Markets always contain some degree of uncertainty.  As investors we must accept risk to attain growth.   But then there are extraordinary times when we’re faced with a significant binary outcome that can’t be ignored.

We’ve arrived at the crossroads of great uncertainty for the next two weeks.   We have no particular edge whatsoever.  This is why we’re sitting with such a high level of cash.  We can be sure that we’ll eventually have an opportunity to invest heavily with high conviction, so best to keep our powder dry in the meantime.

Since we have the ability to get invested very quickly there is no need to bet on an election that could at best be a coin-flip.  No need to step into the fray where the outcome is a myriad of possibilities.

Will the election be declared on November 3?  Or, will it drag out into January?
Even if the election is declared and Biden/Harris are the winners, how will investors react because of taxation issues?

The issue with a Democrat victory is the possibility of a large retroactive tax hike on capital gains effective January 1, 2021.  Investors won’t wait and see come 2021, they’ll likely sell this year.

In any case, market price, volume and direction will be a “tell” as to which course is taken.

At present the Nasdaq composite has worked off its overbought readings reached at mid-month.  The behavior of market leadings stocks remains very healthy.   Yesterdays weakness emboldens buyers the following day with the opportunity to buy the leaders.

At present we own two stocks which may be a part of the next generation of social media leadership:  Snapchat (SNAP) and Pinterest (PINS).

SNAP cost approx $31.6 versus $41.3 today.

PINS cost approx $42.62 versus $55.58 today.

Both stocks are going to be given a wide berth going forward as their price rise is similar to other social media when growth began to accelerate.

In addition, both companies were under-owned by large institutional investors which stamped into SNAP price be damned.

To Sum It Up: The primary market uptrend remains intact.  But with a Biden/Harris win and Dem control of the House and Senate open the door for a large tax hike retroactive to January 1, 2021.  Investors may sell heavily in the 4th quarter of 2020 to avoid the tax hike.

Either way, I don’t invest upon opinions and my models will trigger to the downside should heavy selling takes place.  A large selloff wouldn’t be a bad thing in the long run anyway as it would set the stage for a better rally off a low pivot price in the future.

As Inspector Columbo once said:  “One more thing…

“2020” enough said.  Today is the first day I can head down into town in 11 days as life is returning to normal.  We consider ourselves incredibly lucky that our town and home didn’t burn.    We would look at the maps of the fires and find it astonishing that our little area was the hole in the donut of fire.

If you ask me, it’s all about climate change and especially drought.  Our wells don’t fill at the same rate they used to.   And, for the first time in 16 years that I’ve lived her our pond is dry.

Be Well. Be Kind.
Brad Pappas
October 27, 2020

Long all stocks mentioned.

In the last letter sent 9/28 I mentioned the possibility of a Buy signal as it appeared the September selloff had run its course.

This is the chart sent on the 28th that showed the Nasdaq beginning to bottom out.

A Buy signal did occur in the first week of October and we can see from the updated chart below a continuation of the 2020 rally.

Not only are the markets moving higher – they are moving higher with very strong breadth. This generally implies that this rally is an initiation of a new leg higher in prices with sustainable strength.

One should never allow politics into the investing matrix as it reduces your objectivity.

As in most instances when there is significant negative headlines – the negativity is already baked into the market. Hence more negativity has little effect.

It seems to me that about the time Trump polling began to disintegrate investors began to front-run a Democrat win for the Presidency and Senate. So companies that would benefit from a Democrat monopoly are moving higher and with ludicrous speed.

Looking at our holdings they are the “Greenest” ever.

For example:

Electric Vehicles: Tesla (TSLA) and Workhorse (WKHS)

Alternative foods: Beyond Meat (BYND)

CBD’s: Innovative Industries (IIPR) and Growgeneration (GRWG)

Solar: Soleredge Technology (SEDG) and the Solar ETF (TAN). I’d like to add Sunrun (RUN) if it will just give us a decent entry.

Market leadership is obvious at this point and its a new generation of market innovators and disruptors.

What is absent is the old leadership of Amazon, Apple, Facebook and Google. It would be my expectation that Democratic control would bring about potential Congressional legislation and oversight. While that would be years away should it occur investor capital prefers to focus on a new generation of winning companies.

Be Well. Be Kind.
Brad Pappas
September 28, 2020

Long all stocks mentioned except RUN.

I must admit I’ve been cheering for the market weakness this month. A market break that generated enough fear that can be used to propel stocks higher in the coming months (see second chart below). Competition for stocks is almost non-existent with huge Fed support via 0% interest rates. We may now have an entry point where investing for a longer time horizon would be appropriate.# The month of September 2020 has been especially difficult for the stock market. From peak to trough stocks have declined by 14%. This decline negated the gains made going back to July. This is in contrast to our portfolios which declined by an approximate average of 3% to 4% due to a Sell Signal.

While no one really enjoys a selloff they are ultimately inevitable and healthy. Selloffs can create a significant amount of negativity which is necessary if the market is going launch the next leg higher.

Despite all the calamities of 2020 we remain in a Bull Market with an upside trend. A market that got a little too hot for its own good over the Summer and has now cooled off appropriately.

While we remain on a Sell Signal for the stock market there has been significant positive movement in the model. This could result in a Buy signal this week which is the first since April. If a Buy signal occurs, we’ll ease back into the market rather than plunge. If the Buy signal proves to have staying power market exposure will increase. The market has to earn our increased exposure.

A Buy Signal with staying power will be an excellent entry point as we transition from a seasonally weak period from August to October to the strongest period of the year (November thru March).

Please keep in mind that markets are discounting mechanisms. Meaning they’re not reacting so much to what is happening now, but anticipating the future.

IMO in September markets began to assume a Biden Presidency. While most of you look forward to this (including myself) it potentially bode negative for Big Tech stocks. Perhaps not in Year 1 or 2 but there will be increased scrutiny and the potential for increased regulation. This is the best explanation I have as to why Big Tech (Amazon, Facebook, Microsoft, Apple, etc) were the downside leaders.

In addition the strength in “Green” stocks has been the greatest in years. At present Solar Energy is the #1 performing group. The #2 group are Auto’s, specifically Tesla and Workhorse. Companies that are great innovators are leading and I believe this is due in part to a potential change in the White House.

Earlier I mentioned how fear can propel a market higher. The big market players which are institutional hedge funds, commodity trading advisors etc are positioned extremely negative. In other words they’re betting that the market will decline further to the greatest degree in 10 years.

It’s never wise to invest along when the crowd is disproportionately positioned such as they are now. At present they are net short which is not that common but notice how being net short tends to coincide with market bottoms.

Summary; We are on the verge of a Buy signal for stocks. It’s not a fait accompli at this point. I am presently monitoring what could be the strongest stocks to emerge. At minimum, the market’s inability to decline lower is a change of character which is a very positive step..

Be Well. Be Kind.
Brad Pappas
September 28, 2020

Dear Client

I wanted to take a moment here to explain why we have so much cash uninvested at the moment.

The rise in the Nasdaq index is masking significant weakness in the S&P 500 index and the Russell 2000. The strongest Nasdaq names have gone parabolic – meaning they will likely revert downward just like a rubber band snapping back to form.

In addition, the Nasdaq is very extended and 16% above its 200 day moving average (dma) which was the same divergence at the February peak. There’s no rule that says it has to turn down at this point. The 2000 Nasdaq peak was 35% above its 200 day moving average. But a +16% divergence means the risk right now is terrible.

Eventually the Nasdaq and its 200 dma will meet again. Either by a choppy sideways trend or more likely a broad sell off.

In addition healthy bull market rallies will show an increasing number of stocks making New Highs for the year. Despite the Nasdaq being higher now than in February, there are far less stocks making new highs. This is not healthy at all.

The lack of a broad base rally without all stocks in the various Indices participating creates a vulnerable market prone to failure.

It’s not just the Nasdaq showing poor participation. The S&P 500 is showing its form of poor participation. A healthy rally from the March bottom would be showing at least 50% of stocks above the 200 dma. Right now its just 42%.

If markets cool in the heat of the Summer I’d consider that a significant plus. I have no idea if the Nasdaq is putting in a long term top or not. A sell-off to its 200 dma could be an attractive entry point for Growth stocks.

In the meantime Banks (excluding Wells Fargo) and Value stocks, while extremely attractive, are languishing. The divergence between Growth and Value is remains the greatest since 1999. But it’s been impossible to predict a turn from Growth to Value. Whenever it does occur, the returns will likely be outsized.

Gold, which broke out of its trading range to the upside this week, would be vulnerable in any significant market weakness. When investors need to raise capital they’ll sell anything.

Summary: Expect significant market weakness soon. Many headwinds are likely ahead which are in the news on a daily basis. Last week’s 1800 point decline saw the Fed start the printing press again to prop up stocks once again. Regardless, markets need to revert lower for “the pause that refreshes”. Hence the risk right now is very high.

Be safe, Brad Pappas