Beachman's investing plan - Ready for an October surprise?
Portfolio: What I am planning to do in the markets and with my portfolio
Are we becoming complacent investors in this market?
It’s easy to do so with the SP500 logging all-time-high (ATH) after ATH…about 40 ATHs in 2024 so far. The index has been up for eight of the nine months this year. Seasonally, Sept was supposed to be the worst month of the year, but that did not happen this year. Hard to not grab a margarita, to lean back on the couch and to enjoy the moment.
But then we are soon entering October…a month known for its political surprises that tend to have a higher significance in an election year, especially a US presidential election year. Will we see some fireworks soon? I am not sure and really don’t care to predict anything political.
What I find interesting is how markets seem to be prepping for the US elections…in terms of how they are investing, where they are investing and for when they seem to be hedging.
Welcome to the Beachman community, where we follow the most pertinent market signals that you need to know as an investor…AND…the context and the key takeaway for each of these developments.
Table of contents
Market signals
Key questions
Beachman’s plan
Conclusion
Upcoming exclusive paid content
Beachman recommends
Each week, I will share a recommendation for an app, a book, a website, a podcast, a publication, a movie…anything that I find interesting and useful from an investing and financial management perspective. I don’t get paid to do this. Beachman’s Newsletter has and always will be an ad-free publication. So here goes…
Finchat.io
I use Finchat.io on a regular basis as a secondary source to look up a company’s fundamental business data. I mentioned last week that stockanalysis.com is my first stop for such information. Finchat is my backup source for key performance metrics, forward estimates, earnings call recordings and investor day & industry conference transcripts. I use the free service level at Finchat. I have not found a good enough reason to upgrade to their paid tier. They have a clean, easy to use interface that helps me look up a piece of information quickly when needed.
I have tried so many of these financial data services, but the two I mentioned above meet all my needs. Nothing else comes close.
Market signals
We have two important events coming up this week:
Today, Mon Sept 30th, is a large monthly options expiration.
The Sept US jobs report will be released on Fri Oct 4th.
Options expiration
About $131B in options value are expiring today…on Mon Sept 30th. The JPM (JHEQX) options hedge, that is part of this package, will also be expiring and mostly likely rolled over to a Dec 31st expiration. If you want to learn more about the JPM hedge, read my post from Oct 2023 here.
Most of these expiring options are bullish CALL options….by a factor of 4:1 as compared to the volume of bearish PUT options. The vast majority of them are centered at the 5,750 level for the SP500.
Now, as these options expire, the market makers, who are on the other side of these CALL options trades, remove their own hedges. As they remove their hedges, market makers have to sell stock. Market makers handle more than 95% of all options trading today and they always hedge their positions.
JPM will likely be re-establishing their bullish CALL side of the collar hedge at the 6,000 level for the Dec expiry. Market makers will take the other side of the trade and put on their own hedges by buying stock.
The flurry of activity described above - options expiring, options rolling over, hedges removed, hedges re-established, selling stock, buying stock - all these will increase market volatility over the trading day on Mon Sept 30th.
I expect dips to be short lived and bought quickly.
SP500
Thus far, the 5,750 level has acted as upside resistance…primarily because of the JPM collar hedge CALL position at that strike. This upper boundary will get re-established at about the 6,000 level during the roll forward. Now, markets will have a bit more head room above to grind higher through end-Dec.
That said, 5,685 is an important battle ground level. If markets dip below that level over the next few days, they could go lower rather quickly and will need to find support at 5,400 or even 5,300.
As you can see on the chart above, markets are still close to being overbought. A mean reversion lower is on the cards.
US dollar battleground
Now that the US Feds have started cutting interest rates, there are just 2-3 leading macro indicators that I closely watch. The US $ as represented by DXY is one of them.
The DXY is a weighted index that is derived from the value of the US$ as compared to 6 other major global currencies like the Euro, Yen, Pound etc. and it is at an interesting battleground level.
The $100 level is proving to be a key level for the past 2-3 years.
If the DXY index goes lower and stay sub-$100, it could be good for US and global markets. A cheaper US$ makes commodities cheaper for emerging economies because it improves their buying power (makes their currencies stronger). This is especially true for a mostly importing economy, which describes most of the developing world.
A lower US$ is not as harmful to the US. Even though, we are a mostly importing economy, we have more clout on the other side of the equation which offsets the negative effects. The US $ is the principal reserve currency in the world, used in more than 90% of all currency exchanges and more than 60% of all global trade. Our trade deficit is in the import of goods from other countries, however we have a high trade surplus on the services side, through which we export innovation in sectors like technology, tourism and transportation.
Now, if inflation rears its head up again in the US or if the pace of US interest rate cuts is slowed down, then the US$ could go higher, causing several vice-versa effects.
As investors, the $100 DXY level is important because it will help us gauge how international markets AND US markets could perform in the future.
Chinese stimulus
Last week, the Chinese government released a swath of fiscal and monetary stimuli to reinvigorate their slumbering economy. They gave money to local banks and brokerages to buy stocks. They reduced interest rates and reserve requirements for financial institutions, reduced down payment requirements for property purchases.
While Chinese stocks soared more than 20% in just 5-6 days, investors around the world were left wondering if these measures were real, whether they would be successful in boosting Chinese stocks.
First off, let me say that I don’t believe any data coming out of China that is reported by Chinese authorities. They have a recurring habit of tweaking the numbers to make them look better than they are. They clamp down on dissent and debate. They threaten foreign companies when it suits them. They even stop reporting basic economic information when it suits them. e.g. The unemployment rate in China is very high, estimated above 15%. But the government stopped reporting it in July 2023.
That said, as an investor, sentiment is an important indicator and when it turns positive, it could attract more money to those assets…in this case Chinese stocks.
Chinese stocks have been beaten down and depressed for 3+ years - they never really recovered from the COVID lows due to the extended Chinese lockdowns and drops in global consumer spending as the rest of the world normalized. As per JPM and GS, investors’ holdings of Chinese equities are still close to a 4-year low…around the 17th percentile since 2018.
So you have to ask yourself why now? Why throw out all these stimuli measures now? Are these actions sustainable?
The short answer is because now they can and yes they could be sustainable.
The Chinese economy is very much tied to the strength of their currency, the Yuan, which in turn is tied to the value of the US$. Remember it is all about trade - exports and imports. As the US Feds are cutting interest rates, the US$ becomes cheaper, allowing them to make the Yuan cheaper to stimulate more exports which boosts their economy. Recent US Feds actions allowed the Chinese government to take their own stimulative actions now.
China has set a 5% GDP growth target for 2024 and we are now in the last three months of the year. They have to demonstrate some action that could give the impression that they are helping the economy finish the year on a strong note….IRRESPECTIVE of whether those actions actually result in the achievement of their 5% goal. Remember my stance that I don’t trust any of their data? Nothing to stop them from declaring victory on Jan 1 2025 that they grew their economy by 5.01% because of all the wonderful fiscal and monetary incentives.
As investors, here is a further reality check. Unlike the US, only 10% of Chinese households are invested in their stock market. More than 60% of their assets are tied up in real estate.
According to Fitch, Chinese banks are holding onto more than $220B in losses from bad debts, mostly from the property sector.
As I mentioned above, unemployment in China is very high. Household consumption is some of the lowest since the 1990s.
Nothing can make Chinese citizens spend more money to prop up their economy if they don’t have jobs, spending power and wages are diminished and their real-estate based net worth stays underwater.
Things are not looking good there and these government measures smell more like panic…politicians trying to save their jobs.
But then we come back to sentiment. Over the past week, it seems to be turning more positive towards Chinese stocks and they might be an interesting short term trade opportunity for the brave among us.
And one of the big questions that I am considering is that…if Chinese stocks continue to rise, will that have a negative impact to US stocks?
Follow Beachman
On the daily, you can find Beachman in three places…
Beachman’s Substack chat line here
Beachman’s Substack feed here
Beachman’s Threads feed here
Please check out the must-reads listed on the About page and the Roadmap page. I have stopped using Twitter.
Key questions
The specific, top-of-mind questions that will shape where and how I invest for the rest of 2024 and leading into 2025:
Who is actually making money in AI now or in the near future?
When will the current AI capex boom turn lower?
Who will be the next beneficiary of hyperscaler and enterprise AI spend?
Are markets underestimating US geopolitical risk?
How will small cap stocks perform in response to interest rate cuts?
Will recent China stimuli actions take US markets lower?
I, regularly, curate such research questions to stay hyper focused on finding the best investment opportunities for my portfolio.
I recently initiated 2 new positions in my portfolio - a small cap AI stock and a small cap ETF. Based on the Q2 earnings season, I now have 5 stocks and 1 ETF on my active watchlist. I am highly interested in these as possible additions to my portfolio and I identified preferred buy points for each of them.
The hunt continues…
Beachman’s plan
Given the market signals discussed above…
…given the key questions that I am researching…
…my simple, actionable, measurable investing plan is as follows: