Diary Archives - Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or The World of Twos

We now live in a world of twos. Economic growth is at 2%. Unemployment rate is at 2%. Inflation is at 2%.

And we may soon be facing the cruelest two on all. The stock market may only gain 2% this year, next year, and the year after that. For that’s what a world of twos creates: a stock market that goes virtually nowhere.

This is why I have lately been advising my concierge clients to start checking out one-year CD rates at their local bank, which are now paying 3%-4%. In a world where the stock market offers 2% of upside versus 20% of the downside, you buy CDs all day long.

Certainly, my Mad Hedge Market Timing Index leads one to such a sobering conclusion, which now reads at a very high 70. Another way of describing this highly successful algorithmically driven indicator is that there are new longs now that have only a 30% chance of making money, while 70% of short positions should end up in the green.

That’s not enough for me to go either way. Above 80 or below 20 are the sweet spots for me. And topping processes can run as long as three months. We are only two months into the current one (there’s that damn number two again!).

Let me elaborate. On the one hand, I am loathed to buy a market that has just risen 22% in four months and has a multiple at a three year 18 high in the face of falling earnings during a global synchronized slowdown with a Volatility Index t $12. That’s why equity mutual fund redemptions are proceeding at record highs this year.

On the other hand, I’m not in a rush to sell short a market that has had all four 2019 interest rate hikes canceled and has seen $2.5 trillion in new liquidity pumped into the economy.

As a result, the rate of new Trade Alerts will slow down from Q1’s torrid pace. There’s just nothing to do. And yes, I can already hear the complaints coming. Of course, you expect Trade Alerts if you just paid $3,000 for a service that then tells you to do nothing.

But telling you to do nothing is far more valuable than telling you to do something that is wrong. There is no law that says you have to trade every day of the year. After all, you’re trying to pay for your own yacht, not your broker’s.

There are other services out there that DO give you Trade Alert a day and are even cheaper than mine. But they lose money hand over fist and don’t publish their results as I do. Caveat Emptor. You pay peanuts, you get monkeys.

There is one Goldilocks scenario that’s not impossible to unfold this year. Massive Chinese economic stimulus is working, which is why stocks in the Middle Kingdom have outperformed those in the US by 2:1. That strength spills over to Europe, which then ratchets up US multinational earnings and a sharp rebound in US stocks.

That’s why big tech has been leading the market all year, and why we have been running leveraged longs in that sector. It could happen, but I’m remaining cautious anyway. Being up 14% in three months MAKES me cautious, and I know that stock-only buyers made a lot more.

Earnings are coming in better than expected for Q1. It is looking like companies excessively cut forecasts during the dark days of December. But is it already in the price? Cut risk.

Bright US retail sales give the market a boost, up 1.6% in March, the most in 18 months. A rare positive data point on an otherwise dull economy.

Global PMIs are still weak, with dismal reports from Asia and Europe. The US is still the bright shining light on the hill. Bad news for US exporters through.

Home mortgage demand is soaring. It looks like an ultra-low 4.03% 30-year fixed rate mortgage is going to rescue the residential real estate market from the jaws of defeat this spring.

Broker earnings in free fall, as collapsing trading volumes take a bite. It seems investor faith in this rally is almost nil. Risk is high. Take profits you lucky bastard.

Oil hit a new 2019 high. OPEC discipline also hits a record. Gas at the pump will top $4.00 just as the summer driving hits and it's already there in high-taxed California. Maybe it’s time for a “staycation” this year? Take that long cross-country trip during the next global recession.

Apple (AAPL) and QUALCOMM ended their epic legal battle, over smartphone chip patent dispute. It finally became a high distraction of (AAPL). Buy (QCOM) on the dip.

The Mad Hedge Fund Trader treaded water this year, up 13.92% year to date, as we took profits on the last of our technology long positions.

We took profits on a six-month peak of 13 positions across the Global Trading Dispatch and the Mad Hedge Technology Letter services and will wait for markets to tell us what to do next.

April is so far down -1.50. My 2019 year to date return retreated to +13.92%, paring my trailing one-year down to +21.62%.

My nine and a half year return backed off to +314.06%. The average annualized return appreciated to +33.64%. I am now 100% in cash on both services.

The coming week will be the biggest for the entire Q1 earnings cycle.

On Monday, April 22 at 10:00 AM, we get March Existing Home Sales.
Kimberly Clark and Whirlpool report.

On Tuesday, April 23, 10:00 AM EST, we learn March New Home Sales.
Coca Cola (K) and Verizon (VZ) report.

On Wednesday, April 24, it’s a big day for earnings with Facebook (FB), Microsoft (MSFT), Boeing (BA), and Tesla (TSLA) reporting.

On Thursday, April 25 at 8:30 the Weekly Jobless Claims are produced. We also obtain March Durable Goods. Amazon (AMZN) and Intel (INTC) report.

On Friday, April 26 at 8:30 AM, we get the number we have been waiting for all month, the first Read on Q1 GDP. How mad will it be? Chevron (CVX) and Exxon (XOM) report.

As for me, I’m back out of my deathbed, finally catching up with a backlog of admin and on the lookout for new Trade Alerts. Health Care (XLV) is starting to look interesting, now that it has been slaughtered by the coming election promises of Medicare for all.

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

April 18, 2019

Diary, Newsletter, Summary

Global Market Comments
April 18, 2019
Fiat Lux

Featured Trade:
(SIX STOCKS TO BUY THAT ALWAYS MAKE MONEY),
(SPY), (IXUS), (EEM), (VNQ), (TLT), (TIP)

April 17, 2019

Diary, Newsletter, Summary

Global Market Comments
April 17, 2019
Fiat Lux

Featured Trade:

(DECODING THE GREENBACK),
(WHAT ABOUT ASSET ALLOCATION?)
(TESTIMONIAL),

What About Asset Allocation?

Diary, Newsletter

Asset allocation is the one question that I get every day, which I absolutely cannot answer.

The reason is simple: no two investors are alike. The answer varies whether you are young or old, have $1,000 in the bank or $1 billion, are a sophisticated investor or an average Joe, in the top or the bottom tax bracket, and so on.

This is something you should ask your financial advisor, if you haven’t fired him already, which you probably should.

Having said all that, there is one old hard and fast rule which you should probably dump. It used to be prudent to own your age in bonds. So if you were 70, you should have had 70% of your assets in fixed income instruments and 30% in equities.

Given the extreme over valuation of all bonds today, and that we probably just entered a 30-year bear market, I would completely ignore this rule and own no bonds.

Instead you should substitute high dividend paying stocks for bonds. You can get 4% a year or more in yields these days, and get a great inflation hedge, to boot. You will also own what everyone else in the world is trying to buy right now, high yield US stocks.

Allocation: Are You Him?

Or Him?

April 16, 2019

Diary, Newsletter, Summary

Global Market Comments
April 16, 2019
Fiat Lux

Featured Trade:

(WHY YOU WILL LOSE YOU JOB IN THE NEXT FIVE YEARS,
AND WHAT TO DO ABOUT IT),
(BLK)

April 15, 2019

Diary, Newsletter, Summary

Global Market Comments
April 15, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, OR QE IS BACK!),
(SPY), (TLT), (TSLA), (DIS), (FCX), (GOOG), (MSFT), (AMZN)

The Market Outlook for the Week Ahead, or QE is Back!

Diary, Newsletter, Research

Let me warn you in advance that I am only going off drugs long enough to write this newsletter.

This year’s flu has finally laid me low and let me tell you it is a real killer. Perhaps it is my advanced age that has magnified its effects. Then I developed an allergic reaction to the flu medicine I was taking. For a couple of days there, I was looking like the Michelin Man.

However, I did have a lot of time to read research. And what I learned was sobering.

For a start, we are fully back to a quantitative easing market. In one fell swoop, the Fed went from an expectation of four interest rate hikes in 2019 to none. By ending quantitative tightening early, it has cut the amount of cash it is withdrawing from the financial system from $4.3 trillion to only $1.5 trillion.

The Fed is in effect reflating the bubble one more time. And what do you do in a QE-driven economy. YOU BUY EVERYTHING! This explains why stocks, bonds, commodities, and energy have all been marching upward in unison this year even though that is supposed to be theoretically impossible.

Yes, the decade long liquidity-driven bull market may have another leg up to go.

A higher high inevitably leads to a lower low. The trades you are executing now may be akin to picking up pennies in front of a steam roller. We are clearly planting the seeds of the next financial crisis. But for now, the pain trade is clearly to the upside.

Those of who who traded through the dotcom bubble are seeing déjà vu all over again. Huge money-losing tech companies are now floating IPOs on a daily basis. This too will end in tears, which is why I have recommended to followers to avoid all of them. This is a sucker’s game.

There is a cloud behind this silver lining. After a ballistic 21.43% move in the Dow Average in four months, markets are trading as if risk is a thing of the past. The euphoria is here and complacency rules. That means the number of new possible low risk/high return trades out there has fallen to zero.

There is another cloud to worry about. The more excess stimulus the Fed provides the economy now, the fewer resources it will have to get us out of the next recession, which might be only a year off. As a result, everyone is long but extremely nervous. They are still participating in the party but are standing next to the exit door. Pent up volatility is building like a volcano ready to explode.

The other great revelation is that markets have been trading extremely short term in nature, only one quarter ahead of what the real economy is doing. So, a stock market meltdown in Q4 2018 discounted a collapsing GDP growth in Q1 2019 of a 1% rate or less. That is down 80% from a year ago peak.

The ultra-strong market in Q1 is anticipating an economic rebound in Q2, After that, who knows?

That’s why I am moving both of my trading portfolios for Global Trading Dispatch and the Mad Hedge Technology Letter to 100% cash positions in the coming week.

Last week was the week when Walt Disney (DIS) morphed from being a has-been media stock hobbled by a failing holding in ESPN to a dynamic company that is suddenly taking over the world. The reward was an eye-popping 25% move in three weeks, which we caught.

Copper demand is rocketing, off of soaring global electric car production. Each vehicle needs 22 pounds of the red metal, and 4 million have been built so far. That number reached 5 million by June. Take a second bite of the apple with (FCX) as well.

General Electric got slaughtered again, with an earnings downgrade from Morgan Stanley. It will take years to sort out this mess. Avoid (GE).

The 30-year fixed rate mortgage plunged to 4.03% and may save the spring selling season for residential real estate.

Apple Topped $200. It looks like the market is finally buying the services story. Stand aside for the short term. It’s had a great run, up 42% from the December low. I’m waiting for 5G until I buy my next iPhone, probably next year.

The Mad Hedge Fund Trader hit a new all-time high briefly, up 15.46% year to date, and beating the pants off the Dow Average. Good thing I didn’t buy the bearish argument. There’s too much cash floating around the world. However, my downside hedges in Disney and Tesla cost me some money when I stopped out. I was late by a day.

We are taking profits on a six-month peak of 13 positions across the GTD and Tech Letter services and will wait for markets to tell us what to do next.

April is so far down -1.50%, as my downside hedges in Tesla (TSLA) and Disney (DIS) cost me some sofa change. My 2019 year to date return retreated to +13.92%, paring my trailing one-year return back up to +27.22%.

My nine and a half year return backed off to +314.06%. The average annualized return appreciated to +33.65%. I am now 100% in cash.

The Mad Hedge Technology Letter has gone ballistic, with an aggressive and unhedged 30% long which expires this week. It is maintaining positions in Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN), which are clearly going to new highs.

It’s going to be a dull week on the data front after last week’s fireworks.

On Monday, April 15 at 8:30 AM, we get the April Empire State Index. Citibank (C) and Goldman Sachs (GS) report.

On Tuesday, April 16, 9:15 AM EST, we learn March Industrial Production. Netflix (NFLX) and IBM (IBM) report.

On Wednesday, April 17 at 2:00 PM, we get the Fed Beige Book Indicators. Morgan Stanley reports (MS).

On Thursday, April 18 at 8:30 the Weekly Jobless Claims are produced. At 10:00 AM EST, we obtain the March Index of Leading Economic Indicators. American Express (AXP) reports.

On Friday, April 19 at 8:30 AM, the markets are closed for Good Friday.

As for me, I am staying planted in my bed reading up on research and watching HBO until I kick this flu. After that, I should be good for the rest of the year.

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader