I finally hedged against next week...
Portfolio: What I am planning to do in the markets and with my portfolio
After last week’s “over-the-topness”, this week felt kinda flattish in markets…very tentative of sorts. The Dow Jones and SP500 dropped and the Nasdaq was flat for the week. Meanwhile, some stocks made amazing highs, the Mag7 kept rising and now we have Broadcom AVGO as a new member in the $1T market cap Mag7 club.
Start up those AI copilots to come up with a new, easy to remember acronym using the letters A, M, A, T, N, A, M, B. I tried for 20 minutes and came up with TAMBAMAN. Could also go with ‘AM BATMAN. 🦇 🙋🏽♂️
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.
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Table of contents
Beachman recommends
Market signals
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…
Openinsider
Ever been curious about whether management of a company has been buying their shares? Insiders sell stock all the time, so that is usually not a leading indicator. However, when they buy shares…that is considered a bullish sign because it often signifies higher confidence in the future prospects of the company based on internal information that they are privy to. Openinsider.com is a very useful, simple website for tracking insider sales and purchases. It is one of my bookmarked favorites.
Market signals
My step by step plan in this market continues…
In mid-Oct, I wrote that we are in a window of opportunity…to position our portfolios for a possible year-end rally and enter stocks that could have strong 2025 tailwinds. That is exactly what we have been doing in the Beachman community.
Then four weeks later, in mid-Nov, I pondered about whether the santa rally is already priced in markets and on the decline. I used the topping signals to take gains on several overbought and overvalued positions. We continued wondering how much juice is left to squeeze before year-end. I took some more gains off the table.
Last week, I wrote about how difficult it is to hedge in this market, that the signals are too loud to ignore and that I needed to start placing some hedges. I started doing just that…
Indexes
SP500 is likely to stay pinned…thru year end…close to the 6,050 level due to the massive JPM collar hedge that expires on Dec 31st. However, 6,000 is a must-hold level for this upcoming triple-witching options expiration week.
The Nasdaq QQQ needs to hold 500 else things could go south quickly.
Small caps are in trouble as the US$ and long term bond rates continued climbing all week. The IWM chart recently flashed a clear SELL signal with 230 being an important line in the sand.
P.S. In the chart above, you see an example of the new BUY and SELL signals that we recently started using in the Beachman community.
This small cap SELL signal is also showing up on the RSP equal weighted SP500 index, the DOW index, Momentum stocks and long term bonds.
The warning signals are starting to show up in more places…
Canada is now pissed
South Korea almost had martial law declared recently. The Syrian government has fallen. Israel is on a military offensive along multiple fronts. The war in Ukraine continues. Last week, China made another attempt to jumpstart their sputtering economy (the fourth or fifth try… I am losing count) as well as new threatening moves against Taiwan. The French government is still unstable, Germany's industrial leadership is being gutted and Switzerland might go to negative interest rates soon.
We are getting more clarity on the tariff policies of the incoming US administration. These are likely to cause havoc in commerce with some of our largest trading partners, including Mexico and Canada. Canada even threatened to cut off energy supply coming into the Northern and Midwestern US states.
It takes a lot to anger the Canadians…they are some of the nicest people in the world.
Margin at the highs again
This week, the Founder and Chairman of Interactive brokers said that over the last three months their margin loans were up by about 16%…some of the highest they have seen in recent times. He said that stock prices seemed somewhat overextended and are likely to come down soon.
Now the kicker is that he wanted stock prices to come down slowly so that their margin loan customers could have more time to liquidate their stock holdings….so that they did not get margin-called on their loans.
Take a moment to ponder this.
We are over our skis. We know that we are over our skis. We hope and pray that we have enough time to slow down and not crash.
Strong dollar = weak markets
The US$ has risen 7% since Oct and is threatening to go higher. A strong US$ could trigger lower market liquidity and deeper market declines, as seen in 2022. That year, the dollar surged +18% and gut-punched stocks, bonds, gold and crypto lower. Gold fell -10%, stocks dropped -25%, bonds swooned -31% and Bitcoin lost 58% of its value.
Governments around the world are busy depreciating their currencies which tends to push the US$ higher. New administration policies like tariffs, tax cuts and deregulation could fuel the US economy and further strengthen the US$.
Valuations and memes continue to tango
Last week, we discussed how, on a price to earnings basis, this market and many stocks are richly valued. In fact, we should say overvalued.
This tango continued over the past week as the total market cap of all US stocks increased to more than twice that of the US GDP. Markets are expecting all US companies to double their earnings over the next 9 to 12 months. I'm sure you can decide whether this is possible or not.
Yet again, this week, more stocks declined than those that advanced. This has happened now for 10 days in a row.
And then late on Friday night, we learned that PLTR and MSTR will be added to the NDX NASDAQ 100 index. At the same time, they will take out SMCI from the index, a hot stock that they added only five months ago. SMCI recently crashed and burned as they failed to submit their last two regulatory SEC filings and they investigate possible internal accounting irregularities. So we now have one of the marquee tech indexes in the world, adding and then eliminating risky stocks to their top 100 club with abandon and in the space of months.
Who let the DOGE out?
The Department of Government Efficiency is going to be one of the most interesting developments to watch in early 2025. They plan to cut US Federal government spending by $2T over the next two years. Now the rub is that 90% of the current US Federal budget is spent on Social Security, Medicare, state and local government funding, defense and interest on US debt. Most of this is not going to be easy to cut.
I am rooting for their success. I do want them to find ways to cut wasteful government spending…I think the US military is one of the best targets having failed a government audit seven times now. However, their task is not going to be easy.
As an investor. I am more worried about the confusion it could bring about in markets if they do not succeed or if they don't go about it in a more planful manner.
US Feds Dec rate cut decision
The US Federal Reserve bank will, this week, make another short term interest rate decision. Markets are expecting them to cut rates by another 0.25%. I continue to believe that this cut is unnecessary however since markets have priced in a 90% chance of it happening, the US Feds are likely to make the cut.
Now, as investors, we need to pay less attention to the actual rate cut and focus more on Chair Powell’s press conference. Also, watch the WSJ because often the Feds will subtly leak a message for markets via that publication.
The last few times, when Chair Powell publicly spoke, he has been increasingly hawkish…"The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully."
Markets will not like this.
Dec 20th options expiration
We are still tracking this triple witching options event until it passes…because it is such a monster market-moving event. It is slated to be the biggest options expiration ever. Across the SP500, Nasdaq and small cap indexes, about $1.57T in options are expiring on Dec 20th. More than 90% of this volume is bullish call options. Market euphoria has pushed both these numbers higher over the last week.
I have written in the past about what happens when call options expire and how market makers have to sell their stock based hedges…causing higher downside volatility and dips in stock prices.
On a related note, 0DTE options trading volume is now 50% of all daily trading volume. The US stock market is worth about $60T and trades about $2T on a daily basis.
So what do we make of all of this?
Well, there aren't any easy ways to find fat pitches in today's market. As one investor, that I closely follow, recently wrote, “at this precise moment, we are not seeing the ball. We are seeing too many wild pitches. None of the leaders we are tracking are buyable; they are all extended.“
Let me be clear…I am not expecting a market crash any time soon. The US is the strongest market in the world and it continues to attract investments from all corners of the globe. US ownership of stocks are at their highest levels and the wealth effect feels nice going into the Holiday break…retail investors are likely to stay invested and perhaps put even more money into the markets.
However, what I am seeing is that markets will soon let off some steam. We could get an interesting dip in a week or so. That is what I am trying to navigate through.
I have more serious concerns about H2 2025…but that is the topic for another post…we will cross that bridge when we get there.
For now, we need to be like water…
P.S. Talking about fat pitches…in the Beachman community…we have been discussing some interesting investing opportunities that could pay “noicely” in 2025…possibly, undervalued fat pitches that are just begging to be hit for a home run.
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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: