Things you need to know.

• Stocks got whacked on Friday but futures this morning point to gains today.
• Drama around RH and the Short Squeeze should not derail the plans of the long-term investor.
• Silver is the new target of reddit traders – SLV up 8% this morning. Gold up in sympathy!
• Another big earnings week – Thursday is the big day.
• Try the Pan Roasted Chicken with a Dijon/Wine Sauce

Stocks took it on the chin on Friday…. with the Dow falling 620 pts or 2%, the S&P’s off 73 pts or 1.9%, the Nasdaq lower by 266 pts or 2% and the Russell down by 33 pts or 1.5%.  Even the Transports got whacked – falling 316 pts or 2.5%!  For the month – The Dow and S&P both went negative on the year -2% and -1.1% respectively, while the Nasdaq and Russel ended the month up by 1.4% and 5% respectively.

Many were quick to point out that the weakness stemmed from the havoc created by the ‘band of merry men’ from Sherwood forest (along with very sophisticated participants who can operate inside the chat room pretending to be someone they are not – but that’s just a subplot to this story) …..to which I would say – don’t give them that much credit……..And while the recent turmoil will cause some bigger funds to raise cash (read; sell stocks) It would be hard to convince me and many others that the ‘fight’ going on between the reddit retail traders and the ‘establishment’ in a range of ‘highly shorted’ stocks is the reason for the markets weakness.   Do not let yourself get drawn into that thesis.  While the show is entertaining and full of drama, the broader market (currently valued at more than $35 trillion) is not becoming unglued because of the action in GME, AMC, BBY, TR or the others. In fact – let us be honest – is down 2% becoming ‘unglued’?  October 19th, 1987 saw the markets fall 22.5% in 6 ½ hours – now THAT was unglued!

The market is under a bit of pressure for many of the reasons we have identified…. valuations are a bit stretched, eco data while strong in the US continues to be mixed around the world. Inflation worries – 6 months out is causing some to re-evaluate their current thesis, Relief and fiscal stimulus policies are not as clear cut as many thought and yes, the recent turmoil may cause some to ‘raise cash’ and therein lies the opportunity.

Now I spent a fair amount of time last week and over the weekend trying to help people understand what is going on and why as a long term investor you should not become derailed at all…..Look – If you have an actively managed account – none of these names would fit the bill – thus you have no exposure and if you have a passively managed account then you could have exposure through a mutual fund or an ETF but not enough to make or break performance…..so no need to worry.   And if you are worried that all this drama will force some big hedge funds to liquidate positions to raise cash – guess what?  That is a gift!  Because if they are forced to sell some good names, names whose fundamental story has not changed because they need to raise cash, then get ready to ‘back up the truck’.  Because those names will go on sale and that will create the opportunity.  I mean are you going to sell your Apple, JPM, AMZN, T, XOM, MRNA, PFE, UNH, F, CRWD, HD, CAT etc.…. positions because GME or AMC is suffering from both a short squeeze and gamma squeeze?   Most likely not, and while it may cause broader angst in the markets you should get ready to go shopping…… Why?  Because their stories have not changed, their fundamentals have NOT changed.  Now if this is unsettling you just because it is unsettling – then that is a different story – but then you should talk to your therapist who understands the markets!

In any event – the drama unfolding before us may just be a catalyst for investors to go risk off or maybe it will not…. …. the real concerns here should be the fundamental economic data points.  What will happen to the Biden relief plan?  Will the Dems negotiate or will they force a $1.9 trillion deal through via ‘reconciliation’ – an idea that Nancy (Pelosi) and Chucky (Schumer) support. Today in fact – Joey will meet with 10 Senate Republicans who are proposing a counter plan ($600 billion) far less than the $1.9 trillion plan – playing on Biden’s inauguration promise to ‘work together’, ‘reach across the aisle’, etc.…. What will we hear from the WH after this meeting?

And then we ask – Will we get a fiscal stimulus package on top of that?  What will happen to the 10-year yield currently standing at 1.079%, will it back off or will we see it surge as we did in mid-January? And we are in another week full of earnings – so that is also sure to grab some attention…. Remember – we are running at about a 75% beat rate….and this week features such high-profile names as GOOG, AMZN, BABA, SNAP, XOM, PFE, along with a host of others.

As you might imagine – Friday’s sell off saw every sector in the S&P lower…. Energy (XLE) taking the biggest hit -3.3% at 39.32 – taking it down and thru its short term trendline (50 DMA) raising new concerns about a test of the late December lows…. of $37 ish…. Tech (XLK), Consumer Discretionary (XLY), Industrials (XLI) and Financials (XLF) all losing over 2% while Utilities (XLU) was the best performing sector losing only 0.54%!  And the Growth vs Value Trade – yeah, they both got whacked as well – with Growth losing 2% and Value giving back 1.8%.  And if you look within those groups, you will find some names that have been pushed lower (>10%), just because they are big, highly capitalized names, that are easy to sell in a nervous environment….

Overnight futures have been all over the place…. down more than 250 pts at 9 pm Sunday and up 270 pts by 4 am on Monday….…It is now 6:40 am and US futures are up but have backed off their earlier surge…. Dow futures are up 260 pts, S&P’s up 42 pts, the Nasdaq up 166 pts and the Russell is up 27 pts.   It is a new month – February 1st and a new day….and we wake up this morning to find out that the Reddit traders are now targeting silver in addition to last week’s names…sending that commodity up 10% to levels not seen since 2013…. ~$30……

The mood around the street is surely mixed…. Toby Levkovich – chief strategist at Citibank thinks that this could be the start of a broader correction that could ‘provide entry points that may be 10% lower’.  While Jeffries said that ‘while the events of late may have turned markets on their heads, fear indicators suggest that we have seen the worst of the ‘degrossing’.  (Degrossing here meaning selling). Barclays chiming in saying that is it ‘unlikely that the impact of the short squeezes will ripple through the broader market.’ They also believe that there is more pain to come but remain optimistic that it will likely remain localized’ Localized?  Never ceases to amaze me, the way some analysts on Wall St talk.

Eco data today includes:  Markit US Manufacturing PMI – exp of 59.1 (bullish), construction spending of +0.8%, and ISM Manufacturing Survey of 60 (again very bullish).

Earnings due out today TMO, OTIS and MAC – already reported and all of them BEAT the estimates…. As the week goes on, the reports get more frequent with Thursday being the biggest day.

European markets are all up better than 1% across the board…in what also appears to be a bounce off Friday’s weakness. Eurozone eco data – Unemployment came in at +8.3%, UK Manufacturing PMI came in at 54.1 down from 57.5.  Earnings are also the focus as well as the continuing drama around the virus/vaccine.  At 6:40 am the FTSE +1.19%, CAC 40 + 1.46%, DAX + 1.52%, EUROSTOXX + 1.7%, SPAIN +0.95% and ITALY +1.08%.

OIL continues to churn and is up 50 cts at $52.74 in early trade.  Overnight it has traded in a range of $51.64/$52.76…. Oil has held steady even during all the chaos created in the equity markets…. rising vaccines and output cuts by the Saudi’s along with what is expected to be pressure on US production is helping oil to remain in this tight range.  We remain the $50/$55 range with little chance of breaking out or breaking down until we get even more clarity on vaccinations and virus control.

Gold is up $12 at $1,862 while (as reported) Silver is up almost 10% trading at $28 as the reddit traders attempt to make new headlines…. Gold getting caught up in the frenzy as well but there is little chance that they can ‘corner the gold market’.  Gold is stuck right here ~$1,860 ish but appears to want to break out and needs to pierce $1,892 to allow it to challenge the early January highs of $1960.

Bitcoin which found new life on Friday after Lonnie Musk added a Bitcoin emoji to his Twitter profile has backed off this morning and is down $360 at $34,275 ish.

The S&P closed at 3714 – just below trendline at 3715.……after testing a low of 3694 and a high of 3778.  This morning with the futures higher – we could expect to see it rally to the 3750 level….and if we mimic Europe a surge of 1.5% ish….would not be out of the question…and while a rally would be nice, it would not retake all of Friday’s losses….and that is the ongoing conversation….because we move 1 step forward and 2 steps back in what I still expect to be a move lower to the intermediate trendline at 3562 – which would represent a 6% move off the highs of 3870 on January 26th….Well withing a normal trading range.  In fact – we could trade as low as 3480 and still be within ‘normal’.

Expect more Robinhood talk today and what questions the most recent drama now raises…Clearly lack of capital is what set Robinhood on fire and is now responsible for creating the angst we are witnessing….Short raids are not new….cornering stocks is not new, short squeezes are not new….so this is not a new phenomenon….what is now clear is that current mkt structure is broken….payment for order flow – which has been around for more than a decade now has come home to roost  and when you pull back the covers many are now seeing what so many of us have been screaming about for so long which causes us to ask – how come the regulators haven’t seen it?  It is an interesting time, and this is fascinating to watch…. there will always be winners and losers – where will you be?

Take good care.

Consultant, Market Strategist
kpolcari@slatestone.com

Pan Roasted Chicken w/Dijon Wine Sauce

This recipe came to me from a good friend who enjoys the Morning Thoughts and enjoys working in the kitchen.  Try it – won’t you?

For this you need:

1 2 ½ lb. chicken, washed, cleaned, dried, cut into parts, Olive oil, Salt & pepper, White wine, Shallots, minced, Fresh rosemary, chopped, 1 tbsp Dijon mustard.

You need a 2 ½ lb. chicken cut into parts – preferably use shears and chop the breasts in half to make them easier to cook. Wash and pat until dry, sprinkle with salt and pepper and rub with fresh rosemary.

Preheat oven to 450 degrees.

In a heavy-bottomed skillet heat olive oil on high heat until it shimmers, right around when it starts to smoke. Turn burner down to medium-high and cook chicken in batches, being careful not to overcrowd the pan, six minutes on each side until chicken is browned all over. Once every piece has been cooked, put it all back in the pan and put in the hot oven for 12-14 minutes.

Remove and reserve chicken. Put skillet back on stove on medium heat. Add shallots, additional rosemary, and white wine for a sauce. Let mixture come to a boil and whisk in Dijon mustard and let cook for 5-7 minutes. Add chicken back to pan and let it heat through with the sauce on it. Once heated, serve with sautéed spinach or broccoli.  (you can vary the sauces – balsamic and garlic works also, or sherry and shallots, whatever).