JOBY - Rally Turned Around From A Shallow Sell-Off Last Week What's Next?

2023-07-02 23:54:27 ET

Summary

• It's great to write a weekly article about market conditions. It's just that when Monday comes along and presents a new set of information, my tactics must change.
• Yes, I saw that finally there would be selling. Yet, being in a down market is never all that fun. In this case, it was short and shallow.
• Trading was very productive. It was a good week to be had after all. In the end, I trimmed enough shares and Call options to create about 15% cash.
• Why? I think the next two weeks are going to be a great time for trading, but I want to stay with a cash cushion at 15% or higher. That means turning over trades and putting aside any alpha created.
• That was the what, the why is that I suspect this last rate raise coming at the FOMC meeting on July 25 and 26 might cause some selling since we will, by that time, be very oversold and ripe for disappointment. Cash will give us optionality.

The early week's sell-off was not big enough to cure the overbought condition

The market retreat was hardly anything to write home about at -2.7%, so the question is what do we do with that? We were able to quickly deploy some trades toward the lows and made sure to harvest the bulk of them this past Friday. Why? And why did I also close out some trades that weren’t working, I shared this with the community and asked them to do the same.

Excited about the market but cautious too.

First of all, I want to be cautious because we will likely get overbought again. We could easily be breaking above 4500 or threatening to reach 4600 if conditions continue to be optimal. Optimal how you ask? Well if every economic measure from here to mid-July continues to show lower inflation certainly the Fed is going to have to stop raising, or that will be the chatter, I surmise. As it stands right now with inflation at 4% and threatening to break down to the upper 3%-handle we are already in restrictive territory as far as the FFR is concerned. The 2-Y ended the week at 4.9% so that is restrictive as well, soon 10-Y will have to nudge up too. What I am getting at is, right now the market is seeing higher rates as welcome because the economy is showing strength. After all Q2 GDP was revised from 1,2% to 2%. The economy trudged along for years at 2% during the Obama admin, at much lower interest rates mind you. This points to the underlying strength of the current economy, propped up by the American consumer. Also as long as unemployment stays at the current level hearty consumption will continue. More to the point is that the next 2 weeks according to seasonal patterns are likely to be, if not the best this year, at least some of the best for trading. At some point, even with confirmation that inflation is in exiting stage left, if interest rates touch their previous peaks of (if memory serves) 5.4% on the 2-Y and 4ish for the 10-Y we could have a momentary pause in trading nirvana. This is perfectly timed as we slide into the July 25 and 26 FOMC meeting. So picture us practically tasting 4600, and interest rates rising with a tad more staccato. Soon we perhaps hear talk about whether they will raise .25% or halt. We know that the market hates a lack of visibility, and at this projected level of the S&P 500 level the indexes are at, we could have that 5% to 7% sell-off. So imagine we are at 4585 subtracting 5% and we are at 4357, practically right back to our low of last week - 4328.

Keep building cash for after Mid-July

This is what I am thinking, when you have a bullish market milieu there are always new opportunities for finding dislocations or trends to generate alpha. We should find plenty of opportunities for fast trades in the next two weeks and be successful. At the same time instead of redeploying all of the “winnings” I am going to want to set aside the alpha and maintain this 15% or greater level until we approach the FOMC meeting. Perhaps market participants won’t care because if they raise, and rates continue to fall albeit at this slow pace, it will surely be the last raise. Then we have to watch if the longer rates start to normalize, meaning they inch higher, or if the 2-Y retreats to the mid-4% level of recent weeks. Also, I want to note that the VIX is continuing to sink. In fact this Friday it broke under 13 momentarily. It doesn’t take a genius to see the VIX fall further as this rally nears 4600 on the S&P 500. We will keep our eyes peeled for the VIX moving higher, as the interest rate runs higher, that will be the confirmation.

During the next 3 months, I am going to ask that the group set aside more and more cash. To keep about the same amount of cash-at-risk as they have right now. Whatever alpha they create I hope will put aside the bulk of it as I do. Fall does come and seasonally things aren’t so perfect they can use hedging, and maybe layer in some of that money into great names that will have gotten too cheap by November. What happens in August? We could chop sideways to the beginning of September. On the other hand, we had such a bad year last year perhaps we skip nastiness in the Fall, and we end the year at 5500 on the S&P 500. It’s possible that the stock market could be happy with the election results. Also, we could have a renaissance in quarterly earnings as supply chains completely untangle, and productivity rises because generative AI lowers the demand for high-paid professionals. Or more positively the current level of staffing can handle more work because AI has made the job easier. Generative AI could allow less-trained individuals to handle more complex responsibilities. More manufacturing could be brought to the US with AI-powered robotics being able to handle delicate as well as tedious assembly of smartphones, or making Levis. Is this pie-in-the-sky? It's not that far off. Now how about e-VTOLs like Joby Aviation ( JOBY ) which got approval from the FAA to begin manufacturing their battery-powered “flying taxi”? Right now it will be piloted by a human. Not too far in the future, it will have an autonomous flight with a drone pilot supervising take-off and landing. Think of the productivity this will provide, a non-polluting 100MPH shuttle to Montauk, Newark Airport, or Chicago to O'Hare, in 5 minutes. This is a great segway to talk about –

My Trades:

I’ve had shares in JOBY since it was a SPAC from years back. This week it doubled at one point. Once I read the news about the FAA, I naturally added more shares and warrants. I also added to my holdings of Archer Aviation (AHCR) which is neck-and-neck with JOBY. Just like there were scores of automobile companies at the turn of the 20th Century, there are scores of eVTOL makers, with some having legit aerospace owners like Airbus (EADSY), Boeing (BA), and others involved as well. Most people aren’t paying attention, it’s time to pay attention. These conveyances will be extraordinarily cheaper than helicopters to manufacture and operate. There will still be a place for helicopters since e-VTOLs can’t hover and maneuver like a helicopter. They also won't be able to fly as far or as fast as the top helicopters do, but at less than 10% of the price per unit and not needing aviation fuel or the maintenance required to keep a helicopter running, it will rule the short hop to the airport with a per person cost competitive with taxis.

Last week anticipating that the Spirit Aerospace machinist strike was a “tempest in a teapot” I got long a BA call option at the 205 strike slightly out of the money for $9.60. This week I closed them out on Tuesday for 14.80, a 36% gain. Luckily, Tuesday was the peak price for BA shares. Will BA vault higher this week, and won’t I feel like a chump for selling it? Less than a week for a 36% gain? I’ll take that every day. I had a similar outcome for going long Oracle ( ORCL ) call options though this time I started at the 120 strike and ORCL shares fell further. I rolled those Call Options down to the 115 strike, which cost a bit extra but ORCL then ran up and over the 120 strike and it generated a nice return. The total cost for the 115 strike calls was 7.00 including 2.00 per contract to roll down from 120. I closed them out for 9.95 which was a 30% return. Normally I try for 40% but I wanted to end the week with as much cash as possible. I ended up with 15% cash, and that was plenty. I got long Snowflake ( SNOW ) calls at the 185 strike but SNOW fell a bit more. I will likely roll down SNOW to 180 strike if they remain in the 175 area, and the roll is not too costly. I also went bought more industrial names, Aspen Tech ( AZPN ) added shares of Ingersoll Rand (IR), and started a new position in Emerson ( EMR ) all in shares. I got long Axsome Therapeutics ( AXSM ) back on June 22 they announced positive news on their treatment. This past week they announced a secondary offer for $75 per share. At the peak only the week before AXSM hit 91. This didn’t seem to go down well with existing shareholders and it sold down a bit under 75. I executed a long call on AXSM at that 75 strike. It closed the week at 71, and I may roll this call down to a lower strike as well. The expiration is out to September and should give plenty of time for additional good news. That’s all the interesting stuff I got. Good luck this week and happy July 4th!

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