Welcome back everyone, hope you all had a fantastic weekend.
Starting to feel like every single weekend we get some sort of news, whether positive or negative, that gets avoided during the week. Two weekends in a row we got news on Trump making a deal with Greenland and then this weekend we got confirmation that Canada has no plans to have a free trade agreement with China. This leaves the markets in quite a tough spot where you don’t want to carry risk over the weekend, especially if you’re in shorter term positions. It takes one tweet for Trump to simply shift the markets from being quite positive to a large gap down or vice versa from a weak market bouncing right back.
Now diving in to this weekend’s news which was the fact that Canada will not seek a free trade deal with China. There seems to be some misconception about why the market is gapping down. Many folks are assuming that the market is simply pricing in the fact that a government shutdown is on the horizon. Now that on paper sounds right but if you just dive deeper into the most recent government shutdown which was prolonged, we actually saw the S&P 500 climb nearly 2% in that time period. Not only that, the only selling that we saw was based on tariffs. So to think that this market was gapping down solely on the fact of a government shutdown I believe is completely false.
Just look at the timing over the weekend: the market only started sliding down once the news of Trump to potentially place 100% tariffs on all goods and products from Canada broke. The moment Canada backed down, it took out the possibility of any tariffs that the US would place on Canada. From there the market started climbing and continues to do so through the night. If this sell was based on a government shutdown then we would not be seeing a large bounce back here; we more than likely would see some selling and then price bounces a little bit and sees some sort of balance. I do also want to point out the numbers that are provided over the weekend from Weekend Wall Street has to be taken with a grain of salt. Large funds are not flowing in and out of the futures market, but overall the moves we see over the weekend that are reflected on Weekend Wall Street tend to be very accurate. Now we can shift our focus to the upcoming week with key earnings being reported along with many setups posted over on X that are forming.
As I previously spoke on, all the best setups that were posted on X will be covered inside this newsletter along with ways to structure the trades. Now there is a very broad area of how you can structure a trade so my focus will simply be medium to long term option contracts or simply Commons. By using Commons and taking positions based on the stocks posted inside the watchlist, allocating 5% of funds to each position, you would be sitting at a 17% unrealized gain on the year. If using LEAP option contracts or the furthest expiration date below one year, you could be sitting on a 40% to 60% gain. Just note that many cannot handle the higher volatility in the portfolio; while you do see far more returns, your drawdowns can get quite a bit more ugly if the market was to shift in the opposite direction that your portfolio is currently allocated for.
There are a couple options to drop the risk level on any portfolio with the main two being stocks with a low beta and hedging the portfolio. Hedging can be put on simply by the SPY or the QQQ breaking down below a certain moving average. This can simply be a 21-day or 50-day moving average on the overall index that can just prepare for overall downside that could start building up. As of right now we see clear skies with the indices holding over most of the major moving averages. I will not be mostly focusing on the beta of stocks and be more geared towards hedging by using put contracts on the S&P or NASDAQ. When the time comes I will address it.
Stock Coverage
Rocket Lab (RKLB) The stock has seen a tremendous move in the last couple years with price surging from the low $3 range all the way up to 100. Looking back to the end of 2024, the stock put in a swing high around the 30s before selling all the way down to the 15 handle. From there we saw higher highs and higher lows, but the interesting part is this stock has formed a solid channel where there’s a clear short setup currently at the highs. I would like to see this stock sell back down into the $50 range from here. The January 15th 2027 75 puts are currently at 19.70 which offer plenty of time until expiration and leaves plenty of room between the strike price and the target price for the stock. These can be acquired a bit cheaper if we start to see a rebound up into the low 90s.
