Time to Get Ahead of Consensus

Hey There Income Hunters,

 

I have traded for more than 30 years, and I know the key signposts of a brewing crisis … 

 

I’m talking about the conditions for an aggressive bearish trend in equity markets and credit issues in corporate America that could lead to a rise in defaults.

 

      • Short-term funding markets become stressed and liquidity for running a trading operation dries up.
      • Low-credit rated bonds (BB) rise in yield compared to safe-haven US Treasury securities (AA) .
      • The US Treasury yield curve, i.e. 2-year to 10-year spreads, widen signaling a move out of risky assets into shorter-term safe options.

 

Well, we are not showing any of these signposts. In fact, quite the opposite.

 

In fact, credit is strong, the yield curve is narrowing and credit spreads are near historic lows.

 

Yet … bullish sentiment for equity investors has dropped 16.4 percentage points to 22.4%, the lowest level of bullish sentiment in over a year. 

 

Today, I’ll review the reasons to fade the more bearish consensus and I’ll give you what I consider to be the best low-risk/high reward trade in the market.

 

Three Reasons to Bottom Fish Here

 

1. Consensus is the most negative it’s been in a year

The American Association of Individual Investors (AAII) produces a weekly survey of investor sentiment. Over the past week, has sentiment plummeted to 22.4, which is near the lowest levels in the past three years

 

This coincides with global sentiment based on the China regulatory crunch, fiscal and monetary policy uncertainty in the US and continued fears of the Delta variant:

 

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2. The third peak in global Covid cases has turned down 

The greatest event I have been at in a long time … was sitting at a bar this weekend watching college football in a packed house.

 

Daily Covid cases may still be elevated, but they are declining. Americans are looking ahead and are starting to go to outdoor events and travel. The reopening trade is coming quickly and that is bullish for fourth-quarter growth.

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3. The Banks have been cautious and loan defaults are at rock bottom

The banks learned their lesson in the 2008 financial crisis. In 2020, during the Covid pandemic, they were very restrictive on making loans.

 

This has made a huge difference in the health of the credit markets and default levels are at historic lows.

 

Now that the reopening trade is upon us, companies will be able to return added revenues to shareholders and buyback stock, as well:

 

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Beyond these facts, the most bearish global signpost has been China’s economic slowdown and potential for a corporate debt disaster …

The disaster is already built into many of China’s equity prices and letting Evergrande, the “world’s most indebted property developer,” default is exactly what any government should do. When corporations make poor decisions, they should not be saved.

 

Good companies that need a boost? It’s much more likely that the Chinese government will make credit available to them.

 

In fact, here’s one that is in the sweet spot of progress and in the center of the electric vehicle (EV) revolution …

 

NIO Inc. (Ticker: NIO)

 

The EV market is growing fast and there is a global competitive force that will speed up the demand.

 

NIO has already established a solid presence in China and is expanding quickly into Europe … 

 

Their growing network of service centers and charging stations, along with the  release of new vehicles, will increase its brand awareness and sales in upcoming quarters.

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NIO will turn a profit this year and its earnings per share are forecasted to grow 83% next year.

 

NIO Technicals

The chart below illustrates price in the top quadrant, volume in the second, volatility in the third and implied vol versus real vol in the fourth …

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Here is what I like about the NIO technicals:

 

      • NIO’s price is dropping, but so is its volume, meaning there is little money flow behind the drop.
      • Volatility is also lower, which is counter to what you would expect. So, the vol is not confirming the power of the trend.
      • Implied vol is at an extreme premium to historical vol. Notice the two previous instances implied were at such a premium (red circles). Both times NIO’s price trended higher.

 

Bring It Home 

 

NIO may drift a bit lower in the short-term, however, and I am going to look at a few different scenarios on the most efficient options strategies.

 

Pro and Trading Legion members should join me at 11 a.m. today during the Macro Monday event when I will look ahead to critical data and trades to keep an eye on …

 

I’ll also get into more details on NIO so we can discuss the merits of owning NIO and other companies that may be undervalued.

 

Until then …

 

Live and Trade With Passion My Friends,

 

Griff

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