There is not a trader alive who wouldn?t fall down on his knees and thank the Heavens he didn?t get involved in commodities last year.

I AM ONE OF THOSE TRADERS!

It?s not that we were without opportunities. With every downside swoon, we were barraged with claims from brokers, producers, and the Internet that THIS WAS THE BOTTOM AND IT IS TIME TO BUY!

It wasn?t.

So many fingers were chopped off by falling knives that there were enough to man several symphony orchestras, if not armies.

If you want to know who last year?s commodity bulls were they?re easy to find. Their resumes are all over Craig?s List, Linked In, and other head hunting services.

However, the price action last week is making me wonder whether we finally HAVE seen the bottom in commodities.

THIS TIME IT MAY BE DIFFERENT!

Look no further than my February 9 Trade Alert Buy the United States Oil Fund (USO) May, 2016 $8 calls at $1.12 or best. Today, they traded at $1.60, up a blistering 42.86% in just 9 trading days.

I put out this Trade Alert because I believed that oil would bounce hard off of a $26 double bottom. It did. Texas Tea is now trading just short of $32, a nice 23% pop.

Now I am a pretty good trader. But I am not THAT good. The only way to get this kind of instant result is to suddenly pickup a tailwind from a new market or economic force.

That may have been just what happened.

BUT WAIT! THERE?S MORE!

Guess what the top performing sectors in the market are this year?

Energy and commodities, as I predicted in my ?2016 Annual Asset Class Review? (click here).

Single stocks have gone ballistic since the mid-January lows, like Freeport McMoran (FCX) (+129%) and Occidental Petroleum (OXY) (+22%).

Indeed, oil stocks have made it back to their September levels, when oil was trading at $46. Which is underpriced now, oil or energy stocks?

You can see identical action across the commodities space. Railroads (CSX), (UNP), whose primary business is the moving of bulk commodities like oil and coal, are up 19% so far this year.

The foreign exchange market has been confirming these trends. The commodity heavy Loonie (FXC) has picked up 7.35% in 2016, while the Aussie (FXA) has roared up by 6.15%.

Those are humongous one-month moves for currencies.

Even the dreaded PowerShares DB Multi Sector Commodity Trust ETF (DBC) has eked out a 2.6% increase, which has been trading like death for years.

The amazing thing about the entire commodities space is that they are now showing identical fundamentals and price action, possibly for the first time in history.

This is because they all have several things in common.

ALL are now selling for less than the cost of production. That is a guarantee that new production won?t come on line. Bankers for these giant projects won?t finance a negative cash flow deal.

I can almost hear the clock ticking for the next supply shortage. Some long-term thinkers believe we could even see 2011 style upside price spikes by 2021.

There was also a lot of ?reversion to the mean? buying kicking in at the beginning of 2016. Think of this as ?dogs of the Dow? with a turbocharger.

To add Alpha, or outperformance, big institutions are forced to unload last year?s best performing asset classes (technology and biotech stocks) and load up on the worst performing asset ones (oil, commodities).

This year especially, the influence was exacerbated by structurally poor liquidity and high frequency traders. This is where your new volatility is coming from.

Virtually at the hour that all of these things bottomed, a reader called me and asked if this was the final capitulation.

I responded ?I don?t know if this is the final bottom, but this is certainly what final bottom?s look like.?

Adjust you portfolio accordingly.

What? I?m Supposed to BUY it?

Long-term readers of this letter prospered mightily from my addiction to biotech stocks, one of the top performing sectors in the stock market during the first half of last year.

Readers made three round trips in hepatitis C drug developer Gilead Sciences (GILD) in the past four months, adding 5.77% to the value of their portfolios. I believe the company?s blockbuster drug will become the most profitable in history. So do a lot of others.

Longer-term investors bought the Biotech iShares ETF (IBB) on my advice, which gained an impressive 45% last year.

They certainly were getting downright frothy by June.

No less a figure than Federal Reserve governor Janet Yellen has indicated then that she thought valuations in the biotech sector were getting ?substantially stretched.? The Fed doesn?t single out stocks for commentary very often.

?Sell in May and go away,? turned out to be a brilliant strategy in 2015 because it got out of these stocks at all time highs with huge profits.

It was after that when the rot began.

It started when presidential candidate, Hillary Clinton, sent out the Tweet that sank biotech, warning that price controls and international drug competitions would be a high priority in her administration.

Then the bad boy antics of Martin Shkreli were exposed, who raised the price of an AIDS drug, Daraprim overnight by 55 fold. Nothing like focusing a spotlight on a big open sore. Shkreli is now under Federal indictment for operating a Ponzi scheme.

Then Valient (VRX), a target of activist Bill Ackamn, imploded.

The industry has barely had an up day since then.

My favorite, Gilead Sciences suffered a 33% nosedive, while the Biotech IShares ETF (IBB) sank by a gut churning 40%. Favorite Celgene (CELG) gave back 34%.

Is biotech gone for good? Is this once loved sector headed for the dustbin of history to join coal and 3-D printing?

I don?t think so. Far from the truth.

Big institutional investors and hedge funds that had the wisdom to raise cash at the end of 2015 are starting to circle in on this faded beauty, making lists, and taking names. And (GILD), the (IBB), and (CELG) are at the top of those lists. (VRX) isn?t.

Biotech has always been a hedge fund favorite.

That means hot money regularly flows in and out, giving the sector more than double the volatility of the main market. A 10% correction in any other stock is worth at least 25% in biotech. Now is one of the ?out? times.

This also makes biotech stocks great ones to buy on a dip. My last foray into (GILD) occurred after cautious guidance took the shares down a heart stopping 10% in a single day.

This is a great example of how unusually sensitive biotech stocks are to headline risk. I?ve ridden stocks to tremendous heights, watching them pour billions into a single treatment, only to see them crash and burn on failed stage three trials.

That is just the nature of their business. It?s all about ?all or nothing bets.?

Biotech is a high-risk sector that should only be held within a well diversified portfolio. You may notice that in the Mad Hedge Fund Trader?s model trading portfolio I never have more than 10% in biotech at any given time. I figure I could handle a total blow up and lose the whole 10% and still stay in business.

When I speak at conferences, strategy luncheons, and on TV, I tell listeners of my lazy man?s guide to long-term investment. Only follow three sectors, technology, biotech, and cyber security, and ignore the other 97. You?ll save yourself a lot of time reading pointless research.

Biotech currently accounts for a mere 1% of US GDP. It is on its way to 20%, about where big technology is today. That means that a disproportionately large share of earnings growth will spring from biotech over the coming decades.

One way to protect yourself is to stick with the big caps, which are undervalued relative to the sector as a while, and are expected to haul in 20% earnings growth this year.

Many smaller companies are at prices assuming a total certainty of the success of a single drug. The reality is that this only happens about half the time.

If you do go with small caps, I would take a venture capital approach. Buy a dozen with the expectation that many will go under, a coupled do OK, and one goes through the roof. Never put all your eggs in one basket. Or just buy the (IBB) which does this neat trick for you.

It also helps that you have someone with a scientific background making your picks, like myself.

Because drug companies promise such amazing results, like curing cancer, the sector has always been prone to hype and over promotion. I never met a biotech CEO who didn?t believe his company was about to deliver the next panacea, taking his shares up 100-fold, and delivering him a Nobel Prize.

One plus for biotech is that it has unusually strong patent protection, which usually extends out 20 years for new products. There are not a lot of Chinese companies that can imitate their drugs.

That means earnings can be predicted far into the future, and are largely immune from the economic cycle. If you?re sick, you want to get cured, regardless of whether the GDP is growing or shrinking, or whether interest rates are low or high.

And much of this cost is borne by the US government, through Obamacare and Medicare.

Make sure that your investments have plenty of new developments in the pipeline. Expiring patents on past winners with no replacements can spell certain death for a stock price.

I tell my kids that they will never suffer my medical maladies, as everything important will be cured within 20 years.

A century from now, historians will look back on our era and think ?Those poor people. They were so ignorant and helpless. They new nothing about medicine.? Our most modern treatments will appear to them like the application of leaches.

Publicly listed drug companies are now venturing into research fields that were only science fiction when I was in the lab 45 years go. ?Gene editing,? whereby genes can be repaired, edited, and then turned on and off at will, is now becoming a burgeoning new science.

It promises to cure the whole range of human maladies, including heart disease, cancer, obesity, and a whole range of degenerative diseases (including some of mine).

Expect to hear a lot more about TALENs (transcription activator-like effector nucleases) and CRISPR (clustered regular interspaced short palindromic repeats). You heard it here first.

What is truly fascinating is that hybrid computer science/biochemical scientists are now taking algorithms developed by the National Security Agency hackers and using them to decode human DNA. (I hope I?m not speaking too much out of school here).

Gene editing is the natural outcome of the discovery of recombinant DNA technology developed during the 1970?s by Paul Berg, Herbert Boyer, and Stanley Cohen, all early heroes of mine.

Since none were the equity participants of private companies, the initial rewards for the breakthrough were minimal. I remember that one received a new surfboard for his efforts.

Berg went on to found Genentech (GENE) in 1977 and got rich. If I hadn?t gone into the stock market, that is almost certainly where I would have ended up.

How things have changed.

The short answer here is that biotech does have further to run. A lot further.

The rate of innovation of biotechnology is accelerating so fast that it will continue to spew out fantastic investment opportunities for the rest of our lives.

So expect to receive many more Trade Alerts
in this area in the years to come.

But it is definitely an ?E? ticket ride. So fasten your seatbelt on your path to riches.

As for me, I am thrilled that I got to live so long to see his stuff happen. At times, it was a close run race.

This One Looks Like a Winner

We have the February options expiration today and have the good fortune to see two positions in our model trading portfolio expire at their maximum potential profit point.

Those who held on through the dog days last week will be richly rewarded. Good job, and on to the next trade. You are one of the fortunate few who are up on the year.

Those include the:

(SPY) February $173-$178 deep in-the-money vertical bull call spread
(up +10.62%)

(SPY) February $176-$181 deep in-the-money vertical bull call spread
(up +9.56%)

We also have a March options position that is deep in the money and expires in 25 trading days, and I just want to explain to the newbies how to best maximize their profits here as well.

This comprises:

The S&P 500 (SPY) March $170-$175 deep in-the-money vertical bull call spread with a cost of $3.95.

As long as the (SPY) closes at or above $175.00 on Friday, March 18, the position will expire worth $5.00 and you will achieve the maximum possible profit.

This will work out to a 26.58% gain in seven weeks, not too shabby in these peripatetic times. Better that a poke in the eye with a sharp stick, as they say.

In this case, the expiration process 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.

Your broker (are they still called that?) will automatically use the long call to cover the short call, cancelling out the positions. The profit will be credited to your account on the following Monday, and the margin freed up.

Of course, I am watching these positions like a hawk, as always. If an unforeseen event causes the (SPY) to crash once again, such as if Janet Yellen suddenly, and shockingly, raising interest rates, you should get the Trade Alert in seconds.

If the (SPY) expires slightly out-of-the-money, like at $174.90, then the situation may be more complicated, and can become a headache.

On the close, your short call position expires worthless, but your long call position is converted into a large, leveraged outright naked long position in the (SPY) shares with a net cost of $173.95.

This position you do not want on pain of death, as the potential risk is huge and unlimited, and your broker probably would not allow it unless you put up a ton of new margin.

This is not what moneymaking and risk control is all about.

Professionals caught in this circumstance then sell short a number of shares of (SPY) on expiration day right at the close equal to the long position they inherit with the expiring $170 call to hedge out their risk.

Then the long (SPY) position is cancelled out by the short (SPY) position, and on Monday both disappear from your statement. However, this can be dicey to execute going into the close and requires a level of expertise most of you don?t have.

So for individuals, I would recommend just selling the March (SPY) $170-$175 call spread outright in the market if it looks like this situation may develop and the (SPY) is going to close very close to the $175 strike.

Keep in mind, also, that the liquidity in the options market disappears, and the spreads 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.

As of this writing, this position looks pretty safe as it is a full 18 points in the money. But a lot can happen in 26 days.

Well done, and on to the next trade.

Well Done and On to the Next Trade