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    Chart of the Day



January 24th, 2020
The chart, taken from zerohedge.com, indicates that there's a wide disconnect between valuations and underlying fundamentals. Its the double, compared to dot.com bubble period. Really worrisome.

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Designing a Winner Portfolio for 2020




The year 2020 begins and investors and traders are designing the best asset allocation for their portfolios. And they ask ourselves the usual questions: how will this year comes and what surprises will it bring? What will be the performance of the global economy, today in deceleration with central banks resorting to declines in i-rate and debt issuance? Will the anticipated recession, due to inversion of the yield curve since 2018, finally will occur or seems the US its avoiding it? Will its manufacturing indices fall further and will consumption continue to be the mainstay of its economy? Will the impressive growth of the US exchanges continue or the correction finally come after 10 years of an incredible bullish rally? Will there really be a "Phase 2" in the Trade War? And the Brexit? Many questions and the experts are divided. Whatever the new year has in store, you've got options for investing in 2020 that promise a positive return.

This 2020 I will look for defensive or safer investments, especially in the second half of the year when US elections come giving much volatility in the markets. As usual, I prepare my long-term asset allocation diversifying through ETFs, the easy and cheapest way to create a portfolio. It isn't a completely passive investment: each month I review and filter each asset through basic fundamental and technical analysis, and hold or sell any of them, to avoid drawdowns. That´s a "dynamic asset allocation", in which rebalancing the portfolio monthly is the key. Let show my ten favorite investments for this year:


1. SP500 and Nasdaq


As being the best way to invest in the market top companies of every industry and biggest tech stocks, these ETFs are mandatory in every long-term portfolio. Both, SPY and QQQ, are the less-risky way to diversify in the stock market, and never lose a bullish rally as the current, that seems to never end.

2. Defensive Sectors


I'm looking this year to defensive sectors, mainly Healthcare XLV and Consumer Staples XLP. Both gain in 2019 (as all the GICS sectors), 18% and 24% respectively.  The advantage of an industry fund as these is that it allows the investor to select an industry to invest in, rather than a specific company. However, this kind of narrow exposure to one industry means that a negative development may hurt all the companies in the industry, lessening the benefits of diversification.

Into Healthcare review the Biotech sector XBI, as M&A (merger & acquisitions) in this subsector increases in 2019.  In Staples, I bet in Food and Beverages PBJ as a winner for 2020.

3. Corporate Bonds 


As a rule of thumb, investors design their investment portfolios with stocks and bonds in a traditional 60/40 model. With the stock market now overvalued (a current SP500 PE ratio of 24.64, one of the higher of the decade), it is a good idea to put some money on corporate bonds in 2020, which also works as a hedge if stock market corrects. Like 2019, my favorites are the high-yield or junk bonds, followed by the ETF HYG and the safer investment-grade bonds followed by the ETF LQD. Both did well last year, and a good idea for investors is to shift between the two of them depending on market behavior: optimistic (HYG) or pessimistic (LQD) sentiment.

4. Dividend Stocks


Are less-risk than growth stocks or non-dividend stocks. As usual, better choose companies with a dividend solid-history instead of those who bring higher yields. The Dividend Aristocrats NOBL is a good option: are SP500 index constituents that have increased their dividend payouts for 25 consecutive years or more. A good practice is to reinvest your dividends for better returns.

5. REITs


The Real Estate Investment Trust is a good passive income (or cash flow) for investors who are looking for an easy way to own real estate without managing it. The REIT companies do that job, and generally don’t pay taxes as long as they pass along most of their income as dividends to their shareholders.  Best look for traded REITs, as the popular Vanguard REIT Index VNQ, with great returns in 2018 and 2019, and good perspective this year due to low interests in the sector and acceptable Sharpe Ratio of 0.59.





6. Gold


A dovish Fed, as the current with Powell as chief, means that we should not expect i-rate hikes, and even more with recent CPI data showing declining inflation. So, it's very likely that the dollar will weaken or keep flat during the year. Given its inverse relationship with the dollar, gold, followed by the ETF GLD, could have a good 2020. It seems very basic, but that relation always works. Another reason is the US elections: investors usually take refugee in this commodity. Gold has currently reached a maximum of 7 years due to tensions in the Middle East, which says of its current strength.

7. China


The Large-Cap Chinese stocks, followed by the ETF FXI, are still near 18% from 2018 highs, due to the slowest pace in its economy, for the first time in three decades. Its shares have a 2-year gap that can fill, as the outlook is gradually improving between the US and Chinese governments with the sign of a "Phase One" that could launch fresh stimulus plans. And if China's economy moves up, emerging markets do the same.


8. Emerging Markets


While the SP500 (through its ETF SPY) has run over 182% in the last ten years, the Emerging Markets ETF EEM only climbed 4%. in the same timeframe. It's clearly cheap and a great room for growth. Factors like the probable Trade War end will generate that China again strengthen its economy due to injecting a lot of liquidity into the system, that's will be crucial. Investors are flowing more money now in emerging markets since 4Q 2019, a good signal.


9. Value Stocks


Another good opportunity for investors in 2020 seems is in value stocks. Over the last five years, growth stocks, follow by IVW the SP500 growth ETF, have gained more than 70%, while IVE, the SP500 value ETF increased by 41%. Value stocks lagged growth stocks throughout almost the entirety of the 2010s, but that dynamic started to shift a bit in the second half of 2019, as I post in this September article. Usual ignore by fund managers, now value stocks are cheap as the gap between value and growth stocks is large in the last 15 years and could take advantage of the next value cycle in the U.S.(see chart below). 


10. Banks


Probably the peak sub-sector for 2020. Financial stocks and especially banks, followed by the ETF KBE, have been historically winners during periods of market rotation from growth to value. and, as financial sector XLF represents near 25% of the Russell 1000 Value Benchmark, it seems a good play for this year. Banks did great in 2019 (near 27% gain), despite three Fed' rate cuts, and I believe this good performance could continue this year. With yields rising on later-dated debt, banks could take advantage of the core of its business, the spread between loans and deposits, generating great profits.
With the yield curve is finally seems normalizing again, the US economy is looking like it might be able to avoid a recession. All of these are very bullish signs for bank stocks.


Is the US approaching a value cycle? According to Bank Of America says the US economy has been in "phase four" (downturn/recession) of its macroeconomic cycle for about eight months, and it is typically good for high-quality, low-risk and large-sized stocks. Phase one of the cycle is the “recovery/early cycle,” which is typically good for value, small-sized and high-risk stocks.
Thanks to koyfin.com for the chart.

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Stock Watchlist: January-February 2020



New Year, New Stocks



Happy New Year, traders!

The 2019 trading year finished with a great performance for Wall Street, and also for some followers of this blog (thanks for the private messages!). Hopefully, the recommendations from the "Watchlist Update" posts and my daily tweets did it well. If you follow and trade them, good for you. It's your own responsibility.

For this 2020, I reduced to 15 the stocks of my Watchlist. I'm holding some stocks from my last Watchlist November-December, due to its good performance in these two months and an interesting forecast for next quarter:

- Disney DIS: my favorite stock for 2019 and a candidate to repeat this year.
- Fiserv FISV: now consolidating, ready for its next breakout.
- Kroger KR: we all need a defensive stock in our watchlist, and Kroger did well that "mission", rising when the market corrects. The recent alliance with Walgreens is another hit.
- Lennar LEN: its recent brilliant Q4 earnings report could send its shares up the $60 level.
- PayPal PYPL: in slow recovery since three months ago when it touches the $100 level. Next earnings on January 22th is a great chance to confirm its bullish bias.
- Ross Stores ROST: another 2019 gainer. Many sentiment trading here: I love this stock.
- Twitter TWTR: like PayPal, the next earnings on January 23th could reinforce its recent slow recovery.
- VMWare VMW: a classic from all my watchlists, despite a flat 2019,  I still trust in the products of this innovative cloud company.

I also keep my short position in Beyond Meat BYND. Its earnings report on January 27th. could send this overvalued stock during the first half of 2019, to its real value, I presume in order of $60-70.





New entries in my watchlist include "surprises", as is the first time here for some of them:

- Ambarella AMBA: in a strong bullish rally since my post when I advise that good earnings report didn't reflect in its share price. Stock rides from to $55.205 to $62.42 today.
- Boeing BA: every day a piece of breaking news... great stock for scalping trading, due to its increased volatility.
- Newmont NEM: another defensive stock, now at 5-year highs, can take advantage of recent increasing demand in gold.
- Netflix NFLX: returned to my watchlists, by demonstrating that is still strong in the streaming war despite new giants like Disney+. Golden Globes and Oscar weeks are usually favorable to this stock.
- Raytheon RTN: also a reenter to my watchlists, after a brilliant 2019. Aerospace-Defense stocks saw strong performance due to recent Iraq conflict, not yet finished.
- Shopify SHOP: popular online store, also called, exaggeratedly, the "new Amazon". Its great 2019 performance needs a correction to send its shares to its "real" value, definitely below $400.

I was tempted to include the VXX in this January watchlist. This ETF that follows the VIX, as a contrarian indicator, is an incredible weapon for technical traders to determine extreme conditions of bullish or bearishness of the market, using its inverse relationship: when the market is rallying, the VIX tends to drop; when the market is tanking the VIX tends to rise. Smart and serious investors use it to bet against the crowd when its greed level is extremely high, as nowjust review this accurate indicator. And mainly, they use it as protection or hedge for their investments. 

As you notice, it's a watchlist (include longs and shorts), not a "Buy" List. My suggestions, charts, and ideas regarding these stocks, in which I'm long, short or neutral, I do in the "Watchlist Update" posts. And more fresh data and ideas in my daily tweets through Twitter or StockTwits, which are much more friendly and dynamic platforms for a chat and get feedback from traders.


The image is taken on January 10th, 19:22 EST.
Favorite 15 stocks that I'm following during January-February 2019.

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Trader Notes: Tips for Trading Options



As you know, the US main brokers (Ameritrade, Fidelity, Charles Schwab, eTrade) are now offering zero-commission in stocks, ETFs and options trading. A piece of great news, by far the best this year for retail traders.  It's a great opportunity to start trading options more aggressively, creating an options-based portfolio as now commissions are no longer cutting our profits.


1. Options as a substitute for Stocks: Delta > 0.80


Substituting stocks with options has two unique advantages: only options bring leverage and protection.

- Options provide tremendous financial leverage to users when they are used in a conservative way: you can control the same amount of shares with less money, and mainly, the % returns are much higher when you trade with options. This carries another advantage: with more money available you can diversify better your portfolio.

- And provide protection: with the appropriate strategy, in case of devastating fall of the stock, your maximum loss is always limited to the amount of the call purchase.  The use of stop-loss in stock trading works reasonably well but not always prevent losses due to frequently morning gaps. Stop-loss orders offer protection that is path-dependent (depends on the "path" the stock takes), while options offer time-dependent protection (and never trigger you out of the position just because of the path the stock, as stop-loss did).

Options are two-dimensional assets: you must guess correctly the direction and the speed of the underlying stock. When a stock-trader becomes an option-trader they often buy at-the-money call options (since they are cheaper) as a substitute for the stock. Doing so subjects them to a two-dimensional asset when they are used to trading stocks, a one-dimensional asset. When you starting out, buy short-term options in-the-money (ITM), calls with relatively high deltas in the 0.80-0.85 range and you will have an asset that behaves similar to the stock you are trading. They are more expensive but less risky.

The reason is that a call option with a delta of 1.0 is no longer considered an option, it's a perfect stock substitute. There is no time-premium there, and a lot of intrinsic value that we would rather not pay for. So you don't need to find a delta of 1.0 but should get close, and the 0.80-0.85 range will suit your needs. On the other side, if you buy a higher strike, there is too much time premium in the option and it may not respond to smaller changes in the stock price.







2. Use Credit Put Spreads


As you know, trade options are more complicated than with stocks. You need to guess not only the direction of the stock but also how quickly the stock's price will get there (the speed). We can combine two concepts for a solution, selling puts and the vertical spreads, to create a great strategy, the credit put spread.

- You can create a bullish trade not only by buying calls: you can sell puts. A short put, being on the opposite side of a trade of a long put, is bullish. Most traders, who are bullish, tempted to immediately reach for the long calls, also due to its unlimited gains, but they need the stock to move. A short put also makes money if the stock rises. And more important, also make money if the stock standstill. It's a big difference: by selling puts you don´t need the stock rise for us to make money; you just can't have it fall. You eliminated the speed component of the option.

- Sell puts creates an unlimited downside risk that you could control by creating an option spread, that's combining two different option strikes as part of a limited-risk strategy.  This called vertical spread, consider buying and selling a call, a call spread, or buying and selling a put, a put spread, of the same expiration but different strikes Essentially, trading put credit spreads is very similar to the short put. Preserves its advantages, but without its dangerous downside risk. And that's great!

A vertical spread can be bullish or bearish and can be for a debit or a credit. Let's review my favorite of all, due to its many great features, the credit put spread.

Click to enlarge.

Typical P/L (profit/loss) chart of a credit put spread. This month I'm bullish in silver (follow by the ETF SLV), now trading at $16.77. The spread was created with two legs: sell put 17 and buy put 16, for a net credit of $0.49. If SLV rallies, the put credit will decrease in value and result in a profit. Conversely, a sell-off results in a loss. As max-gain is similar to max-loss ($500), we had a good risk/reward ratio of 1. When the expiration date is near, the spread will benefit from theta decay, unless legs are completely ITM. 


As you verify in the chart above, a credit put spread has important features advantages against other option strategies. Let's summary them:

- Maximum profit: limited, and is the credit or premium received.
- Maximum loss: limited, and is the difference between the two strikes minus the premium received.
- Risk Level: low, if you use a Risk/Reward ratio near 1.0 or less. You could get it with ATM legs (that's one ITM and the other slightly OTM).
- Break-Even: is the strike price of the short pull minus the premium received.
- Environment: ideal when you have a bullish, neutral or slightly bearish position and don´t need a great move in the stock price.
- Legs: two, a bullish short put (the main) and, further away, a bearish long put (the protection).
- Goal: receive credit and hope both legs expired worthless, or the same, the stock price stays above the short put strike, as you can review in the chart above.
- Stock Volatility: as it affects both legs at the same time, its effect is mitigated.
- Implied Volatility: in terms of cost, for high IV, use the spread Buy OTM Put/Sell ATM Put. For low IV use the spread Buy ATM Put/Sell ITM Put.
- Time decay: acts in favor of a put credit spread, as short put gains with the passage of time, and its theta offsets the long option theta.
- Close Position: as other options, a spread could be closed at any moment, better prior to expiration if it reached its max profit. Sometimes you only need to close the short put since it can't gain more and leave the long put in case it rises. And if you reach the max loss, wait: always there's a chance that the position turn in your favor.
- Expiration Risk: be careful if the underlying expires within the short and long strikes, or the short ITM and the long OTM. You have the obligation to buy 100 shares of stock for each short put. If buying power isn't enough it will activate a margin call from your broker.

Selling options strategies with a favorable risk-reward and a high probability of success is the way an Income Trader works. Think like them and treat your portfolio as an insurance company: they live selling policies (options) for a premium, a successful business. The goal is to do the same: collect as much premium income as possible and never pay out the policies. So, maximize the number of credit trades, diversifying between index, ETFs and stocks, in different sectors, through bull or bear market conditions, analyzing only the stock direction. Now that brokers offer commission-free trades, it's perfectly possible.

In the next Trader Notes, we take a step forward with another popular risk-defined option strategy, the iron condor, that combines two verticals (a call credit spread and a put credit spread), for use when you have a neutral bias in the underlying.

This practical chart summarizes what options strategies work better depending on market direction and implied volatility size. Straddle, Strangles, Butterflies, and Calendars are not treated in this post, but in some next.





3. Best Options for Earnings Play


Buy a stock just before its earnings report is a bet: it can be highly profitable or devastating for your portfolio. You decide the risk you face. I always prefer to wait for the report, to compare their numbers with the estimates in EPS, sales, and guidance, review the conference call for some additional data and see the next day analyst's ratings, which usually increases or decreases their weighting and price target. Also, high-volume transactions with price and implied volatility moves, are guaranteed before and after the earnings date.

And, of course, you can use specific options strategies during these events. Let's overview some ideas as to choose the right strategy. You need to know the following principles:

-  A strategy that involves long options (been calls or puts) will typically gain value as IV increases and lose value quickly with IV decreases.
- On the contrary, a strategy that involves short options (been calls or puts) will typically gain value quickly with IV decreases and lose value as IV increases.
- During an earnings event, the implied volatility IV of the underlying usually increases some days before the report (due to typical great attention given by traders, creating orders like bets). And when the report was released it drops sharply.


Click to enlarge.

Thinkorswim includes this great feature in its platform, in which, at a glance, you could review the latest earnings of any stock, in this case, Disney DIS (my favorite 2019 stock), showing its price move and implied volatility before and after the event. 
Here is an example of what usually happens during an earnings event: despite the result (if the stock beats or miss EPS, sales or guidance), the implied volatility increases before the earnings date, and decreases quickly after it, the next day, hurting the premium. The goal is to take advantage of this movement.


If you decide your directional bias in the underlying near the earnings report, buy OTM calls (or OTM puts, depending on the direction) just before it, with cheaper premiums, looking for a big profit if the stock explodes after the report. It also works with spreads (OTM credit puts or OTM credit calls) for bullish or bearish bias, respectively. Traders love this simple strategy (really, it's a bet): low-cost, minimum risk but also very little profit probabilities in your favor. But it's valid: sometimes works.

If you have a neutral position or presume the underlying wouldn't have a sharp move before/after the earnings report, you could consider taking advantage just from volatility changes:

- Before earnings: entry long positions (long calls, long puts or ATM debit spreads) one or two weeks before earnings day, and then closing the position the day before the event, so to take advantage of the volatility increase mentioned above.

- After earnings: entry short positions (short calls, short puts, or ATM credit spreads) just before earnings, to take advantage of the volatility decrease mentioned above. The position could be closed just after the report.

As you see in the three option "tips" mentioned in this post, risk management is the main factor I consider in all of them.  Protect your portfolio and protect your gains is the key to become a profitable trader.



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A Decade in Charts



The ten years period, from  2010 to 2019, finished and leave us many transcendental changes in different branches, like the economy, technology, work, home, or retail. Let's review those moments through the way we love: charts.
Many of the charts and texts are taken from Morning Brew daily newspaper, definitely a great weapon for our Wall Street stock trading. Thanks, Brews!


Stocks (SP500 SPX and the Dow Jones DJIA) experienced the longest bull market in history, while Crude Oil /CL is still recovering from its 2014 dramatic drop. Gold /GC is still below 2011 and 2013 highs, while 10-year U.S. Treasury Bonds TNX swings during the decade in a range from 1 to 4%.

It's called the Tax Cuts and Jobs Act, and it reduced the corporate tax rate from 35% to 21%. Tax reform has led to a divergence in how much corporations earn and what they pay the government in taxes. A success from Trump's economic policies.


U.S. private equity deals have climbed steadily upward in both quantity and value, according to PitchBook. IT, healthcare, and B2B sectors made up the majority of deals.
From 2006 to 2017, the number of PE-backed companies increased by 106% while the number of publicly traded companies fell by 16%. In 2018, the number of private equity deals finally rose to pre-recession levels.






In 2019, U.S. venture capital (private equity and financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential) are expected to top $100 billion for the second straight year, according to PitchBook, with 185 deals above $100 million already recorded. The number of deals above $50 million has increased since 2012, though angel and seed rounds have been slowly declining since 2015.



NFLX In dollars, easier to view: the savvy investor who sank $25,000 in Netflix in 2009 would now be sitting on $1 million. Taken from @CNBC.


The FAANGs: in Aug. 2018, Apple AAPL became the first company in history to reach a $1 trillion valuation. One month later, Amazon AMZN joined the club (though it has since fallen back to the billions), and this April, so did Microsoft MSFT. But it's not just the number of 0's that has regulators and other businesses worried. These big tech companies have evolved from mostly singular missions (search engines, retail, phones) to businesses than span content creation, cloud computing, artificial intelligence, ad platforms, self-driving cars, and more.



Cryptocurrencies were one of the best-performing assets this decade.
That's mainly due to bitcoin. Bitcoin is a digital currency created in 2009, and for the first half of the 2010s, it flitted between obscurity and heavy skepticism from consumers, the finance industry, and governments. Then all hell broke loose in 2017 when it shot up to nearly $20k and turned some early backers into millionaires. Now...some are comparing bitcoin to the financial bubbles of centuries past. 
But over the latter half of the decade, something happened. Cryptos like Ethereum, Ripple, Litecoin, and (yes) bitcoin gained more legitimacy. Wall Street started thawing, and this year Facebook FB corralled some of the biggest names in payments, banking, investment, and tech to back a cryptocurrency project, the Libra Association



The U.S. unemployment rate fell from almost 10% at the start of the decade to 3.5% at the Bureau of Labor Statistics' last count. BLS's 2009 predictions that employment growth would be concentrated in the services sector, especially professional/business services and healthcare/social assistance, were pretty spot on.
The chart above represents broad industry categories. While manufacturing technically posted a net gain over the decade, it was still home to some of the worst-performing sub-industries over the last 10 years, including many apparel manufacturing sectors.








                                                 FAMGA acquisitions since 1999



The FAMGA (Facebook FB, Amazon AMZN, Microsoft MSFT, Google GOOG, and Apple AAPL) has made over 750 acquisitions in the last 30 years. @CBInsights has a nice chart on the $1+ billion acquisitions from 1999 to 2019.


                                            Trades, a threat for the economy



In 2008, the majority of the U.S. people considered trade more of a threat to the economy than an opportunity. Now, 74% view it as an opportunity for growth.


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    Weekly Economic Calendar


Real Time Economic Calendar provided by Investing.com.