Global Market Comments
November 15, 2019
Fiat Lux
Featured Trade:
(NOVEMBER 13 BIWEEKLY STRATEGY WEBINAR Q&A),
(FCX), (TSLA), (FXI), (SPY), (AAPL), (M), (BA), (TLT)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader November 13 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Has the multiyear decline in commodities ended, such as for Freeport McMoRan (FCX)?
A: Yes, for the short term. However, we will almost certainly have another recession scare—or even election scare—sometime next year. That will cause a retest of the recent lows in commodities. The volatility will continue, but the long-term trend is up. The next recession will likely be so short that people will start discounting the recovery now. If you’re only looking for a 2-quarter recession and have a long-term view of your stocks, you probably want to use any kind of dips to buy now. A lot of the recent buying in Tesla (TESLA), by the way, has been of that nature.
Q: Will the US eventually drop all tariffs on Chinese imports (FXI), or do you see the US raising them?
A: I think eventually they will solve the trade war next year, right in front of the election—maybe June/July/August—so that Trump has something to run on. It’s too early to solve it now for political purposes. The whole trade war was essentially designed to depress the economy and then bring in Trump as the savior right before the election, and that has all tariffs disappearing sometime next year. By the way, some of the buying in the market now is discounting the end to the uncertainty of the trade war. So, either that or it ends when Trump leaves office—in either case, that’s 15 months off. Many big institutions think in timeframes much longer than that.
Q: Can the US consumer bring us through the holiday season to have equities (SPY) finish at all-time highs?
A: Yes, they can; I thought we might get a dip to trade off of in Oct/Nov, but we haven't gotten it. It’s looking more and more like a melt-up into year-end, even though it’s a slow-motion melt-up of 50 or 100 points a day.
Q: Will Apple (AAPL) keep going up every day forever?
A: No, don’t forget that Apple can have 40% pullbacks at any time without warning. Usually, they happen with new product launches. I would think we’re getting overextended here. If we somehow get a 10% or 20% pullback in Apple next year, I’d be jumping back into that for the product launch next September when we’ll likely hit $200, which has been my target for Apple for a very long time.
Q: Is it time to make a short term buy of beaten-down retail names like Macy’s (M)?
A: No, I am a person who trades with the long-term trend at all times. Most people are not agile or smart enough to do counter-trend trades and make money, and the risk/reward is also terrible—you make a mistake, you get killed on those. I think this company’s having a going-out-of-business sale, unless we enter a major increase in economic growth in this country, which is nowhere in the cards. If anything, I’m looking for a sharp rally to sell into. Macy’s might want to test that 200-day moving average up there at $20 at some point; that would be a great selling place. But no, we don’t want to touch the retailers right here, and retailers have been very kind to us this year on the short side.
Q: Do you see the United States US Treasury Bond Fund (TLT) as a safe-haven buy at today’s prices, or are bonds overpriced?
A: I think we’re getting the safe-haven bid as a hedge against stocks selling off. Wildly overbought Mad Hedge Market Timing Indexes are also great places to buy bonds because when you finally get the correction in the stock market, money piles into bonds, and you want to be buying the (TLT) before it does that.
Q: Is Boeing (BA) a short for the next 6 months?
A: No, I think the short play on Boeing is over. If we do get another run down to $325, take it as a gift and load the boat. I think the next major move in Boeing is to $400. Buy the dips.
Q: Do you think the Fed will cut one more time before the year is over, or will they hold off?
A: They will hold off—Powell said as much in this morning’s speech. He really said that not only will there be no more cuts this year, but next year as well, because we are essentially eating our seed corn when it comes to the next recession if we do cut rate because that means there will be no tools with which to get out of the recession.
Q: Are you seeing stocks rising to the end of the year, into the first of next year? If so, will there be a pullback during November before a final rise?
A: Yes we are seeing stocks rise to the end of the year; and you would think we will see some kind of pullback, but we have so much liquidity chasing so few stocks now, any pullbacks may be limited.
Q: (TLT) is called the iShares Barclay 20+ year bond fund. In your trade alerts, you talk about 10-year yields. How are the 10-year yields linked to the (TLT)?
A: There isn't a liquid 10-year bond ETF. There are ETFs but they’re fairly illiquid, so I put everyone into the 20-year (TLT) purely for liquidity reasons.
Q: What about going outright long on the (TLT)?
A: That’s not a bad option; the only problem with outright longs is you make no money if we grind sideways for a while, whereas with the options trade, you get in all the time decay. And we only did the December's, which have about 27 days left in them in trading time.
Q: Tesla just announced it will open a Berlin factory—what does this mean for Tesla and the share providers?
A: Well, it creates the means by which Tesla can increase its production from 400,000 cars this year to 5,000,000 cars a year in 10 years. And it’s just one other factory; expect more to come. Interestingly, their first choice was actually Great Britain, but Brexit scared them out of there.
Q: Do you think Silicon Valley should be a judge on political advertising?
A: I think Silicon Valley should not allow publication of obviously false content which they do now. That’s something the mainstream media are not allowed to do or they will get fined by the Federal Communications Commission. That ban does not apply to social media companies like Facebook (FB) and Twitter (TWTR) but should be as they are vastly more powerful than conventional media. Without it, you'll continue to see massive amounts of false information put out on the Internet. I can see the fake info clearly, but most can’t. I saw a statistic yesterday saying that roughly 50% of all information you read on the internet is false.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
November 14, 2019
Fiat Lux
Featured Trade:
(WHY TECHNICAL ANALYSIS IS A DISASTER)
(SPY), (QQQ), (IWM), (VIX),
(TESTIMONIAL), (NVDA)
Global Market Comments
November 13, 2019
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, NOVEMBER 15 OPTIONS EXPIRATION),
(TAKE A RIDE IN THE NEW SHORT JUNK ETF),
(SJB), (JNK), (HYG),
(THE COOLEST TOMBSTONE CONTEST)
Followers of the Mad Hedge Technology Letter have the good fortune to own a deep in-the-money options position that expires on Friday, November 15, and I just want to explain to the newbies how to best maximize their profits.
This involves the:
the Boeing (BA) November 2019 $300-$310 in-the-money vertical BULL CALL spread
The total profit on this position will increase the value of our $100,000 model trading portfolio by an impressive 1.35%, or $1,375.
Provided that we don’t have a monster “RISK OFF” move in the market this week (more failure of the China trade talks? War with Iran? A massacre in Hong Kong?) which causes stocks to collapse and volatility to rocket, this position should expire at its maximum profit points. So far, so good.
I’ll do the math for you on the (BA) position. Your profit can be calculated as follows:
Profit: $10.00 - $8.75 = $1.25
(11 contracts X 100 contracts per option X $1.25 profit per options)
= $1,375 or 14.28% in 18 trading days.
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 position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning November 18 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally mistakes do occur. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
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 on Friday. So, if you plan to exit, do so well before the final expiration at the Friday market close.
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, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next quarter end.
Take your winnings and go out and buy yourself a well-earned dinner. Or use it to put a down payment on a long cruise.
Well done, and on to the next trade.
Markets are Especially Tricky Right Now
Stocks will drop sharply in the coming year. It will most likely happen when the Democratic candidate takes a substantial lead over the president, which recent by-elections have shown is likely.
What could be better than an ETF that benefits from both falling bonds AND stocks?
It just so happens that there is such an animal.
When you look at the profusion of new ETFs being launched today, you find that they almost always correspond with market tops.
The higher the market, the greater the demand for the underlying, and the more leverage traders bay for it. The resulting returns for investors are usually disastrous.
But occasionally, a blind squirrel finds an acorn, and if you fire buckshot long enough, you hit a barn.
That’s why I am getting interested in the new ProShares Short High Yield ETF (SJB). After riding the bull move in junk all the way up with (JNK), (HYG), I have recently turned negative on the sector.
Junk bonds have moved too far too fast. Current spreads for junk paper are now only 200 basis points over equivalent term Treasury bonds, and investors at these levels are in no way being compensated for their risk.
If the stock market starts to roll over in 2018, then the junk bond market will follow it in the elevator going down to the ladies' underwear department in the basement.
Keep in mind that when shorting the junk market, you run into the same problem you have with the (TBT), a leveraged short ETF for the Treasury bond market.
Buy the (JNK) and you are short a 5.75% coupon which, with the management fees, works out to a monthly cost of more than 50 basis points. That is a big nut to cover.
So timing for entry into this fund will be crucial
Global Market Comments
November 12, 2019
Fiat Lux
Featured Trade:
(HOW TO GET A FREE TESLA), (TSLA),
(TESTIMONIAL)
Global Market Comments
November 11, 2019
Fiat Lux
SPECIAL VETERANS DAY ISSUE
Featured Trade:
(A TRIBUTE TO A TRUE VETERAN)
Global Market Comments
November 8, 2019
Fiat Lux
Featured Trade:
(WHAT I TOLD MY BIGGEST HEDGE FUND CLIENT)
(SPY), (AAPL), (AMZN), (MSFT)
This week, I had to fly off to a party given by my biggest hedge fund client at the Penthouse Suite at the Bellagio Hotel in Las Vegas. And what a party it was!
The showgirls were flowing hot and heavy, roaming magicians performed magic tricks, and there was the odd fire-breather or two. For entertainment, we were treated to rock legend Lenny Kravitz who played his signature song, American Woman.
I managed to get a few hours in private with my client, one of the wealthiest men in the world whom you would all recognize in an instant, and this is what I told him.
SELL THE NEXT BIG RALLY IN STOCKS. IT MAY BE YOUR LAST CHANCE TO GET OUT AT THE TOP BEFORE THE NEXT BEAR MARKET. ANY STOCK YOU KEEP AFTER THAT YOU WILL HAVE TO OWN FOR AT LEAST TWO YEARS AND 4-5 YEARS TO GET BACK UP TO YOUR ORIGINAL COST!
The markets are coiled for a sharp year-end rally for the following 16 reasons:
1) The S&P 500 (SPY) is more overbought than at any time in a decade, according to my Mad Hedge Marketing Timing Index at 90. Technology is the most oversold since the Dotcom bubble. We are in the early stages of the final melt-up.
2) The algorithms that drove the markets down so quickly and severely are now poised to flip to the upside.
3) Bear markets never started with real interest rates of zero (1.75% inflation rate – 1.75% ten year US Treasury yield).
4) Bear markets also don’t start with all-time high profits reported by the leading companies like Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT)
5) We are now in the strongest seasonal period of market gains from November to May.
6) Sales during both Black Friday and Cyber Monday will do exceptionally well as the consumer is on fire.
7) At least $100 billion in corporate share buybacks have to kick end by yearend.
8) Risk Parity Traders, another new hedge fund strategy bedeviling the markets, are now in a position to strongly buy stocks, and sell bonds, which have gone nowhere.
9) Both month-end and year-end window-dressing purchases are not to be underestimated.
10) Much stock selling is being deferred to January when capital gains taxes are not payable for 16 months.
11) A lot of hedge fund shorts have to be covered by the end of 2019.
12) Global liquidity growth is slowing but is still enormous. There is nothing else to buy but US stocks. If you missed 2019, you get to do it all over again in 2020.
13) The collapse of oil prices from $77 to $50 a barrel has created a $200 billion surprise economic stimulus package for the US, especially for big energy consumers like transportation.
IT ALL ADDS UP TO A BIG FAT “BUY.”
I expect this rally to set up a classic head and shoulders top in the first quarter of 2019 (see chart below). Here’s where stocks fail, and we enter a new bear market. Here are ten reasons why:
1) Next year, S&P 500 earnings growth will sharply downshift from a 26% annual growth rate in 2018 to zero in 2020.
2) The upfront benefits of the corporate tax cuts will be all spent. With all the tax breaks in the world, companies won’t spend a dime if they believe the US is going into recession.
3) The massive expansion of government spending Trump brought us will be slowed by a Democratic-controlled House of Representatives, especially for defense.
4) The trade war with China will continue, cutting US growth. The Chinese are determined to outlast Donald Trump. The Middle Kingdom can take far more pain than the US, which has open elections.
5) The global synchronized recession worsens, dragging the US into the tar pit.
6) The Fed will cut interest rates any more in this cycle. You’re going to have to live on the hyper stimulus you have already received.
7) If the Fed had any doubts, they only need to look at the inflationary impacts of new duties on most imported goods.
8) A continuation of the China trade war also will trigger depression in the agricultural sector which is suffering from a China boycott that has crushed prices. Millions of tons of crops rotting in storage silos. This will spill over into a regional banking crisis.
9) The mere age of this Methuselah-like bull market at 11 years is an issue. Too many people have made too much money too easily for too long.
This all adds up to a big “SELL” sometime in the spring.
I just thought you’d like to know.
To watch the video of Lenny Kravitz playing, please click here.
