Global Market Comments
November 14, 2017
Fiat Lux
Featured Trade:
(I HAVE AN OPENING FOR THE MAD HEDGE FUND TRADER CONCIERGE SERVICE),
(HOW TO HANDLE THE FRIDAY, NOVEMBER 20 OPTIONS EXPIRATION), (AAPL), (TLT),
(THE FAT LADY IS SINGING AGAIN FOR THE BOND MARKET)
We have the good fortune to have an options position left that expires on Friday, November 17 and I just want to explain to the newbies how to best maximize their profits.
This involves:
The US Treasury Bond Fund (TLT) November 2017 $127-$129 vertical bear put spread
Provided that we don't have a monster "RISK OFF" move in the market over the next few days (war with North Korea?), which cause bonds to rally big time, the (TLT) position should expire at its maximum profit point below $127.
In that case, your profits on this position will amount to 12.32% in 13 trading days, or $1,232.
We got a real gift last week thanks to the Republican mishandling of the tax bill.
A proposal to delay corporate tax cuts into 2019 triggered the sharpest one day selloff of 2017.
This happened the day after I doubled my short position.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck and pat yourself on the back for a job well done.
You don't have to do anything.
Your broker (are they still called that?) will automatically use your long $129 put position to cover your short $127 put position in the October (TLT), cancelling out the total holding.
The profit will be credited to your account on Monday morning October 23, and the margin freed up.
Some firms charge you a modest $10 or $15 fee per leg for performing this service.
If you don't see the cash show up in your account on Monday, get on the blower immediately.
Although the expiration process is now supposed to be fully automated, occasionally mistakes do occur. Better to sort out any confusion before losses ensue.
I don't usually run positions into expiration like this, preferring to take profits two weeks ahead of time, as the risk reward is no longer that favorable.
But we have a excess cash right now, and I don't see any other great entry points for the moment.
Better to keep the cash working and duck the double commissions. This time being a pig paid off handsomely.
If you want to wimp out and close the position before the expiration, it may be expensive to do so.
In the unlikely event that we approach the upper $127 strike in the (TLT) spread, we may have to do some finessing going into expiration.
Keep in mind that the liquidity in the options market disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration.
This is known in the trade as the "expiration risk."
One way or the other, I'm sure you'll do OK, as long as I am looking over your shoulder, as I will be.
This expiration will leave me with a 70% cash position.
I am going to hang back and wait for good entry points before jumping back in. It's all about getting that "Buy low, sell high" thing going.
I'm looking to cherry pick my new positions going into yearend.
Take your winnings and go out and buy yourself a well-earned dinner. Or use it to pay your upcoming 2017 income tax bill.
It's probably going to be a big one, given how much money you made trading this year.
Well done, and on to the next trade.
You have just been adopted by a new rich uncle.
I doubled my short position in the US Treasury bond market last week (TLT).
Furthermore, I'll be using any subsequent price rise to sell more bonds, roll forward put options, put spread options positions, buy LEAPS, sell short bond futures, and buy the ProShares Ultra Short 20+ Treasury Bond Fund (TBT).
It is undoubtedly the cleanest trade out there in the world today.
Of all the momentous changes in the prospects for asset classes as a result of the presidential election, bonds absolutely top the list.
And not just US bonds, but German, Japanese, British, and every other kind of bond out there in the world as well are exiting a 30-year bull market and entering a 20-year bear market.
Fixed income instruments are totally toast for the next four and possibly eight years. Indeed, the list of reasons is so long that I'll have to list them one by one.
1) The hallmark of Trump's economic policy revealed so far is to run the economy hot by launching a massive round of deficit spending.
Independent analysis predicts that the US national debt could rise by as much as $10 trillion over the next decade.
That's what a massive tax cutting, spending rises gets you.
Call it Reagan 2.0, without the jokes.
Even if the Federal Reserve does nothing, this unprecedented issuance of new government paper will crowd out private borrowers and drag interest rates upward, to the detriment of bond prices and borrowers everywhere.
2) The bond market was already in trouble well before the election. Prices peaked in July 2015, and have been steadily eroding since. Every bond position I have strapped on since then has been from the short side.
This was because the world was assigning a growing probability of a long series of Fed interest rate hikes.
You could see this in the way bank shares traded, which started moving off of multiyear bottoms during the same time period.
All the election did was pour gasoline on a small fire that was just starting to build.
3) After hiding in a deep cave for the past ten years, inflation is about to make a dramatic comeback. It was already starting to edge up with recent economic reports.
And here is the problem. If you initiate a huge new jobs program with weekly jobless claims already at a 43-year low, wages will take off like a scalded chimp.
Oh, and by the way, wages are the largest component in any inflation calculation.
4) Years of zero, or subzero, interest rate policies from central banks around the world have created a substantial mal investment bubble in all fixed income assets. As a result, the relative valuations have reached ludicrous levels.
However, that government liquidity flow will turn negative by October 2018, thanks to simultaneous and coordinated QE wind downs.
The S&P 500 is now trading at 20 times earnings, and possibly 18 times 2018 earnings. US Treasury bonds at a 2.37% yield are trading at an amazing 45 times earnings.
This sets up the mother of all asset reallocations, out of the worst yielding financial instruments in the world, into the best.
5) After spending 50 years in the financial markets, I can describe to you a problem that I have noticed from the very start.
Institutional investors keep their foot firmly on the gas pedal while only looking in the rear-view mirror.
Call it the herd instinct, safety in numbers, or the lack of imagination, but portfolio managers, by definition, ALWAYS overweight the wrong asset classes at market tops, and underweight the right ones at market bottoms.
Making matters worse is the fact that these institutions move with the speed of molasses in the dead of a High Sierra winter.
Some entertain changes in sector and asset weightings only once a quarter, while others do it annually.
Yes, this means they can minimize tax bills. But it also assures that they are perpetually behind the curve.
When the memo gets out and real changes DO occur, they unfold over years, if not decades.
Every institution in the world is now overweight bonds and underweight stocks.
Guess what happens next?
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
November 13, 2017
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE TAX BILL COMES DUE)
(INDU), (TLT), (GLD), (NVDA)
(WHY TECHNICAL ANALYSIS DOESN'T WORK)
(TESTIMONIAL)
Finally, investors were reminded of the fact that stocks don't rise in value every day like a sinecure.
We even witnessed a rare $250 point draw down in the Dow Average. In 2017, these have become as rare as hen's teeth.
You can thank the Republican Party's proposal to delay all corporate tax cuts to 2019 for that one.
The closely watched average has not seen a 3% correction in a torrid 370 days, a record.
In the meantime, concentration is increasing to perilous extremes, never a healthy development.
NVIDIA (NVDA), my top market pick for this year, is up 680% in 18 months, making it one of the largest stocks in the market, compared to 37.64% for the Dow Average.
By the way, I hope you have since deservedly fired all those newsletters who were bearish 18 months ago.
As good as 2017 has been, even IT will come to an end.
After earnings, the tax reform bill being mooted by congress has become the sole driver of share prices.
That has made life miserable for strategists such as myself, as trial balloons are floated one day, only to be shot down the next.
For a start, the bill is misnamed as a tax cut, as almost everyone I know will pay higher taxes, and I'm talking acquaintances in all 50 states.
The bill would cost me $100,000 personally, as I own a lot of real estate. The hit promises to heavily influence my vote in the next election.
Vastly complicating matters is the fact that the House and the Senate bills are wildly conflicting on basic issues, meaning that reconciliation is going to be impossible.
In the end, it may be a lot of fuss over nothing.
The bill that makes it to the president's desk for signing will be determined by the most liberal Republican member of the Senate, which at this point is either Maine's Susan Collins and Alaska's Lisa Murkowski.
And at this point Collins has confirmed that she won't vote for ANY bill without public hearings, and certainly WON'T vote for the elimination of the estate (death) tax.
In the end, it may be the erstwhile voters of Alabama who decide the matter.
They vote for a new Senator on December 12, and due to unforeseen circumstances, the Democratic candidate has suddenly shot to a 46% to 42% lead.
However, the margin of error is 4.1%. So once again, we are forced to bet on an event on where we have absolutely no idea of the outcome.
And you wanted to work in show business?
If this is all the bull market has to hang on, it could be in trouble.
It is this conclusion that prompted me to add my first short positions in stocks in many months.
In particular I sold the Russell 2000 (IWM), which actually has only 1,700 stocks left after mergers, bankruptcies, and private equity buyouts.
This is the index you love to hate in falling markets because of the fragility of smaller companies during times of economic uncertainty.
Of course my big trade of the week, if not the year, was my recommendation to buy the March 2018 $123-$125 vertical bear put spread LEAP.
Two days later saw the sharpest bond market selloff of the year, nearly two full points.
Those who got in at the $0.80 Wednesday low saw an eye-popping 69.50% return on capital by the Friday close.
It's another example of how the harder I work, the luckier I get.
Did Christmas come early for me?
I bought the exchange position limit maximum of 2,000 contracts with an average cost of $0.90, meaning that coined $50,000 in two days to cover my coming Christmas shopping bills (front row seats for Hamilton in Chicago, etc.).
Oops, looks like I am going to have to save some for a higher tax bill for 2018 as well.
The third quarter earnings are now winding down to a close, but we still have a few biggies in the coming week.
Troubled General Electric (GE), Wal-Mart (WMT), Home Depot (HD), and Bank of America (BAC) are all reporting.
On Monday, November 13, there is no economic data of any import.
On Tuesday, November 14 at 6:00 AM EST we get a new NFIB Small Business Optimism Index, which is based on a questionnaire of only 10 common business outlook questions.
On Wednesday, November 15, at 7:00 AM EST we obtain MBA Mortgage Applications, which should tail off, given the recent sharp rise in interest rates.
The weekly EIA Petroleum Status Report is out at 10:30 AM.
Thursday, November 16 at 8:30 AM EST we learn the Weekly Jobless Claims, which have been plumbing new 43 year lows.
On Friday, November 17 at 1:00 PM, we receive the Baker-Hughes Rig Count, which lately has been rolling over.
As for me, I'll be personally trying to reinvigorate the economy of Napa Valley by engaging in some high end wine tasting.
The community lost the entire month of October, normally their busiest of the year, and they are trying to get locals to fill the gap left by out-of-state cancellations. Layoffs are now rampant.
I'll also be helping relatives sift through the wreckage to salvage what few mementos they can.
I Call Them As I See Them
While the Global Trading Dispatch focuses on investment over a one week to six-month time frame, Mad Options Trader, provided by Matt Buckley, will focus primarily on the weekly US equity options expirations, with the goal of making profits at all times. Read more
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
November 10, 2017
Fiat Lux
Featured Trade:
(SELLING SHORT THE STOCK MARKET),
(IWM), (RWM), (SPY),
(A TRIBUTE TO A TRUE VETERAN)
As much as you may think I have just gone MAD, I believe it is time to start dipping your toe in on the short side in the stock market.
I don't want to boast, take credit, or run a victory lap about the Trade Alert I sent out yesterday.
After all, two hours after I sent out the Trade Alert to sell short the Russell 2000, the small cap index has plunged $2, or 1.36%, creating an instant $1,480 profit for my nimbler followers.
No, I won't go there.
Instead, I want to continue on with the finer points of the rationale for doing this trade.
I didn't have time earlier because I was in a rush to get the Trade Alert out while the (IWM) was still rallying to its high for the day.
The new Republican plan floated yesterday to delay corporate tax cuts to 2019 has certainly put the cat among the pigeons with equity investors.
It has reminded them how high stocks have run, and how much now withering unrealized profits are sitting on their books.
The Russell 2000 is actually misnamed, as it now has only 1,700 stocks.
The rest have disappeared over the years through mergers, privatizations, or bankruptcies, and have not been replaced, as happens quarterly with the S&P 500 (SPY).
For you and me this means that the (IWM) is more illiquid that the (SPY). When stock markets fall, the (IWM) falls about 1.5 times faster than the (SPY).
In other words, it's a great short to have in a falling market.
I think stocks markets may be starting to either top out, or roll over here, at least for the short term.
That is especially true of the Russell 2000, which has not participated in the rally for the past month.
An approaching yearend is a big risk for the markets, as are overstretched valuations and prices.
The warning signs of a selloff are absolutely everywhere, but until now, have been ignored.
My Mad Hedge Fund Trader Market Timing Index has been living in overbought territory for the past two months. The normal life of a medium-term top is, guess what? Two months.
To see how risky markets are right now, take a look at the three-year history of my market timing index.
It shows that the normal life of a medium-term topping process is two months.
When will that two months end?
About mid-December, two weeks before gigantic deferred tax selling hits the market in January.
Another way to play this is to buy the ProShares Short Russell 2000 ETF (RWM), a bet that small cap stocks will fall.
If you are looking for other ways to hedge your portfolios you might consider the Trade Alert I also sent yesterday to buy gold (GLD).
Look at the chart below for the barbarous relic and you see that we have a sideways triangle formation setting up over the past month that will be a nice springboard for a sudden move upward.
All we need is one more threat to the tax cuts, which these days, seem to be coming out of the woodwork.
Listening to subscribers in all 50 states, I don't know a single individual who is seeing the prospect of lower taxes as a result of the Republican plan.
It appears that those earning between $200,000 and $500,000 a year will bear the entire burden of the package, who make up the bulk of my readers.
The benefits gained through a doubling of the personal exemption don't even come close to offsetting losses from lost tax and mortgage interest deductions.
And where is the cut in capital gains taxes, long a Republican goal?
If you make anything over $500,000 a year, you're golden.
