Markets are playing marbles until year-end...I am moving onto 2025
Portfolio: What I am planning to do in the markets and with my portfolio
My dad usually came up with good, one-line zingers for athletes who were not performing. Did not matter the sport…tennis or soccer or even taekwon-do (as a teen, I competed at nationals every year). If a player or a team sucked, Dad would go…”tsk…tsk…these guys are just playing marbles now…”
That’s what’s happening in markets these days.
Marbles…
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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…
Yardeni’s investing blog
Ed Yardeni, a Wall Street veteran, publishes a blog, Yardeni Research, with a ton of good market data and insights. Many simple-to-understand charts and supporting explanations. He updates this information daily and uses it to develop his theses on what’s happening in markets now and likely to happen going forward. Much of his content is free, while some is behind a paywall. I read the free stuff…that’s good enough for my needs.
Market signals
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.
And so now we find ourselves wondering how much juice is left to squeeze before year-end. Since the post-election joy, the SP500 has barely added 2.9%. The Nasdaq and small caps have each added less than 2% over that timeframe. But then some stocks have zoomed higher like rockets…MSTR adding 50%, APP rising +100%, AXON tacking on 40%, HIMS gaining 49%. Among the mega-caps, AAPL gaines 7%, NVDA and GOOG lost value, META has been flat and TSLA tacked on 20%.
Difficult to hedge
So why are the indexes relatively flat while many stocks have zoomed much higher? It is because of dispersion. Due to massive options position, including 0DTE options trading, the indexes are pinned down and trade within a narrow range. If within the index a few stocks move violently to one side, then the others have to compensate to the other side of the scale to keep the index in check. So you end up with little intra-day market movements along with 10-15% jumps or drops in certain stock prices.
You might say that this is market rotation in play. To some extent, I agree, but these movements keep swinging back and forth, often even from one day to the next. That is not a rotation, imo. That is market dispersion.
The upside of this phenomenon is that index ETFs and portfolios that own them can steadily trend higher over time.
The downside is that it is now more difficult to pick winning stocks and sectors.
It is also very difficult to hedge against the indexes or even against individual stocks.
You either have to ride along the bumpy index road or get off the bus. You could pick and own a handful of stocks, but there is no guarantee that they will perform or continue to perform if this market suddenly pivots in a new direction.
Dec 20th options expiration
I just checked the volume of options expiring in three weeks…I almost fell off my chair. Across the SP500, Nasdaq and small cap indexes, almost $3T in options are expiring on Dec 20th. 88% of this volume is bullish call options.
As I have written in the past, when investors buy calls, market makers have to hedge by buying stock or even more calls. This pushes markets higher. So now Dec end rolls around and these investors might decide to book profits or harvest tax losses or even roll over their positions to Jan 2025. Market makers have to remove their hedges. If investors lean towards doing more profit booking or tax loss harvesting, then guess what happens to the market? If you are tracking with me, yes the markets will dip lower because stocks will be net sold.
$3T in options volume is nothing to joke about. I have never seen it this high EVER…
Memes are getting tired?
In the Santa rally post linked above, I listed several macro indicators that are flashing warning lights. The running of the memes was one such signal.
MSTR now has a $79B market cap predicated solely on the value of the Bitcoin that it owns on its balance sheet. MSTR owns about 387k Bitcoin that currently have a market value of about $37B. Their software business is a failing, unprofitable enterprise that barely brings in $450M in annual revenues and spends twice that to run the business. This stock added 100% to its value in less than one month, as the CEO was taking on more debt and issuing more stock to buy more Bitcoin…smart financial engineering as he describes it in this recent CNBC interview. WTF is he talking about? I don’t get it. Reminds me of when I boarded a public bus in Scotland and asked the driver how much the fare was. He responded back to me in English thrice and I did not understand a word of what he said. I loved Scotland btw…one of the best places to visit in Europe.
MSTR stock peaked at $543 on Nov 21st and has since pulled back -29%.
Meme stocks and even several cryptos could be running out of steam.
Credit spreads at historic lows
This is perhaps one of the most concerning warning signals. Credit spreads are the difference in bond interest rates paid by mature, stable, high quality companies versus bond interest rates for smaller, unprofitable, risky companies. Typically, the more riskier bonds command a higher interest rate. However, currently both these cohorts of companies are offering fairly similar bond interest rates….meaning there is more demand for riskier bonds…investors taking on more risk than they have historically done in the past.
Narrow credit spreads typically signal market tops.
Playing marbles
So what do we make of all of this?
I believe that markets are now just playing marbles…
Indexes dancing around each other while going nowhere. If one marble (stock) is hit, it might jump and go far. Along the way, it hits other marbles and pushes them in the opposite direction.
Market dispersion = Newton’s third law of physics…for every action there is an equal and opposite reaction.
Indexes stay pinned while individual stocks are moving more violently in opposite directions….often seemingly in random.
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.
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: