The New Norm: Investing With an Elevated Fear Factor

President Biden was sworn in and it seems he kept his promise that on “day one” there would be changes, states John Person of PersonsPlanet.com.

He made an historic event this century with seventeen (17) Executive Orders signed on day one of office. That compares to Trump's single order and Barack Obama with two, Bush had none.  Certainly, this administration's “first 100 days” will be interesting to keep pace with. I am wondering if investors will be able to understand what short- and long-term ramifications these swift policy changes will have on equity valuations and take advantage of these changes. 

Last week also gave us some nice trades like the “broken wing butterfly” bullish option strategy in Netflix.  As I said this would give traders an advantage of profit if the price of the stock exceeds to higher strike call option. The strikes in that trade were $520/$540/$555. The stock surged to gain 14%, trading up near $593, well exceeding the $555 higher strike and as a result of this strategy we exited the trade Wednesday at $6.50 for a nice “double.”

Lately I have been warning the Russell 2K is in jeopardy of a pullback and on Friday we entered a 50% position in a bear put spread using the 210/200 strikes in the February 19th expiration. We will look for deteriorating technical conditions to see if it warrants adding to the position OR if technical conditions improve early next week (Monday/Tuesday) then we will exit the trade. Apart from that I have not changed my opinion that the market, while showing some signs it is vulnerable for a correction, will present trading opportunities in select sectors.

Notable changes have occurred already in the Notes over Bond (NOB) spreads showing higher yields, and a widening in the “crack spread” where the biproducts are outpacing gains in crude oil. In addition, we have had a major breakout in the grain complex and Friday we saw a sharp gain in beef prices, sending the April/August cattle bull spreads (no pun intended) widen.

The sharp gains in commodities remind me of the research I did back in the late 1990s, which showed late-stage economic cycle tend to see booms in commodity markets. Ironically, on a year-to-date basis, one of the best-performing ETFs is the large-cap China fund (FXI). It's up 11.2%. Second place is Emerging Markets ETF (EEM); it’s up 8.05%. Worst performer? It’s the Latin American fund (ILF); it's down 2.96%.

The best classification of the environment that I can describe is we are under a rotational change of guard and remains a select stock-pickers' market. The obvious evidence is the relative performance difference between the sharp gains in the small-cap sector (IWM) and the tech sector weighted (QQQ) performance versus the losses in the industrial/ material (XLB -1.30%) and financial sectors (XLF -1.94%).

Perhaps this is why we still remain with an elevated volatility reading in the cash (VIX), which closed at $21.91 last week while the S&P 500 made another new all-time weekly closing high, typically the $VIX would be at least below 16.00. It seems the new norm is traders are taking on higher risk equity positions with a relative historical high fear factor indicator, the SPX Volatility Index (VIX). According to Barron’s weekly report, smart money and insiders are reportedly selling stocks at record pace. At the least it shows some are skeptical the rally can continue with limited risks.

We have a barrage of earnings and economic reports to work through. Facebook, Tesla, and Apple are due out after the close on Wednesday. All had “sympathy” rallies in association with Netflix’s insane breakout, that we profited from. However, I am waiting for the market's trade patterns into Tuesday before addressing an option strategy as I shared in Saturday's Laser Target Trading workshop.  Facebook is pricing in approximately a 6% move (16.50) derived from the ATM straddle. My take is they had to have made ridiculous earnings on ad revenues in Q4. My concerns are what will forward guidance and weekly viewer time show, as well as investors’ concerns regarding potential government (foreign & domestic) restrictions due to their censorship actions?

Possibly, we may see a rally into earnings and perhaps a sell-off afterwards. Pump before the dump or a buy the rumor sell the news type of trade.  As for Apple (AAPL) it has bullish technical conditions (PMC & OBV) with a confluence of upward target resistance from Persons Pivots using weekly, monthly, and quarterly analysis between 149 and 157.  Seasonal trends show this stock tends to move sideways to lower from January into early April. Therefore, it may present a better after-earnings trade selling OTM call spreads on an exaggerated move near the targeted resistance levels.

The weekly expiration 139 ATM straddles are roughly at $8.70 suggesting about a 5% move either way. If the stock moves to the 150 level that would be a 7.6% move. Since earnings are out after the close Wednesday, we have time to price out a strategy before then daily buy signal scans show some interesting set-ups in names that might provide surprisingly strong short-term gain like Blue Apron (APRN) Checkpoint Software (CHKP).

Sell signals showed some surprising names like Visa & Mastercard, Bank America, and Citi Bank. I still am looking to buy the names presented last week, however, I did raise the bids again in (MPC). However, we ended the week with more stocks in a weekly sell more than there were stocks in a buy mode. 

Weekly Bearish PPS & LCD Signals: BKNG, C, CSX, EXPE, FMC, IBM, ISRG, LL, LKQ, MA, MDLZ, MRK, MNST, NSC, ROST,

Current positions:

• Option Strategy: 50% position in (SPY) Jan. 29th exp. 355/340 Bear Put Spread paid $2.35.
• Option Strategy: 50% position in (IWM) Feb. 19th exp.  210/200 Bear Put Spread paid $3.10.
• Option Strategy: Valero Energy (VLO) March 19th exp. 65/75 Bull Call spread, paid $1.90.
• Option Strategy: Teva Pharm. (TEVA) March 19th exp. 12/15 Bull Call Spread paid .95 cents.
• Long full position in Junior Gold Miners (GDXJ) $41.46 using Feb. 19th Exp. 45 Put option in lieu of stop.
• Long full position in Walgreens (WBA) $39.22 using March 19th Exp. 55/45 Collar in lieu of stop.
• Long 50% position in Marathon Pet. Corp. (MPC) at $36.58, raise bid to add 50% at $41.52, stops at $37.19.
• Long 50% position in Hollysys Corp. (HOLI) $36.58, add 50% at $13.67, stops at $12.43.
• Long 50% position in Cardinal Health (CAH) $55.62, add 50% at $53.44, stops at $49.33.
• Long CF Industries (CF) at $42.64, stops at $38.12.
• Long 50% Tilray (TLRY) at $18.27, add 50% at $16.08, stops at $13.12.

To learn more about John Person, please visit PersonsPlanet.com.