🔒Premium Membership Positions - May 7, 2023

Hi Wealth Builders! 👋

What happened in the markets this week?📊

Markets pulled back a bit this week with the S&P500 dropping -0.8% and Dow Jones dropping -1.2% while Nasdaq held steady at +0.1%. Tech and Banking sectors once again dominated the headlines this week as we move into the late stages of our earnings season.

What was newsworthy this week:

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Labor market remains hot

What happened: 235,000 jobs were added last month making April unemployment fall to 3.4% (lowest since 1969)

Why it matters: Job reports are a critical part of information the Fed uses to assess monetary policy (i.e., how much to set the target interest rate). It's also a general indicator of our labor markets and macroeconomy as a whole.

My thoughts: I find it amusing that whenever Fed changes rates, a new round of debate begins on whether Fed will keep changing rates in the same direction, pause any further changes, or reverse their decision because they were overzealous. My understanding is that there's a lag in the impact in interest rates so whether (from an economic standpoint) they were too aggressive or conservative, the immediate impact has much more to do with what the market thinks than the actual impact of the rate action. Joining this fun, I personally think that we'll see a deceleration of rate hikes because some of the lagged impacts are being felt now (expressed through the recent regional banking crisis, housing sales, etc.,). However, the big issue that was font 80 on all major news outlets last year (you know...inflation..) has yet to be resolved.

Banking troubles continue to weigh down on regional lenders

What happened: First Republic is the next bank to fold with JP Morgan Chase picking up the balance sheet

Why it matters: This is yet another episode in a long saga that started months ago. A perfect storm of regulatory inadequacy and unprecedented speed of Fed rate hikes is forcing many of the regional banks to throw in the towel and their customers clamoring for peace of mind elsewhere

My thoughts: If you look at this graph below from FactSet, it's clear we have many other banks within the "midsize/regional banking" sector. Even though the nuances of each bank's vulnerabilities differ (e.g., exposure to tech vs. exposure to real estate developers vs. anything else), the pattern of "customers losing confidence --> deposits are withdrawn --> bank risks insolvency" is the same. I'll be keeping my eyes open to what other big banks (e.g., Bank of America, Citigroup, Wells Fargo) may be assuming the balance sheet of the cohort below. After this all shakes out, I feel we'll be presented with a new (not really) issue of banks being TBTF (too big to fail) again. Anyone getting deja vu?

Fed hikes continues

What happened: Fed by another 25 basis points this week, for the 10th rate hike since March 2022

Why it matters: Higher interest rates can combat inflation by lowering spending, encouraging saving, and decreasing business expenditure and investments. At the same time, higher rates can cause banks to collapse as balance sheets quickly become negative (i.e., higher rates lead to lower bond prices which means the bond assets on the bank's balance sheets are worth less).

My thoughts: Similar to my thoughts above on labor numbers, the Fed has a tough job ahead.

Why stocks decrease when earnings are good

What happened: SBUX released a better than expected earnings this week but its stock price dropped.

Why it matters: Although this isn't macroeconomic news like ones above, I thought it was interesting to share for any of my members wondering..."good news = bad reaction...what gives?"

My thoughts: Over the decades of me investing in the market, this actually happens more often than most would think. In my opinion, this week's SBUX scenario is the classic "buy the rumor, sell the news". I've seen this happen with AAPL and many other strong company stocks though the price drips were never really lasting because fundamentals prevail over the long run. In addition to traders selling the news, I also feel the macro-sentiment has a factor in weighing down expectations whereas if we were in 2021 (when optimism was at an all time high), the market exuberance may have been enough to counteract the impact of traders selling the news.

Steve's Trades

1. APPL Jade Lizard (aka APPL Case Secured Put + APPL Bear Call Spread)

(For any nerds like me...it's called a Jade Lizard because the profit and loss graph of this position looks like a lizard with its tail hanging off to the left hand side)

Expiration Date: June 16, 2023

Leg 1: Cash Secured Puts Trade

Leg 2: Bear Call Spread Trade

Total credit/premium received from both legs: $140 + $106 = $246

2. AMD Bear Call Spread

Expiration Date: June 16, 2023

Step 1: Buy 1 $125 strike call option (delta 0.02) for $13

Step 2: Sell 1 $105 strike call option (delta 0.15) for $91

Step 3: Set a buy-stop order of 100 shares at $104

Credit/premium received: $91 - $13 = $78

Ask Steve 🤔

Q: Like with your guidelines for covered calls, do you advise avoiding selling cash-secured puts before ex-dividend or near earnings date?

A: Great question! From a dividend perspective, it doesn't matter if you're selling CSPs right before and through an ex-dividend date because you would not own any shares either way. As opposed to selling a covered call, you own the shares and someone might want to execute their option in order to receive the shares before this date and be eligible to receive the dividend.

With respect to selling CSPs near earnings, this is actually a prime time to sell these short-term options because implied volatility is higher, which means we get higher premiums :). Just remember to always trade to your comfort level because prices can dramatically change (even gap up/down!) after earnings are released.

Q: Hi Steve! Do you recommend money market such as SWVXX? The current 7-day yield interest rate is 4.58%. Let's say I'm conservative and not planning to invest into any particular stocks or ETFs but currently holding on cash, would it make sense to put the cash into a money market fund since it's doing pretty well? I'm thinking money market may be safe to secure some profit right now and once the S&P 500 drops even more, I can sell my money market funds and buy into the S&P 500. Thoughts?

A: Yes! Since interest rates are high, you can consider putting your money into a money market fund. You can even consider putting your money into a high-yield savings account. I'm currently using Wealthfront and I get 4.8% interest rate (by referring a friend). SWVXX currently gives around a 4.6% interest rate. Other options besides HYSA or money market funds are Treasuries and other type of high quality bonds. I know some of my members have recently purchased short term Treasuries at just over 5% (U.S. Government Bonds) to capture the higher rates. Feel free to ask around in our Discord channel, I'm sure you'll get lots of examples! One final note: if you're investing in bonds, I recommend sticking to high quality. I know you can get even higher rates (maybe even 9-10%) on some high yield bonds but those are a lot more risky and the issuer has a higher chance of default (i.e., they declare bankruptcy and you won't get any interest or principal back).

Q: Any tips or hints on how to determine if a stock is bullish, neutral, or bearish. I've been thinking of looking at the 1m and 6m marks for relevancy?

A: We typically look at the one month and three month chart to determine the short-term trend. This is more of a visual/technical analysis skill. If we see the trend go up, then it is bullish. If we see it go down, it is bearish and if we see it go sideways, it is neutral. Keep in mind that technical is just one way of looking at stocks. I also conduct the fundamental analysis (how strong the company is in generating cash flow) and sentiment analysis (how the market is feeling about the stock at this moment). This definitely takes some practice and you'll get better with time :)

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Stay disciplined everyone! I know that people usually get excited with these rallies, but be mindful that there is still some uncertainty with the Fed and them raising interest rates. Also be mindful that we are getting close to earnings season at the end of April, which means that there are going to be some volatile weeks.

Have a wonderful weekend! 🙂

-Steve and the Call to Leap Team

The following article is strictly the opinion of the author and is to not be considered financial/investment advice. Call to Leap LLC and the author of this article does not claim to be a registered financial advisor (RIA) or financial advisor. Please visit our terms of service and privacy policy before reading this article.