On the latest episode of the Schaeffer's Market Mashup podcast, Patrick is joined by finance author, trader and avid New York sports fan, Adam Warner. They chop it up over the VIX/VXX's recent movement (9:05), the role of social media in retail investing (18:45), and whether a market correction is upon us (21:50). And in between, plenty of Julius Randle, Lenny Dykstra, and Mets talk!

Transcript of Schaeffer's Market Mashup Podcast: February 25, 2021

Patrick: Ladies and gentlemen, welcome back to the Schaeffer's Market Mashup. I am very excited to introduce today's guest; I have been looking forward to having him on for the longest time so let's get right to it. Please welcome Adam Warner; an investing Renaissance man, author and trader. He's the author of Options Volatility Trading Strategies for Profiting from Market Swings; a book released back in October of 2009 which, perfect timing for market swings. Adam, how are yah man?

Adam Warner: I'm doing good, thanks for having me Patrick.

Patrick: Good, good. Well I guess I want to start and congratulate you Julius Randall making his first NBA all-star team and the Knick's, first since Kristaps Porzingis in 2017, 2018.

Adam Warner: It's been great. I was looking at it. And, I don't know if he's better than like Bam or Felter who got that left off, but he's been fantastic. He's getting triple doubles and getting forty points. It's fun actually, that the Knicks are relevant for the first time in, kind of forever. 

Patrick: Yeah, I really like the pieces they have. I have a couple of friends in Dayton, huge Obi Toppin fan. I see a lot of Shawn Marion in there with him. So yeah, like you said, I never hated the Knicks, you know? Well, one, I wasn't threatened by them as a Celtics fan. Two, when they're good, it's good for basketball so I'm happy you guys are on the upswing.

Adam Warner: Yeah, I mean, I'm old enough to remember the 90's extremely well and last year with that Michael Jourdan thing was on and my son came in was watching, I'm like, you know, he has no memories of the Knicks ever being good. I'm like, you know the Knicks were actually really good in the 90's, you know? Year after year they were, you know? Find and the game was so different and they were relevant, you know? And for 20 years they've been terrible. 

Patrick: Oh yeah.

Adam Warner: (2:15 inaudible) relevant, I mean they're not gonna make it to the title but for them to make the playoffs it's progress for them and yeah they got some good, young guys here. And Quickly is very promising and yeah. Like so Toppin, I was so excited when they drafted Toppin and I thought he was (2:26 inaudible) in college last year. And no one knows, you know? Dude, it's the Knicks so what they'll end up doing is they'll trade five of them for, you know, a 32 year old superstar but decline.

Patrick: Well I looked at Toppin's minutes and it was classic Thibodaux, just like playing him 10, 11 minutes. It's like, come on, man. Get 'em out there. Well, since you're a new guest, I want to start from the beginning. Give me a quick snapshot of your background. I know you were Johns Hopkins majored in Econ, so another fellow D three-person here; big lacrosse school. Tell me how you got to where you are today, what you're doing now, just kind of, break it down.

Adam Warner: I started a business as a Market Maker on the American stock exchange. It started in late 80's and, it was a very different business back then. We had single listed options, in other words, if you wanted to trade like Caterpillar options, you had to come to the Amex. If you wanted to trade Phillip Morris options, a couple off the top of my head, you had to come to the Amex. And so there was no, you know, online trading; it didn't exist at the time. Online didn't really exist at the time. So it was a good business for a while but by the end of the 90's, a lot of things happened to make that poor business. They went to decimals and then to pennies so it's heightened on the markets. The exchanges started all listing everybody's options so you would now have competition with all the other exchanges. And then you had online exchanges popped up and before you know it the spreads, went from, you know, a quarter to 2 cents. 

Patrick: Right.

Adam Warner: And you had the match other the markets. And so, there's no edge in being on the floor. So I left in 2001 and I figured as long as I can, like, train again, I might as well. As long as I can trade online, I might as well be able to dictate my positions. So I started trading online, this about 2001 and I subscribed to some websites and one of them was Real Money. It was under the street.com umbrella and they also have a site called Street Insight. And one time they said they were looking for writers. So I sent in an email and they said sure. So, I got my first ever writing gig and started writing about options and volatility and whatnot for street insight. And then I went (5:05 inaudible), I was going to switch. I guess I started reading (5:08 inaudible) and I might be dating myself (5:11 inaudible) Paris fantasy. 

Patrick: Yeah, you lost me.

Adam Warner: It was this fabulous site at the time. And, it turned out there was a non-compete agreement between the two sites, so I had to leave. I had to take I think, I forget it was either 3 or 6 months so I started to, it was about the time blogs were getting popular. 

Patrick: Okay.

Adam Warner: So it was, I have a few people that read my (5:30 inaudible) so, let me just do it in blog form. So I did it and it got really popular and my most popular topic was, oddly enough, Lenny Dykstra. As a big Mets, I am a big Mets fan and he started writing up an options column for Kramer's. I forget if it was the street or real (5:56 inaudible). And he was like making these outlandish recommendations and getting these outlandish representations of how well he was doing. Then it became like a running joke, he was recommending deep calls and these stocks, and he was like. 

Patrick: Lenny Dykstra was?

Adam Warner: Lenny Dysktra was, yeah; and Lenny Dysktra investment guru.

Patrick: (6:12 inaudible).

Adam Warner: He doesn't have any incarnations missing. Anyway, so here's this guy who was like, one of my all-time favourite players, but he was just (6:19 inaudible). I loved it as a kid, but he was just running these absurd options advice columns and he was like, misrepresenting his returns. What he do was, he would like mention only the winners that had closed out, but, let's say he had one that went against him, he would like literally never mention it again. So you're claim like he had like, you know, 99% winners, which he very well might've. But what he didn't mention was like, the losers were like, the winners were tiny and the sheet losers were just absolutely enormous. And if you actually looked at the numbers, the losers totally wiped out, any wins he had. Anyway, obviously, they did this and they once got picked up by (7:06 inaudible) cause I think they covered him once and I sent an email, like maybe, clarifying what he had done and then they linked to my site and they blew up my site up cause I got so many hits just from, kind of, the Lenny Dykstra. I was very sure that Lenny obviously did a million other things that got him into trouble beyond. 

Patrick: Yeah.

Adam Warner: His options that (7:28 inaudible).

Patrick: Well that's the long story short is never meet your idols, really.

Adam Warner: Right, right; it did cross my mind once on Twitter once where there was like a music video, I think. And I don't think he ever, I never mentioned that I used to write about him. Anyway, so for the blog I started doing (7:45 inaudible) thing got outdated really, you know, with Twitter and whatnot. So I just started doing freelance writing after that, which led me to a Schaefer's. I wrote for, column for Schaefer's for a number of years. Plug here, I love Schaefer's, love the people.

Patrick: Yes, there we go. I was sitting there waiting like, here we go, come on. Let's get it. 

Adam Warner: No, but everyone I ever dealt with was so nice, knowledgeable and I really loved it. I just kind of ran out of, like, daily ideas on telling people. I don't know how many times I could tell people, you know, some of these esoteric option products are, you know, (8:30 inaudible) but they're really bad, long term. So right now I just, I don't write much anymore, but I do trade, I guess. I do more long-term investing now. I don't do much in my 1short term training. So, just; you know? Like.

Patrick: Well, it sounds like you've had your hand in everything and your Twitter profile, which, you know, we'll get into that later; you know? It says in VIX, we trust so that's kind of where I'd like to start. 

Adam Warner: Sure.

Patrick: What is a VIX crush? And did it play a role in the recent highs and the, you know, subsequent pullback from 2020 into 2021, you know? In the past week, you know, we had that brief, very brief, dip below 20. Unpack that a little bit, you know, to start. 

Adam Warner: Well, I think that, I mean VIX is better looked at as reflecting what's happening as opposed to predicting. So, I think, just kind of, VIX is a perpetual, 30 day at the money-ish option on (9:43 inaudible) and it measures the volatility of that. So it's extensively predicting what the volatility of the market is going to be over the next 30 days. But, when you look at the numbers, like, I used to run numbers. I believe this is from a book where if your offset VIX and say like, how to do predicting the feature versus how to do just predicting what just happened. And, I don't have the exact numbers off hand, but it currently, hit at almost nil with, going forward and it correlated an awful lot with what just happened. So, a bit of the crash might be, you know, the market was very strong and then it kind of tapered off. But, you know, it's drifting a bit now but it's not doing anything too violent and I think the crash is more just reflecting. Like, it got kind of high last year and its still, you know, 20 is still a historically high number. The, let me just look this up real quick, the all-time median is about 17 and a half. 

Patrick: Yeah.

Adam Warner: So, you know, we're still even at 20 which seems low compared to last year is still on high side, all the time. So I think it's just, you know, sort of drifting off the high number. What's happening below the surface is the realized (11:04 inaudible) SPX that is absolutely imploded. That was in, you know, the 30's, the 40's, the 50's last year. The 20's recently it's down to about six. That's a very low number. 

Patrick: Yeah

Adam Warner: Like, if you use the rule of 16, where, 16 is (11:26 inaudible) is equivalent to about a 1% move in the markets. In other words, it picks the 16, is expecting a typical day to be about a 1% range. Realize what I'll tell you, which looks back to about the last 10 trading days, the number six. It means the typical range lasts 10 trading days is, you know, less than half a percent. So, you know, the actual ranges are tightening up and (11:50 inaudible) is just kind of following that. 

Patrick: It's been a lot of consolidation.

Adam Warner: Yeah, I think we're tight. I mean, I'm terrible at guessing where the market's going, but, that's what it seems like. You know the bond yields are going up. So it seems like the market's just kind of, you know, drifting a little quite right.

Patrick: Yeah.

Adam Warner: You know it's not much of a drift. 

Patrick: So

Adam Warner: At this point.

Patrick: You've mentioned on Twitter a couple of times recently, not saying that I stalk your Twitter, but I did do my research here. You mentioned VIX features, the VXX. To start, can you differentiate between the VIX and the VXX for those who aren't familiar and then give a snapshot for what you're seeing with the VXX lately?

Adam Warner: Okay, sure VIX is an index of actual options. So VIX is a hypothetical 30 day option on the SPX (12:52 inaudible) that option. There are futures on the VIX, which have fixed expiration dates and they; to simplify, it's kind of a bet on where the VIX is going to close on that date in the future. It's a little more complicated than that because; I don't even want to get started on the whole like.

Patrick: Yeah.

Adam Warner: VXX is, essentially a perpetual 30 day future on the VIX. So it's more or less a combination of the two near month VIX features. So it's always 30 days. VIX itself is not tradable. You can't trade the actual VIX. 

Patrick: Yeah.

Adam Warner: You can trade the VIX future. That's something very different from the VIX. The VIX itself is not tradable. VXX is tradeable; the idea is, essentially is, you can trade future volatility in the form of a, well it looks like an ETF; it's a little different, but it's like a stock. And so it looks and acts like a stock. The big issue is the VXX is not a stock. It has structural issues that are really important. It declines over time because the VIX features are in the tango almost all the time. Which, what that means is, you have to, for VXX, you have to look at the two nearer months and the further month out is almost always higher than the nearer month. So in order for VXX to maintain 30 day duration, it effectively has to sell the nearer month and buy the outer month. It doesn't necessarily do it that way. I believe they can do swaps and non-products, but it effectively has to buy time over and over and over and over again. That has the effect of causing you to lose value over time. People come into this, see VIX, and expect it to go up or down but they should not expect VIX to go up. They say "hey I cannot buy VIX but I can buy this VXX", so they buy it and in like a week later it's down and, you know, and VIX up or flat or floating down or whatever. And it's just been a disastrous product over time for a long-term investor. You shouldn't buy it for any length of time. It's fine as a tradeable way to play a very near term, moving. And VIX it correlates pretty well very, very, very near term. It does not correlate well with, like, (15:28 inaudible) length of time. I should also mention that this is VXX too. There is an original one, the original VXX was structured as if it was like a node of some sorts. So it had had a fixed expiration date from inception to the fixed expiration date, which was a decade away. I think it lost something like 99.9% of its value and then they created a new one that started a few years ago that now has about a 30 year deed. Although I did read they could cut the plug at any time, but. 

Patrick: Wow.

Adam Warner: So this is actually VXX 2, but it's the same dynamic. 

Patrick: Yeah that just doesn't roll off the tongue as nice as VXX. How would a retail trader read the VIX and adjust their trading strategy?

Adam Warner: I think VIX is a very good proxy for how good the market is for traders in general. Like, it's a bit like the pool of available profits. Like a low VIX, means like, you know, you really got to trade tightly and you technically have to play larger because if you want to get certain returns and whatnot, you'd need to trade more, you know? Maybe I could trade bigger. So with VIX higher it implies that the trading pools is just, you know, the potential profit is just bigger, you know? And you can branch it out to, you know, momentum stocks, you know? Whatever, you know; just higher VIX environment is just a better trading environment. So, you know, you could, obviously it's more uncertain if you lose, but, you know, you're going to be optimistic. It's more opportunity to make the trades. So, I think the best way to look at it is that, I don't think when VIX actually levels are not great for calling the market you know? When it gets extended, like, VIX versus it's moving average is something I like to look at just to see if a move is too extended. Like, when VIX goes too far beyond is moving averages I use a (17:47 inaudible) which I think pretty much the copy of the ones used (17:50 inaudible).

Patrick: Yeah.

Adam Warner: That's a decent market indicator, but VIX absolute levels, I think were just a good indicator of just the overall tradability of the market.

Patrick: Yeah, I'm looking up the VIX's10 day right now just to curiously see where it's at. Looks like, I think, five days above it, 1, 2, 3, 4, 5 days above it; yeah

Adam Warner: Yeah, it's like little above. You know, it got extended a couple of weeks ago.

Patrick: Yep, sure did. And then now it's kind of.

Adam Warner: Yeah.

Patrick: Levelling out.

Adam Warner: Here and now it's pretty close, it's kind of nothing much to really look at there.

Patrick: You're right though, I think that's definitely something that an investor or a retail investor, just trying to get as much information as possible can keep an eye on, you know? Just another alarm bell that they can use to say like, "oh, okay; you know, it breached here, let's keep watching it." I do want to pivot a little bit to the role in social media and in retail investing, given the, you know, I guess 2021, really is when it really blew up. Don't want to focus too much on the GameStop stuff and everything that's been played over. I'm so sick and tired of seeing that gene taker. But I do want to focus on the fallout. You are very active on Twitter. I want to try to understand how a retail investor can parse out good data from bad data. There is so much out there when you look on StockTwits, on Reddit, how does one kind of separate the, you know, real from the fake there and how has that impacted your own trading mind-set?

Adam Warner: That is a good question. I've never gone on Reddit, so I don't know.

Patrick: Good, good.

Adam Warner: Exactly, I knew one of the original StockTwits people, like just wanted the ones they recommended was probably (19:46 inaudible) that must be like 12, 13 years ago. I don't remember exactly what, I guess it cannot be because Twitter. It must be a little more recent than that. But StockTwits is better in that they do not just recommend anybody, you know? You have to have a bit of a track record for them to plug you and plug your material; it's difficult. I think, you know, the general rule, if someone's putting their name behind it and putting actual picks or advice in real time, you know, that stuff's good. You always got, watch out for like people to put out just the winners. You know, it's trying to show you how good they've done and you know, it's hard to trust. I don't want to use this as a total blanket rule, but when someone's not putting their actual name behind I think it creates a higher bar. I understand some people just cannot for maybe regulatory reasons or for some other reason, but, um, I just think you should have a high bar if the person's not attaching their name or a tattoo, you know, real time numbers and trades and whatnot. So it's dangerous. Cause I think, you know, like you said with Game Stop, you know that was a winner, but yeah, no one talks about, you know, the countless runs or, you know, the (21:08) people. Is like bad ideas, they'll pile them at the top and pile doubt at the bottom. And I would just recommend being careful. Just look at people who have a track record.

Patrick: I think in the same way that when you're reading a news source these days, you have to look and see, okay,  who is, you know, who owns this organization, you know?

Adam Warner: Yeah.

Patrick: You have to do research, not on what the person is saying, but who exactly is saying that. And I think that gets glossed over sometimes where; someone can, you know, you can look up someone's charts that they're peddling and it can be an echo chamber of like, "yeah, yeah, yeah. I really agree with that." But then look and see where this person has come from I think it is another step that needs to be taken. With that said, what are you looking at really in the next six months to so, because we've got Johnson, Johnson's vaccine is awaiting approval from the FDA; so six months to a year what are you keeping your eye on?

Adam Warner: Well, like I'm totally optimistic, societally with the vaccines and I think if anything they're being under sold. (22:17 inaudible) you know, if you look, they are doing a great job of stopping, you know, severe cases. They just don't know the answer on like decent amount of cases. They might be good for stopping that too, but they're demonstrably doing a good job with severe cases so I'm very optimistic in the real world economy. I guess the question is more, do the market price (22:44 inaudible) already because it's been going up in anticipation of this recovery for a while now. And that's where I'm a little questioning of that. Are you going to get, like, you know, a sell the news type thing, you know, whereas the numbers demonstrably get better. And, you know, I am at all remotely an expert at bonds but are the bonds telling you that, "hey, you know, the economy really is going to recover," and, you know, are we now I'm going to start worrying about inflation and, you know, whatnot and, you know, start, you know, if I have it priced in the recovery area now that it's going to just start pricing in. You know the not great effects of too fast a recovery. But, I'm not bearish but I'd say, you know, there is a question of like how much of this is already priced in and we are mostly there at this point and the actual market.

Patrick: Yeah, you know, I remember the day after they officially declared Biden, the winner, there was also vaccine news; I can't remember which one. 

Adam Warner: It may have been Pfizer news I think. 

Patrick: Yeah, I think it was the Pfizer and there was a huge explosion and it was just one of those days where everything was just, you know, shiny, perfect and new and you wonder now with three months later or so, was that it? And I feel like that is kind of the question people need to kind of start asking themselves and saying like, "how do I get ready for a potential correction and whatnot." And I feel like keeping an eye on the VIX, keeping an eye on the VXX are ways to strategize when it's coming. Am I correct in saying that or?

Adam Warner: Yeah, I mean, I think a good way to look at VXX is it behaves very much like a market cut. Like it decays for a different reason but it is a reasonable, it depends, downside. I mean, you know, and if it loses money for you it is not necessarily the worst thing in the world. 

Patrick: Yes.

Adam Warner: Because it might imply you're doing well with everything else. 

Patrick: Exactly.

Adam Warner: So, you know, a market heads, you know, the same you would look at maybe buying some puts against a portfolio, you know? I mean, VXX, I (25:03 inaudible) recommend this, but I'm just saying, like, it has similar behavior to if you bought an index (25:10 inaudible). So it's not terrible in that respect. The dynamics of the decay are different, but the effect is the same, you know? An option decays because time is running out. 

Patrick: Right, right.

Adam Warner: And VXX decays because of the Tango issue. 

Patrick: Yeah.

Adam Warner: Because of the rolling futures, more or less.

Patrick: One final question, who finishes with a better record this year, the Red Sox or the Mets? 

Adam Warner: Oh, that's easy, the Mets. 

Patrick: You know what, I'm afraid to say; I am agreeing with you

Adam Warner: We have Captain Money Bags now owning the team.

Patrick: Geez.

Adam Warner: And the Red Sox they are getting profits right now. 

Patrick: The Tampa Bay Red Sox over here; are you Jets or Giants?

Adam Warner: I'm a Giants fan man. My family had season tickets from when I was a kid until they switched stadiums and they made you buy these, cause at the time seat licenses were big and then it was like throwing money down for no reason. 

Patrick: Got it.

Adam Warner: I just wasn't young as much at the time anyway, but I am a Giants fan. They are periodically great.

Patrick: Yeah.

Adam Warner: But the highs are very high; I remember one of the Super Bowls versus how good they generally are, so that's fun.

Patrick: It's a Super Bowl; it is all that all that matters. 

Adam Warner: Yeah.

Patrick: Well then, I guess, in the last one will be, better record Giants or Bangles?

Adam Warner: Well I like Joe Burrow better than Daniel Jones I would have to admit so I do not know. I mean, I do not love the way the giants have. 

Patrick: Yeah, you I think.

Adam Warner: Managed the last few years.

Patrick: I think we got you. 

Adam Warner: So we got a little better this year.

Patrick: On that one. 

Adam Warner: Yeah, I think the Bangles long term, you know, they got another high pick this year I assume and I think they are headed the right direction. The Giants, I feel like they do business terrible and the Bangles (27:06 inaudible).

Patrick: Yeah.

Adam Warner: So that is one fact in the Giants favour but, the actual team, I do not think the Bangles (27:10 inaudible) going forward the next couple of years.

Patrick: Well, we will see; hopefully, you know, there will be actual people in the stands this fall. 

Adam Warner: Yeah, hopefully.

Patrick: So, but that's about it for me. Adam Warner thanks again for coming on. Do you have any thing you'd like to plug or last minute things you want to, you know, sign off with?

Adam Warner: Yeah, I'd just like to tell them to get your vaccine, that's going to help everyone. 

Patrick: There you go. Hey, my parents. 

Adam Warner: As soon as it's your times on the line, go get it. It's going to.

Patrick: My parents are getting theirs tomorrow or no, today and tomorrow. So, You know a lot of good feelings in the Martin family right now. So, yeah, go get that jab. 

Adam Warner: Exactly.

Patrick: Well, other than that, thanks again for coming on. Maybe we can do a summer episode and check-in on all our teams and, you know, kind of recap what's been going on.

Adam Warner: I anxiously await my Mets victory lap, so thank you and thanks for having me.

Patrick: There you go; yeah all right. We will sign off right there. Thanks again, everybody. Cheers.

Piper Sandler has slashed its rating on discount retailer Dollar Tree, Inc. (NASDAQ:DLTR) to "neutral" from "overweight," and lowered its price target to $102 from $117 this morning. The analysts is exercising caution on the stock due to mounting pressure from inflation as freight rates rise. Piper Sandler also predicted a $1 per hour pay raise for store associates, which would mean a $215 million headwind, adding that its low-income wage growth and total wage growth, as well as the job quite rate in the retail sector are both at historically significant levels. 

The shares of  DLTR are down 1% to trade at $100.50 in response, moving even further from their recent rejection level at $102, which has kept a lid on the stock since it suffered a massive post-earnings bear gap in late May. While the 320-day moving average captured the worst of  this pullback, the stock is now deepening its 6% year-to-date deficit. 

Should this negative price action continue, it could lead more members of the brokerage bunch to join Piper Sandler with downgrades and/or price-target cuts. Coming into today, seven called DLTR a "buy" or better, and six said "hold" or worse. Meanwhile, the 12-month consensus price target of $117.74 is a 16% premium to last night's close. 

An unwinding of optimism in the options pits could also put pressure on DLTR. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security sports a 10-day call/put volume ratio of  4.51, which stands higher than 77% of readings from the past year. This implies a much healthier-than-usual appetite for long calls of late. 

Echoing this, the stock's Schaeffer's put/call volume ratio (SOIR) of 0.34 stands in the extremely low second percentile of its 12-month range, meaning short-term options traders have rarely been more call-biased. 

Today the usual initial and continuing jobless claims data are due out, as well as durable goods orders, and the revised GDP. 

The following companies are slated to release quarterly earnings today, June 24:

Accenture plc (NYSE:ACN -- $285.70) provides strategy and consulting, interactive, and technology and operations services worldwide. Accenture will report its Q3 earnings of 2021 before the bell today.

Darden Restaurants Inc. (NYSE:DRI -- $135.45) owns and operates full-service restaurants in the United States and Canada. Darden Restaurants will report its Q4 earnings of 2021 before the bell today.

GMS Inc. (NYSE:GMS -- $43.00) distributes wallboards, suspended ceilings systems, and complementary building products in the United States and Canada. GMS will report its Q4 earnings of 2021 before the bell today.

Methode Electronics Inc. (NYSE:MEI -- $47.57) designs, manufactures, and markets component and subsystem devices worldwide. Methode Electronics will report its Q4 earnings of 2021 before the bell today.

Rite Aid Corp. (NYSE:RAD -- $20.42) operates a chain of retail drugstores in the United States. Rite Aid will report its Q1 earnings of 2021 before the bell today.

BlackBerry Ltd. (NYSE:BB -- $13.14) provides intelligent security software and services to enterprises and governments worldwide. BlackBerry will report its Q1 earnings of 2021 after the market closes today.

CalAmp Corp. (NASDAQ:CAMP -- $13.76) provides in telematics systems, and software and subscription services. CalAmp will report its Q1 earnings of 2022 after the market closes today.

FedEx Corp. (NYSE:FDX -- $297.37) designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. FedEx will report its Q4 earnings of 2021 after the market closes today.

Progress Software Corp. (NASDAQ:PRGS -- $45.53) develops business applications. Progress Software will report its Q2 earnings of 2021 after the market closes today.

Synnex Corp. (NYSE:SNX -- $118.92) provides business process services in the United States and internationally. Synnex will report its Q2 earnings of 2021 after the market closes today.

Now let's take a look at how yesterday's earnings announcements compared to expectations:

IHS Markit Ltd. (NYSE:INFO -- $111.71) provides critical information, analytics, and solutions for various industries and markets worldwide. IHS Markit reported $0.81 earnings per share (EPS) for the quarter, beating analysts' consensus estimates of $0.80 by $0.01. The firm earned $1.18 billion during the quarter, compared to analysts' expectations of $1.14 billion.

Patterson Companies Inc. (NASDAQ:PDCO -- $35.12) provides security analytics software to governments and enterprises worldwide. Patterson Companies reported $0.38 earnings per share for the quarter, missing analysts' consensus estimates of $0.52 by $0.14. The company earned $1.56 billion during the quarter, compared to the consensus estimate of $1.52 billion.

Winnebago Inc. (NYSE:WGO -- $66.54) provides security analytics software to governments and enterprises worldwide. Winnebago reported $2.16 EPS for the quarter, beating analysts' consensus estimates of $1.77 by $0.39. The firm earned $960.70 million during the quarter, compared to the consensus estimate of $836.82 million.

H.B. Fuller Co. (NYSE:FUL -- $66.54) formulates, manufactures, and markets adhesives, sealants, coatings, polymers, tapes, encapsulants, additives, and other specialty chemical products worldwide. H.B. Fuller reported $0.94 earnings per share (EPS) for the quarter, topping analysts' consensus estimates of $0.92 by $0.02. The firm earned $827.87 million during the quarter, compared to the consensus estimate of $764.37 million.

KB Home (NYSE:KBH -- $43.23) operates as a homebuilding company in the United States. KB Home reported $1.50 earnings per share (EPS) for the quarter, beating the consensus estimate of $1.31 by $0.19. The firm earned $1.44 billion during the quarter, compared to analysts' expectations of $1.48 billion.

Steelcase Inc. (NYSE:SCS -- $14.47) manufactures and sells integrated furniture settings, user-centered technologies, and interior architectural products. Steelcase reported ($0.24) EPS for the quarter, beating the consensus estimate of ($0.30) by $0.06. The firm had revenue of $556.60 million for the quarter, compared to analysts' expectations of $556.30 million.

Looking ahead to tomorrow, Friday will feature personal income, consumer spending, and consumer sentiment data. All economic dates listed here are tentative and subject to change.

On the latest episode of the Schaeffer's Market Mashup podcast, we discuss Covid-19's 12-month impact on the markets. On the one-year anniversary of the coronavirus pandemic hitting Wall Street, Patrick is joined by Joe Tigay, Portfolio Manager, Equity Armor Investments and Cboe's Senior Options Institute Instructor, Kevin Davitt to chat about the last year, and what's to come. Using as many as Opening Day baseball puns possible, they talk bull/bear market cycles (3:40), the utility of VIX hedges, (16:10) and what could spook investors in 2021(25:09).

Transcript of Schaeffer's Market Mashup Podcast: April 1, 2021

Patrick: It's the last day of March; opening day is tomorrow a little over a year ago. The VIX index roared to a new all-time closing high up at 82.69. Exceeding any closing level during 2008 and 2009. And even though the S and P 500 experienced its fastest 30% drop in history at just 22 trading days. It's good to note that the stock market has recovered from every previous bear market. Today, I try out Joe Tigay portfolio manager of Equity Armor Investments and CBOs, senior options Institute instructor, Kevin Davitt, to discuss the volatility market landscape. What the VIX can tell us, how to protect your portfolio. And we try to squeeze in as many as baseball ponds as we can. Let's take a listen. Joe, welcome on first-time caller. How are you?

Joe Tigay: Thank you very much for having me. It's very good to be here.

Patrick: And basically my co-host at this point, Kevin Davitt, how are you, man? Good to see you. Last time we talked it was I think September 9th.

Kevin Davitt: I'm doing wonderful and it's great to be back. I look forward to it.

Patrick: Great, great. Let's jump right into it. You know, it's I know it's a tough act to summarize an entire year in a few short sentences. Kevin, is it safe to say that global markets have regained their footing from the past 12 months?

Kevin Davitt: That is a tough act, but I think it was Shakespeare and Hamlet where they point out that brevity is the soul of wit. So let's try to get witty, the S and P 500 looking back experienced a technical bear market between February 19th and March 23rd of last year. Now, as many people know it was the sharpest 30% decline in history, and it was followed by the fastest bull market in history. So we had a whiplash market and it might sound fairly obvious to point out that markets to use your words have regained their footing. When the S and P 500 is up 77% from the March lows of last year. That's the largest 12 month advance for the index since it was introduced in 1957. And you'd have to go back to the mid-1930s for a larger move on a rolling one-year timeframe. So the bellwether US equity index is 17% higher than the feb 2020 highs. So on face and in price terms, the market is on solid footing. I would argue that there's potentially microstructure elements under the market that might indicate future issues, which I imagine we'll get into. What do you have to say about it, Joe? 

Joe Tigay: Yeah, I would say that's a spot on, it's been a year we won't forget to say the least and to say that the market has recovered is an understatement. I think I'm concerned about some of the underpinning of ethics of the market, but just where you're sitting today. Certainly the markets are at ease with the pandemic situation.

Patrick: Okay. And what is the moment Kev, you can take this or what is the defining moment that characterizes a new market cycle in the first place? So investors can start to pinpoint whether in looking forward or looking back.

Kevin Davitt: Yeah, we love to pinpoint dates, right? I think that's a natural inclination. There's probably a couple of ways that you could answer it from a technical perspective. The kind of 2009 to 2020 bull market run ended in March of last year. Now, from a purist standpoint, if you get a 20% move lower in the broad market on a closing basis, textbooks will refer to it as a bear market. 

Patrick: Yes.

Kevin Davitt: But as I alluded to a minute ago, this bear market was unlike any other, the last two technical bear markets ended in March of 2009 and October of 2002, those took 517 days and 929 calendar days to play out. The 2020 version took 33 calendar debts. So back to your point, if your primary concern or risk is price, then a new bull market began on March 23rd of last year. And it's just over a year old; Joe and I are both kind of focused on derivative markets and volatility, which is a critical component with respect to things like futures and options, those tools. And I imagine we'll get to those or to viewing the market through adapt lens shortly, but from a letter of the law standpoint, bull and bear markets are defined by 20% closing moves higher or lower.

Patrick: Wonderful, wonderful, Joe, what do you got?

Joe Tigay: When it comes to just that stretch we are obviously focused on the VIX a lot and the VIX sometimes is a leading indicator or an indicator. And I noticed when the market bottoms and the VIX peak at the same time that can be a change in sentiment. Of course, that happened in March, of course that happened a lot faster than historically it's happened. But when we saw the market recovering and the VIX making a lower, low and the market making a new relative high you know, and I'm talking about the VIX coming down into the fifties and the market coming off of that 35% drop off., you know, down to only 25% that we could have said was, okay, now we're in a new era. But again, that's only, it was only known in hindsight. We didn't know it when it was actually peaking. So that's just kind of the uncertainty of it and what happens with volatility.

Kevin Davitt: Yeah, but when you point out, I think that's an interesting point you bring up the VIX index on a closing basis peaked last year on the 16th of March and technically the S and P didn't find a bottom until about a week later. So you could argue that leading indicator worked last year, there isn't any silver bullet, but if you have that on your screen and on your radar, that can be valuable the next time something unforeseen occurs.

Patrick: That's a very good point. That's a very good point. Well, let's go straight into volatility since I know both of you are chomping at the bit here. The volatility market seems to be revealing a higher volatility regime now. To start what does that mean and why is it important to distinguish Joe you can go first and then Kevin can finish.

Joe Tigay: Yeah, so it's all relative. We need to remember last year we had the VIX peeking out in the eighties slowly when it came back down and now we're kind of settling in where the low side of the range is, you know, maybe the high teens to the low twenties is kind of where the VIX is, is bouncing around lately. And in the past year, that's low, but if you go back in the last bull market, that's kind of high. And, you know, as we sit here today, as we're recording this, the S and P 500 is just a few points away from an all-time high, and we still have the VIX in the high teens. So this is signaling to me that there's a new normal for the VIX.

The new normal is we're going to be having a relatively higher volatility. And the reasons for that for me are that you know, the economy and the stock market are not quite on the same page. A lot of the economic buildup has been simulative, money handed out by the government that continues to be the case. We have a stimulus package coming out soon and the market of course loves that, which sets up this weird dichotomy, where we give high praise to the earnings ratios and the market's pricing that in because they're expecting the economy to be stimulated by the money going in and the economy has yet to catch up.

So that creates a margin of error for these companies which are, is really narrow, they have to hit their earnings. And then the second thing, which is very volatile is the low interest rates and I know they're rising as we speak, but there's still historically very well. And when we have low interest rates that, that leads to higher volatility because when we have a small interest rate percentage, [unclear 09:01]  rate point move is a larger percentage move when it's lower and the move send to do the same, it's just higher percentage. So that creates more volatility in the, throughout the whole equity market. 

Kevin Davitt: So I take absolute, I would echo Joe's points on kind of the market here and now to your question about sort of what does higher volatility mean, or how might you distinguish that? I'd take maybe a little bit broader perspective and point out that as Joe did realized, and implied volatility levels remain higher than pre pandemic on both a short and longer term basis. Now, for those that are maybe unfamiliar realized volatility is based on historical data. So to what extent were underlying prices moving over a specific timeframe in the past, implied volatility measures are forward-looking and there we're talking about something like the VIX index. 

So the value is backed out based on an option pricing model, but in short, it's a dynamic estimate of potential future volatility. And Joe mentioned that bellwether measure for equity volatility being the VIX index. And I would contend that higher volatility markets can provide both opportunities as well as risks. And that might be obvious, but thinking about it that way helps me, the timing and flexibility elements embedded in options have become really widely embraced. I say this often, but volatility is a constant, and it's one of those words where the connotation and the denotation of the word volatility are often distinct.

And that volatility is neither inherently good nor bad those measures ebb and flow. But as Joe pointed out the uncertainty as we look forward, there's considerable unknowns, and there's tremendous information embedded in things like the Vicks, and then just rounding it out like forecasts are imperfect. But they're super useful and options can give us great insights into what the market is collectively forecasting with respect to future uncertainty, right? So I mean, if you want to make it a little more tangible, if the forecast calls for wind and rain and falling temperatures, we're talking about opening day for baseball tomorrow, right. And it's 65 and sunny. Now that might impact your planning and choices about clothing in the future. And that information alone can be super valuable.

Patrick: Yeah, I hate to run with that analogy, but I think that's why you always layer up, you know, you always wear a long sleeve shirt, maybe, you know, something to protect you either way, give you the flexibility. I don't know, maybe I ran too far with that, but Joe, I want to talk about you...

Joe: I love it.

Patrick: I want to talk to you about your expertise here a little bit. How does all of this impact a client's risk management decision?

Joe Tigay: Yeah, so we're sitting in the area, we're expecting more volatility. So we have a few choices for protection to the downside. Of course, the traditional method my advisors usually look at is a balanced blended portfolio. You have equities and you have bonds historically, that's provided production to the downside. You have bonds which give you a cushion when the equities go lower, your bond portfolio goes well, and lately that's not been providing any downside protection. It's actually adding risk. We're seeing equity risk to bonds; to rates specifically so, looking at volatility is a really attractive space for me in order to provide downside equity protection. Now, it's also kind of matured but the volatility space has matured to a point where it's a lot easier to do that for the average investor.

There are VIX futures now, people can invest in VIX futures or they can invest in funds, which do that for them like my own. And, but before there were VIX futures, it was a lot harder to get involved in impure volatility. You could buy puts in the S and P 500, in index options that would be fundamentally different than a VIX future though, because first of all, those of course expire regularly. But when you're buying volatility in sporting, since the S and P 500, what you're effectively doing is buying the difference between the implied vol and what the actual realized wall will be, okay. So you're making a bet that the realized vol will be more than the applied vol you purchased.

When you're owning VIX futures you can, you are actually just saying, okay, I expect this future to go higher because you're just buying something that has a set price, rather than depending on the actual volatility of any index. So it's more of a pure volatility play and that of course has only been around since 2006 back before 2006 if you remember all the way back then we were on blackberries instead of apples, or actually I had a flip phone. I remember very well an ESPN flip phone I was the biggest nerd, but I loved it. Anyways, the VIX futures allow us a pure play in a volatility, which moves very highly negatively correlated against the market.

And it allows advisors like myself to be aggressive when the markets lower, Kevin talked about volatility being a potential benefit. I have two portions of my portfolio, the equity portion, a volatility portion, when the market's lower; I can harvest the returns on my volatility portion. Put it back into my equities, which are now lower, which getting inside baseball and the options world that's trading long gamma, which allows me to buy low and sell high in the market.

Patrick: Very interesting, very interesting. I love that. Yeah, I, my dad promised me he was going to get me the ESPN phone if I got straight A's and yeah, I haven't seen the phone.

Joe Tigay: I wasn't worth it.

Patrick: I do want to or Kevin, did you have anything you wanted to add or?

Kevin Davitt: No, I'm just a big fan of the analogies and Joe's pointing out that correlation risk where it has been fairly strongly positive between fixed income markets and equity markets of late and historically a demonstrably negative correlation between volatility as measured by VIX or VIX futures and the equity markets. So I think that's a key thing to be mindful of.

Patrick: Okay, so I want to talk a little bit about VIX hedges and their applications making sense in a higher vol regime. Joe is it easier to time compared to index puts and then Kev you can follow up and fill in the blanks.

Joe Tigay: Well it's more purely a negative correlated asset. Of course, like I said, you don't have to worry about the implied versus realized volatility. There still is the same challenges rolling and I think it takes, in either case it takes an expert with some hands-on knowledge of the instrument. Of course, you have big futures, which move independently of the actual index. So it takes some knowledge of the seasonality of it, the timing of it. But to be able to do a daily rebalance is, which is what I do is very tricky to do with an option position. You got a very wide bid-ask spread to get it on and off is not as simple. With the VIX futures they're very liquid, very deep. It allows for a clean daily rebalance in the VIX futures world.

Patrick: Okay. Kevin, anything to add?

Joe Tigay: So I'd be careful and I think Joe did a great job of pointing out that none of this is easy, right. And so really understanding the tools and their utility and perhaps your own limitations is important here. And then as I'm inclined to often do I sort of take a step back and think about it from a broader perspective. And I would argue that hedges make sense, period, and kind of independent of the overall regime. I think the regime might inform your sizing and potentially the monetization of those hedges, which Joe hinted at already and I might elaborate on. So from a big picture standpoint, hedges are designed to lose money that's reality, but it's one that many market participants and particularly new ones are kind of low to a net.

And I understand it. We want to grow our account balances and then there's this desire to want to time the market. And I'll be vulnerable, I have been in the markets for the better part of the past 20 years, and I've never top tech sold the market or bought the bottom, right not ever. So if you have considerable money and that can vary depending on your situation in life, in the market, a shock, like a pandemic or a financial crisis from 12 years ago or 20 years ago, if you're a little bit older like Joe and me can really, really impact your bottom line. And so, protection in the event of a big move can it's a little cliché, but keep you in the game and something Joe hinted at that I would absolutely reinforce that protection can enable you to allocate capital back into equity markets when they're discounted, as opposed to being reactionary, which is a much more typical behavior when kind of the proverbial house is on fire.

So again, understanding that full cost benefit analysis and if we went back to that weather forecast ahead of baseball, like if you know that in climate weather is a distinct possibility, you plan ahead. Like if you go to Ireland or Scotland without a rain jacket that's your fault, right? So I think hedges just makes sense, period, or to the reds opening day. You better dress up.

Patrick: The analogies are flying fast and furious today. And I really do like what Joe said about the reallocating that articulated a lot for me. 

Joe Tigay: Yeah, like maybe if I can clean up better on that the bases are loaded here. We, we're talking about how this hedge is considered to be an insurance and most people are accepting that insurance will cost money. And again, I'm going back to the implied versus realized trade here, if the implied, or if you buy something implied [unclear 20:41] realize it's more than the implied, it actually will be profitable. And the way that options are priced is that there's a potential, or a move every single day. So you have a passive trade, you're more likely to have a big drag and having that insurance costs you money.

If you're a passive hedge, if you have an active hedge where you're trading daily, your chances for profit and making that insurance cost money, it costs less money or even be profitable are much greater. So that's why I think it's very important to consider this active trade where we're expecting, we're not expecting the VIX make money over time because we can hold it just like equities. We do expect equities to make money over time, but we expect the VIX to go higher and come back down lower and then revert to the mean. That's why you need to be active on it; you need to be adding when it drops. You need to be selling it when it goes up.

Patrick: Very sound advice. I want to kind of take a page out of Kevin's book here and take a step back. As of right now, I just had it pulled up, let me see here. VIX is sitting at 19.21, so that's a pretty low level right now. So wouldn't that indicate a sense or return to quote unquote normal levels? I know Joe, you talked about a new normal would you want to explain that a little bit?

Joe Tigay: Yeah. So the VIX has been trending lower for some time. It took a while to crack that 20 mark. There's nothing magical about it, but it seems stubborn to want to fall below there. And we're still trending lower now, but as we are low, we still are having these mini blips back above 20, 22, 23. So I expect more of that to happen because there's still more shaking out of the economy that needs to happen. We have, you know, the growth names, which are at a tremendous year for the past 12 months, we're still catching up to them in value so, while that shakes out, we're going to have a little bit of under some uncertainty there. And at the end of the day we have more uncertainty than normal right now. And the essence of volatility is uncertainty. We don't know what's going to happen, you know, a week ago. I, you know, I would not have predicted that a ship blocking the Suez canal is going to cause like a big impact in you know, global trade. And I would not have predicted a pandemic, you know, 14 months ago either. So there's just a lot of unknowns and right now, given the state of the economy where we expect it to be really good, it's not good yet. That's just, we're sitting in a spot where it's, there's a lot of unknowns.

Patrick: Kevin. 

Kevin Davitt: I echo most of what Joe had to say, I guess the deep only, or reinforce that it does seem like we're returning to some version of normal. In my opinion, that'll likely be characterized by a slightly higher baseline, which again is echoing what Joe had to say for volatility measures we'll likely continue to see spats of what I characterize idiosyncratic volatility, whether it's Suez Canal or whatever. The next one that happens to be just like you see in kind of any pre 2020 market, we remembered these huge, huge moves, but in the interim, there's a whole bunch of kind of noisy volatility moves. And then sort of pointing out one, the VIX index is back around 19 as of today, but the VIX index is not tradable. It's an index, it measures and then the VIX futures, which Joe spoke about already and manages those days to day are on average, or they remain high relative to kind of a more normal VIX around 19 market. So, that's indicative of S and P 500 index options pricing in that potential for greater future swings, up and down is worth pointing out the volatility is not directional. And so understanding that or having a better understanding of that entire ecosystem, I think can be very beneficial.

Patrick: Well said, well said I think we're going to, about to wrap up here. I want to close with one broader question about sentiment, Kevin, you can take this and then Joe can bring it home, but regarding the market sentiment, what, is really spooking investors and what can participants expect broadly from volatility for the rest of 2021?

Kevin Davitt: It's a great question. It's one that I think legitimately millions and millions of people are asking themselves in the wake of the past year, the woulda-coulda-shouldas. So from my perspective, and again, this is just my opinion. It seems like inflation and that relationship to interest rates in the US and globally will continue to be a fairly paramount concern. I'd point out that there is a relationship or that that fixed income markets and that equity markets are kind of competing for a finite pool of capital. And so at what point, or is there an inflection point between interest rates, whether the ten-year moves through 2%, does that, incentivize people to move more capital into bonds? I don't know the answer to that, but I think it's one that concerns a number of investors, or maybe on a, like on a really basic level. 

We've seen the prices for things like, food and energy move markedly higher in the past couple of months. Now, from an inflation standpoint, those are stripped out of your core CPI calculations that the fed points to. But they impact your pocket book, my pocket book, Joe's pocket book. At what point does that become a meaningful drag on potential spending, which is what drives the economy forward, consumer spending. Maybe well behind that would be moves in housing like if that becomes a stretch for too many people. And then the one last, I think very legitimate one, which we skirted around the issue would be valuation. So Joe pointed out that looking ahead, we're expecting a recovery. And part of that would be much stronger earnings in the next year. Otherwise, the broad market PE ratio would be unusually high. And if that has to meet somewhere in between, what that might mean in terms of a draw down, I think is an interesting one. What about you, Joe? What do you think about my worries? 

Joe Tigay: Yeah. I think that's pretty true. There and the way that I always think about it also is that there's always a list of worries though. Just like you said, and they're always pressing, they always feel really important. We're always really excited about the next jobs; we're always really excited about the next FLMC meeting. And at the end of the day, my view doesn't usually change. I think if you have a long-term view, I think the market will be higher, [unclear 28:08] five to 10 year horizon but while the market's going higher. I'm pretty confident periodically almost once a year, there's going to be a big volatility of that. So my view is I always want to be in the market and I always want to have a hedge now, right now going back to what's currently on my mind is that and this is just like a lot of other people I'm talking to, is that they're worried on the market might go up 30% this year and there'll be in cash. That's one worry, they don't, and that’s just as bad as being down for some people. And then you also have [unclear 28:42] worried that there's really high D ratios is always things that we're always worried about and the market's about to crash. So, all things are possible and that's why for me being invested in the market with a hedge is my favorite way to invest and that is why I can sleep easy. 

Patrick: Very well said.

Kevin Davitt:  You're talking about the proactive versus reactive if you're able to manage both of those things well put. 

Patrick: Very well said, very well said. Joe, Kevin, I hate to finish with one more analogy, but, and it’s the easy one, but you guys hit it out of the park. I can't thank you enough for coming on and you know, Kevin; you're returning guests, so thank you again. And Joe, hopefully you can come back.

Joe Tigay: Alright. 

Kevin Davitt: You put it on the team Patrick. These are 70 mile an hour fastballs. Even some guy on the Reds could hit that out of the park.

Patrick: Yeah, there we go. We can log off right now. Alright, cheers guys.

On the latest episode of the Schaeffer's Market Mashup podcast, Patrick is joined by Christopher Uhl to talk about his 10-Minute Trading podcast. Chris chats with Patrick about what led to starting 10-Minute Trading (12:13), the new tracking metric he's found success with (17:40), and how to use investment social media effectively (22:10).

Transcript of Schaeffer's Market Mashup Podcast: April 30, 2021

Patrick: Ladies and Gentlemen, welcome back to the Schaeffer's Market Mashup. This is your ever dutiful host Patrick Martin coming to you. Unfortunately, not from a South Carolina beach anymore, but the suburbs of Westchester Ohio. I am very excited to introduce this week's guest, Christopher Uhl CMA. He's a two time, top 100 person in finance and the host of the 10 minutes stock trader Chris, how are you now?

Christopher Uhl: Hey, thanks for having me Patrick, looking forward to chatting with you today.

Patrick: Great and I take it you're in the Dallas Fort Worth area. How's that right now?

Christopher Uhl: Yes, yeah. That's great I mean, everyone's moving here. I mean, if you haven't heard every company is up and moving to Texas, so if you're not here yet, you will be at some point.

Patrick: I have one friend who was moving to North Texas, but besides that, I'm afraid to say I've only been in Austin briefly, so I'm a little behind the eight ball, right?

Christopher Uhl: No, that's okay. There's two types of Texans there's people who liked Austin and people who don't and I'm in the don't camp.

Patrick: Interesting.

Christopher: Yeah, it's funny, I've lived in Texas my whole life and every time I go to Austin, I just shutter because it's just a terribly laid out city. Traffic is miserable, the people are terrible. It's just not where I want to be but on the other side there are people who would like fight me and say, no, Austin is the best place in Texas. So, I guess there are two kinds of people, some that like them and some that don't.

Patrick: That kind of sounds like almost, you know coming from a native that just jumped the shark essentially. Almost a little bit like a Nashville where it's over touristy. Is that, am I right?

Christopher Uhl: Probably so, yeah, I mean the last time I went there, it was for a formula one race and, the racetrack is amazing, but you know, getting around Austin, you know, going to hotels, going up and down sixth street doing the whole Austin thing, you know, this is pre pandemic. It's just not my scene I am, I, yeah, like I said, it was just not my scene, you know, it's right for some people it's right for Elon Musk, it's right for Joe Rogan, but it's not right for me.

Patrick: So, let's jump right in. I looked on your website; you are very candid about your investing mistakes. You don't even, shouldn't really call them mistakes, lessons, I guess. Do you want to walk through some of the highlights of what got you to where you are now?

Christopher Uhl: Oh yeah, absolutely. So, you know, I've early on in my career, I decided that whenever I had a mistake or a lesson, I considered it, my Wall Street tuition. So, five figure Wall Street could have been worse, I suppose. But you know, if you think of like a doctor or a lawyer or any sort of professional who jumps into their profession, their career. They can't do it overnight, but yet the trading industry is full of people who say, take this course, do this lesson, follow these three simple patterns or whatever. And you'll be an instant millionaire. It's just not true. And the reason I'm so Frank about it is because I don't think there's enough people who are right.

And I think that that's why I've gotten the audience and the recognition that I have is that I'm there to be vulnerable. So other people don't make the same mistakes I did. I mean, Patrick, I blew up my account the first time, 60 days with an opening. Like the stat is 90% of traders blow out 90% of account in the first 90 days of trading. I beat it, 60 days. The way I did it was I was overconfident and taking way more risk than I ever should have. But at the same time, I learned a lot from it.

And the big take away from that point, when I lost the account, the first time I was trading against trends, I had no idea what I was doing. Like I said, but I also, wasn't going to give up. And I remember driving up the Dallas north toll way with my wife, since we're going to be specific here. She was driving, which is a very unusual circumstance, but she was driving. I looked over and I was like, Jennifer, I got to tell you something

She was like, what? And I was like; you know I started trading a few months ago or a few weeks ago, really? She's like, yeah. I was like; things haven't gone so well, she's like, what do you mean? I'm like; I lost a lot of money. And she was like, how much? And I was like, like two thirds of the account. And she's like, you know, what do you mean.

Patrick: Brake slam.

Christopher Uhl: Yeah. I'm like well, I learned a lot and she's like, okay, Chris, don't even think about trading again. Can't you learn to trade with fake money? And Patrick, the light went on in my head and I'm like, oh, paper trading. That's a great idea. A great idea on how to learn to trade so I did that, and I did that for, several months to the point where I felt really confident again. And, then gold was tanking.

I don't remember what year this was. In the 2015 ballpark gold was tanking like hitting, you know, recent decade lows. And I'm thinking to myself, this has got to be the bottom. Several people on the Twitters that I followed were all saying, this has got to be the bottom. So, I'm like, let's go long, long gold, long silver, long GDX, long GDX J, long every possible thing with metals. And it kept going down and it kept going down. And Patrick, I don't know if you know this, but it kept going down after that. And again, I was staying at a loss because I refunded the account, got the things back up and running. I was staring at a loss that was about two thirds of my account again. And I'm like son of a, B this, okay. I am doing something wrong.

And the way that I learned to trade I feel is not conducive to most traders. So, I learned a trade with like selling like naked calls, naked puts, you know, taking much higher leverage for a much smaller return, right? Like let's say taking 10 units of leverage for one unit return. And if you lose on that one trade, you know, you lose 10 units. And then you got to start all over again and now you're, you know, you have to get 10 perfects in a row to get back to even. And I was like, this suck, this is not right. I mean, there may be a high probability set up with this, but I am like on the opposite end of the curve. Like how is it like how am I getting all these wrong, right? So, then I started thinking, okay, there's got to be a better way.

So, I started a podcast, which is approaching nearly 2 million downloads now it's called How to Trade Stocks and Options podcast. And in the process, I have talked to some of the brightest traders in the world and it's completely transformed my trading. And at the end of the day, the best piece of advice that I can give to somebody is number one, buy low, sell high is the quickest way to the poor house, that's not how trading works. Patrick, if you bought something at $10, hey, it's a pretty crappy stock because it's already at $10 b, you bought it because it was on sale, right? Like at the grocery store, it's on sale. I'm going to get a great deal on it. But Patrick, not only was it not on you know, it was on sale today, but it's going to be on sale tomorrow, but for like a bigger discount.

And the day after that, and the day after that, and it's the opposite of the grocery store, getting things on sale mentality. When you're using financial products, you've got to buy them when they're going up, because the market is going up because people are buying the stock, people want to be there. If you're buying something that everyone wants to get out of it, I mean, in the simplest form, you could think of it like with GameStop, when it was hitting its all-time high and then Robin Hood locked it down and said, the only thing you can do is sell. There was no physical possibility in this world that it could continue to go up, it could only go down. So, if everyone is selling, everyone's getting out of the stock and you've seen your stock drop from 20 when you liked it, 10, you must really love it.

5 men, that's the blow out deal of the century. Who's to say, it's not going to go to one or zero, but let's say your stock that you used to love at 20 it's now gone up to 30 and everybody's getting into it. You see a higher volume rally. It's above every moving average you've ever seen, you've back tested it with all of your data that you have access to. And you can see, hey, you know what? As long as it's above its 10-day, exponential, moving average, something like that. For example, it has shown a historical win rate of like 120% over the last two years or something like that.

This is the kind of thoughts that go through my head. It's like; the last thing I want is something on sale. I want something as expensive as possible because I know other people are trying to get into it. So, buy low, sell high, throw that in the garbage can, you want to buy high and sell higher? Every trading book written by a real trader will tell you exactly that Jesse Livermore, Martin Minnervini, Steve Burns, you name it. They all said the exact same thing, buy high, sell higher.

Patrick: Yeah. It makes sense from a standpoint of, if this is something you're going to own, don't you want it to look good for everybody?

Christopher Uhl: I don't care what everybody thinks about it. I really don't what I care about is if I'm buying it at 30 and it goes up to 35, right? And the way that I really think of it, I mean, I have a, you could call it like a five-step system, right? one of the steps in the system is to use back just the train lines, right? And some people call it, support, some people draw shapes on charts I can't do that. I am very much a data analytical person. So, if I can go in and I use Tran’s finder for all my back testing, it's really cool. You can click a stock. You can say, you know, tell me the back-tested results every time it's above the five X finished, moving average and, exit every time it's below the five X finished, moving average, and you can see what those results are. Try it with the 10, try with 15, try with the 20.

Patrick: 60.

Christopher Uhl: Basically, you can get in anywhere while it's going up the stairs right. But you've got to know when you're going to get out. Because I mean, if it's going to go from 30 to a 100, you could get in at 35 or 50 or 70, as long as you understand that you've got $1 or $2 at risk or something like that. So, I am not at all a long-term holder. I'm not a 10-minute holder; I know that's a misnomer. We can talk about that in a minute, but I want to be in and out of something with the weakest hands possible. If it's going up, I'm there. But as soon as it turns around, you're going to have it back I don't want this. It's like hot potato.

Patrick: It's not a fast paced it's a reactive pace. I feel like the old John Wooden phrase be quick, but don't hurry. And so, I, you did mention the 10-minute trading thing. Was that something, when you were founding this company, is that something you were cognizant of or did it kind of come along later on?

Christopher Uhl: So let me tell you how it came about. So, I was working in corporate finance, went through the whole corporate finance track. And I really, I love, I'll tell you the whole story it's one of my favorite things. So, I was working in corporate finance, and I overheard two people in the office talking about, you know, if you really feel so strongly that Deutsche bank is going to go down, why don't you go out and buy putts? And people who have listened to my podcast would know I've told this story a hundred times, but I just, I love it because like immediately a light bulb went off in my head and I'm like, wait a minute. I've heard of putts. I know about this, hang on a second. And so, I'm Googling it right? And it's like; putt rises in value as the stock price goes down.

And I'm like, well, this is cool. Okay, so you can make money when stocks go down. I didn't even realize that because I hadn't really traded right. I just did, you know, corporate finance accounting type stuff. And then I was one of those nerds who kept all my textbooks and I turned around behind me and I pulled out my finance textbook and threw it on the table. You know, that's one of those 900-page textbooks where you drop it and the whole earth kind of shakes a little bit, right.

Patrick: It's wider than it is tall.

Christopher Uhl: Yeah. And, it had two tabs on all 900 pages. One of the tabs was for bonds because bonds, you know, they're wacky in the way that they do pricing with the yields going up and the price going down, et cetera. But the other tab was for options.

And I'm like, how did Chris from 10 years ago know to put this in there. So, I flipped to this page and I'm reading all about the options. Keep in mind, I'm still sitting at my desk and I'm like, this is kind of cool. All right, let me check this out. So, I was Googling around, and I found several websites that teach how to trade options. And like I said, the majority is basically just sell, sell putts. Sell costs, it doesn't matter, you've got a 30% probability of profit at a 70 Delta, and you know, 30 Delta or whatever, all day, every day, you don't have to worry about trends, trends don't exist. The market is efficient, all this other stuff that as an actual trader, I don't believe in anymore. And then, I needed to fund my first account and I can't remember where the account, I feel like it was, like a Schwab knockoff.

Like it was Options express by Charles Schwab and it was awful. The worst platform I could have ever wanted to learn on, but it was the first one I found. And so, I was like, okay, they need $5,000 to open the account and I, was like, where am I going to get $5,000? I'm looking around and I'm like, I've got this old 401k that I've literally done nothing with ever. It was at a previous job I never contributed to it. And it was just sitting and I'm like, let's cash it out. So, I cash it out, I get the check, and I remember walking into my kitchen, opening the envelope, pulling out the check and I kid you not Patrick that check. I needed $5,000 to open that account.

Patrick: 18 cents more. It's 18 cents more.

Christopher Uhl: $5000 and 15 cents. And I'm like, whoa, is this not a sign from God or what? Like, I am on the right track here. Which of course, like I said earlier, I proceeded to blow the next two months, but it was the lesson learned. But you know my trading these days, I really just, I go with the trend. I still like to sell spreads, right. But I'm not selling anything naked. I'm not selling anything just Willy nilly. Like if a stock is going up, you better damn believe I am not selling calls against that, but I'll sell putts, I'll sell putts spreads you know put spread, why not, as long as it's blowing back just a trend line, you've got a helacious, probability of profit right there. But I'll also do what some people call a stock replacement, which is buying deep in the money call paying little extrinsic value for it.

And you're really getting a huge amount of leverage there. You get five to eight X leverage, versus just buying a stock outright. So, if I hadn't started a podcast and if I hadn't learned my Wall Street tuition, I probably would've continued to make the same mistakes over and over. And that's just assuming that, hey, the market's efficient, which probably goes against, you know, half your audience, what they think and B that you can, you know, a 30 Delta call has just as much probability of a winning as the 30 Delta putt, right? And early on my media career, I wrote articles for a few different websites. And I was like, hey, do you like oil? You could sell a call, or you could sell a put either way. You're going to have a 70% probability of making money on it. And now looking back at it, I'm like, I was really ignorant then, like good intentions, but not wisdom enough to talk about that.

Patrick: It's the first stuff you write you always look back on and say like, why did I say that? We touched on it briefly, but for the summer of 2021, what macro trends do you see on the horizon? And then any options strategies that could be heavily utilized this summer.

Christopher Uhl: And for me, that's not the greatest of questions or topics. I only say that not as a criticism to you, but because, like this week I'm long financials. Like I'm in discover financial fifth, third bank, Charles Schwab and I also [unclear 00:17:44] some oil, but I could be out of all of that by the end of the day. Like if all that turned around, you know, by the end of the day I could be back out and I don't keep a long-term focus. I keep it very, very short-term focus. But here's something that your audience could do that they may find useful. I've got it built into a spreadsheet. So, I don't have to actually do anything, but like take, for example, the sectors. So, like Excel E, Excel F, things like that takes the relative strengths.

So just basic RSI, take RSI and then divide it by the S and P five hundred RSI. By doing that, you're going to get a relative strength across the market. So, you can say, let's say, I don't know let's say Excel E energy has a 30% on your relative strength calculation there. And in financials, Excel F has a 50% relative strength in your calculation; their financials are a better buy. And then you can just go into that sector and find what works best for you. But that's how I narrow my focus. You're literally doing that very simple calculation and saying, if this is the best sector in the market, that's where I want to be.

That's how I cut the whole move in oil earlier this year. Like my account went up like 75% and I thought it was like king of the universe, right? Because it's like, I caught all of these moves, I caught every single stock, I caught oil and all the, you know, Exxon Chevron's whatever’s. And it was literally because I had taken that calculation and saw, oh, geez, Excel E is performing really well against everything else in the market. Let me go investigate those, got long those booms.

Patrick: You picked out the one.

Christopher Uhl: It's a really simple metric. I have not seen anyone ever talk about that. But when I discovered that I was like, this is a big deal. Like this actually seems to work, no it doesn't work every time, but it does give you some insight into where the money is going, right. Cause then you can, it's an apples-to-apples comparison versus anything else that's, you know, an apples to oranges comparison.

Patrick: Well, I also think that relative strength is something that a new retail trader can easily grasp. It’s a concept I think that is a lot more digestible than some of the other stuff that's out there.

Christopher Uhl: And it'll make a lot more sense when the S and P 500 is not hitting all-time highs every day. And then you've got, more opportunities in different sectors, right? Cause like when the S and P 500 is, let's say it's coasting at a 70 or 75 RSI, not everything is up there. So not everything is showing like a greater than one value, but let's say the S and P is down at like 60, 50, 40. And then you see something that peaks really strong. Like, let's say at that point in industrials, XLA has RSI of like 60 versus the S and P of 40 that's one and a half times as much, but that's where the money is going right now.

You should be out the industrials. So that's an easy, easy apples to apples comparison that somebody could make, and this is, I mean, I just discovered that this year, and as soon as I discovered it, it was like a game changer in my returns. And so, I'm telling everybody, I can, like, this is a very simple metric that you can easily calculate in five seconds, and you can use that and, you know, just do it on the 11 sectors. You know, how long would that take you a day, 30 seconds if you've got a spreadsheet or something like that?

Patrick: Not even that, especially with some of the tools that, I know people are gaining access to. Yeah, I really liked that it's kind of an opening salvo. And then you kind of dig deeper from there and you pick out which ones, you want. yeah.

Christopher Uhl: It'll get you on the right playing field, right. Instead of trying to play basketball and football and baseball and all the other racket balls and, you know, lacrosse balls and things like that, you can just go straight to, oh, everybody's playing football I need to go play that.

Patrick: I like that. I like that a lot. I want to pivot just for a little bit here. You see, you are very active on social media. And I've had a couple of other guests that I wanted to pose this question to them. How do you parse out, filter out the trustworthy information you see out there when it comes to investing? There is so much risk, I think of information overload, analysis paralysis, or just straight up bad faith advice that you see on Twitter, on Stock Twits. What's your kind of filtration system that you use to look through that kind of stuff?

Christopher Uhl: You know, I think Jesse Livermore even said it way back in the reminiscences of a stock operator, but you have to do your own research for yourself. You can't rely on somebody. And like I said earlier, right? I'm in discover financial, it's been busting, it's up 12% this week. My stock replacement strategy in the money deep calls, they're like 90% over the week everything's going awesome. But if I told you that today, Patrick, and you went out and bought it today and it went down tomorrow, you would say this Chris guy has no idea what he's talking about.

Patrick: Exactly.

Christopher Uhl: So, I would tell somebody, because I fell under this a long time ago of following what I guess you could say, like Twitter gurus were saying, and you're not going to find me out there putting trade recommendations. I mean, you can go through my feed. You ain't going to find one. Because my trading is not you’re trading. And I can't tell you how much to trade. I can't tell you when to get in. I can't tell you when to get out. And if I, I mean, I keep a journal of all my trades, but there's lots of great people you can learn from like Martin Minnervini, he's fantastic. I just had him on my podcast couple of weeks ago, you can learn a lot from Brian Shannon. The guy's a trend spider they're fantastic. But you've got to make your own decisions, like literally your own decisions.

Patrick: Yeah. I think you also have to put in your own sweat equity where if you do see a piece of advice, not necessarily a recommendation, because you're right. Anytime I see something like that on Twitter, I am incredibly leery of that. But even if you see like advice or just thoughts, or just, you know, ruminations, you kind of have to run it. You put in the work and look at this through your own lens. I'll give you a very simple, basic example that I saw. I saw on some Twitter, and it was some random account with, you know, 6,000 followers or so it got retweeted. It got picked up by some big thing, and he listed all the big names that he's watching for 2021, and then looked like a little brief blurb about it. And the person called this company, the Chinese Tesla, and it takes two seconds of research to look and say, their headquarters is in Arizona. And you had all these people being like, wow; love this pick it's great. It's like, guys, you have to do your own research. You can find a couple people, like you said. And I think it's very important that you latch on to a couple people that you trust, but you have to put your own sweat equity in there.

Christopher Uhl: I agree, but when you put your own sweat, sweat equity in B, be humble enough to say when you're wrong.

Patrick: Yes.

Christopher Uhl: Right. Because you may, I have been guilty of this and I've heard of a lot of other people who have been guilty of this, that they will analyze the trade to death. And they were like, all right, I'm ready to go long apple. And it's the day apple goes down, but they'll never get out because they're like, I did all the research. This should be going up. Should, should never be in your vocabulary either is going up and you're riding the trend or it's going down and you're planning your exit.

Patrick: Right. I mean, that's a very good point.

Christopher Uhl: Very simple trend trader at the end of the day. Now I get lots of different ideas from different places. But if the only thing that matters is price going up or price going down if you're going short, but I don't ever go short I just go long. It's not, I mean, if you're going to go short, hey, you got to have a market working for you, which doesn't happen all that often. And B you've got to be very precise because the largest bull rallies ever happened in bear markets. And if you get in on the wrong side of that, your toast.

Patrick: Very well said, very well said. Well, we're nearing our time limit here. So, I want to wrap up, I always like to end the episodes with giving you the floor to plug what you guys are working on. So, tell me about 10 minute’s stock trader.com. What do you guys have coming up for the next couple of weeks?

Christopher Uhl: For sure? I would definitely encourage everyone to go check out the podcasts that we put on its called How to Trade Stocks and Options podcast. It's on every podcast platform on YouTube we're getting this close to 2 million downloads now. And it's about 500 episodes, it's you know, a labor of love. I've been working with a FinTech firm called, Fin club, Fin club.ai, and they provide artificial intelligence stock picks. And originally when they first contacted me, they're like, hey, we've got this cool service. And I'm like yeah right sure and then I tried it and I was like; this is pretty cool. And it works really, really well. I am an investor in it myself after that point. And we created a course, and, in that course, you actually get a month of their software for free when you take the course. So, you'll learn how to trade, and you learn how to trade with AI and to get 30 days of free AI stock picks, whenever you do that. And the way to get there is through AI stock trading system.com.

Patrick: Great, great. I saw that on your site, and I was hoping I was going to get a chance to hear about that it piqued my interest.

Christopher Uhl: I didn't get a chance to go into it but maybe we can make that a second episode because the first time that I used it, I was on vacation in the shower and I made a trade in the shower and I got out of the shower and I'm like, oh wow, this works that was really cool. Alright, let's go out to lunch.

Patrick: You step out with an epiphany. I bet you it's the best tasting lunch you've had in a while.

Christopher Uhl: Exactly, yeah. So, I'm a huge, huge, huge advocate of that. And I factor that into my trading, right? If they, the simplest of terms, they give you picks, they say, you know, stock a is going to this price by this timeframe. And here's a stop loss in case it doesn't. And then they also give you like a red, yellow, orange, and a green light on each day. And I took that and it's like gospel, ii it's a green day I'm looking to go along with everything. If it's a red day, I close my computer I'm out. So, I mean, it's a really amazing program and I definitely encourage people to check it out. AI stock trading system.com, absolutely.

Patrick: Absolutely, check it out. And then of course, 10 minutes stock trader.com. Christopher Uhl from Cincinnati to Dallas, just like Andy Dalton. I appreciate you coming on. Yeah, part two it's got to happen. So, we'd love to hear from you again in future take care, Chris.

On the latest episode of the Schaeffer's Market Mashup podcast, entrepreneur extraordinaire, Leigh Drogen, founder and CEO of Estimize Inc, stops by the pod for a wide-ranging chat. Leigh and Patrick chart the origins and inspirations behind Estimize, what so many get wrong about earnings trends (6:30), Bitcoin (11:45), Cathie Wood (17:24), and much more!

Transcript of Schaeffer's Market Mashup Podcast: April 13, 2021

Patrick: Ladies and gentlemen, welcome back to the Schaeffer's Market Mashup. Thank you for being patient with me as I battled Cincinnati's highest pollen count in 30 years. But hey, I'm better, I'm here, I'm through it. So, let's get right to it. Please welcome entrepreneur extraordinary Leigh Drogen, Lee, what is happening?

Leigh Drogen: Awesome. Thanks for having me, Patrick.

Patrick: Well, when he's not tweeting about hockey, Lee is the founder and CEO of Estimize, Inc. I see as a fear driven FinTech platform, designed to collect data for earnings analysis and market trends, but I guess we can jump right in, and you can go with how you got started with Estimize. I know you had some Stock twits, experience prior to that, but walk me through your thought process behind Estimize and, you know, I took a look around the site I joined it's very expansive, very community driven. So, just unpack that for me to start.

Leigh Drogen: Yeah. So, my background is originally from, the systematic equity quant trading kind of, you know, piece of the ecosystem. And one of the strategies that, we ran at the first shop that I worked at as an analyst and then a PM was based around the inefficiency of those sell-side analysts’ estimates. Namely, the Thomson Reuters Ibis dataset. And what we were doing was we were basically attempting to better understand what was actually baked into the market, by the time the company reported and then look at what the real surprise was. Instead of, you know, instead of just going off of the sell side number, which we all know is kind of biased and skewed and they sandbag the numbers.

And especially when you get a high growth technology company that reports, you know, they guide, they sandbag the guidance and then the cell site sandbags their estimates with the guidance, and then they beat by, you know, 5% on the revenue. But yet the stock is down well that's because, you know, the buy-side really thought it was going to be 8% on the revenue, or whatever. So, you know, we took advantage of that and made a lot of money off of it. And fast forward a couple of years, I, yeah, I was part of the first team at Stock Twits there in the first two years after Howard founded the company. And what we started to see, even on Stock Twits was the community make estimates on the stream for, you know, what is Apple's iPhone number going to be?

And, you know, what are the earnings going to be? Basically, you know, the story goes that I wanted to build Estimize at Stock Twits. And I asked Howard, several times if I could have, you know, the group of engineers to go do it. And Howard did kind of the best thing I can never ask for anybody to do, you know, that works for you is, he basically, after the third time came to me and said, Leigh, I'm firing you, I'm accelerating your options. Here's some severance and here are a couple of investors that I'm going to introduce you to who are going to invest in your company to build this product, because it's a good idea. It's just not going to happen here. And we went off and, we built it and we launched it in January of 2012 and it worked. And so, it's been a lot of fun since then.

Patrick: Probably the best summers package in the history of FinTech, maybe.

Leigh Drogen: I'm sure there are a couple of really good ones these days in crypto and some other stuff, but some are doing the right thing for your employee perspective, Howard, is quite a mech, yeah.

Patrick: That's great. And you really touched on, I think a problem that's prevalent in the community where I can't tell you how many times, first of all, I'm on the writing side of everything. When I'm instructing and teaching, my employees and they write and say like, I don't understand it was you know, top line beat. Why is the stock down, or why is the stock up after it whiffed on estimates? I think there really is a knowledge gap there that, you guys are doing great work and narrowing.

Leigh Drogen: Yeah. So, the whole point of Estimize was to, from an academic perspective, basically build the collection of these estimates in the way that you would, if you were starting from scratch with a new system. And there are, you know, a set of different wisdom of crowds, principles that you want to build into a system like this. And they're basically; you want a broad, diverse set of contributors. You don't want them to be hearding together. So, you don't want them to see each other's estimates before they make their own. You want them to have the correct incentive to provide aggressive estimates and not just be safe with their estimates. And, you know, we did that from the very beginning. And so, we've been successful at basically we've got 110,000 contributors to the platform now, we cover basically, all the liquidly traded Russell 3000 names.

And, the experiment worked in that, it ended up being both more accurate on a consensus level about 70% of the time relative to the IVUS data. But I think more importantly, and this is really what we were attempting to achieve from the beginning was it ends up that the data set is more representative of the true expectation of the market. When you go to judge it for how does the market actually behave relative to the data? So, we look at a couple of different timeframes as market tests. When we say that, one of them is the kind of the pre-earnings period where you get these trends in the consensus numbers, and how does the stock move relative to those trends? And then, the second one is really the post earnings period. So, the company surprises, well, did it really surprise in whatever direction you think, that we find that there's more alpha in that post earnings period by kind of benchmarking it against the Estimize data than the wall street data.

Patrick: Yeah, that's very well said. So, for our retail trading audience, how does, like, what did you guys learn when reading the tea leaves on these earning trends? And can you walk me through kind of like the guidelines of, that someone should use when trying to read and unpack these earnings trends?

Leigh Drogen: Yeah, absolutely. So, there are two ways to think about, playing around earnings. One of them is kind of a more discretionary, you know, I really like this stock. It's a holding of mine, but I want to understand if I should get heavier or lighter in the name, or I want to understand if it's, you know, a major risk to me. If I have a really high position, really heavy position in either direction going into the announcement. The other way to think about it is from a purely kind of quantitative perspective, which is, is there alpha to be picked up by short-term trading in a lot of different names throughout the quarter to capture some arbitrage. Our business, we have an internal quantitative research team and what we do for our clients, which are mostly large systematic hedge funds and asset management firms is we build those systematic models that kind of do the latter. But on the front end of the platform for all of our contributors and our, you know, kind of subscribers on the front end.

So, you can subscribe to the dataset, to the platform to see all the data without having to contribute as you normally would. We try and give them kind of guidelines, regarding using the data for really discretionary purposes and the way that we view it is this, there's a screener on the platform. And that allows you to basically look at all the different relationships in the data. And so, in the pre-earnings period, what we find is that when there's a really big Delta between the Wall Street consensus and the Estimize consensus, so Estimize is way above the street, kind of in those two weeks before the announcement. We find the stock tends to drift in the direction of that Delta up to the announcement day. So, you want to log the names that have these big, positive deltas between wall street and Estimize, but what's really interesting is that in the through earnings period where you really taking the earnings risk, where there's a lot of vols. We find that the strategy is actually the exact opposite.

So, when Estimize is way above street going into earnings, it's likely that the stock has already surged into the report. And it's harder for the company to hop over that kind of expectations threshold. And thus, we find that between T minus one day before the announcement and T plus 20, there's negative residual return in that period. So those are your names where there are disappointments, the stock will underperform. And if you're really heavy in those names, you may want to lighten up if the stock is surge and the Estimize consensus is way above the Wall Street numbers. And then in the post earnings period, if you're thinking about getting into a position, let's say after the company reports. Let's say the morning after what we find is that if it surprised significantly that there is positive drift in the three days after the report.

And so, you want to get into that stock right away at the open, because there's alpha to be captured there or you want to get heavier in your position. If the stock surprised negatively, like really, really negatively, there's a lot of negative drift in that first day, but what's really interesting is that let's say, it's a deep value name and you've been wanting to get into the position for a while. And let's say the company has a big disappointment and you really want to get in. You don't want to get in right at the open there, you want to wait one day and then enter the trade. Because what we find is that after that first day, for those names, that really disappointed heavily that there's this big positive drift over the next 20, because what happens is institutional traders come in, they scoop those names up kind of baby out with the bath water kinds of things. And there are a lot of alphas there over the next 20 days. So, the platform using the screener can kind of allow you to find these situations, match them up to your watch list, or, you know your portfolio and alert you when there's a potential to make those trades.

Patrick: Yeah, it seems so simple when you think about it like that, as far as identifying the entry points and figuring out when something's already baked in, it feels like something that should have been a foundational piece to an investing strategy, you know, 30 years ago and it's only just now becoming prevalent.

Leigh Drogen: From a discretionary perspective yeah. Now, from a quantitative perspective, it's been about, yeah, about 30 years since they've been doing kind of this type of stuff from a systematic perspective.

Patrick: That's fascinating. I want to pivot a little bit just to some broader topics. I know we exchanged some emails about, you know, the crypto space and it's, I've had conversations with people on these podcasts before, and I always want to come at it from a slightly fresher angle because you see all these news cycles and it's all the recycled content. What is something out there that's being overlooked? Whether it be an angle, a worry or a trend. You just tweeted a couple of things about it earlier about the bank. You can just start from there and we can....

Leigh Drogen: Yeah. So, the Coin base is going to come public here this week. It's going to be a seminal moment for the space, but what I'm really interested in are basically, two things that are going on associated with Coin base, but not for the sake of trading Coin base. You know, we're at the very beginning kind of, of the crypto space. If you think about the fact that Coin base is basically a bucket shop. And I say that, without malice, right? Like I don't say it in a pejorative sense, but like technically Coin base is a bucket shop and, thus it can charge really high fees. And so, you know, they're taking an average of 50 bibs in, fees off of every trade. And that's incredibly high when you think about modern brokerage for assets, right? Like maybe if you're talking about like, institutional bond sales or something like that, but, you know, still it's, it's egregious and it's going to come down.

And so, I think when you look at Coin base’s valuation something around a hundred billion dollars, you know, relative to Binance. And more importantly, I think, relative to what we call these Dexis, the distributed exchanges like Uniswap. I think those distributed exchanges are likely very undervalued relative to Coin base and today, you know, Uniswap some 24% and I think you're going to see this major run in these distributed exchanges as people realize that they're knocking at the door of Coin base in terms of the fees. And you basically can invest in the whole value of those through their coins. So, I think that's a really interesting place, you know, to be putting money right now. I think there's also for me, a lot of interest in the Defi space at large, because you know, the crypto space and it's again very, very, very early, but we've basically just written a new banking system from scratch.

And, if you kind of think about what's going on from a fundamental perspective, you can now be the bank, right by lending money in the form of crypto by staking it, you know, so that people can take out loans and we don't need a middleman. And you're the one that can get that yield now and all of these kinds of Defi protocols give you the ability to invest in, people becoming banks. And I think that's a really interesting concept long-term, what I want to, if I didn't know anything about it, and I'm still new, you know, for a lot of this really, really difficult to figure out which project and which one's going to be, which. There's something called the Defi pulse index, and you can actually just buy one coin that represents the index itself. And I've done that in my personal account, and I think that's a good decision probably for people who don't want to do all the research for each individual kind of protocol. And I'm definitely in that boat too because I don't know, you're in finance from maker, from, you know, any of these things. They're, very complicated, but that's a good solution.

Patrick: And I feel like it's just like one goes down or something like that three more pop up, they're growing like weeds. And I think the rate at which you can try to retain that information. You can't keep up unless next thing you know, you find yourself down the rabbit hole. So I think something simple, like what you just mentioned, it is a start at least, but you are onto something that is the self-ownership of everything about it does have saying power, I think. So yeah, I'm inclined to agree with you. It's just daunting to kind of look at something like that, that we won't really understand, but we understand the concepts behind it and the context behind it.

Leigh Drogen: Yeah, look it's, this is, literally, if you had to open up a bank and understand all the guts of a bank and how a bank works, like that's what they've done here. Except they did it intentionally with crypto because getting the nerds involved in wanting to play around with the guts of a new banking system is the boot program for everybody else wanting to be involved in it. And eventually, somebody will make the user experience of all these things really, really simple, and we'll all get involved. And that's kind of in a way that is the Busch thesis on this set. It's so early that if eventually they do that, the growth in this is going to be massive. And yeah, I don't want to play early-stage VC with each of these individual projects, right. I just want to own a kind of market cap weighted index of the top 15 or so, so that I don't have to know anything about it. I just want to invest in the trend.

Patrick: Exactly, that's, I came to that conclusion myself, I'd say two or three months ago, and I think that's what most people want is they don't want to crack the code, solve the puzzle. They just want a piece of the action. So that's interesting. And then speaking of, you know, piece of the action, I know we also talked about the arc innovation, and I think that's something really that I don't think a lot of retailers, retail traders are quite familiar. So do you want to give like a little broad introduction and what you're seeing, and I'll try to fill in as I'm getting up to speed as well.

Leigh Drogen: Yeah. Look, Cathy would, and the arc stuff touches just so many different major arguments and discussions and trends that are taking place today. So, you know, just some of them are why has growth outperformed value? Why have we seen historically high multiples and high growth tech stocks relative to almost any time in history except for the tech bubble?

Patrick: Ridiculous.

Leigh Drogen: Do those multiples deserve to be higher because there's more innovation taking place today than at any point in history that disruption is happening faster? So should there be a disruption multiple that's more significant. There, is just massive change taking place in regard to the way that ETFs capture assets, right? And what happens when an ETF that inherently is investing in a limited pool of kind of assets, because she's got a very specific type of investing strategy.

What happens when they own 25% of the market cap of a $2 billion stock, right? Like, is there enough liquidity to get in and out, is, are the flows into the ETF actually driving the performance of the stock price? And is that a problem if people choose to take money out of the ETF? There's just so many different, interesting things going on here with Arc and my own personal take on it is that I think Cathy, what is correct in the sense that. We are in a super cycle for technology eating; basically every industry and you want to be invested in low asset, high innovation companies. Because you know, you don't want to have a heavy asset balance sheet. We've seen that the valuation on intangible assets has grown considerably relative to kind of hard assets; some of the quants have been having serious problems with this because a lot of their models were based on the valuation of non-intentional assets.

And so, but I don't think that trend is going away at all, you know, we saw, we've seen software eat the world as Marc Andreessen kind of predicted a decade ago, but I think that it's now eating a lot of other things, that he didn't even predict. And she's on top of this trend, the problem I have with it and why I'm not invested in the Arc TDF, you know, as kind of the proxy for my own equity trading strategy, which is almost purely momentum; I'm a momentum trader at heart. And so, it fits directly into, you know, her philosophy. But my problem is that she's invested in some companies very heavily like Tesla here, where I just find it a little bit hard to believe there's that meat on the bones going forward, right?

Patrick: No momentum there.

Leigh Drogen: My whole, philosophy is you want the middle of the trend. You don't want to be early, and you definitely don't want to hang around late, right? But that middle 80% of the trend just has a ton of returns. And I think some of the names that she's really heavy in here, she's just kind of pushing assets into these stocks because she needs to push assets somewhere and it's hard.

Patrick: Yes, I wholeheartedly agree with that. We wrote something, I think it was yesterday, maybe over the weekend where we talked about kind of wildcard factors for certain areas and our wildcard factor for, Arc, I think was one sentence. And it was just every day is a wild card day for Kathy and her ETFs. That's if you want to strap on and enjoy the ride, be my guest, but it's, there's a lot of choppy waters to navigate there I feel like.

Leigh Drogen: My other like general issue with her whole business is, basically that from an asset manager perspective, I understand that she wants to be fully invested at all times, right? And, in interviews, she has said that basically the way that they kind of pull back from the market after huge runs, where they feel that things are overvalued is not to go to cash. It's to basically try and lower the beta of their portfolio by rotating into what she feels are lower beta names. But the problem is that she's basically rotating into names going from a beta of like two and a half to going to a beta of like one and a half, right?

Patrick: That's not enough.

Leigh Drogen: Just go to cash, you know, like, can we just go to cashier, please? You're up 300%, just go to cash. And so like, I feel that when you can use some basic momentum overlays to, you know, kind of get you out when that draw down starts, instead of having a dry down of like 35 or 40%, you know, which is kind of what her strategy entails. And she's willing to stomach that, you can kind of play some of those names yourself and use a little bit tighter risk management strategy to maybe keep that dry down to like twenty percent so that you don't want to throw up all over yourself.

Patrick: Actually, that makes me feel a lot better about myself, because I've been saying go to cash for, a while now. So, I, so, you know, we kind of mentioned a couple, well, one, your guts analogy was on Twitter. I giggled at that as I was doing my research here and this relates a little bit to your Stock Twits experience as well. You have a very engaging Twitter profile presence, not meant to like gash you up or anything. I just, you're all over the place there and I really have found the connection between social media and investing. I'm all over Stock Twits, I took over Shaffer's Twitter around a year ago and trying to pump those numbers up. What do you see? Where do you see as that trending towards between the relationship in social media and investing?

Leigh Drogen: So, you know, I look at it from my own perspective first and then, you know, trying to extrapolate off of that. And, you know, I got onto Twitter back in 2009. And you know, the reason I got involved because I saw it as kind of a trading journal, I think the traders do really well when they feel like they are financially responsible to somebody else. But responsible to themselves in a public way and you know, none of us are getting abed because we're not trading enough size to get our ideas abed, right? But putting stuff out there being intellectually honest, being intellectually honest with yourself, having to almost explain your own ideas to yourself, I think is a great, I think it's a great thing to do. And Stock Twits, you know, the reason I got involved in Stock Twits at a very early time was because I felt that that was a community that was focused specifically on that.

But there's one really interesting story. I remember very early on at Stock twits, I was on the phone with a prominent member of, not a prominent member of the community, but a very public figure who was coming onto the community. And I was looking at his stream and I was looking at it and I was like; this guy doesn't know what he's doing on here. Like, you know, like you should be doing this not the other thing, and I was on the phone with him, and I was saying these things to him in a very nice way. But Howard, Howard overheard me, and I remember Howard literally while I was on the phone, screaming at me saying, no! never tell somebody else how to use Stock Twits or Twitter. That's not your place to do that we want people to figure out what's good for themselves.

What makes sense for themselves, what's valuable to themselves. And what you think is valuable may not be what's valuable to that person. And he was a hundred percent correct and I learned my lesson like right there that day. And so, you know, I have friends and colleagues who use Twitter and Stock Twits in very different ways from what I do. And even my own kind of use of it has changed over time, significantly from just posting that, to being more of all of who I am and the hockey stuff and politics stuff and geopolitics stuff and the, you know economic stuff on top of the trading. And then it was obviously very helpful for building Estimize at large that the community there, you know, so everybody has their own perspective on it, and you just have to know what you want to get out of it. And that may change over time, in terms of kind of where this whole social thing is going. The last, you know, three or four months has been really interesting because kind of everything that we had been working on for the last 10 years at Stock Twits, and Estimize kind of happened all at once.

Patrick: Yeah, it's all becoming accelerated.

Leigh Drogen: Yeah, with the game stop stuff. And then all, you know, it was like overnight success right of the concept.

Patrick: Yeah, that's February month was. I mean, it was I, not that I have this long-decorated experience, but I've never seen anything like that in watching it happen, so yeah.

Leigh Drogen: It looks so, you know, I think the retail trader kind of mania that's gone on is transitory in nature, right? Like there's no way everybody could keep this up. I was getting calls; I was getting calls from my microbiologist friend in St. Thomas down in the Virgin Islands saying, how do I open up an account so I could trade penny stocks, right. Like, that's just, you're at a point there where it's not healthy.

Patrick: I mean, I had some of my dumbest friends giving me advice and I'm just sitting there like, can we just, I don't want to do that. So yeah, and that's what I always find fascinating about the dichotomy between social media and investing is yes, it's out there, it's in short, compact bite size form, but is it reputable, you know, are you getting actionable advice behind it? And I love what you said about kind of adjusting, because I actually talked to somebody higher up in the Twitter sphere, I guess I'd call it. And they gave me this kind of laundry list of this, that, and this, that he saw wrong with our profile. And I sat down and looked at it and said like, look dude, that's not what we're looking for. That's not the audience that I'm trying to build, and it really does depend on the user and what they want to achieve. So, I'm glad that someone else out there understands that and gets that, so thank you.

Leigh Drogen: Yeah. There's look, you know, on the other side of that there is a lot of useful information. I feel like, you know, Estimize is built as a structured platform so that you can understand just the data without all the other mishigas. But you know, Stock Twits and Reddit and Twitter and all these other platforms, I think personally for me, and I say that because, you know, the lesson from Howard for me. The lesson is that you build a curated list of people that you trust to follow, that share a similar investing philosophy as you. And then you listen to their ideas and use them as a sounding board, and I think it's been incredibly valuable for me. You know, some of the people that I follow, you know, some of them do work at hedge funds and some of them just run really big personal books and it's incredibly valuable to follow their ideas and bounce ideas off of them. And then in general, even the kind of more macro data coming out of the Reddit sphere and kind of the aggregated sentiment, I think if used correctly can be very valuable to understand potentially, you know, where trends and companies are going. And what's the hot new retail name and where the money that's going to pile into the next tech company is going to be, and if you're a momentum trader like me, you know that's very valuable if used correctly.

Patrick: Yeah, I think there are just so many breadcrumbs on there that you'd be insane not to check that out every day, not every day, but as often as possible to kind of stay involved. Alright, well you know, we're about running out of time here. I always like to end with a chance for you guys to promo plug, whatever you guys want. So, I'll give you the floor. What do you guys got going on at Estimize?

Leigh Drogen: Yeah. Look, we'd love everybody and anybody to be a part of the community to contribute their own estimates for coming around into earning season. So, it's completely free to get involved with, if you would like to access the data without contributing can become a client of ours pretty easily. We've got the factor models that represent those strategies that I talked about, which you could access. And, yeah, as I said, the community, the data set only gets better as the community continues to grow. So, no matter what your level of sophistication is, we've got algorithms that either overweight you or underweight you at the consensus. And that is the whole philosophy is, you know, it's all just based on the data, not, you know, not trying to say that the guy at Goldman Sachs is the best analyst, just because he works at Goldman Sachs.

Patrick: Very well said, guys they even have leagues, like the league stuff I thought, you know, for a competitive SOB like me, I would be all over that fascinating stuff, I love it.

Leigh Drogen: Thanks for having me, Patrick.

Patrick: I appreciate it. Take care Leigh.

Despite the security's recent rally, there is still plenty of room for upgrades amongst the brokerage bunch. Of the 18 analysts in coverage, eight carry a "hold" or worse rating on DKS. Plus, short interest has been slow covering since last July, and makes up 18% of the stock's available float. In other words, it would take nearly seven days to buy back these bearish bets, at the equity’s average pace of trading.
 
DKS is seeing attractively priced premiums at the moment, per the stock's Schaeffer's Volatility Index (SVI) of 34%, which sits in just the 4th percentile of its annual range. Furthermore, Dick's Sporting Goods stock's Schaeffer's Volatility Scorecard (SVS) sits at a relatively high 85 out of 100, meaning the stock has exceeded options traders' volatility expectations during the past year. Lastly, our recommended call has a leverage ratio of 6.1, and will double in value on a rise of 16.7% in the underlying security.

Subscribers to Schaeffer's Weekend Trader options recommendation service received this DKS commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Trader is one of our most popular options trading services.