October 5th Daily Market Note: Traders await tomorrow’s all-important Jobs report. Selling Covered Calls at today's open served its intraday purpose.
10/5 Premium Strategy Note
Intellectually Nourishing Quote: The single greatest edge an investor can have is long-term orientation - Seth Klarman
Bottom Line: Traders await tomorrow’s all-important Jobs report. Selling Covered Calls (discussed from Pre-Market Whatsapp) at today's open is fruitful.
Forward-looking Conclusions of this note:
Macro: Nervousness characterizes today’s market session, but no clear trend conclusion can be formed before tomorrow’s Jobs report. In our Pre-Market Whatsapp Note, discussing using covered calls for 1-2% out-of the-money strikes on this Friday’s expiry to partially hedge heading into tomorrow appears to be fruitful.
Stock-Specific: JNJ bounced from our 150-153 region to 157 earlier this session (idea discussed from Monday) in the context of a flat SPY week. Other ideas will perform over time, I believe.
Bonds: If TLT can defend the 85 region, we’re looking at the 87-88 level within 30 days. My opinion.
China: Hang Seng may catch a bid beginning next week. Hang tight.
Rest of World: Louis Vuitton (Euro Ticker: MC or US Ticker: LVMHF) direct shares is up 1% from entry.
LVMH trades as ticker MC in Europe.
Daily Market Note & Context
Today’s Daily note will be more long-term focused so that my notes released each week can comprise of several editions that include trading opportunities and also discuss longer-term investment positioning as well. I personally think it would be best to separate trading from investment positions into different accounts as they have distinct purposes, timelines, and transaction behavior.
Let’s start with the U.S. market’s forward multiple (forward P/E), which now reads roughly 17.7X for the S&P 500. Long-term Asset Managers, Mutual Funds, and Institutions tend to use big-picture valuation metrics to base their asset allocation decisions, particularly looking at whether the current earnings multiples make sense in today’s context and their relative attractiveness towards historical valuation. Today’s valuation reading, in my interpretation, is roughly about 10% higher than the historical average of 16X. During the covid-era stress of 2020 where corporate earnings plummeted for 2-3 quarters, the valuation multiple was 14X and during the 2022 Bear Market, valuations reached roughly 15X. Selecting the right valuation for longer-term entries is highly subjective, but if one is an investor with a 10 year+ timeframe, I do see great value in the concept of DCA (dollar cost averaging) - where a person puts in a set amount into the index within a retirement account to smooth out economic and market cycles. Should the current macro cycle and hysteria on social media deter one from gaining multi-year exposure to the index? No, I do not think so. I think investors who have committed to a DCA schedule to stay the course, even if there is a period of drawdown.
The indexes SPY and QQQ are both market-cap weighted, meaning that strong performance in one name will eventually make it rise towards the top of the weightings. Although this does create concentration risk at certain points (like in 2022), long timeframes tend to smooth out the risks of concentration from key companies, and the business cycle allows for emerging companies that have strong prospects to gain prominence within the index – offsetting any cyclical weakness from current leaders.
I do believe that most people will be very well served having exposure to the U.S. indexes for multi-year holding periods. As of now, the levels on SPY of 420 is OK on an intermediate-term (3-6 month) basis because we will soon be entering stronger seasonality later in Q4 with a target of 435-440 again. Should we see a 380-390 reading on SPY, which is 10% lower than today’s levels, we’ll once again arrive at the historical valuation multiple of ~16X. That region should be fruitful for a 5-7 year holding period, regardless of the drawdown in between.
If we arrive back to the ~450-460 level (19X-20X forward p/e) again before year-end, I think that region merits considerable caution because bond yields of 4.7% (if they stay there) will be now a serious competitor to stocks if they have an earnings multiple of over 19X.
From now until year-end, I will continue to find opportunities that add alpha in the context separately from a longer-term DCA portfolio. There’s a lot of posted strategies out on the internet. Ultimately, many of them will fail to beat the DCA approach.
Although I have done decently without the DCA approach, I fully intend to employ it soon on top of my core trading positions because it is passive, statistically proven, and time-tested.
DCA all the way along side my core strat.
-Larry
Our opinions from this past week.
On JNJ
On Louis Vutton (Ticker: MC for Europe or LVMHF for U.S.)
On S&P 500, QQQ, and TLT ETF as I shared an opinion for a .5-1% bounce earlier this week
At this moment in time, I’m looking to get back into SPY, QQQ, and TLT at swing lows. I do NOT want to be out of these names when the market continues its come back.
If you’re a public reader, join us. My work is simple, direct, and unambiguous.
Just a reminder that I do not publish on Fridays for Pre-Markets on Whatsapp and Daily Market Notes. Have a great weekend.
Disclaimer: My investment community is not investment, financial, or trading advice, but for educational informational purposes only. I am happy to share my personal opinions which I provide as my personal journal. Trading of any kind of securities involves a lot of risk. No guarantee of any profit whatsoever is made. Investors may lose everything they have. Practice extreme caution. No profit is guaranteed whatsoever, You assume the entire cost and risk of any trading or investing activities you choose to undertake. You are solely responsible for making your own investment decisions. Owners/authors of this publication are NOT registered as securities broker-dealers or investment advisors either with the U.S. SEC, CFTC or with any other securities/regulatory authority. Make sure to consult with a registered investment advisor, broker-dealer, and/or financial advisor.