Special Risk Capital Management LLC

The Year Winding Down December 25, 2022

December 23, 2022 –  Well we’re almost there . . . the end of 2022 is right in front of us.  And the most impactful categories were Ukraine (oil & commodities) and Inflation (interest rates & economy).  The biggest question is just how much and how fast will the world economies react to the economic slowdown driven by central banks increasing interest rates.

The whole idea is to dampen consumer demand without over doing it; a delicate balance.  Slowing economic growth will also slow revenues which hit profits / earnings, and we know that in the long run, profits (or the hope of them) drive stock prices.  2023 looks to be a very tepid year and hopefully no worse than that.  With the possibility of a recession comes a likely leg lower in the markets.  It’s hard to say that current stock prices are considered a “Value” since the price to earnings ratio remains above historic levels in most cases.

I’ve randomly select stocks in major sectors to compare their performance over the past year (to date).  As you can see about the only place to ride out 2022 was in the Energy sectors. Ouch ! (click on chart to enlarge)

The Short Term Sector table is shown below –

That’s about it.  Next week will be a low volume period with many folks on vacation.  And with low volume can also bring volatility in prices.  We’ve likely seen all of the year-end tax selling by now.  I think we’ll have to wait until 2023 begins to get a feel of where things are likely headed.  I’m heavy in Cash for the time being.

Wishing you & your family a Happy Holiday Season and a Prosperous New Year.   ………  Tom  ………..

Price chart by StockCharts.com; table by http://www.HighGrowthStock.com. Used with permission.

FED Is In It For The Long Haul December 17, 2022

December 16, 2022 –  The FED raised rates ½% as expected and the market initially thought that the end of rising rates was near, but Chairman Powell’s press briefing but that “to bed” quickly.  He stated that elevated rates will be here for “awhile”, likely well into 2023 before there will be a possible lowering.  The markets didn’t care for that and reverted back down.

How much lower?  That all depends.  We’re in the final stages of tax selling and we’ll need to see the options structure after Fridays “quad witching” of futures and options.  Going into Friday the amount of Puts and Calls was about equal, with large option volumes at strike prices just above the closing prices on Friday.  Did these options get “rolled forward” into next month or were they closed out?  We’ll get an indication of that on Monday.  But the call buyers got burned on Friday (strike prices above the Friday close).

In reality from an economic stand point not much has changed.  It’s going to take months to tame inflation and we’ll very likely get another ¾% to full point increase in 2023.  Recession is becoming more of a reality.  Let’s keep an eye on the Bond market and small cap index for clues as to an indication of whether big money is actually getting more optimistic.  Bond prices rising (like they have been) and the US Dollar falling is Bullish; will that continue?  The opposite is Bearish.

The chart shows that prices are back to the mid-June, 2022 levels (on the way down) and the mid-July, 2021 levels (on the way up).  Sure does make a case for active investing.

The Short Term Sector Strength table is shown below:

Next week will be slow with low trading volumes, but that can breed volatility, so be careful.  I’m likely not going to be very active, but areas I like are in Pharma / Biotech and Healthcare.  These are more defensive but can participate IF the market price structure improves.  Have a Good Week & Take Care.  ……  Tom  ……

Price chart by MetaStock; & table by http://www.HighGrowthStock.com. Used with permission.

At The Previous High December 3, 2022

December 2, 2022 –  Despite all of the glowing reports on this market, we’re actually at the previous high of 11492 back on November 15 on the broad NASDAQ Composite Index.  (see chart below)

Thus we really have not had that big breakout that many have proclaimed.  Since we’re technically “over bought” I’d expect a pullback early in the week.  Any move after that would be a better indication of a new trend.  However, December 14 looms in the background.  That’s when the FED announces its next interest rate move.  Powell is alluding to a ½% increase but that’s still an increase.  The economy remains strong and consumers continue to buy with Christmas retail sales increasing.  This is NOT a sign of inflation slowing down, as much as we’d like to see it.

What’s moving in the short term?  The table below shows the Short Term Sector Strength –

And so we watch and wait for the preverbal “Santa Clause Rally” . . . if it comes.  Beware of end of the year tax loss selling; that’s the Grinch.  Have a good week.      ……  Tom  ……

Price chart by MetaStock; & table by http://www.HighGrowthStock.com. Used with permission.

Watching & Waiting November 20, 2022

Nov. 18,2022 –  A lot of volatility back and forth this past week but not much commitment in either direction.  The number of Put hedges has dropped off significantly and it just “looks” like the markets “want” to go higher but need a good reason to do so.

We remain in a broad trading range that speaks of base building and thus a possible . . . change in trend.  As the 3^rd quarter earnings wrap up the stage is set for the holiday season and that may (just may) be a spark.  The next FED meeting is December 14 and there is MUCH anticipation as to the next interest rate announcement (the bet is on ½%).

The Short Term Sector Strength table –

Semiconductors want to be loved along with Biotech but there is more smoke than fire in those sectors.  Next week will be a short trading week, so I’m not anticipating much will be happening.  For those in the US, Happy Thanksgiving.   …………..  Tom  …………..

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.

The FED Strikes (back) November 5, 2022

November 4, 2022 –  In the week leading up to the Fed announcement last Wednesday the markets we’re thinking (i.e. hoping) for some indications of a slowing interest rate increase.  Maybe ½% or at least some indication that the rates were approaching a peak.  That really didn’t happen.  Just a few “maybe in the future we’ll consider slowing the rate of increases”, then another ¾% increase.  This has been a steepest / fastest increase in FED funds rates ever in our history and it has the markets spooked.  We’ll have to wait until December to see IF there is some moderation.  In the meantime the markets remain concerned about interest rates and their effect on a possible recession.  It’s looking more likely.

Not much is going to happen until after the midterm elections have been called and that may take weeks, if not longer.   I see us in a range bound market between 11230 (top) and 10093 (bottom) on the NASDAQ Composite Index.  Right now it seems that there is more potential to go down than up.  We’re going to need to see some light at the end of the tunnel before prices can break (and stay) higher.

Folks wonder why I nearly always show the Sector Strength table (below).  It’s important in performing a ‘Top Down Market Analysis’.  These are the sectors / industries that are performing best and that’s where we need to consider taking or holding positions.  The idea is to “fish where the fish are” and not to cast a broad net everywhere.  The bottom line is to minimize risk and try to put the “wind to our back”.  It’s a focused part of trend following in an attempt to follow the bigger, long term investors.

The Short Term Sector Strength table is shown below –

The week coming up will be interesting to see just how strong or weak the markets are as the election results and the fallout is relieved to us.  It’s a good time to be heavy in Cash IMHO.  Have a good week (and VOTE !).  …  Tom  …

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.

Still Within a Down Trend October 15, 2022

October 14, 2022 –  There really isn’t much new to discuss.  Overall, the environment has not changed.  These massive one day moves are generally started with Put options and short covering (up) followed by short term day traders piling on.  After the “evening out” of short positions stops, reality returns and we just come back down.

The hedging activity remains high, the big intuitions remain concerned about a 10% drop and are not taking chances right now.  What is driving this are rising interest rate fears driven by the FED who is driven by inflation data, and we got two doses of that in the past week.

Ask ourselves:

• Has inflation shown signs of slowing?
• Has the FED indicated stable or slower rate increases?
• Has the market trend changed?

I’m answering ‘No’ to all of these right now.  But all is not gloom & doom.  The number of stocks making new lows is slowing (selling drying up ?).  Retail investors are flooding into Cash; looks like capitulation.  The market (in general) is “oversold”.  But . . . “Selling begets Selling (& Buying begets Buying), so if we see a sustained amount of selling, that could be the final ‘blow off low’.  Right now I’m holding a heavy position in Cash and trying to be patient because the market will turn.  I sure would like to see it put in a base over a month or more before any spring higher happens, but one must stay flexible.

Short Term Sector Strength table –

I note the previous market leaders are at the bottom.  One bright spot is BioTech, but that could be a short term blip; we’ll see. Have a Good Week.        ………..  Tom  ………..

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.

Bottoming Or Lower ? October 8, 2022

October 7, 2022 –  Here’s my quick read of this market:  We are either in a broad “Bottoming” / base building process (scenario ‘A’, green lines) or headed lower (scenario ‘B’, blue lines).

The market rocketed up about 5% early in the week and then gave it all back late in the week.  This is typical of a nervous market where folks are trying to anticipate the next move, which causes ‘Shorts’ / Hedges to cover their positions and buy.   The technical term is a “Short Squeeze”.

What is causing this nervousness is the very fast rise in interest rates and a large amount of debt / loans that are affected by interest rates.  The market (according to CME interest rates futures) is expecting 80% chance of another .75% interest rate rise come November (Bearish).  Watch for the latest CPI (Consumer Price Index) data that will be coming out on Thursday.  That could be a big mover in either direction, as the FED is keying off of inflation data, and that drives their decision on interest rates.

What will confirm that a move has “legs” will be how the US Dollar and Treasury Bonds react.  A lower US $ and stable or high bond prices (lower rates) would be Bullish and support at least a longer run higher.  Of course the opposite is true too.

The Short Term Sector Strength table is shown below –

I am very heavy in Cash waiting for a sign of at least a ‘tradable bounce’ . . . . in either direction.  I’d like to think that the worst is behind us but proof of that is not easy nor plentiful.  This market is nervous and right now the institutions are staying hedged and away.  Me too.    Have a good week.   ….  Tom  ….

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.

FED Freak Out September 24, 2022

September 23, 2022 –  If anyone thought that this market was strong or getting stronger, they had their “head handed to them” after Wednesday afternoon.   Powell reinforced the FED Board’s hawkish stance that was stated earlier at Jackson Hole . . .  fighting inflation and whatever it takes.  Hopes of interest rate increases slowing and then going down in early 2023 were pretty much dashed.  My old adage: “Weak stock markets react badly to bad news, while strong markets sluff it off”.  Folks are nervous about corporate earnings.  The “bottom line” is in fact the bottom line.  Forward earnings guidance is generally not that good in a slow or receding economy.

This last rally was primarily driven by retail investor with FOMO (Fear Of Missing Out) clearly on their minds.  Rarely do we see a ‘V’ shaped bottom and if we do, we also see big institutional volume coming in.  This time there was only average volume.  Very typically institutions need time to accumulate shares so as to not affect prices and this takes time.  We’re not seeing that accumulation / base building phase yet.

My past anticipated move down to the 9400 level (blue lines) panned out OK, but what next?  I’m of two minds: 

Scenario A is we continue a little lower early next week then rally back up toward resistance at about 10565.  And then begin the process of building a base via the double bottom scenario.

Scenario B is that we bounce around late next week with a minor recovery (a.k.a. head fake) then head steadily lower to 11500 via a selling climax where everyone gives up on heavy selling volume.

A clue as to which one might develop is the US Dollar.  To simplify things, a strong US$ equals a weak stock market (yes, that includes crypto too).  A weaker US$ would support a stronger / basing stock market.  Precious metals, especially silver, will also provide some evidence.

And of course News is going to be a major driver.  Coming up on 9/30 we have the PCE data which is an indirect measure of inflation, then 10/13 the latest CPI data.  These are potential market movers in either direction.

The Short Term Sector table will also provide an idea if money is flowing into or out of growth sectors or defensives sectors (a.k.a. risk on or risk off).

Hope this provides some perspective (at least one guys view; I can be wrong) of the market.  Please feel free to comment.  Have a good week.      ……………  Tom  ……………..

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.