August 25, 2020

STOCKS – MSFT, AAPL, PFE, CSCO

Macro – SPY, QQQ

Mike’s Reading The Markets (RTM) Premium Content – NOW WITH A 2 WEEK FREE TRIAL

• Nasdaq Setting Up For Typical 4-5% Correction
• Internals Decline As Risk Assets Diverge
• Pfizer Call Buyers Come Back For Round 2
• Waiting On Gap Fills
• Stocks Are Set To Rally On August 24?
• Risk Asset Remain On Watch The Week Of August 24 
• Micron’s Stock Declines May Be Far From Over
• Something Gotta Give.
• Dollar Steals The Show On OPEX – Morning

MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPIAL OWN AAPL AND TSLA

MICHAEL KRAMER OWNS QQQ PUTS

Stocks where higher today, but the Nasdaq 100 ETF finds itself in an interesting spot. We have been tracing out the channel for some time now, and algo’s have respected the lower and upper bounds of that channel.  Whenever the QQQ has hit that upper bound, in conjunction with the RSI crossing 70, it has resulted in a pullback to the other side of the trading channel since June 10. Now maybe this time, it will be the time it doesn’t work because I’m pointing it out. But that has been what has happened; if the pattern holds, then we should see one of that sharp 4-5% decline, any day. (Mike’s premium content – Nasdaq Setting Up For Typical 4-5% Correction)

The chart above also shows how the advance-decline line continues to trend lower, again, this a bearish divergence. When the market decides to turn lower, I don’t know. All I can is tell you what these things mean and point them out.

Could the S&P 500 first rise to 3465. It seems possible. It would be the next significant level of resistance for the index. The one thing I haven’t been able to confirm is if this is the big break out or not. I would feel more confident in saying, yeah, the S&P 500 had a big break out and is going 3,800, if the RSI wasn’t already at 70, and the Advance-Decline wasn’t heading lower. I’m not there yet. 

Treasury rates are still heading up and are around 70 bps. I think they are heading to approximately 78, and perhaps 90 bps. I know it is still 90 bps, and that is very low. But part of the reason why the market keeps rising is this narrative about the equity risk premium and the earnings yield of the S&P 500. Honestly, in 25 years, I have never heard this used as an excuse for higher prices. Yes, lower rates spur more risk-taking and make equities more attractive, encouraging higher earnings multiple. But this equity risk premium stuff was always in the classroom, not in the real world. Maybe I missed something along the way.

What is most bizarre is how all of this just one big circular reference. We find earnings estimates by using the value of the S&P 500 and backing into that number with the value of operating profits. We find the price to earnings ratio, by dividing the S&P 500 by the earnings we just backed into using the S&P 500, and the earnings yield by dividing the earnings we estimated by using the S&P 500 and dividing that by the S&P 500. Did you follow that? Makes total sense. 😛

Anyway, if the yields start to rise, that risk premium won’t be as attractive anymore, which means that multiple needs to contract. 

Pfizer (PFE)

Anyway, the Pfizer call buyers were back, and the stock managed to hold support at $38. That is a big level that has to hold. (Premium content – Pfizer Call Buyers Come Back For Round 2)

Microsoft (MSFT)

It looks Microsoft if forming a rising triangle, maybe all the Apple traders will rotate to Mr. Softy. This one has been stuck in the mud since July. Maybe it’s headed to $234.

After all, Apple still trades with a lower one-year year earnings yields. So Microsoft has bps it can make up when compared to the 10-year.

Cisco has to be wondering how it gets into this game. 

This one does not look healthy. It better hold $41.

Anyway, I had a lousy day overall and got very little done. So I’m going to call it quits. 

-Mike