Weekly Raid #68 - TSLA vs. Volume Gap
It’s Thursday and we have another packed day of news.
Yesterday’s home data was less than exciting with new data showing affordability at record lows. Let’s hope today is a little better.
In other news, TSLA (-4.79%) got smoked after earnings gapping down to the low 230s as of this writing and that is dragging the rest of the markets down with it.
News of the day
The highlight of the news today is Chair Powell speaking. Anytime he talks the market usually listens. Bake that in with Tesla earnings and we could be in for a real doozy.
In addition to that we have the existing home sales numbers and I honestly think that it could be a catalyst for some real momentum on the overall market.
If home sales come out weaker than expected and the government and Fed are forced to realize that we are in a recession I think we could see some serious sell start to creep into the market. The SPY is now firmly back inside its yearly value area and the 80% rule says that 80% of the time it will make a trip all the way through it.
Parallels to 2008
This is a long one, the Tl;Dr is at the bottom if you don’t care about the details.
Everyone loves to post charts comparing the price of the SPY or Nasdaq to 2008 or the early 2000s and the dotcom crash, and there are indeed some similarities. But I caution you to look for overfitting.
Overfitting is a concept in backtesting that eventually makes your model look almost identical to the benchmark you are using (in very basic terms) and it renders your model completely useless. It’s also important to remember how the market actually works: Earnings and confidence drive prices, not the other way around.
This is important because in recent years the market has been touted as the economy doing well, but that is not the case. As we can see right now, the market is still way up on the year, but if you go ask most normal people we are in some serious trouble economically. But we have talked about that a lot.
There are a few parallels between now and 2008 though:
First up is rates, rates are spiking and investors are starting to get spooked. Always watch the bond markets, they don’t lie, and when investors require more than the Fed Funds Rate on short or long-term debt it means they are losing confidence in the risk/reward.
Second, the Fed is woefully behind. In late 07/early 08, the chair at the time as well as the treasury said the economy looked strong and that banks were in good shape. In the ensuing 18 months one of the largest banks on Wall St went bankrupt (Lehman) and bailouts were handed out lollipops at a bank window. Clearly, they were wrong. Now Yellen and Powell are saying the same thing despite a pile of evidence to the contrary.
Third, Separation between the working class and the governing. I was still in school in 2008, and one of my favorite professors used to work as a trader at a small firm around where the school was. Everyone at the college and my job knew there was something getting ready to happen, but they all would just listen to the Fed that it would be okay. All except that trader who had gone to cash (he called it trader instinct). He missed out on the last pop in the market sure, but in the end, he was saved a lot of wealth loss. The same is happening now, at my day job, the water cooler is awash with “there is a crash coming” talk while the government still says everything is rosy. This is a huge divergence.
So great, now that we know about it Viking, what do we do with this information?
Tl:Dr: Well, I am glad you asked. All of these are solid indicators that something is wrong. Even if a crash doesn’t arrive, it could still be a good time to lighten your positions and sit in cash. Or at the very least buy some protection. You don’t have to go full Gold Bug, but recognizing that divergence between reality and the market could save you in the long run.
Short Watchlist section today.
SPY is first and it is the same chart as above. I like the spot as we have now retested the VAH on the year. I am looking at some LEAP puts to take this thing down with. Worked well in 2008, albeit there were a lot fewer options. If the LEAPS are too expensive for your account (I get it I was there), then look for some longer dated credit spreads. You could make a hefty sum layering some spreads if the market falls.
TSLA got smoked on earnings last night so I am watching for either a continuation or a rebound trade today. We are pretty much in No-mans land on the volume profile so I am looking at the lower 220s or upper 210s to get back involved. Also if you had taken a trade earlier this week as discussed in our newsletter on Monday you would have made a 100% profit on a credit spread.
MSFT bouncing off of its yearly POC and looks to be heading south again. So it could be a great time to sell a call spread or two and try and play a continuation for that move. Remember on some of these trades, you are not trying to make a million, just make some profit and leave. My price target here would be the 50 DMA around 220 for a close of at least most of your position if you are still in it.
As always trade well and
As always this is all for educational purposes only. You are solely responsible for your trades as I am for mine. Nothing in here should be construed as financial advice, but only educational content about the markets and my particular trading style.