?I don?t know where the next 1,000 points is coming from, but I know where the next 10,000 points is coming from,? said Sir John Templeton, when he was playing chess with me at his home at Lyford Cay in the Bahamas many years ago.
Given the failure of the ?RISK OFF? trade to develop any serious downside momentum this week, I am using the dip this morning to take a small profit on my S&P 500 ETF (SPY) puts.
We had every reason to go down, given the Standard and Poor?s threatened European debt downgrade on Monday night. If this despised and deeply flawed ratings agency had made this announcement in September or October it would have been worth at least ten (SPY) points to the downside.
But they didn?t announce it then, they announced it now, and in the post Armageddon world this gets you only a modest two point dip. It?s an old trader?s adage that if you throw bad news on a market and it doesn?t go down, then you buy it. The risks have just risen that the Santa Claus rally continues for a few more weeks. Plus, if I can duck a major headline risk this weekend and still keep some change in my pocket, like the European ministers meeting, I am going to take it.
As it is way too late to buy, this means cover your shorts. This is doubly true for options holders who have a heavy price to pay in time decay and falling volatility over the holidays.
On top of this, we are looking at retail holiday sales that are coming in better than expected and a seasonal liquidity push to year end. Although consumers are depressed about the outlook for the economy in 2012, they are apparently dealing with their sorrows through buying a big screen TV, an Apple iPad, an Xbox 360, or a Snuggie.
There is another factor at work here. Any hedge fund manager who has had a great 2011 tends to step out of the market now and go flat. This locks in their gains until their 20% performance bonuses are paid out in January. Any profits in hand now get paid out in cash in 30 days. With a 42% year to date return, I certainly fall into that category.
My profit on this trade came to (9 contracts X 100 X $.32) = $288. For the model $100,000 virtual portfolio this adds 29 basis points to the total return. It?s better than a poke in the eye than a sharp stock, and will afford me some silver eagles to toss in the Salvation Army pot next time I go to the mall.
For those who wish to participate in my Trade Alert Service, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put ?Trade Alert Service? in the subject line, as we are getting buried in emails.
?You are either looking out five days or five years in this market. You?re either a surfer or a yacht. There are no small boats anymore,? said Bob Iaccino, a trader at Your trading room.com.
Trade Alerts are a premium subscription service, you must login to read the details. As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
Have you ever wanted to spend your summers basking in the sunlight at your mountain top Tuscan villa, surveying the manicured vineyards which produce your own estate bottled wine? Are you drawn by the cachet of claiming George Clooney as a celebrity neighbor on the model strewn shores of Lake Como? How about a luxury apartment that is walking distance from the Vatican?
Hedge fund managers are salivating at the prospect of one of the greatest fire sales in history, as assets of every description are being dumped in anticipation of the hard times now hitting Europe. On the menu will be trillions of dollars of distressed loans hived off by desperately downsizing and deleveraging continental banks. Corporations are expected to dump money losing divisions and subsidiaries in a race to beat the coming recession, which is expected to be severe.
In many respects, these deals of the century represent the second shoe to fall after similar bargains were had in the US during the 2008 crash. Europe?s day of reckoning was postponed by four years, thanks to a recovery in the US, QE1, QE2, and Federal Reserve policies that kept interest rates at century lows.
The complacency in Europe since then has been staggering, with many turning their noses up, claiming it could never happen there. Some are predicting that the balance sheet scrub could take as long as a decade, similar to Japan?s tortuously long repair of its own banking system.
Some hedge funds are taking advantage of the wholesale withdrawal of European banks from the credit markets to beef up their own international lending?at much higher interest rates. The same funds, like Highbridge, similarly locked in enormous spreads in the US when conditions were dire. Several American private equity firms are said to be setting up new European distressed asset funds to peddle to pension funds and high net worth individuals. Those who made similar investments in the US four years ago, made fortunes.
For individual investors the easiest and ripest pickings may be among the European bond ETF?s that already trade in the market. Many of these have suffered gut churning declines in recent months as the European melt down unfolded, despite offering yields multiples of what can be found at home.
Below is a short hit list ranked in order of damage incurred from the recent peak to the trough:
PowerShares DB Italian Treasury Bond Fund (ITLY): -19%
Wisdom Tree Euro Debt Fund (EU): -13%
iShares S&P Citigroup International Treasury Bond Fund (IGOV): -11%
SPDR Barclays Capital International Treasury Bond ETF (BWX): -9.5%
Germany Bond Index (BUND):? -4%
Of course, the eternal question of when to buy is the open to debate. There have been enormous declines in European bond yields since the peak seen last week, with Italian ten year yields plunging from 8% to 6%, and Spanish yields plummeting from 7% to 5%. It was a simple shortage of paper, not any ECB intervention that drove yields down so rapidly.
Aggressive traders are already starting to scale in. Others say the worst is ahead of us and that these sovereigns could see 9% yields before the fat lady sings.
I think the safe play here is to use the major sell offs to start accumulating positions and count of the big cash flow to pay for it over time. You can hedge out your currency risk by taking out an equal dollar amount in short (FXE) positions. Triple ?A? French bonds were yielding 7% last week, while ?AAA-? US Treasuries paid a paltry 2.0%. Is something wrong with this picture? Guess how it will end.
Is the Fat Lady Singing for the European Bond Market?
Hey, Neighbor!
I am pulling the plug on my short position in the Euro here, selling my Euro ETF (FXE) January, 2012 $134 puts at cost.
It?s not that I have suddenly fallen in love with the beer drinkers and the garlic eaters. This is an option driven decision. With market volatility falling across all asset classes, the short dated options are eroding away faster than the underlying is moving in my favor.
Time decay is also taking its toll, accelerating into the January 19, 2012 expiration. This continues even while the markets are closed over the holidays. In fact, Christmas and New Years are the best time of the year to run a volatility short. So while I managed to catch a two cent move down in the (FXE) since I added this position on November 18, the options are trading at my cost. There is nothing worse than being right and not getting rewarded for it. All work and no pay makes the Mad Hedge Fund Trader an irritable boy.
On my last four trade alerts the options quickly rose substantially, only to give back all the profits within days. That happened with Jeffries (JEF), the Euro (FXE), silver (SLV), and the S&P 500 (SPY). The time frame that markets allow traders to make money has suddenly shortened. The lesson here is to take the money and run.
By going neutral on the Euro here, I now have dry powder to sell it again on the next short lived ?feel good? rally to $1.3550 or higher. The headline risk going into this weekend is also large. I can roll into the next strike in February to partially sidestep the holiday time decay. With the (FXE) bang in the middle of its recent $1.3180-$1.3550 range, this is no time to let positions grow hair on them.
Live on the fight another day.
?Europe is in the terminal phase of its life,? said David Murrin of Emergent Asset Management.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
Take a look at the charts below, and you will see what prompted me to knock out some shorts on the S&P 500 (SPY) on Friday. The longer the current trading range in the index works, the more traders pile into it, confining it to an ever narrowing range.
I am even hearing that fundamental managers who normally shun charts and technical analysis as a pagan religion are starting to track such alien indicators as Bollinger bands, relative strength indicators, and stochastics. The 200 day average presents such formidable upside resistance that it will take spectacularly good news to close substantially above it on big volume. A little bit of ?kiss and make up? in Europe just isn?t going to cut it, especially when they continue to bad mouth each other among their close friends in private.
Since I am such an inveterate seeker of cross market correlations, I always like to refer to the Volatility Index before taking decisive action on a trade. And guess what? Just as stocks are bumping up against resistance, the (VIX) is bouncing along support at its 200 day moving average. This further reinforces my belief that the indexes are ripe to give back a chunk of their recent gains.
Watch your news service headlines. This contest will ultimately be determined by what does, or does not happen in Europe. And once again, thank you Standard and Poor?s for another belated downgrade of European debt!
Yes! Technical Analysis Can Work!