Issue 30 

Issue 30 

November 25,2020 

This issue is dedicated to my friend Pauly. 

The Open 

Florida has a lot of ants. I know this because an entire colony of fire ants attacked me when I was washing my car one day. Brutal little bastards came on in the hundreds and did their best to turn my legs into a buffet. Thank God I had a hose in my hand. A few hard bursts took care of them, but the experience left a lasting impression on me, an impression that carried far beyond the lesson I learned, which was to always keep my eyes on the ground. 

Ants are effective due to their numbers. One or even a dozen fire ants cannot bother you. One or a dozen ants cannot carry off the remains of a family picnic. A queen ant, by herself, cannot create panic in a lady’s locker room. Hundreds and thousands do the trick, though. They swarm out of their holes in an endless stream of workers, and that is what gives them their strength. They are organized and proficient, each ant doing its part to help the whole. Death eventually awaits any of them, even the queen, if they venture away from the pack. 

The stock market is often like this ant swarm. There are more than 3,500 stocks listed on American exchanges and most are names you’ve never heard of. In addition, stock market professionals have long divided stocks according to 

valuation size (the total worth of the company). Apple, Microsoft, Disney and Wal-Mart are some of the biggest firms in the world, with valuations well over $100 billion each. The big companies we are all familiar with are called large capitalization stocks. The smaller firms, with valuations between $500 million and $5 billion, are called small cap stocks. These are companies involved in community banking, oil drilling, chemical and auto parts manufacturing along with thousands of other economic inputs that we need but don’t see or think about every day. 

Politicians like to say that small business is the lifeblood of the American economy. If that is true (and I believe it is) then small cap stocks are the lifeblood of the stock market. There are 500 stocks in the S&P 500 index, the largest stocks in the country. There are 2,000 stocks in the Russell 2,000, which is an index of the small cap stocks. A move by Amazon grabs headlines (as it did last week when the company announced plans to get into the pharmacy business) but thousands of smaller companies in expansion mode moves the needle throughout the economy. 

Generally speaking, the stock market does best when all capitalization sizes are doing well. There are a few reasons for this, beyond the obvious. It is a testament to the strength of the overall economy. Having 3,500 companies buying, selling, hiring, expanding is better than just 500 firms doing it. It also means investors are making money across their entire portfolio. This is important because investors tend to stay with winners and avoid losers. The more winners, the better. Here is an example. 

In 1999 part of the stock market was on fire. Anything technology related was flying as the internet was growing into our lives. Stocks like Amazon and Ebay were doubling every week and it seemed like it would never end. But it did. Most investors were not sharing in the tech stock market wealth because most stocks did not participate in the manic run. As more and more brick-and-mortar companies slipped away, investors began selling their tech stars to raise cash. It took a while, but eventually the smaller firms pulled down the big leaders. 

Powerful bull markets are supported by wide participation. Stock market lore says that the war is lost when the generals go in front. Pawns and ground troops are critical to the longevity of any bull market. It is good to see small and large 

cap stocks moving up together. It is better when small cap stocks lead the way. This has not happened in a very long time. It is happening now. 

I titled a piece in late August called “The Apple Falls.” Traders were running Apple up before the stock split, and things got out of hand. Regardless of how good the company is (and I believe it was the greatest business in history, but note the word was), there is a limit to how much people are willing to pay for that greatness. We all want a Porsche. If they cost the same as a Ford, we would all have one. There is a limit to how much we are willing to pay. As Apple stock has been resting the past 3 months, many smaller stocks have been taking the mantle. The Russell 2,000 closed at a new, all-time high last week as the larger stocks settled slightly off best levels. Over the past month the smalls are up 8% while the bigger stocks have only gone up 3%. This is extremely healthy for the current bull market and it raises the probability of something I brought up last week, that this bull market still has a lot of life left to it. 

The ants are marching, and it is a good idea to pay attention to them. 

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The Beach 

Different bunch, same banana. 

The first issue of TradeHawk was released on May 1st, 2020. I showed a chart of the US Government 10-year bond, which at the time was yielding .62%. I said it was a great time to borrow as much money as possible, as interest rates were near 6,000-year lows and unlikely to much lower. 

Since then, the prudent among you have not added new money into the bond market, and that has been the right move with bond prices down. This is significant because most financial professionals told their clients during this time to keep adding cash to the bond market. Waste of time and money. 

I have been a broken record about the bond market and interest rates (remember, when rates go up, bond prices fall). Well, the record is still scratched. Biden is president, but interest rates are still trending higher. Same idea; no new money into the bond market! 

There are some of you who have lost money in bonds over the last 8 months. Stop listening to these other dopey advisors! Just because you are 60 years old does not mean 60% of your portfolio should be in the bond market. Spread your retirement money around in American stocks until further notice. And that notice may not come for several months. 

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Hawk Attack 

The Hawk is a predator bird. It glides high in the sky and surveys the ground below. It conducts a constant assessment of conditions, then attacks when the time is right. 

This is a new piece that I will bring out every few weeks. In rapid fashion it will cover the 10 major sectors in the economy (which are all represented by exchange traded funds). It will not cover the general stock market because that is discussed every week in the Bottom Line. Let me know what you think. 

Industrials (XLI) took the leadership position from technology in early September and has not given it up yet. It is currently the strongest sector in the market and should remain so for at least the next 2 months. 

Basic materials (XLB) are also doing quite well. Further new highs should be seen in coming months. 

Transportation (IYT) has surprised a lot of people with its strength. From day one I have encouraged you to ignore the news and watch the stocks. IYT hit a new all-time high yesterday, despite all the bad covid news. This sector is not as strong as industrials, but still a candidate for new purchases on dips. 

Technology (QQQ) put on an investor clinic from March through September 2nd, advancing over 80% in less than 6 months. Tech is still consolidating those gains. It is not a good idea to add new cash to technology for a bit, but not something that has to be sold right away. 

Utilities (XLU) blasted higher in late September, outperforming the rest of the stock market by a nice margin. Most of the run is probably over, but utilities don’t look terrible. 

Health care (XLV) received a lot of attention this month from the vaccine news, but these stocks don’t look great. Most of that good news was priced into these stocks by early July. For the rest of this bull market (anywhere between 6 months and 3 years) health care stocks will probably lag the general market. 

Financial stocks (XLF) are breaking out with authority this month. The shoeshine boy put XLF on his board 2 weeks ago at $27 and it hit $28.69 yesterday. I wouldn’t chase this, though. 

Energy firms (XLE) shot up aggressively with the vaccine news. Oil price per barrel rose from $36 to $45 in the last month. XLE responded in kind with a 45% upside move. This is most likely short covering. Energy has been the whipping boy of the stock market for the last 2 years and I have not seen anything recently that challenges that position, even after the monster move this month. 

Communication stocks (XLC) look a lot like technology, which makes sense due to the large number of stocks that are in both sectors. Same analysis and opinion as tech. 

Consumer companies are doing fine but will not lead the market anytime soon. Stil, it is impressive that these firms are holding their own throughout the covid crisis. 

That’s it. Go forth and prosper. 

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Shoeshine Corner 

It is time for a broad summary of what this wily character has been up to. One losing trade since May. That should command anyone’s attention. 

Shoeshine guru has conducted some full round trip trades along with partial sales and longer-term holds. Regardless of time frame, he has been smashing it out of the park. 

Let’s do the round-trip trades first: 

He bought AMD in May and again in June for $53 a share, sold it all for $65 in July. 23% return in 2 months. 

XLV was added to the buy board in May for $97 and he got rid of it on August 12th for $107. Interesting that it was trading for $107.80 just 2 days ago. 11% return. 

Gold caught his eye in June when it was selling for $1740 an ounce. He sold it at the end of July for $1895. Gold is trading for $1813 an ounce today. That was a 9% return in 6 weeks. 

He did a fairly quick trade in QID, bought it in the middle of July for $11.20 and sold it on August 4th for $11.66, a 4% return in 3 weeks. 

He picked up some DDM on July 22nd for $43.60 and sold it on September 2nd at $51.55. That was an 18% return. 

NKE joined his buy board on August 12th for $105. He sold this on September 2nd for $115. NKE did go higher over the next few weeks, but that happens sometimes. He still made 9.5% in 3 weeks. 

The only loser of his entire career came from AAOI. He bought it in early August for $13.50 and sold it September 2nd for $12.50. That was a 7.5% loss. 

Now, onto the real winners! 

He grabbed some QQQ on May 1st for $212 and sold half the position on September 2nd for $303.35. That is a 43% return. QQQ is trading for $295 now and he will hold the rest. 

He bought SSO on June 24th for $61.16, added to it on September 16th at $75.73, and added again on October 28th when it was at $70.35. SSO is currently trading for $85.25. His average cost is $69.05, which means he is sitting on a 24% return. He is holding all SSO. 

He bought XLF on November 11th for $27. It is trading for $28.30 today, a 5% return in 2 weeks. Still holding. 

He picked up MS on November 11th for $55.65. MS is currently trading for $62.85. That is a sweet 13% return in 2 weeks. 

And now for the grand champion. SNAP! He bought this on October 7th for $26.73. Sold half the position 2 weeks later for $36. It is selling for $44.60 today. If he sold the rest, he would net a 51% return. He is holding it, though. 

Between vigorously shining shoes I heard him say that due to the market’s recent runup he is not interested in adding anything today. Any pullback should have him adding again to his buy board, so let’s stay close and listen. 

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Bottom Line 

If November ended today, it would go down as the strongest single month in global stock market history. That is saying something. Everything is up, and up big. Vaccine news was the catalyst, but this is something that has been brewing since March. Therefore, every issue of TradeHawk since our inaugural release on May 1st has been either buying stocks or staying long. And I haven’t been shy. I’ve used phrases such as “aggressively long” and “buy as much as you can.” 

I did not know exactly when the vaccine news was going to break or how good it was going to be, but the stock market did. And I watched and listened to the market. 

Stocks are going higher. The market may need to breath after this month’s torrid pace, but stocks are going higher. The S&P 500, which is trading for 3,624 today should see at least 3,700 by February. 4,000 is an easy target for 2021, and 5,000 by the end of 2022. As mentioned, stocks are going higher. 

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Investing and trading are hard; TradeHawk can help. Please contact us with any comments or questions. 

hawk@tradehawk1.com 

317-452-2083 

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