Last Update: August 2021

Hola amigos!

Today I will change the tone a little bit and let the garden rest for a week, as I want to share some deep thoughts about the economy and current market conditions. While we as traders almost purely trade what we see in the charts, we also need to look at the big picture and be able to draw some inferences and conclusions of what’s going on in the macro-economic system. Not only because we are long-term investors too, but also because what happens in the economy affects more than a bull-put spread. It affects the cost of living, working opportunities, wages, retirement plans, etc. So before diving into the Clean and Dirty lists as every week let me share some thoughts about the current environment we are trading on.

It looks like the market and the economy in general are doing very well the last 18 months or so. We can see that in pretty much every single economic indicator: jobs, inflation, unemployment, consumer confidence, etc. Trading wise, pretty much all the industries are going up and it looks like any alternative form of investments non-tied to the US dollar (steel, gold, silver, crypto, even real state) are taking it in the chin lately. I’ll give you Oil as the only one neutral to bullish, but the rest is dead. This phenomenon has a reason behind it: the market has been on fire, powered by the current policies (tax cuts, import tariffs, etc.) that are boosting the US economy and the market in general. This is also being translated to the US Dollar ($DXY) which has gone anywhere but up this year. All this party, my friends, is what keeps Mr. Powell and the FED gang awake at night…

Have you ever looked at the FED mission statement? It says that their role is to foster a lot of things, but the very first one mentioned is STABILITY. And stability means heating things up when they are cold, and cooling them off when they are hot…It sounds like a simple task but in reality is the most difficult thing to do for any government or economic entity. If regulating an entire economic system wasn’t hard then, well, recessions wouldn’t exist. In 2017 the Federal Reserve of the United States started executing a plan with the main goal of “cooling down” the economy and the market, however, the effects of that policy are not visible yet as nothing has really slowed down. And that leads us to the topic of today’s blog.

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The “Cold Shower” effect 

During my entire college stay I had one (yes, only one) professor that was really into monetary policies and economic systems, and he tried very hard to teach us how the economic machine, as Ray Dalio calls it, worked. This guy taught us something that stuck with me forever. During one class he said that the economic decisions that Federal Reserves and Governments take to either boost or cool down the economy, usually follow what he described as the “cold shower” effect. Think about this situation: you are taking a shower and the water is too hot, what do you do? You open the cold water to compensate, no biggy. But the water doesn’t cool down instantly, does it? There is always a delay between your action and the effect of that action. You open the cold water but you keep burning for a little bit until the cold one kicks in and then you’re fine. A similar relationship can be observed between economic decisions, such as interest rates hikes, lowering taxes, printing money, etc., and their impact in the economic cycles.

The key to this is: how well does the shower (economic system) work and how good are you (or the FED) at regulating it? In Argentina, for example, showers, as well as the economy, don’t work very well and the effects of the actions taken is not immediate, usually causing the “water adjustment method” almost impossible to work properly. Why? well think about it, you are getting burnt with hot water and you open the cold water but nothing happens, then you open the cold water even more, and if nothing happens and you keep burning, you fully open the cold water and close the hot one. And just when you did the last adjustment, the effect of the very first one kicks in, and now without doing anything you start getting cold. Then you open the hot water a little bit, but the effect of the second action (more cold water) kicks in. You don’t understand what’s going on, you open more hot water, you get more cold water, get burnt, get cold, get burnt…and at the end you just shut everything down. In a very simple way, this is the big challenge of any economic system and the reason why recessions happen. Simply because timing the shower is extremely hard.

We are surfing an 8+ years bullish market (longest in history), records broken every week, President tweeting about the party we’re living in, and in the meantime, we have the FED trying to cool it down. They raised rates 7 times (SEVEN!) during the last 3 years and more to come. It’s clear that they are starting to get burnt with hot water and they keep opening the cold one, but nothing has happened just yet…let’s all be ready to react for whenever the cold water reaches the shower. Once the markets start reacting to all this, we will be ready, we have to. As educated investors, we need to have a plan to thrive through a market correction and then invest wisely once the bullish clock resets. Just make sure you start building that plan now before it’s already time to execute it.

Until then, trader’s gonna trade, so back to business now.

Environmental Hedging Clean list

$SPWR (SunPower Corporation) 

Still riding naked puts, halfway through expiration and not paying much attention to them, to be honest. They will either get bought back at $0.05 or assigned to me at $7 and I am fine either way. Executing EH rules (step 2) at its finest here and putting my attention into other stocks and trades. On the shares I own, I covered them through earnings to have some protection but I uncovered them right after as it pivoted at support and bounced back a bit. Right now I am riding uncovered for the following reason, and let’s use this example for educational purposes. I bought shares at an average price of $7.90 (some of them at the low $7s, some of them at $8) so what I would like to do is to let them go up a little, enough for me to sell calls at let’s say $8 at least. That way, I make some money either way (called out or expiration). Isn’t that cool? Right now the premium is just not there for a $8 call so I’ll give it a few days, hopefully it moves up.

$FSLR (First Solar)

Exact same pattern as last week. As I have naked puts on SPWR I didn’t trade this one, but this week as I’m close to profit-taking territory with SPWR I might place a trade on FSLR if premium is good. From a technical analysis standpoint, I think any theta-trade play with strikes below $48 and/or above $58 looks solid, then is a matter of playing with premiums and ROIs based on your expectations. If your bias is 0, +1 in the market right now, this one might fit in your trading plan for this month. Great covered calls candidate.

$AIG (American International Group)

Last week when I was writing the blog I saw this one, but earnings was coming up so I figured I would wait. Today I love the set-up, one of my favorites for this week without a doubt. Multiple rebounds around $52 and Friday move looked like a potential rebound as well. Hopefully, Monday follows through with a green candle so we can jump at it. It doesn’t have a ton of options, so it might be a little difficult to build good credit spread on it, but the chart looks so good that I might just swing trade it with calls. I’ve been talking to my buddy Marque’s on this one, trying to make him trade it with me this week. It’s good to have a trading partner to manage trades with. Marque’s, if you are reading this, I will be calling you tomorrow!!

$TSLA (Tesla, Inc., temporarily unavailable)

Ok, I need a minute to talk about this one today…

I have traded TSLA at least once a month over the last year and a half, all bull-put spreads, with 80ish % of the trades making money. So it was a good part of my monthly cash flow with this system…until last week. We all know Elon has a big heart and his mission to save this planet (and conquer other ones) is one that a lot of us love and embrace. But we also know he is a rich-smart-arrogant-tweeter addict-out of control-Silicon Valley crazy kid. And that’s fine, quite frankly it doesn’t change my opinion of what he is trying to do, and more importantly, it did not affect my trading. But lately, this guy has been absolutely out of control and his somewhat unstable behavior has made Mr. Market a little nervous. I counted 66 tweets during the last week alone, and some of them are the following ones:

Some serious stuff, and also some irony around it as well:

“Dang, turns out even Hitler was shorting Tesla Stock…” 

“Am considering taking Tesla private at $420. Funding secured” (TSLA jumped +10%) 

“Investor Support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote” 

“Short shorts coming soon to Tesla merch…paired with thigh-high sockboots and thigh high socks with pockets for lipliner & cards” 

Nothing wrong with wanting to take TSLA back to private. As a matter of fact, I think it’s a good idea. If he really wants to focus on making the company efficient and profitable then I support that, at the end of the day Tesla will never be short of money from investors, private or public. I have no problem with Elon trying to go private, but I do have a problem as a trader with trading a stock of a company that is not making money and his chief in command is out of control. And since last week when he started directly messing with Mr. Market, we are now talking about potential market manipulation, on top of all the craziness.

If you are a day trader with good timing, maybe you can get in and out right after one of his tweets and make some money, I don’t know. But I am a theta trader and I personally don’t feel comfortable with trading a passive cash-flow time-decay strategy on a stock that can move 10% (up or down) with one tweet. I actually think is closer to gambling than to trading an 80% POP strategy. So, as Mark Cuban would say, “for those reasons…I’m out” until further notice.

Environmental Hedging Dirty List

$AMD Advanced Micro Devices

It found some resistance at $20 and it has been hanging out there for a few days. But AMD has been a resistance-breaker this year, so with a little push from Mr. Market, it might do it again so stay alert. I have naked-puts at $17 and, similar to the SPWR trade, this one is either buy or die. I will just let it be until expiration unless something crazy happens.

$X (U.S. Steel)

We see here the importance of the “wait for confirmation” thing we always mention in our blogs and reports. I pointed this one out last week as a potential candidate upon confirmation, but the latter never happened. Moreover, it went down like a pound, and this time our good ol’ buddy $31.5 didn’t hold. This is probably related with the tariffs as Trump is negotiating what looks like a promising deal with Mexico to reduce/eliminate them. Next stop could easily be $26 and if you look at the weekly chart, it looks even more scary. If it keeps moving down, it might become a good bearish candidate to balance our portfolio, but this week just popcorn on the side for me.

$FCX (Freeport-McMoRan)

Sitting at support around $15, it could be a potential swing trading option if it shows some strength this week. Again, the importance of waiting for confirmation as it has shown some weakness during the last few weeks. If you look at the last few candles, it started every day with an attempt to swing back up, but it failed, so I’ll keep an eye on this one.

$USO (United States Oil Fund) 

Very nice upward trend for USO, pivoting at the bottom of the channel. Beautiful set-up potentially for a swing trade with calls or shares. The only flaw to this chart is that it technically violated the “higher swing highs and lows” rule during the last move. But the chart looks solid to me. Unfortunately, premium sucks on this ETF compared with the other candidates of this list, so I might be looking for another green candle on Monday to jump at it with a debit trade. It’s been a while since I traded this one so I might go back in this week, we’ll see. I’ll keep you posted in the Club House.

I will be on vacation next week so hopefully, Bob can share with us some updates on his journey. Once I’m back, I hope my rooftop looks like Jumanji and I can share it all with you.

Cheers,

Franco. 

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