Until July 1, everyone seemed to have pretty much the same investment strategy.

What would you do if I recommended an investment strategy that would cause your accountant to disown you, your inheritance anticipating children to sue you, and your wife to file for divorce?

Chances are you would designate all my future mailings as SPAM, unfriend me from Facebook, and tear my card out of your Rolodex.

Well, here is anyway. I’ll call it my “Ignore All Risk” portfolio. It’s really quite simple. This is all you have to do:

1) Buy stocks that have already gone up the most, boast the highest year-to-date performance, and have momentum overwhelmingly on their side. Only do what every else is doing. Go for the easy trade.

2) Buy stocks with the highest price earnings multiples. I’m talking mid to high hundreds.

3) Lean towards stocks with the highest short interest. GameStop (GME) was a perfect example of this.

4) Put every free penny you have into cryptocurrency bets, like Bitcoin

5) Ignore all valuations and fundamentals. Don’t waste a minute reading a single page of research, especially from an old-line legacy broker. Seeking Alpha, where none of the information is independently verified, is a far better source of information than JP Morgan (JPM).

6) Big institutions should allocate all of their assets only to their youngest traders and portfolio managers. Old farts, or anyone with any memory or experience whatsoever, should be completely ignored. A person who’s never seen a stock go down is now your best friend.

7) Oh, and there is one more thing. Go hugely overweight bonds over equities in the face of unprecedented and massive government borrowing at all-time low interest rates.

Any professional manager pursuing an approach like this would surely get fired, lose all of their securities registrations and licenses, and get banned from the industry for life.

But there is one big offset to these career-ending consequences. They would also be the top-performing money manager of the year, beating the pants off of all competitors. Every investment they made this year worked.

They would be regarded as trading genius on par with my friends Paul Tudor Jones and Appaloosa’s David Tepper. If they invested their own money using this strategy, they would be so filthy rich they wouldn’t care what happened to themselves.

We are now in an environment where EVERY trade is crowded, be they in equities, fixed income, or foreign exchange. There is no value anywhere. The metaphors coming to mind are legion. There are too many passengers on one side of the canoe. The lemmings are mindlessly stampeding towards a giant cliff. I could go on.

Of course, incredible excess liquidity is to blame. That is the only time both stocks AND bonds go up at the same time. The world’s central banks have been flooding the globe with cash for decades now, and the pandemic has given them license to increase these efforts vastly.

The end result has been to overvalue all assets classes, be they paper or hard. Cash is trash, especially in Japan and Europe where until recently you had to PAY banks to take your money.

The fact is that shares with the fastest price appreciation over the past 12 months are trading at valuations that are almost 50% higher than normal.

I have traded and invested through all of this before; the Nifty Fifty of the early 1970’s, the Great Japan Bubble of the 1980’s, the Dotcom Bubble of the 1990’s, and of course the 2007 bubble top. And there is one thing all of these market apexes have in common. They inflated a lot longer than anyone expected, sometimes FOR YEARS!

You could be conservative, go into 100% cash, and just stay on the sidelines until mass groupthink, hysteria, and insanity leave the market. But that could be a very long time.

And after more than a half-century in this business, there is one thing I know for sure. Traders who don’t trade, investors who don’t invest, and newsletters that don’t recommend all have one thing in common. THEY GET FIRED. Just because investing gets hard is no reason to quit the market.

The Japanese have a great expression for this: “When the fool is dancing, the greater fool is watching.” So, I’m going to start dancing away. What will it be? The cha cha, the limbo, or the Watusi?

Hmmmm. Let me see. Let me Google what everyone else is doing.

 

 

I received a call from a friend the other day.

He said he bought Goldman Sachs last summer, a great move since it has since risen by 40%. That is until last week when he got a margin call from Goldman Sachs. It turns out that he didn’t actually BUY (GS), he sold it short, accidentally clicking the bid instead of the offer.

My friend asked if there was any recourse in this situation.

No, not a chance, not in a million years. Brokers are the most sued companies on the planet. They record absolutely everything and have massive teams of lawyers to defend themselves. Even when they mistakenly allocate someone else’s trade to your account you only have 24 hours to contest it. After that, you own it.

Oh, if you accidentally do the wrong trade and it makes money, it will disappear from your account the second they become aware of it, even if it is months later.

What was the cost of this harsh lesson? $700,000.

So, today, I’m going to teach you how to execute one of my market-beating Trade Alerts to prevent you from suffering a $700,000 lesson yourself.

Pay attention, because if you have subscribed to Global Trading Dispatch or Mad Hedge Concierge, you will receive about 200 of these a year. These alerts will bunch up at market tops and bottoms. After that, we may see weeks of no action. Ideal entry points don’t happen every day of the year.

Following them is your path to understanding global financial markets.

You will also make a lot of money.

Most important thing is for you to add my email address to your address book. Otherwise, all my trade alerts will go into your spam folder.

So please add alert@madhedgefundtrader.com right now to your email address book. To sign up for the Text Alert Service so you can get alerts five seconds after they are issued, please email Filomena directly at support@madhedgefundtrader.com. Be sure to put “Text Alert Sign Up” in the subject line.

Let me show you a real-world example of how to do a round trip on a trade that I issued a few years ago.

First, start trading on paper only. All online brokers now give you the option to trade on paper with pretend money. They will even run a pretend P&L for you. That way, in a moment of excitement, when you hit the bid instead of lifting the offer, you will lose $700,000 of pretend money, not the real thing.

Here's another hint. Check your positions at the end of every day. I know this can be tedious, but that way, if a surprise $16 million US Treasury bill position suddenly and erroneously ends up in your account (which happened to me last week) you can get on the phone immediately and get your friendly broker to move it into the correct account.

There are two ways to execute a trade: like a beginner, or as a professional. I’ll focus on the latter.

You may notice that I send out a lot of trade alerts for options spreads, where I believe the best risk/reward for the individual trader lies. That’s because these include a hedge within a hedge within a hedge, which I will talk about another day.

These are illiquid securities that are executed by computer across 11 different online exchanges. These have wide dealing spreads. For example, yesterday I bought the Tesla (TSLA) August 2024 $150-$160 in-the-money vertical bull call debit spread at $8.60 or best. These expire worth $10 in nine trading days. The bid/offered spread was $8.30-$8.90.

This is how you enter your orders. Split your order into five parts. Then start at the middle market and place limit orders at $8.60, $8.70, $8.80, $8.90, and $9.00. You should get one or two fills at $8.80 and $8.90. If there is an intraday dip in the market, you will get all of them with an average price of $8.80. This is called scaling.

For overseas traders who are asleep when the US markets are open, such as those in Australia, this is a great approach. Just enter your limit orders before the market opens, go to sleep, and dream about how you will spend your profits. When you wake up, your fills are in your inbox. I have followers in Australia who have been with me for a decade or more and they say this approach works like a charm.

Holy smokes! What’s that?

That pinging sound from your cell phone tells you the Mad Hedge Fund Trader has just sent out a Trade Alert! The urgent text alert says:

MHFT ALERT- Buy ETF (TBT) at $57.06 or best, Opening Trade 9-8-2014, wgt: 10% =174 shares, SEE EMAIL

A minute later I received the following email:

Sender: Mad Hedge Fund Trader

Subject: Trade Alert - (TBT) September 9, 2014

Trade Alert - (TBT)

Buy the ProShares Ultra Short 20+ Treasury ETF (TBT) at $57.06 or best

trade date 9-8-2014

Opening Trade

Portfolio weighting: 10%

Number of Shares: 174

You can buy this in a $57-$58 range and have a reasonable expectation of making money on this trade.

Logic to follow.

Here is the specific trade you need to execute this position:

Buy 174 shares of the (TBT) at……………$57.06

(174 shares X $57.56 = $10,015.44)

 

 

So that’s how it’s done.

You now own 174 shares of the (TBT). That is a bet that bond prices will fall and interest rates will rise.

So let’s see how that position worked out over the next several days.

Did you make money? Let’s see what transpired in the weeks after this trade alert was issued.

It turned out that the TBT was the perfect position to take at that time.

Bond prices fell pretty fast, and interest rates spiked up nicely, causing the (TBT) to jump by $2.91 in the following nine days. That works out to a nice little gain of 5%.

By the way, you can pull up these charts anytime you want for free by just going to www.stockcharts.com 

What’s that? Here comes another text message from the Mad Hedge Fund Trader! Better check it out.

 

 

MHFT ALERT- Sell ETF (TBT) at $59.97 or best, Closing Trade 9-17-2014, wgt: 10% =174 shares, SEE EMAIL

The following email says:

Sender: Mad Hedge Fund Trader

Subject: Trade Alert - (TBT) September 17, 2014

Trade Alert - (TBT)

Sell the ProShares Ultra Short 20+ Treasury ETF (TBT) at $59.97 or best

trade date: 9-17-2014

Closing Trade

Portfolio weighting: 10%

Number of Shares: 174

Here is the specific trade you need to exit this position:

Sell 174 shares of the August 2014 (TBT) at……………$59.97

Profit: $59.97 - $57.06 = $2.91

174 shares X $2.91 = $506.34, or 0.51% for the notional $100,000 model portfolio.

So there, you’ve just made $506 in just 9 days, which works out to 0.51% per $100,000.

You did this never risking more than 10% of your cash at any time.

Annualize that, and it works out to 206% a year.

That’s how it’s done. This is how the big boys do it. This is how I do it.

Of course, not every trade is a winner, and not all do this well so quickly. Sometimes, it requires the patience of Job to see a trade through to profitability. Last year, 90% of my trades made money. The rest I stopped out of for small losses. That’s because it’s easier to dig yourself out of a small hole than a big one.

But one thing is for sure. You win more games hitting lots of singles. Beginners stand out by swinging for the fences and striking out almost every time. 

So, watch your text message service for the next Trade Alert. Watch your email. And you can follow me on your way to successful trading, and to riches.

 

 

I am writing this to you from the first-class lounge at Warsaw Airport for LOT Airlines, the national air carrier of Poland. Every seat is full and the air conditioning is broken so the air is stifling.

The guy sitting next to me is shopping for a new tattoo on his iPhone as if he had space for another one.

There is all the day-old Polish food you can eat, but everything is full of garlic, not a great idea in a packed lounge of people waiting to get on to packed airplanes. The Internet doesn’t work, and I had to hack into another airline’s router to send out my trade alerts. They’re doing noisy construction next door. I’m here because my LOT flight to Lithuania is five hours late.

Oh, and the Dow is down 1,000 points.

Oh, the joys of international travel! I wish you weren’t here.

Which raises the important question of the day.

Did Jay Powell blow it?

Did he and his cohorts at the Federal Reserve hold off on interest rate cuts unnecessarily long, so long that he triggered a recession? That is certainly what the stock market thinks today, where it is to sell first and ask questions later.

When the Fed governor says he might cut interest rates that means “SELL” to a trader when the Headline Employment Rate is on an undeniable trend to a year high of 4.3%.

So, how is Jay to atone for his sins?

Cut rates sooner, faster, and by more. Instead of 0.5% in cuts by yearend, we instead are looking at 1.50%. He certainly has the dry powder to do it with. A 5.25% overnight rate against a 3.0% YOY inflation rate that is falling?

Who is Jay kidding?

It may take a couple of weeks for markets to figure all this out. Wash out all the stale Big Tech leveraged longs and we could get there pretty quickly. The 30% Volatility Index ($VIX) on Friday was certainly pretty convincing. That is known in the trade as a “1% event”, with a move in ($VIX) from $12 to $30 in two days only occurring 1% of the time.

Just be happy you didn’t own Intel (INTC), down 50% on the week. I (and therefore you) never bought into the (INTC) recovery story because I think the CEO is a con man. Andy Grove is rolling over in his grave.

In the meantime, anyone who loaded the boat with interest rate-sensitive stocks is looking just fine, thank you very much. Look no further than the (TLT), which hit an impressive $98, a one-year high.

Those who hovered up the dozen or so (TLT) calls spreads and long-term LEAPS I recommended during this time are sitting pretty. Has anyone looked at the (CCI) lately, where I put out a LEAPS as recently as in June at $95? It’s now at $115.50!

And the game has only just begun. This could go on for years.

Although few realize it, we actually suffered a global financial crisis last week. The metals like copper (COPX), and iron ore (BHP) have been waving a red flag for three months. Oil prices (USO) matched a new low for the year, already the worst-performing asset class of 2024, despite getting massive support from multiple wars in the Middle East. A near-instant move in ten-year US Treasury yields to 3.79% says that a recession is already here.

What you are seeing worldwide is known in the business as a “de-grossing,” where everyone shrinks their trading books all at once. The proof of this is the explosive 15% move in the Japanese yen (FXY).

For the past 30 years, hedge funds have been financing their positions through selling short the yen, which yielded zero, and investing the proceeds anywhere in the world into anything with a positive return. They then leveraged this position times ten or more. The Bank of Japan’s move to raise interest rates by a mere 25 basis points ended this game.

Another signal this was all about a “de-grossing” is that assets that should be rocketing on falling interest rates, like gold (GLD) and silver (SLV), actually fell. These declines will end once sanity returns to the markets, which should be soon.

The swan song for all of this frenetic activity is that some great trading and investment opportunities are setting up. But I’ll wait until the last trader throws up on their shoes before pulling the trigger. My Mad Hedge AI Market Timing Index now at 20 says we are already there.

So will you.

In July, we ended up a stratospheric +10.92%. So far in August, we are down by -4.83%. My 2024 year-to-date performance is at +26.11%. The S&P 500 (SPY) is up +9.43% so far in 2024. My trailing one-year return reached +42.49.

That brings my 16-year total return to +702.74. My average annualized return has recovered to +51.42%.

I used the market collapse to take profit in my shorts in (NVDA). I am still short (TSLA). I came out of a long in (SLV) when it started to wobble at support, a move that days proved too soon.

I added a new long in interest-sensitive (CAT). The Friday meltdown stopped me out of (IWM) and (IBKR). It’s easier to dig yourself out of a small hole than a big one.

I also used the meltdown in big tech to add a very deep in-the-money long (AMZN), taking advantage of the extremely high implied volatilities.

This is in addition to existing longs in (GLD), (BRK/B), (DE), and which I will likely run into the August 16 option expiration.

Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 44 of 56 trades have been profitable so far in 2024, and several of those losses were really break-even. That is a success rate of 78.57%.

Try beating that anywhere.

Market Prices in 50 Point Basis Cut for September, job growth in the U.S. cratered and the unemployment rate inched higher. Nonfarm payrolls grew by just 114,000 and below the estimate of 185,000. The unemployment rate edged higher to 4.3% setting the stage for rates to be cut earlier than expected.

Weekly Jobless Claims Jump 14,000 to 249,000, a one-year high. The report from the Labor Department on Thursday also showed the number of people on jobless rolls swelling in mid-July to the highest level since late 2021. It could fan fears of a rapid labor market deterioration, which surfaced last month when data showed the unemployment rate rose to a 2-1/2-year high of 4.1% in June.

Bank of Japan Raises Rates for only the Second Time in 17 Years, up 25 basis points to 0.25%. The Japanese yen caught on fire as massive short positions were covered. The BOJ also halved monthly bond buying to ¥3 trillion in Q1 2026. Five-year bond yields hit a 15-year high at 0.665%. The world’s most despised currency, down 40% in three years, just caught a bid. Buy (FXY) on dips.

Fed Leaves Rates Unchanged at 23-Year High but indicated that the September rate cut is in the mail. Recent economic data has pointed toward inflation data falling back toward the central bank’s 2% target, while the unemployment rate has crept up above 4%. The Fed said in its policy statement Wednesday that it is attentive to risks on “both sides of its dual mandate,” which is maximum employment and stable prices.

Pending Home Sales Rocket 4.8% in June, versus 1.0% expected. The rise in housing inventory is beginning to lead to more contract signings. Multiple offers are less intense, and buyers are in a more favorable position. The Pending Home Sales Index (PHS), a leading indicator of housing activity, measures housing contract activity and is based on signed real estate contracts for existing single-family homes, condos, and co-ops.

Europe’s Economy Grew at a 0.3% Rate in Q2, far begin that of the 2.8% rate in the US. Germany in recession was a big drag. Germany, the euro zone’s biggest economy, unexpectedly posted a 0.1% contraction in the second quarter. It is amazing how strong the US is with its export markets so weak.

Homeowners Insurance Premiums Rocket by 21%, last year. Experts say a rise in severe weather largely contributed to the increase, but it’s hard to tell how insurers are factoring climate risk into the cost of policies. Some insurers have pulled out of certain areas completely, making state-sanctioned options a necessity. That’s only a Band-Aid as climate change can easily bankrupt any individual state, even California. Many in Florida now only buy fire insurance because storm insurance is now priced out of reach.

Microsoft (MSFT) Bombs, with an earnings and revenue beat, but with a slight shortfall in their Azure cloud business. Revenue from Azure, Microsoft’s main growth engine in recent years, rose 29% in the fiscal fourth quarter, compared with a 31% jump in the previous period. About 8 percentage points of the increase in the recent period was attributable to AI, up from 7 percentage points in the prior quarter. When you’re priced for perfection and come in less than perfect it's worth a 7% share price drop. Avoid big tech until it bottoms.

Tesla Recalls 1.8 Million Cars Over Hood Latch. Tesla claims a warning can be done with an overnight software upgrade. An unlatched hood could fully open and obstruct the driver's view, raising the risk of a crash, the National Highway Traffic Safety Administration (NHTSA) said. Thank goodness I sold short Tesla twice this month.

Janet Yellen Says $3 Trillion Annually is needed to shift to a low-carbon global economy, far more than we have currently budgeted for. On the other hand, it also offers the greatest investment opportunity of the century. We’ve had several alternative energy booms over the past decade, provided you got out on time.

My Ten-Year View

When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.

Dow 240,000 here we come!

On Monday, August 5 at 8:30 AM EST, the ISM Services PMI is out.

On Tuesday, August 6 at 9:30 AM, the Balance of Trade is published.

On Wednesday, August 7 at 8:30 PM, the new Mortgage Data is printed.

On Thursday, August 8 at 8:30 AM, the Weekly Jobless Claims are announced.

On Friday, August 9 at 2:00 PM, the Baker Hughes Rig Count is printed.

As for me, I received calls from six readers last week saying I remind them of Ernest Hemingway. This, no doubt, was the result of Ken Burns’ excellent documentary about the Nobel Prize-winning writer on PBS last week.

It is no accident.

My grandfather drove for the Italian Red Cross on the Alpine front during WWI, where Hemingway got his start, so we had a connection right there.

Since I read Hemingway’s books in my mid-teens I decided I wanted to be him and became a war correspondent. In those days, you traveled by ship a lot, leaving ample time to finish off his complete work.

I visited his homes in Key West, Cuba, and Ketchum Idaho.

I used to stay in the Hemingway Suite at the Ritz Hotel on Place Vendome in Paris where he lived during WWII. I had drinks at the Hemingway Bar downstairs where war correspondent Ernest shot a German colonel in the face at point-blank range. I still have the ashtrays.

Harry’s Bar in Venice, a Hemingway favorite, was a regular stopping-off point for me. I have those ashtrays too.

I even dated his granddaughter from his first wife, Hadley, the movie star Mariel Hemingway, before she got married, and when she was also being pursued by Robert de Niro and Woody Allen. Some genes skip generations and she was a dead ringer for her grandfather. She was the only Playboy centerfold I ever went out with. We still keep in touch.

So, I’ll spend the weekend watching Farewell to Arms….again, after I finish my writing.

Oh, and if you visit the Ritz Hotel today, you’ll find the ashtrays are now glued to the tables.

As for last summer, I stayed in the Hemingway Suite at the Hotel Post in Cortina d’Ampezzo Italy where he stayed in the late 1940’s to finish a book. Maybe some inspiration will run off on me.

 

 

Hemingway’s Living Room in Cuba, Untouched Since 1960

 

Earnest in 1918

 

Typing at Hemingway’s Typewriter in Italy from the 1940s

 

The Red Cross Uniform Hemingway Wore when He was Blown Up in 1917

 

Good Luck and Good Trading,

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