This Week in Barrons: January 3rd, 2021
Getting a little Portfolio Theory in your Life: Our lives are filled with projects / investments that range from low to high degrees of success, and from small to large degrees of profitability. Although elements may fit into each of the four quadrants, 2020 taught us that they change dramatically over shorter timeframes. Going forward:
1. Don’t put all of your eggs in one basket. Sure, someone has to win the lottery, but that doesn’t mean it’s going to be you.
2. Psychologically we all need a win once in a while, and the high-probability – low-value quadrant does just that.
3. Being ‘risky’ and having a ‘low chance of success’ are NOT the same thing. Just as ‘unlikely’ is not the same as ‘not worth trying’.
4. The path to success starts with an innovation that creates value, and that value is multiplied and validated by sharing it outside ‘your village’.
5. Any network effect increases a company’s value astronomically; however, as much as ‘a rising tide lifts all boats’ – not all boats are created equal.
6. Every portfolio generates 90% of its income from 10% of its projects.
In 2021, shorten your investment timeframe down to monthly. As an example: on July 1st, I generated the statistical likelihood of various major indices landing within their standard ranges for the last half of 2020.
- The SPY should have landed between $249 and $369 … result = $372 = NO,
- QQQ should have landed between $200 and $302 … result = $313 = NO,
- IWM should have landed between $105 and $177 … result = $196 = NO,
- TLT should have landed between $145 and $182 … result = $158 = YES, and
- The VIX should have remained above $13 … result = $23 = YES.
That tells me that the smartest people in the options pits around the world – were only able to forecast 6 months out with 40% accuracy. By redoing the same analysis to a monthly timeframe – the accuracy increased to over 74%. Bottom line: shorten your investment timeframe.
The Market: Goodbye 2020 = Hello $30,000 Bitcoin!
In 2020 – per HL, we saw solar, electric vehicles, fuel cells, online gambling, gene editing, and virtually all SPACS do exceptionally well. When Wall Street smells a good story with unlimited demand, it makes sure to oversupply the market. We are starting to see absurd SPAC valuations – some without even knowing the company that they will merge with. We are also seeing quite a few stocks that doubled in 4-6 weeks, and doubled again after a brief consolidation. There has even been an increase in reversals after technical breakouts. These are signs of a market top – a behavior that could be resolved by another set of sector rotations. I’m watching: (a) homebuilders and building material stocks starting to set up, (b) silver and gold miners beginning to perk up, and (c) financials thinking of breaking out. By the way, if you’re not recommending / buying Bitcoin and/or Ethereum: (a) What are you waiting for? (b) Didn’t you get the memo?
In 2021:
- COVID will end in the developed world. We will eventually be vaccinating 40m people/month. When you add that to that the 90m that have already been infected, by Q4 we will have over 250mm people in the US who have some protection from the virus.
- In Q4 of 2021, people will return… to offices, restaurants, bars, clubs, gyms, stadiums, concerts, parties, travel, theaters, and even cruises. However, this mass re-socialization will not change many of the behaviors we adopted during COVID. We will continue to work, exercise, shop, watch movies, order in – all from home.
- Current 2020 trends will NOT reverse in 2021… but the slope of adoption will flatten.
- Governments will continue to print fiat money without restraint… and they will tax & regulate new innovative companies in order to protect the old & dying ones.
- Investors will allocate more capital to CRYPTO… and to new ways of creating and financing innovation (decentralized projects and organizations). The idea of financing and executing innovation inside of a global decentralized autonomous organization is such a powerful idea and one whose time has come.
The end of 2021 will be a ‘different normal’, that will require us to ‘adapt yet again’ in order to survive.
InfoBits:
- Revenge spending is coming... on elements outside the home on things like vacations, concerts, dining, and non-stretchy clothes.
- Peloton’s subscriptions and sales doubled for 2020. Be careful, a $2K spin bike could easily become an expensive coat rack.
- Comfy is the new cool... will trend into 2021. Moisturizer is the new bronzer, sweats are the new khakis, and craft-made is the new designer. With +11m Americans still unemployed – ‘comfy could be king’ for a while.
- Etsy was the 2nd best-performing S&P 500 stock of the year. It was the best performing stock, until Tesla was added to the index in December (womp).
- Crocs had a Croc-star moment in 2020: US footwear sales were down 20%, but Crocs sales increased by 48%.
- Mexico is legalizing marijuana… thinking that boosting MJ competition will reduce price, and drive down demand for underground drugs.
- 2020 was a good year to IPO: More than $167.2B was raised in 454 offerings. That crushed the previous 1999 record by almost $60B. Average 1st day pops were 18%, and average 1st day Tech pops were 34%.
- In 2020
o 5 companies accounted for between 20 – 25% of the S&P,
o COVID triggered an unbundling of the indexes that was long overdue, and
o Retail went from 10 to 25% of all trading. In a Robinhood / TikTok world, the indexes will continue to be unbundled.
Crypto-Bytes:
- Bitcoin passed Berkshire Hathaway in market cap… just 18 months after Warren Buffet called it “rat poison”, Jamie Dimon (CEO of JPM) called BTC a “fraud”, and Mark Cuban ‘n Kevin O’Leary (Shark Tank) called it “a sham & useless”. Ahhhh, what’s the line: “He who laughs last – laughs best.”
- BTC’s value will continue higher in 2021. It was the talk of the town during the holidays. It’s up 450% since March, broke over $32k – is $100k next?
- Central Bank Digital Currencies (CBDCs)… saw a significant pilot in China and in-depth research from several European banks and the FED. I hope to see a fully-functional roll-out in 2021.
- 2020 was the year of DeFi (Decentralized Finance): Institutions are catching on to the immense returns from liquidity mining and from DeFi itself – and are introducing massive 2021 projects as we speak.
- Crypto M&A grew from $19m to $46m per deal in just 12 months: More crypto companies are reaching unicorn status, and Coinbase is IPO-ing. Crypto SPACs / M&A will become an even greater trend in 2021.
Last Week:
Monday: This is not a week for stock market hero stuff. I expect a pretty active week with tight markets and plenty to do. One that I mentioned last week, Fiii had a gap and then a fade, so at least it gives us a target to play with. I will reload with Fiii over $15.30. I don't have any love for FB, but the technicals are firming, and if it gets over $273.08 it will probably test the 50-day.
Tuesday: Last night the house passed the $2K stimulus check idea, and now it's up to the Senate to see if they're going to go forward with it. IPOC is still looking great. Somethings bugging the markets today. I don't think this is just profit taking. They've lost the momentum, and they’ve gotten defensive all of a sudden.
Marijuana…Beverages are Ripe for Drinkin’ in 2021:
It has been more than two years since recreational cannabis was legalized in Canada, and last year they opened up the market to edibles, beverages, and vape cartridges. Beverage companies are eyeing the THC-infused beverage market as a way of expanding their presence in Canada. Two companies at the forefront of the Canadian drinkables market are Canopy Growth and Truss Beverage Co., which have accounted for nearly all of the category in Canada this year.
1. Constellation’s beverage arm - Canopy Growth (CGC) accounts for about 70% of the THC-infused beverage market in Canada (about 2m cans). The U.S. market is easily 10X the Canadian market, and we’ve only sold twice as many beverages – so we’re just scratching the surface in terms of beverage potential. Beverages (to date) are about 2.5% of the total MJ mkt.
2. Truss Beverage is a joint venture between Molson Coors and cannabis producer HEXO – formed in August 2018 to develop non-alcoholic, cannabis-infused beverages. Their products sell for between $4.50 and $6.25 per 12 oz. can.
3. Fluent Beverage is the joint venture between AB-InBev and Tilray. They just launched their first CBD-based beverage in Canada called Everie.
Next Week: Trade like it’s a New Year!
- The marketplace continues to grind higher… and this week we even touched the upper edge of the expected move.
- SPX Expected Move:
o Last week the expected move was $58, and the actual move was: $58.
o Next week we are expecting a $90 move. That’s a 50% increase in volatility over last week. It’s time to put on your ‘Big Boy’ pants.
- Wrap your Risk: With the SPX projected to move about 100 points next week, every trader needs to be comfortable with the amount of risk that they have on.
o We are entering 2021 with elevated volatility. Know your own risk, and take steps to reduce it while you can – BEFORE you have to.
o The SKEW is showing us that the professionals are buying out-of-the-money PUT options (like they’re going out of style). This is potentially in anticipation of a market retracement or is a part of a hedging strategy.
- Political Showcase: We can certainly attribute some of the proposed market reaction to the election in Georgia, the Presidential certification, and the upcoming release of the Jobs / Employment Report next Friday.
o The volatility is also telling us that the risks in the near-term are almost identical to the risks in the far-term.
o If you like ‘scalping volatility’, then look at the IWM. The IWM is a major index product that is showing an implied volatility rank over 30. Therefore, investors are worried about our small cap stocks collapsing under the weight of this coming week’s political climate.
- High volatility sectors: Along with the small caps (IWM) you also have the financials (XLF) that are increasingly showing high volatility readings – and they are also entering earnings season within the next 10 days.
- Based upon this data: This next week could easily turn into: “Mr. Toad’s Wild Ride” inside of the market place.
o You can make a case for all of the momentum being to the upside, but all of the professionals are heavily hedged to the downside.
o We’re sitting on markets that are at all-time-highs with a volatility index that is elevated and a SKEW reading that is off-the-charts. Those three pieces of data don’t go together well.
- Where’s the Opportunity: I’m looking for the small cap index (IWM) to offer up opportunities to the downside over the next week.
o That could be buying out-of-the-money, February Puts, or selling close-to-the-money Call Spreads on the IWM.
o That could also be: Selling the February $20 / $15 Put Spread in the VIX to finance the purchase of an out-of-the-money $40 / $60 Call Spread in the same timeframe.
- For 2021:
o Volatility (for the next 30 days) should continue to be quite significant.
o The tone of the market has changed from that of 2020. The ‘Monsters of Tech’ are trapped within a range.
o Now that Tesla has been added to the S&Ps, much of its ability to move and influence will be muted due to its immediate S&P surroundings.
o Tip #1: “Keep your hands and feet inside the vehicle at all times.”
o Tip #2: “Keep your allocations small.”
Tips:
HODL’s: (Hold On for Dear Life) / (All %’s = YTD – will reset next Sunday!)
- CTIC ($3.22),
o Just keep selling Jan. $3 covered calls for income
- DM ($17.20 / in @ 14.24 = up 21%),
o Sell Jan. $17.50 covered calls for income
- ETHE ($15.50 / in @ $13.44 up 15%),
- FIII ($13.54 / in @ $12.42 up 9%),
- GBTC ($32.00 / in @ $9.41 = up 240%),
- HYLN ($16.48 / in @ $0.32 = 5050%).
o Sell Jan. $15 covered calls for income
- IPOC ($16.77 / in @ $12.51 up 34%),
o Sell Jan. $15 covered calls for income
- Pan American Silver (PAAS = $34.51 / in @ $13.07 = up 164%),
o Sell Jan. $36 covered calls for income
Crypto:
- Bitcoin (BTC = $32,300),
- Ethereum (ETH = $770),
- Bitcoin Cash (BCH = $360)
Thoughts: I think the EV revolution is real, I think it continues to grow and AAPL’s entry into the pond will be a big deal. If I’m right Volkswagen will produce AAPL’s EV car. One may consider a long- term hold on VW once it is announced; however, the ADR is thinly traded. Popular names in the EV space are: FSR, TSLA, WKHS, FUV, NIO, KNDI, SOLO, BLNK. If our FED doesn’t pull the plug on its printing presses, all of these have the ability to move much higher.
Follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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