Beachman's investing plan: Window of uncertainty=opportunity
Portfolio: What I am planning to do in the markets and with my portfolio
I believe that we are in a window of opportunity…
…for the next 2-3 weeks starting about now…
…an opportunity to do two things:
Position our portfolios for a possible year-end rally.
Enter stocks that could have strong 2025 tailwinds.
Why do I think so?
Because we are entering a period of uncertainty from three angles:
This week’s options expiration is another massive one.
There is growing doubt about the size of the next interest rate cut in Nov.
Markets are not sure how the US elections will play out.
So let’s take these themes one at a time…
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Table of contents
Beachman recommends
Market signals
Key questions
Beachman’s plan
Conclusion
Upcoming exclusive paid content
Beachman recommends
Each week, I 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…
Compound and Friends podcast
The Compound and Friends is one of my 2-3 favorite investing podcasts. Josh Brown and Michael Batnick have an easy-going banter about the current state of markets. Every week, they bring on interesting and experienced guests from all facets of Wall Street. One of the things I appreciate most about their show is that they cover many verticals and stocks that I usually do not monitor. This gives me a broader understanding of what is happening across the investing landscape. Check out their latest episode and let me know what you think.
Market signals
Oct monthly options expiration
I tend to get cautious during options expirations weeks like now. Why is that? Because in today’s market, options positioning and trading has a major impact on how markets and stocks perform.
e.g. The SP500 was grinding higher every day for several weeks now….because of 0DTE options trading. NVDA recently rose to the $130s…because of options positions related to the stock. SNOW bottomed at $107 and is now in the $120s…due to more bullish options trades being setup against its shares. The VIX has been subdued recently, however VIX futures are elevated for late Oct and early Nov…because of options positioning.
About 45-50% of all trading today is options driven. Within this options volume, about half is 0DTE, very short-term options trading. Markets makers handle over 90% of all today’s options trading. They hedge their positions by buying or selling stocks.
This week, on Fri Oct 18th, about $500B in market maker hedging is expected to come off as options positions get closed or rolled over. Most of this hedging is bullish…about 7:1 CALLs to PUTs. Meaning as we get closer to Fri and as hedges are taken off, stocks will be sold. Looking at past market data, about 70% of the time, markets reverse during such large options expirations.
This could lead markets lower and stocks could provide interesting buy-the-dip opportunities.
Will they or won’t they (cut rates)?
Markets are beginning to doubt how much the US Feds will cut short term interest rates through the end of the year…because it is becoming clear that both inflation and employment are at stagnant and arguably healthy levels.
Investors now believe that there is an 80%+ chance that the Feds will deliver a standard 0.25% cut next month. But then one of the Fed committee members said last week that they are open to skipping a rate cut altogether in Nov.
The US$ (DXY) has risen above $103. Both 2-yr and 10-yr interest rates have climbed for four weeks now and are hovering around 4%. These three leading indicators, collectively, are signaling that they are not expecting the Feds to cut as much through the end of the year. If they stay at these elevated levels, it becomes harder for the Feds to justify further large cuts.
There is about $6.5T sitting in money market accounts and in US Treasury bonds collecting 4.5 to 5% interest. They don’t have any incentive right now to jump all in on stocks if the pace of rate cuts are going to slow down.
Election-related uncertainty
The US presidential elections are about 3 weeks away and this race is very tight. No one knows who will win, although fears are growing that it might take a few more days than normal for the final results to be announced and perhaps even accepted.
Markets hate uncertainty and if this happens, they will not like it. The US is considered to be the most liquid, stable, well-run and well-managed financial market in the world. About 20% of US equities and 35% of US bonds are owned by foreign investors. If there is any post-election unsurety, US and global markets could catch a cold.
In preparation for these possible events, traders have been putting on more hedges with expiration dates into November. Realized volatility is currently low, while implied volatility for Nov is much higher. It is important to understand that if this uncertainty is not addressed quickly after the elections, then there is a lesser chance of a year-end Santa rally.
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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:
Do markets have an October surprise in store for us?
Who is actually making money in AI now or in the near future?
When will the current AI capex boom turn lower?
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 3 new positions in my portfolio - 2 small cap stocks 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 curious about 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: