the animal spirits. I respect the power of the collective mood. There is nothing on earth that will dislocate a market quite like major currency problems. The basic assumption in any financial model is that valuation is based on a stable underlying currency. In the absence of said stability the numbers are gibberish.

There is no fundamental case to be made because who the hell knows what the Chinese are going to do if/when the Shanghai Comp burns like a wooden shed on Monday. Would a Chinese crash cause a recession here? I don’t know but the closer the $SSEC gets to zero the less I like our chances. Most stocks are worth more than zero but true value is not calculable. If you have no idea what a company will earn you can’t even create a PE ratio.

Under such conditions, doing nothing makes a ton of sense.

 

Homework

If the S&P500 drops to 1788 today we will have a genuine US Circuit Breaker. Presumably the Chinese would find this hysterical but, trust me, it won’t be funny here.

The last time the US markets triggered trading circuit breakers was 1998. The cause was “Impossible” currency fluctuations exacerbating the losing positions of a hyper-levered hedge fund called Long Term Capital Management. Most of you know the story. For those who don’t here’s a relatively lively academic overview.

On the topic of emotion being timeless, I’ve been reading up on the Panic of 1857 today. The trigger then was the end of artificially easy lending to fund the buildout of the the American rail infrastructure. Thank God nothing could happen like that today…

Here’s a link to a good summary of the 1857 Crash and a cartoon from the day. The man on the ground represents a banker who attempted to stop a market panic, as represented by the horse.

 

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As I’ve said before, we’ve always known intervention doesn’t work. Governments simply can’t help themselves.

Why would I link you to these things when the stock market is obviously crashing? Because 20yrs of experience tells me the best way to burn off your fight or flight energy is to study, rather than trade. Analogies are not a gameplan. This time is ALWAYS different in critical ways. But humans never change.

Your trading opportunity will come from other people panicking. Your job is to be the smart money. Pick away at your favorite longs. Slowly. And do some reading. The crisis will still be here when you get back.

 

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The Bear Strikes Back: Survival Guide

Stocks are down hard this morning because that’s how bear markets work.

For those of you who started trading after 2009, welcome to hell. You’ll find the heat a bit… stifling at first. I’m not going to lie, most of you are really going to hate the next few weeks. But, if I do my job and we all try to learn as we go along there’s no reason anyone needs to get wiped out like some house-flipping day-trader.

Stocks are set to erase all of Thursday’s gains right at the open. Blame China. Blame the GOP debate. Blame nothing at all. Price is reality. Here’s where we closed last night:

The Bear is Over!
The Bear is Over!

 

Here’s where we’re set to open this morning:

 

Sic Transit Gloria
Sic Transit Gloria

 

Digging deeper into the madness it looks like all the popular stocks (Either heavily-owned or those few with gains YTD) are down across the board:

 

Screen Shot 2016-01-15 at 4.46.21 AM Screen Shot 2016-01-15 at 4.48.39 AMScreen Shot 2016-01-15 at 4.46.34 AM

 

Today is a day when technicals are both very basic and important. Watch Wednesday’s lows. If we take them out every single person who “bought the dip” over the last two days will be underwater. Disciplined traders take profits before winners turn into losers. Newbies tend to wait until they’re down before conceding defeat. Either way, there will be sellers. This isn’t chartist jargon speak. It’s no more complicated than training a dog with a shock collar. When something hurts sentient beings seek to stop the hurt.

I can tell you from personal experience getting suckered into a headfake rally hurts. A lot. That means selling. The Trillion Dollar Question is this: Will there be buyers?

You don’t need a lot of new material this morning. All the charts from yesterday still apply (since, you know, Thursday basically never happened at this point). I covered the emotions and basic strategy in my morning write-up and the closing video.

Here’s one chart. It’s the S&P500 over the last two years:

 

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Counting from October 2014’s Ebola Lows (we hit 1820 intraday but closed in the mid-1800s) a reversal on the S&P500 anywhere between 1865 and 1850 would constitute a quadruple bottom.

Traders don’t believe in triple bottoms so you can imagine the suspicion with which they view the prospects of a knee-jerk bounce off ancient support. This is especially true in light of the freshness of yesterday’s pain.

Futures aren’t everything, as this week as proven. We could bounce but Friday’s are a matter of time. If we’re down hard at noon NYC time (with its fancy “NY Time Values”) there’s a decent chance today ends in tears.

Very few good decisions are made under pressure. Your instincts will probably betray you. Be afraid but not scared. Don’t make any trades without thinking about the risk-reward first.

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Sell-Off! Welcome to Crazytown

No need to update this morning’s chart. It’ll be out of date by the time you see it, anyway, given that stocks are falling about 1pt every 20-seconds.

As of this instant the S&P500 is 60pts off the highs of the day at around 1890. I would expect (but am not betting on) stocks regaining 1900 by the close.

At 1870 I am a buyer in some size of equities across the board. Sell-offs are about emotion. If bear markets went down in a straight line they wouldn’t be at all scary. You could just short everything. There is going to be a hellaciously vigorous rally very soon. The question is whether it’s from here or 10% lower.

Today is the first day I’ve heard (felt) real concern from the bulls. That’s the start of a bottom.

Earlier this week I said the time to buy would be when getting long felt completely insane. Being a contrarian is overrated but there’s a 20-minute wait to buy a PowerBall ticket but it would take a nanosecond to get filled on $250,000 worth of Amazon $100 lower than where it was 2 weeks ago.

It’s time to start getting constructive on stocks.

 

Probe
Probe

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Don’t Get Cute: Trading the $SPX

There’s a science to cute. It’s all about ratios and proportions.

The picture below is scientifically cute. If you disagree you’re a psychopath. Trust me, I was a Psych major.

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Cute isn’t for everyone. You can choose to ignore it entirely but its existence is undeniable.

Which brings us to the S&P 500. On December 29th it closed at 2078. Last Friday stocks closed at 1922 and on Monday they probed lower before ending the day up 1pt at 1923. Yesterday we closed at 1938:

Stuck in the middle
Stuck in the middle

Here’s where it gets adorable. The Book of Trading says this rally-lette will hit resistance at 1981 (38.2% retracement) and again at 2017 (61.8%). Those are almost exactly the levels we’ve been dealing with for almost 6 months.

Here’s a chart from mid-September, highlighting support at 1989 (the title of Taylor Swift’s album… hence the picture):

Screen Shot 2016-01-13 at 6.13.42 AM

A month later we broke out above resistance at 2020 (the exact high from Yellen’s September presser):

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Mid-October’s short-lived Breakout Set-up

As of today’s open the S&P 500 is almost exactly in the middle between resistance at 1980 and 2020 and support at 1900 and 1860. The trading risk-reward set-up on a strictly technical basis is ~4% potential upside and ~4% downside. That’s a cute trade, so called because you can play with it all day but ultimately it’s a lot of work and very expensive. Just like a baby.

There are times to go for the jugular on a macro trading call. This isn’t one of those times. If you’re day-trading the $SPY you’ve got a chart with no clear direction and the crazy Chinese hanging over your head like the Sword of Damocles. Everything in the range is pretty much random as far as traders are concerned. A 30pt move in the S&P500 today would mean nothing for tomorrow.

It’s less expensive to play PowerBall for $2 than trade noise for real money.

If you want to get cute, lean long with a 1895 stop. If you want to stay sane stick with the positions you like on a fundamental basis and stop betting on market static.

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Brace for a Monday Probe

Stocks don’t bottom on Fridays.

That’s almost literally true. Sell-offs larger than 5% have made lows on a Friday twice in the last 15 years.

Key Levels: 1920 on the S&P 500 is a 10% correction. 1865-1870 is a double bottom from August and October.

Make your list of buys over the weekend. The bottom will come when buying stocks seems completely insane.

 

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