Scary Smart

The Lund Loop - Your weekly update on markets, trading, and life.

Eric Eberwein was smart. Scary smart.

The moment he walked into Algebra II/Trig I knew he was a curve killer – the yardstick by which the rest of us would be compared.

And he looked the part.

Off-brand sneakers, tube socks pulled up to the knees, cargo shorts, a faux football jersey – all topped by a mop of hair that never met a comb or dollop of styling gel.

The prototypical high school nerd.

It wasn’t long before Eric got a chance to demonstrate the power that lay in his overdeveloped cranium.

“Would anybody like to take a stab at this problem?” Mr. Hughes asked, pointing toward the chalkboard.

Eric instantly raised his hand.

“Ah, Mr. Eberwein? Please come on up.”

Eric strode to the front of the room with confidence. He took a dramatic pause, then turned to address the class.

With an authoritative tone and the cadence of a computer, he broke down Mr. Hughes equation.

“Taking into account the concepts of the quadratic equation and the corresponding numerical coefficients, we can reduce these factors to their lowest common denominator.”

The class was mesmerized.

We were watching the next Newton. The next Einstein. A man whose name would one day be spoken with the same reverence as that of Euclid, Archimedes, and Pythagoras.

There was beauty and grace in the way he dismantled the equation - arms waiving to punctuate points, hands slashing across the board, exing out unneeded variables – like a conductor directing a symphony.

Then, as his performance reached its crescendo, he threw back his shoulders, tilted his head skyward, and closing his eyes as if about to experience the rapture, exclaimed;

“The answer is 3x – 7.”

The room fell silent.

Mr. Hughes got up from his desk, walked over to Eric, and laying his hand on his shoulder said;

“Wrong Eric.”

It was just the first of many times this same scenario played out over the course of the semester.

“The answer is 3 over π.”

“Wrong Eric.”

“The answer is the hypotenuse of a triangle.”

“Wrong Eric.”

“The square root of 747.”

“Wrong Eric.”

“Seventeen.”

“No, wrong Eric.”

Eric Eberwein was smart. Scary smart.

Except he wasn’t.

——

Realizing someone you thought was brilliant isn’t, provokes a variety of reactions.

If it’s a casual acquaintance, maybe there’s an odd curiosity.

If it’s a close friend or relative, you’re disappointed

If it’s a parent, it’s unsettling – especially if you’re still a kid.

And if it’s someone who manages your money, it’s terrifying.

That’s how clients of OptionSellers.com must have felt when they woke up two weeks ago to read that their accounts had been blown up - terrified.

If you are like me, you have a non-consensual relationship with the principals of OptionSeller.com - James Cordier and Michael Gross.

Particularly Michael Gross.

Thanks to the algorithm that is the Internet, every time I logged in to watch a video on YouTube for that last two years, I was subjected to a pre-roll with Messr. Gross telling me about the “3 Biggest Mistakes New Options Sellers Make.”

He had a whiteboard so you knew he wasn’t fucking around.

Oddly enough, one of those mistakes wasn’t taking out-sized risk for minimal gain.

Because that exactly what the strategy used by OSDC embodied - selling naked options in order to capture their premium. A strategy that is often referred to as picking up pennies in front of a steamroller.

But in this case it’s more aptly described as picking up pennies in front of a steamroller while wearing clown shoes, five-years worth of dreadlocks, and Princess Diana’s wedding train.

At some point, you’re gonna get caught.

And that’s exactly what happened when the natural gas futures options they had sold short - yes, you read that right - spiked, increasing volatility exponentially, and blowing out almost $80 million across 300 client accounts.

But wait, here’s the funny part.

They used margin, which means their clients are on the hook for more than they invested. $34 million more. With some clients liable for up to $1.4 million more than they invested.

The news was announced in a video posted on YouTube by Mr. Cordier. In the now deleted video, Mr. Cordier laments - while holding back tears - all the fun he won’t be having with his clients in the future due to the fact that he lost all their money.

“You were my family, and I’m sorry that this rouge wave capsized our boat,” Mr. Cordier says in the video.

He continues, “I promise you, every day when I woke up, I was checking for rogue waves…”

Let’s pause a moment to consider this.

To start with, if you have to watch out for rouge waves, you are doing something wrong.

You are over-allocating. Or using too much leverage. Or not managing risk properly. Or so on.

By the way, natural gas trades 24/7. Who was watching out for that rogue wave while you were asleep Mr. Cordier?

And why weren’t you hedged? And why were you trading a product that was originally designed only for hedging? And why didn’t you take off your Rolex before you filmed a video telling your clients you lost all their money?

My critique of Mr. Cordier and Mr. Gross is particularly harsh because they didn’t just fall off the turnip truck (shit, did I actually write that?).

They are co-authors of a number of books on options selling, including, “The Complete Guide to Option Selling: How Options Can Lead to Stellar Returns in Bull and Bear Markets,” and “The Complete Guide to Option Selling.”

They also have appeared numerous times on CNBC, Fox Business, Bloomberg TV, as well as in the Wall Street Journal and Forbes.

They should have known better.

And you could (almost) forgive them if they were risking everything to make a killing.

But instead, they were risking everything to make almost nothing.

Smart guys. Scary smart.

Except they weren’t.

For a New Beginning

In out-of-the-way places of the heart,
Where your thoughts never think to wander,
This beginning has been quietly forming,
Waiting until you were ready to emerge.

For a long time it has watched your desire,
Feeling the emptiness growing inside you,
Noticing how you willed yourself on,
Still unable to leave what you had outgrown.

It watched you play with the seduction of safety
And the gray promises that sameness whispered,
Heard the waves of turmoil rise and relent,
Wondered would you always live like this.

Then the delight, when your courage kindled,
And out you stepped onto new ground,
Your eyes young again with energy and dream,
A path of plenitude opening before you.

Though your destination is not yet clear
You can trust the promise of this opening;
Unfurl yourself into the grace of beginning
That is at one with your life’s desire.

Awaken your spirit to adventure;
Hold nothing back, learn to find ease in risk;
Soon you will be home in a new rhythm,
For your soul senses the world that awaits you.

- John O’Donohue

I came across this poem last week and it really resonated with me.

It’s hard to take the first step along a path when you can’t see - or even imagine - the final destination.

And that’s a perfect excuse to avoid all risk, and take no steps at all.

But if you have faith that you can figure things out along the way - as you’ve likely done before - your future isn’t guaranteed, but it will be better than living in a permanent past.

Bucket o’ Charts

Hard to believe, but it’s been barely two months since the S&P 500 hit all-time highs. And as we all know, it’s been a rough two months.

The good news is there was some serious technical work put in this week that could signal the beginning of the end of this recent downtrend. From a seasonal standpoint this would make sense, especially if you believe in (the) Santa Claus (rally).

According to the venerable Stock Trader’s Almanac, since 1969, the Santa Claus rally - which encompasses the last five trading days of the year and the first two of the new year - has yielded positive returns 34 out of 45 times, for an average gain of 1.4%.

So if we we’re going to have a St. Nick rally, now would be the time to put in a bottom.

Let’s go to the charts.

(click to embiggen)

Dow Jones Industrial Average - DJIA

When the smoke clears from a market tankage event, you want to look for good relative strength - those indexes and stocks that held up best during the worst.

The Dow is that average. It never really got anywhere near it’s April low and has now put in a “W” type pattern, recapturing both the 100 and 200-day moving averages.

A little sideways work here right below the short and intermediate-term moving averages would set up the potential for a nice run higher going into the end of the year.

(click to embiggen)

S&P 500 - SPX

The SPX got closer to that April low than the Dow, but put in the same double bottom and “W” pattern. The only reason it’s technically weaker is because it closed the week right below the 200-day moving average.

Once again, sideways consolidation blah, blah, blah…..

(click to embiggen)

NASDAQ-100 Index - NDX

The NDX came closest to the April low, didn’t put in a double bottom, and is farther away from its 200-day moving average - and all-time highs - than any of the other indexes, currently making it the weakest index.

Sideways action here would be yada, yada, yada…..

Honestly, because both the SPX and NDX broke below the July low - while the DJIA stayed above it - I would like to have seen them just go all the way down and run the stops out at the April lows.

Instead, they both turned at no-man’s land levels of support. In all likelihood, any sellers that were going to bail, did, clearing the way for new buyers to move things higher. But still, that final flush would have made me almost certain we put in a bottom.

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CBOE Market Volatility Index - VIX

We don’t know what will happen with the markets. All we can do is gather clues and try to piece together the puzzle as best we can. The VIX is big part of that puzzle.

Lower highs as the indexes held support is a good sign. Right now, the VIX is at a crucial point. It could either be ready to break out of a flag (bad), or ready to roll over (good).

To my eye it looks like it’s ready to roll over, but a close below the blue support level, which would also roughly put it below the 100 and 200-day moving averages, would confirm for me that it’s risk off time.

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TripAdvisor - TRIP

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Tesla Motors - TSLA

Both these stocks have acted like champs during this downturn - particularly over the last month.

Both are trading above the four major moving averages (21, 50, 100, and 200), and both are within striking distance of their all-time highs. Relative strength doesn’t get any better than this.

(click to embiggen)

Amazon - AMZN

Here’s something funny. Amazon’s chart is a hybrid of the SPX and NDX.

It closed right below its 200-day moving average - like the SPX - but didn’t put in a double bottom like the index. Instead, it put in a lower low like the NDX.

This is due to the confusion on Wall Street as to whether Amazon should be considered a tech stock or a consumer goods stock. I tend to think it’s the later, which means it should outperform tech as the market recovers.

We’ll see.

(click to embiggen)

Netflix - NFLX

Netflix has shown more relative weakness than other stocks, dropping not only below the April lows, but the January lows as well.

In an oxymoronish way this is good. The stock has cleared sellers out all the way back to its gap up at the first of they year, which gives it a better chance to build a base from which to move higher.

(click to embiggen)

Facebook - FB

On Wednesday I tweeted this out;

🎄Brian Lund🎄@bclundBeen said before, but $FB looks like a bottom is in for now. Could bounce up to $149. After that, who knows.

We’re now 5+ points higher - alert the press!

But still, a close over $140 and resistance is good. Next obstacle is the short-term moving average (21). If we can get past that there’s a good chance of running to the 50-day moving average and major resistance at around $149 and change.

(click to embiggen)

Nvidia - NVDA

This former golden boy of tech stocks is as broken as broken can be, suffering along with the fate of cryptocurrency.

The recent 3-day reversal pattern that put in an intra-day low of $133.00 was pretty powerful and now we’ve closed right below the bottom of a gap.

At the risk of sounding redundant, a couple of days to a week of sideways work here would set up a sweet risk/reward trade with easy to discern stops and targets. Keep watching this space, and if it sets up, you’ll be the first to know.

(click to embiggen)

Invitae Corp - NVTA

A couple months back we highlighted NVTA right around $10.00 (the blue line) and I suggested the stock needed some - let’s say it together - sideways consolidation, before I’d consider it.

Guess what?

NVTA didn’t give a shit about what I thought and proceeded to run up 84% in about a month. And now, after a fairly orderly pullback in this recently volatility, the stock seems to be coming out of a downward channel, perhaps to make another run?

It looks good over $14.10, with about a buck stop, which would put it back in the channel.

(click to embiggen)

Apple Inc. - AAPL

Here’s the rub.

Apple looks terrible.

It made a reversal in no man’s land - i.e., not off any significant support level or moving average - and is currently below resistance and every major moving average.

Ugh!

Here’s a few random observations about Apple, take them for what they’re worth;

  • There definitely is no setup in Apple right now.

  • It’s possible that Apple looks worse than everything else because it took so long to give up the ghost in the first place.

  • Apple can recover faster than any stock around.

  • Though the market cannot crash without Apple, it can recover without it.

This equivocal hot take is worth the price of The Lund Loop alone.

It’s Good, It’s Good

Everything old is new. Or at least it has the chance to be. My latest YouTube obsession is restoration videos. This one where an old vice came back to life is impressive. But when a 1950’s tyre (tire) inflator was brought back to life, the Lund brain was blown.


I seriously don’t know how I missed Lapham’s Quarterly for all these years. Launched in 2008 by Lewis Lapham - former editor of Harper’s Magazine - this journal takes macro issues and frames them via historical writings.

It’s the equivalent of literary candy.

Grab a cup of coffee, a highlighter, and a copy of this finely printed journal, and I guarantee you’ll lose yourself for a day.


My love of podcasts has led me to old timey radio shows. I know, kill me now.

But I’ve found that listening to old sci-fi radio plays is an incredible experience, and one that makes your transition into the arms of Hypnos each night effortless.

Start with Dimension X and then go to X Minus One.


Years ago, I read an article that mathematically proved that LP’s can’t sound as good as digital tracks. But it didn’t take in to account the intangible aspects of a vinyl record. (CNET)

I’m a traditionalist at heart. I believe history should have a light shone on it, not covered up. And I am not prone to reactionary ideas. So when the movement to take down Confederate monuments first coalesced, I was skeptical.

But as I thought more about it, I realized that by keeping these monuments up we are honoring men who betrayed their country in an attempt to uphold one of the most evil institutions ever - slavery.

So knock those fucking statues down. (The Washington Post)

Okay, I’m not old. Restaurants really did get louder. (The Atlantic)

It’s said that politics does not exist on a line, but on a circle. I.e. the policies of a left-wing dictator are indistinguishable from those of a right-wing dictator.

In the same vein, here’s how liberals have replaced religious conservatives as the standard bearers of evolutionary denial. (Quillette)

10-minutes tonight makes for a great tomorrow. (Medium)


Thanks for reading this week’s edition of The Lund Loop. And if you haven’t figured it out by now, I want to hear your opinion on these, or any other topics you see fit to espouse on.

So drop me a line and weigh in.

If you got here by accident, happenstance, or magic, click here to get The Lund Loop automatically delivered to your inbox once a week - isn’t technology great?

And you’ll be my best friend if you Like and/or share this Lund Loop with the buttons at the bottom of this page.

Talk to you soon,

-B

P.S. It should go without saying - but I’ll say it anyway - all opinions expressed here in The Lund Loop are my own personally and don’t reflect the views of my employer, any associated entities, or other organizations I’m associated with.

Nothing written, expressed, or implied here should be looked at as investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own diligence.