While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
October 23, 2015
Fiat Lux
Featured Trade:
(THE COAST IS CLEAR),
(SPY), (XLI), (XLY),
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD)
(AAPL),
(TESTIMONIAL)
SPDR S&P 500 ETF (SPY)
Industrial Select Sector SPDR ETF (XLI)
Consumer Discret Sel Sect SPDR ETF (XLY)
Apple Inc. (AAPL)
Sometimes I hate being so right.
I was almost alone in the desert last August, when I asserted that the dramatic sell off in share prices was nothing more than a stock market event (click here for ?The Volatility Peak is In?.
The economy was fine, there were no geopolitical events of importance, and prices would recover once sanity returned to the market in the fall.
I went through great pains to deliver you lists of shares that would lead the recovery, which have proven wildly successful (click here for ?Ten Stocks to Buy at the Bottom?.
I even used the rare opportunity of the wild summer market action to teach you how to survive and prosper during these tumultuous conditions (click here for ?How to Trade a Crash?.
Today, all of these efforts finally bore fruit.
The S&P 500 (SPY) decisively broke through the 200-day moving average to the upside. The big cap index had not enjoyed this rarified, intoxicating atmosphere since August 20.
The coast is clear.
And guess what the two leadership sectors are?
Industrials and consumer discretionaries, which I trumpeted to you on my extended research piece only yesterday (click here for ?Switching From Growth to Value?.
The big question is: ?What do we do now??
You usually don?t get a clean break of a 200-day moving average the first time around. Many believe this is a false breakout, sucking in hot money bulls just before another meltdown in November.
So we may get some choppy backing and filling right around the key 200-day number of $204.34.
This will test the faithful.
The bears will get some assistance from the Republican Party, which may attempt to shut down the government one more time by refusing to raise the debt ceiling.
Treasury Secretary Jack Lew has warned that the government could run out of money as early as November 3.
If my thesis is correct, external events such as these will just fall away like water off a duck?s back, beyond a peripatetic day or two. Use them as buying opportunities.
This breakout certainly paves the way for a run to new all time highs for the (SPY) in the $2,200-$2,300 range by March 2016, and possibly as soon as the Christmas holidays.
It?s ?RISK ON? again, baby.
The Coast is Clear
(The West coast of Portugal)
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
October 22, 2015
Fiat Lux
Featured Trade:
(FRIDAY, OCTOBER 30 SAN FRANCISCO STRATEGY LUNCHEON)
(SWITCHING FROM GROWTH TO VALUE),
(GE), (BAC), (C), (GS), (HD), (DIS), (AAPL), (MSFT),
(UUP), (FXE), (FXY), (YCS), (CYB), (FXA), (FXC)
General Electric Company (GE)
Bank of America Corporation (BAC)
Citigroup Inc. (C)
The Goldman Sachs Group, Inc. (GS)
The Home Depot, Inc. (HD)
The Walt Disney Company (DIS)
Apple Inc. (AAPL)
Microsoft Corporation (MSFT)
PowerShares DB US Dollar Bullish ETF (UUP)
CurrencyShares Euro ETF (FXE)
CurrencyShares Japanese Yen ETF (FXY)
ProShares UltraShort Yen (YCS)
WisdomTree Chinese Yuan Strategy ETF (CYB)
CurrencyShares Australian Dollar ETF (FXA)
CurrencyShares Canadian Dollar ETF (FXC)
All good things must come to an end.
For most of 2015, growth stocks far and away have been the outstanding performers in the US stock market.
Almost daily, I delighted in sending you trade alerts to buy winners, like Palo Alto Networks (PANW), Tesla (TSLA), and the Russell 2000 (IWM).
And so they delivered.
The reasons for their impressive gains were crystal clear.
The expectation all year was that the Federal Reserve would raise interest rates imminently. This gave us a perennially strong dollar (UUP).
Thus, one could only direct focus towards companies that were immune from plunging foreign currencies and falling international earnings.
It really was a year to ?Buy American?.
But a funny thing happened on the way to the bear market for bonds. It never showed up.
The final nail in the coffin was Fed governor Janet Yellen?s failure to move on September 17. She looked everywhere for inflation, but only found the chronically unemployed (the 10% U-6 discouraged worker jobless rate).
Not only did we NOT get the rate hike, the prospects are that WE MAY NOT SEE A SUBSTANTIAL INCREASE IN THE COST OF MONEY FOR YEARS!
At this point, the worst-case scenario is for the Fed to deliver only two 25-basis point rises over the next six months, AND THAT?S IT!
This reinforces my belief that the top of the coming interest rate cycle may only reach the bottom of past cycles, since deflation is so pernicious, and so structural.
All of a sudden, the bull case for the dollar, which has been driving our US stock selection all year, went wobbly at the knees.
Europe, Japan, and China are all now in between new quantitative easing and stimulus cycles, giving a decided bud to the Euro (FXE), the Yen (FXY), (YCS), the Yuan (CYB), the Aussie (FXA), and the Loonie (FXC).
New round of QE will come, but those could be months off.
Therefore, I am sensing a sea change in the market leadership. Rushing to the fore are the shares of companies that benefit from flat interest rates and a flagging greenback.
Those would be value stocks.
Value stocks are easy to find. Do any quantitative screen based on low price earnings multiples, low price to book value, and low price to cash flow, and you will find thousands of them. This is what the big boys do.
There is another reason to refocus on value stocks, but it is more psychological than analytical.
We are now into our sixth year in this bull market, one of the strongest in history. Portfolio managers are very wary of paying high multiples at market tops, as many did at the summit of the Dotcom bubble in 2000.
At least if they buy cheap share at market highs they have adequate job preserving explanations for their actions. There is also some inherent built in safety in increasing weightings in companies that haven?t appreciated very much.
I probably don?t know you personally (although I call about 1,000 of you a year), but I bet you don?t have 100 in-house analysts at hand to help you sift through the wheat and the chaff.
So let me do the heavy lifting for you. I?ll distill down the value play to a handful of high quality, high probability sectors.
1) Industrials ? Remember those, the decidedly unsexy, heavy metal bashing companies that you have been ignoring for years? With global businesses and hefty borrowing for capital spending, they do very well in a flat interest rate environment. What?s my favorite industrial? The former hedge fund that made light bulbs, General Electric (GE). They make really cool jet engines and diesel electric locomotives too.
2) Consumer Discretionary ? Finally, people are spending their gas savings, now that they realize it is more than a temporary windfall. A housing market that is on fire is creating enormous demand for all the things owners stuff in their homes, both in new purchases and upgrades. Low rates will keep the 30-year mortgage under 4% for longer. You already know my best names here, Home Depot (HD), and Disney (DIS).
3) Old Technology ? Tired of paying 100 plus multiples for the latest non yielding cloud highflyer? Mature old technology stocks offer some of the cheapest valuations in the market. As, yes, they pay dividends now! I?ll go with Microsoft here (MSFT) as the action in the options market has suddenly seen a big spike.
And what about the biggest old tech stock of all, Apple (AAPL)? I think this will be a 2016 story, and investors reposition themselves to take advantage of the run up to the iPhone 7 launch in a year. But as the recent price action shows, some portfolio managers may not want to wait.
4) Financials ? Are not the first sector to leap to mind when looking for a low interest rate play. Overnight interest rates will remain depressed as far as the eye can see. However, rates at the long end, maturities of five years or more, are rising.
This steepening yield curve is where it really matters for banks, as it allows them to expand their profit margins. On top of that, bank valuations are at the bargain basement end of the market, with many still trading at below book value. Go for Citibank (C), Bank of America (BAC), and Goldman Sachs (GS).
New leadership from low-priced sectors could give us the rocket fuel for a melt up in the indexes into the end of 2015. It could take us right to the low end of my forecast yearend range for the S&P 500 I made on January 6 of 2,200-2,300 (click here for ?My 2015 Annual Asset Class Review?).
After five months of derisking, both institutions and hedge funds are underweight stocks and shy of exposure. As a result this underperforming year has ?chase? written all over it.
Keep your fingers crossed, but stranger things have happened.
It?s My Turn to Do the Heavy Lifting
?They ring a bell at the bottom, and right now the bell is ringing,? said Robert Reynolds, a manager at Putnam Investment Fund.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
October 21, 2015
Fiat Lux
Featured Trade:
(EL NINO IS CLOSING IN ON YOUR PORTFOLIO),
(CORN), (SOYB), (DBA), (MOO),
(TEN TIPS FOR SURVIVING A DAY OFF WITH ME)
Teucrium Corn ETF (CORN)
Teucrium Soybean ETF (SOYB)
PowerShares DB Agriculture ETF (DBA)
Market Vectors Agribusiness ETF (MOO)
I came up to my Tahoe lakefront mansion in Nevada this week so I could get in some serious mountain climbing after the markets closed every day.
What did I get? Three days of torrential downpours. The rain was hitting the roof so hard last night that it kept me awake.
Flash floods are wreaking havoc in Los Angeles. Poisonous sea snakes indigenous to Southern Mexico are appearing on California?s golden beaches.
Local fishermen are hooking Mahi Mahi normally found in Hawaiian waters.
And guess what? The first great white shark in 100 years was spotted devouring a seal inside of San Francisco Bay. It looks like I am going to have to reconsider my plans to run the Escape From Alcatraz triathlon this year.
There is absolutely no doubt about it. El Ni?o is arriving with a vengeance. And so is the impact on your trading and investment portfolio.
The potential consequences for your trading and investment portfolio are huge.
The Australian Bureau of Meteorology (click their link http://www.bom.gov.au/climate/enso/) has even gone as far as to predict that this will be a very big El Ni?o year, the kind that occurs only twice a century. The last two major events occurred in 1982-1983 and 1997-1998.
That emergency caused $550 million worth of damage in California alone.
These tumultuous weather events are caused by a differential in Pacific Ocean temperatures off the west coast of South America, in what is called the ?El Ni?o Southern Oscillation Zone.?
A weak event is triggered by temperatures 0.5-0.9 degrees centigrade more than average, a moderate one 1.0-1.4 degrees warmer than average, and a very strong event more than 2 degrees above average. As of October 13, the temperature was 1.4 degrees above average and rising.
The implications of an El Ni?o winter are global in scale.
Australia will almost certainly face a severe drought, destroying much of the grasslands on which the nation?s livestock industry depends.
You can also expect the wheat crop there to fail, as irrigation is rarely used Australia to cut costs.
Southeast Asia will also be dry, damaging rice production in Thailand, the world?s largest exporter. Sugar will also take a hit.
The drought could extend to India, reducing crops for grain, rice, sugar, and cotton. As Indian incomes fall, the gold market could be impacted, as the country is the largest buyer of the precious metal.
El Ni?o also decimates the annual anchovy catch in South America, which competes in the international markets with soybean meal.
El Ni?o?s bring mosquito blooms and the diseases they cause, bringing sudden epidemics for Malaria and Dengue fever. If you?re headed to Latin America this year, be sure to get your shots and take your pills.
It is estimated that the 1998 El Ni?o caused 16% of the planet?s coral reefs to die off.
The opposite effects occur in the Northern hemisphere, with El Ni?o bringing torrential downpours.
I remember the last one all too well.
In 1998, I led a troop of Boy Scout volunteers to fill sand bags to save a levee in California?s Central Valley. We returned two days later, covered from head to toe in mud and exhausted, living on granola bars.
This time around, El Ni?o would be welcomed by the Golden State with open arms, as it would bring to an end a four-year drought, the most severe in history. Everyone here is now subject to strict water rationing and hefty fines for water hogs.
Indeed, when I was recently in Las Vegas, I couldn?t help but notice that the tap water at the Bellagio Hotel had become undrinkable.
The water level in nearby Lake Mead is now so low that it has fallen below the intake pipes for the city. The hotel was unable to resupply bottled water in the shops fast enough.
For the trading universe, this could all finally bring the long bear market in agricultural commodities to an end. Whether there is too little rain, or too much, abnormal weather of any kind brings plummeting crop yields, and higher prices.
So far, the price action in the ags has been very encouraging as El Ni?o continues its relentless march northward.
Affected have been the commodity prices of corn, (CORN), wheat (WEAT), soybeans (SOYB), ag stocks like John Deere (DE), Caterpillar (CAT), Potash (POT), and Monsanto (MON), and many basket ETF?s, such as the PowerShares DB Agriculture Fund (DBA) and the Market Vectors Agribusiness Fund (MOO).
The term ?El Ni?o? translates from Spanish as the ?Christ Child?. It is so named because the event was first discovered in South America just before Christmas about 50 years ago.
They have been occurring throughout human history. The crop failures they brought are thought to be responsible for the collapse of several pre Columbian civilizations. One historian even posits that it was a major cause of the French Revolution in 1789.
El Ni?o?s are also legendary for bringing enormous snowfalls in the High Sierras during the winter. While a student, I was working a part time job at the Mammoth Mountain ski resort in California when a legendary one hit in 1968.
An incredible 35 feet of snow fell in one weekend. Entire buses were buried and lost in the storm. I spent a week helping trapped people dig out from that one.
This is one big catch to all of these prognostications, as there always is. El Ni?o winters have been predicted in the past and not shown up, most recently two years ago. After all, models are just models, not certainties.
Betting on the weather can be hazardous to your wealth.
Besides the trading opportunities, an El Ni?o would make the coming ski season up here at Lake Tahoe look pretty good. I am shopping for new equipment already.
?
Looks Like Rain to
Me
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