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Below, please find subscribers’ Q&A for the April 16 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.
Q: Is it time to get out of the (SH), which is the short S&P 500 LEAPS?
A: I would say no. We’re still very deep in the money for the LEAPS I put out two months ago. I doubt we’re going to new highs by August when that LEAPS expires, so I would hang on to it, especially if you have other longs on the stock market. But if you’re nervous, you probably have at least a 50% profit in that anyway, so take the money and run.
Q: Could the S&P 500 trade down to 4,500?
A: Absolutely, yes. China is kind of in a good position. They can wait. They can wait a very long time until they get what they want. We can’t. Trump needs China to fold immediately, or the trade with China will cause a never-ending recession in the US. Remember, we have elections here—in China, they don’t. That puts them in a very strong negotiating position. That’s why you’re seeing basically all economic data roll over and point to a recession. Even if some settlement is negotiated, there still will be some tariffs left. They just won’t be at 145%. You know, it’s not a great investment environment to bet your retirement savings on, and certainly not an environment to engage in very rapid short-term trading unless you have 50 years of experience like I do. That’s why I’m up this month, and the rest of the world is getting absolutely crushed.
Q: Are you going to send more LEAPS?
A: LEAPS are something we do at market bottoms, not tops, because we have such enormous leverage in the LEAPS trade—they’re usually 10 – 1 to 100 – 1 leverage. At some point, there’ll be a lot of fantastic LEAPS in technology stocks, but I don’t think we’ve hit bottom yet. In fact, at best, they’ve mounted weak bounces over the last few days. So, the charts still look terrible—not a good time for LEAPS.
Q: When do you see the bottom?
A: I have no idea, nobody has any idea. It’s like economic policy is changing hour by the hour. Best thing to do is nothing in that situation—and that’s what most of the economy is doing. That’s why the economy is shutting down. Nobody knows what the final picture will look like—the uncertainty is the greatest since the uncertainty of the pandemic, or 9/11 before that.
Q: Should I hide in a money market fund?
A: No, with the money market fund, you run credit risk with the issuer of that fund. With 90-day US Treasury bills, there’s no risk, so you have a government guarantee to get all your money back on the maturity date. If your custodian goes bankrupt, you can always get the T-bills back. It may take you three years in custodian bankruptcy proceedings to get your money market fund back. That’s what we saw with MF Global in 2011.
Q: What is the end game of the China-US trade dispute? How does it affect the stock market?
A: Well, we can’t see an end game. Basically, you have two counterparties who are stubborn as heck, and we could be stuck in no man’s land for a very long time. You’d have to think eventually a settlement of some type comes. Is that worth a recession for the U.S? For most people, I doubt it. And what if China just wants to wait out Trump and wait for the tariffs to go away in four years? That is a possible outcome. Stock markets always discount the worst-case scenario first before they discount anything else. I think that’s what we saw last week, when we broke 5,000 in the S&P 500.
Q: Are you optimistic about bank stocks now?
A: No. They will lead the downturn along with technology stocks. But when this all ends, they will also lead the upturn, and that’s why you’re seeing bank stocks have such hard bounces off their bottom. It’s another one of two sectors that people will be first to rush into—banks and technology stocks. And while tech is expensive, banks are cheap.
Q: How can interest rates fall when government policies, interest rate policies, are causing them to spike?
A: Well, it’s very simple: when foreign investors lose faith in the U.S. Government, they have, they pull their money out. They don’t need to be here. It’s a situation of, “Well, if you don’t need us, we don’t need you.” And foreigners own about 25% of all of the $36 trillion in national debt out there, or about $9 trillion. And in stocks they own here and the number goes up to $12 trillion. It doesn’t take much selling to cause a panic in the bond market. That is what we have been seeing. Whether that continues, I have no idea—it depends on the next tweet coming out of Washington.
Q: What about Bank of America (BAC)?
A: Yeah, it will also bounce the hardest off the bottom—great buy, and these things are all cheap relative to technology stocks. You know, banks still have PE multiples in the low teens. Tech stocks are all the way down to the low 20s from the 30s and 40s, so they’re roughly trading at double the multiples of bank stocks. That’s one reason people are rushing back into these.
Q: What’s the basis of your prediction on a falling US dollar?
A: Again, it’s foreign selling. I don’t think I’ve ever seen a falling dollar and rising interest rates in 60 years of watching. It goes against all economic fundamentals in the currency markets. But when there’s a panic, there’s a panic. People want out of everything at any price, and that’s what’s happening now. As long as foreigners are dumping our assets, the dollar will keep going down—dumping our assets means dollar selling after 80 years of dollar buying.
Q: Is gold the only safe haven?
A: Yes. We’ll get into this in the gold section, but even gold went down for three days, and then wiser heads prevailed and it actually triggered a panic melt-up in gold assets. The miners were up 25% in days. That is another great weak-dollar play.
Q: How do you protect the US from a dollar fall?
A: Change our economic policies; end the trade war.
Q: Is it a good time to buy a house?
A: No, it is not, unless you can wait out the current downturn. High interest rate mortgage rates shot up from 6.5% to 7.1% in a week, and that basically kills off the housing market for the foreseeable future. And of course, when people are worried about their futures, their savings, and their assets, the last thing they do is go out and buy a house.
Q: Is there enough negative sentiment around now for us to go back into the bond market?
A: No. There is no precedent for the type of market action that’s going on now. Will the U.S. government suddenly become reasonable? I doubt it. You can expect tweet bombs to happen at any time. So, people are just hoarding cash and avoiding risk at all costs. It used to be that bonds were the safe place to go. No longer. Not with 10% moves down in a week like we saw last week. Sorry—T-Bills are the only actual safe play out there, and their yield is the same as Treasury bonds without the risk.
Q: Will crypto keep going down?
A: If we continue with a risk-off market, I think you can expect crypto to keep falling. Crypto fell 30% from its top—at least Bitcoin did. It’s basically matching the downside with tech stocks one for one, so no protection in crypto, no diversification. The protection aspect that was promised by crypto promoters lever shows. No flight to safety is happening there whatsoever. And that’s why I’m looking to add to my short in MicroStrategy Inc. (MSTR)—they’re a leveraged long Bitcoin play.
Q: Is the U.S. economy set for a hard landing?
A: I think absolutely, yes, the hard landing is in progress. That’s what all of the economic data says. It’s hard to find any positive news coming out of the economy—people are running for their lives, essentially.
Q: Do you expect inflation to return and take stocks lower?
A: Absolutely, yes. The highest tariffs in history start hitting retail prices in the next month or two, and the price increases should be dramatic, especially on anything from China. So yeah, we should see that come out in the data in the next few months.
Q: Do you expect silver to follow gold?
A: Yes, I do, but it hasn’t been performing as well because there is a recession drag on silver, which you don’t have for gold. Silver (SLV), (AGQ) are used in a lot of electronics and solar panels.
Q: When do you get back into gold (GLD)?
A: Whenever we get a dip. So far, any dips have been very brief and short-term. It’s kind of reminiscent of the 1970s when gold moved from $32 an ounce to $900. That’s when you found me in a line in Johannesburg, South Africa, waiting to sell all my Krugerrands.
Q: Which countries will benefit from manufacturing moving out of China?
A: The answer is really no countries. As soon as manufacturing moves from China to another one like Vietnam, the US then puts punitive tariffs on that second country. So, there’s no place to hide. It’s really a war against the world. That’s the message that the administration is putting out: if you don’t want to build a factory here, we don’t want to do business with you. We don’t want your products. And most companies will do nothing. They’ll wait this out, wait for a future president to eliminate all tariffs. Until then, international trade grinds to a halt. No trade makes sense at 145% tariff. Just to give you some idea on how much that is, if you buy a top end MacBook Pro for $8,000, and you pay the full 145% tariff, that is an $11,600 tariff if you have to pay it, which brings the total cost of a MacBook Pro to nearly $19,600. How many are you going to buy at that price?
Q: Do you think the Fed will cut interest rates?
A: No, we haven’t seen the inflation data yet. They are backward-looking, and only after we see a sharp rise in prices will they raise rates. Chances of them cutting now are zero with all the risks in inflation to the upside right now and unemployment still under control. So, no interest rate cuts this year.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
With wait times for the IRS customer support line recently having extended from one hour to five hours, I thought conditions couldn’t get any worse.
I was wrong.
I knew the letter from the IRS sitting in my mailbox was bad news just from the color of the paper.
It was not light green, the color of a refund check from the United States Treasury. Instead, it was white, warning that it contained some sort of demand, audit notice, or threatened legal action.
In fact, it was far worse than that.
In the most stilted, bureaucratic language possible, I was informed that my $100,000 tax refund for 2016 had already been paid out to someone else.
Another party using my name and social security number, but a different address, had already filed a 2016 return for me.
In order to get my money back, I would have to file a new return and include hard copies of every single piece of supporting documentation. It was, in effect, a full paper audit. Then I would have to wait 60 days.
This was three months ago.
I informed my accountant immediately. I heard him shout across the room to his partner, “Hey Joe, I’ve got another one.”
He told me that half of his clients had their refund checks stolen this year, and as a result, the IRS was now demanding automatic audits on all refund requests of four figures or more.
It gets worse. Budget cuts at the despised government agency mean that huge delays are occurring in almost all interactions. Even routine requests can sit on a bureaucrat’s desk for two years. The number of standard audits has fallen substantially.
The ones that take place are just a quick pass over, often conducted by mail, rather than the in-person, full proctologic examinations of the past.
Furthermore, the government didn’t have the money to pay for the latest upgrade of QuickBooks Pro.
This means it is unable to use the online accounting service’s spreadsheets during audits when the taxpayer’s accountant has upgraded, greatly increasing the time required for each audit while decreasing its effectiveness.
As a result, QuickBooks is seeing the fastest and most widespread adoption of its latest software version in history.
You can’t make this stuff up.
I asked my accountant how long it would really take for me to collect my 2016 refund.” Better count on a year,” he said.
Then the news flash came out that a hacker had stolen the tax returns of 100,000 individuals, including their personal information. I was one of those victims.
Not only did the crooks discover my name and social security number, they also knew that my high school team name was the “Apaches,” my first car was a “Volkswagen,” and that I was married in “Tokyo.”
I bet they know my inside leg measurement as well (I’m not telling!).
It all reminds me that it is once again time to revisit Palo Alto Networks (PANW). I have been recommending this cybersecurity name for the past three years, issuing Trade Alerts on each opportunistic dip.
The near destruction of Sony (SNE) by North Korean hackers has certainly put the fear of God into corporate America.
Apparently, they have no sense of humor whatsoever north of the 38th parallel.
I saw The Interview the other day on a plane, the film making fun of Supreme Leader Kim Jong-un that so pissed them off, and it totally sucked.
As a result, there is a generational upgrade in cybersecurity underway, with many potential targets boosting spending by multiples.
It’s not often that I get a stock recommendation from an army general. That is exactly what happened the other day when I was speaking to a three-star about the long-term implications of the Iran peace deal.
He argued persuasively that the world will probably never again see large-scale armies fielded by major industrial nations. Wars of the future will be fought online, as they have been silently and invisibly over the past 15 years.
All of those trillions of dollars spent on big-ticket, heavy-metal weapons systems are pure pork designed by politicians to buy voters in marginal swing states.
The money would be far better spent where it is most needed, on the cyber warfare front. Needless to say, my friend shall remain anonymous.
The problem is that when wars become cheaper, you fight more of them, as is the case with online combat. Cyber wars are now happening every day, all the time, 24/7, and everywhere.
You probably don’t know this, but during the Bush administration, the Chinese military downloaded the entire contents of the Pentagon’s mainframe computers at least seven times.
This was a neat trick because these computers were in stand-alone, siloed, electromagnetically shielded facilities not connected to the Internet in any way.
In the process, they obtained the designs of all of our most advanced weapons systems, including our best nukes. What have they done with this top-secret information?
Absolutely nothing.
Like many in senior levels of the US military, the Chinese have concluded that nuclear weapons are a useless waste of valuable resources.
Far better value for money is more hackers, coders, and servers, which the Chinese have pursued with a vengeance.
You have seen this in the substantial tightening up of the Chinese Internet through the deployment of the Great Firewall, which blocks local access to most foreign websites.
Some Mad Hedge Fund Trader subscribers in the Middle Kingdom have told me they can no longer access their US based online brokerage accounts, which are blocked by mainland “porn” filters.
“Porn” is defined as anything the Chinese government doesn’t agree with.
Try sending an email to someone in the Middle Kingdom with a Gmail address. It is almost impossible. This is why Google (GOOG) closed its offices five years ago.
As a member of the Joint Chiefs of Staff recently told me, “The greatest threat to national defense is wasting money on national defense.”
Although my brass-hatted friend didn’t mention the company by name, the implication is that I need to go out and buy Palo Alto Networks (PANW) right now.
Palo Alto Networks, Inc. is an American network security company based in Santa Clara, California, just across the water from my Bay Area office.
The company’s core products are advanced firewalls designed to provide network security, visibility, and granular control of network activity based on application, user, and content identification.
Palo Alto Networks competes in the unified threat management and network security industry against Cisco (CSCO), FireEye (FEYE), Fortinet (FTNT), Check Point (CHKP), Juniper Networks (JNPR), and Cyberoam, among others.
The really interesting thing about this industry is that there are no losers.
That’s because companies are taking a layered approach to cybersecurity, parceling out contracts to many of the leading firms at once, looking to hedge their bets.
To say that top management has no idea what these products really do would be a huge understatement. Therefore, they buy all of them.
This makes a basket approach to the industry more feasible than usual.
You can do this by buying the $0.70 million capitalized PureFunds ISE Cyber Security ETF (HACK), which boasts CyberArk Software (CYBR) and Infoblox (BLOX) as its three largest positions. (HACK) has been a hedge fund favorite since the Sony attack.
As for my tax refund, I am still waiting.
I Have Some Bad News for you, Mr. Thomas
Just a quick note of appreciation for your helping me decide to get my clients into (GLD) with a 15% allocation early this year.
It sure has helped me to be more of a hero to my clients this year than a goat…
Best wishes to you and yours! Keep ’em coming.
Brad
Bakersfield, CA.
Followers of the Mad Hedge Fund Trader alert service have the good fortune to own FIVE in-the-money options positions that expire on Thursday, April 17, and I just want to explain to the newbies how to best maximize their profits.
These involve the:
Risk On
(COST) 4/$840-$850 call spread 10.00%
(TSLA) 4/$160/$170 put spread 10.00%
(NFLX) 4/$800-$810 call spread 10.00%
(NVDA) 4/$70-$75 call spread 10.00%
Risk Off
(MSTR) 4/$340-$350 put spread -10.00%
Provided that we don’t have a monster move in the market in three trading days, these positions should expire at their maximum profit points.
So far, so good.
I’ll take the example of the (NVDA) 4/$70-$75 call spread.
Your profit can be calculated as follows:
Profit: $5.00 expiration value – $4.50 cost = $0.50 net profit
(25 contracts X 100 contracts per option X $0.50 profit per option)
= $1,250 or 11.11% in 9 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, April 21, 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, machines do make mistakes. 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 those pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears and the spreads substantially widen when a security has only hours or minutes until expiration on Thursday. So, if you plan to exit, do so well before the final expiration at the Thursday 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 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’s end.
Take your winnings and go out and buy yourself a well-earned dinner.
Well done, and on to the next trade.
You Can’t Do Enough Research
Back in 1987, I flew my Cessna 340 twin from London to Rome to visit Morgan Stanley’s high-end Italian clients. Held over by meetings, I got a late start, and I didn’t get as far as the French Champagne country until midnight. Right then, at 20,000 feet, the gyroscope suddenly blew up with a great resounding “thwacking sound.”
I instantly lost all instruments and lights, but still had a radio. I commenced a very wide spiral dive in the pitch-black darkness. Paris control started yelling at me because I was deviating from my approved flight plan. I started to pass out from vertigo.
Then I did what all Marines and Eagle Scouts are taught to do in this situation.
I improvised.
I pulled a flashlight and canteen out of my cockpit side pocket. By steering to the water level, I was able to use it as an artificial horizon level and straighten out the plane. Then I used the Girl Scout compass I always kept around my neck and plotted a rough course to Paris. Then I got on the radio.
“Mayday, Mayday, Mayday, N3919G complete instruments failure, request emergency landing at nearest airfield.” The air went dead for 30 seconds.
Then I heard “N3919G, cleared for approach Charles de Gaulle, steer 240 degrees and change over to 118.15.” As I made my final approach, the Eiffel Tower sparkled off my starboard wingtip. I could see the entire Charles de Gaulle fire department (Sapeurs Pompiers in French), blinking their blue lights. When I hit the runway, they chased me all the way until I stopped.
Then a captain elaborately dressed in firefighting gear stepped out of his fire engine cabin and asked, “Are you alright?”
The experience reminds me of the government’s current economic policies. They are attempting to rebuild the engines of a plane while flying at 20,000 feet in the dark with no tools or instruments. Except there are 340 million passengers this time, not just one.
Will we pull out of the dive before we crash?
Back in January and February, my biggest concern about the markets was complacency. It is safe to say now that this concern has completely vanished, not just by me but everyone.
I have been looking for parallels to the current crisis, and there are few to choose from. Stocks, bonds, oil, commodities, and the US dollar are all crashing at the same time. S&P 500 multiples (SPY) have been marked down from 22X to 18X in a mere two months, and 16X or 14X beckon. The NASDAQ multiple has collapsed from 31 to 21. Small caps (IWM) were hit the hardest, falling to 2016 levels.
It was the action in the bond market that was most concerning, which was hit by massive waves of selling from both foreign investors and hedge funds facing margin calls. Liquidity has disappeared and the Treasury was ill-equipped to deal with this because DOGE just fired 10,000 of their people.
Most don’t realize that US bonds are the lifeblood of the global financial market. When they drop 10% in a week, as they just did, ripples become tidal waves. Suddenly, banks are undercapitalized, central banks and companies have to mark down reserves, and margin calls run rampant.
A national debt of $36 trillion, which was happily ignored for 25 years, instantly becomes a crisis. Is US debt headed for junk status? Will Trump impose capital controls to stem the outflows? You might call these questions fanciful or born of conspiracy theories, but I was woken up every morning last week from European banks asking exactly this. When they start asking in the debt markets, you have a problem.
All earnings reports coming out now can be torn up and thrown out the window. That’s because they reflect profits from an ancient economy in the distant past that no longer exists, like January-March 2025.
Back then, it was about a growing globalized economy spinning off ever-increasing profits and higher multiples and share prices. Now it’s about a shrinking global economy at war with itself, declining profits everywhere justifying lower multiples and share prices.
Last year, S&P 500 earnings came in at $240. Two months ago, the consensus forecast for 2025 was $270. Now it’s moving towards $230.
The average price earnings multiple is now back up to 20X. The 120-year average is 14X. American exceptionalism picked up another 8 multiple points after WWII. If we give all that back and the multiple returns to 14X that gets the (SPX) down to $3,220, or off 47.5% from the February high.
Confidence levels are collapsing at 50-year lows. We’re rearranging the deckchairs on the Titanic while we’re headed straight for a giant iceberg, and it’s dark and darn cold outside. We are not getting a reversion to the mean in stock markets; we are getting a reversion far beyond the mean. Markets won’t bottom until all the worst-case scenarios out there are fully discounted.
The shock to the global financial system is of the same magnitude as when Nixon took the US off the gold standard in 1972. That’s why gold is rocketing now as then. The US dollar then lost half its value.
This is the first bear market created by government policies since 1930, back when the Smoot-Hawley Tariff Act started the last major trade war. When the current policies end, the bear market will end and not before then. We are now within days, if not hours, to the complete collapse of the global financial system. The global economic pie is rapidly shrinking, and everyone is fighting over the scraps that are left.
Trillions of dollars of capital from corporate America have been stranded abroad in the wrong countries because Trump convinced them to move there eight years ago, like Vietnam. Millions of small businesses unable to eat the tariffs or pass them on to consumers will go out of business.
With no policy changes from Washington expected any time soon, it’s likely that we will eventually exhaust selling and enter an “L” shaped bottom. That has stocks bottoming out and then moving sideways in a range for a long time. You can forget about any immediate sharp “V” type recovery that takes us back to the all-time highs we saw in February.
So you should use any rally in the stock market to sell short calls against the long equity positions you want to keep. If you want to be more proactive than that, I have some clever ideas for you.
We now know that Trump is willing to resort to gaming the market by talking it up whenever the S&P 500 hits 5,000. That’s because he is taking immense heat from Americans who have lost 20%-30% of their retirement funds in two months.
You can use the next plunge to 5,000 in the (SPX) to buy the best quality technology names like (AMZN), (AAPL), (GOOGL), (PANW), and (NFLX), which likely won’t go to new lows on the next crash and will rocket on any trade war success.
There are other fish to fry.
Let’s say that a tweet hits that the trade war is progressing or is about to end. What are China’s biggest US imports? Corn (CORN), wheat (WEAT), or soybeans (SOYB), which all have actively traded ETFs just above four-year lows. They will take off like a scalded cat on any good news.
The next time the Volatility Index ($VIX) takes a run at $60, buy the Proshares Short Vix Short Term Futures ETN (SVXY), an exchange-traded fund that sells short futures in the ($VIX). You can buy shares in it like any ETF. There is no expiration date. It hit a low of $32.90 on Thursday, but traded as high as $40 the week before, and $50 in December.
By the way, icebergs don’t enter the Atlantic shipping lanes anymore. Global warming has melted them before they do. The few that do drift south are tagged with transmitters that show up on ship radars. So if you’re planning a trip to Europe this summer on the Queen Mary II, you don’t need to worry about suffering the fate of Leonardo DiCaprio.
The Financial Crisis Trade is Still On, with 10-year US Treasury bonds hitting 4.6% yields, the US dollar plunging to 3-year lows, and gold at an all-time high. Foreign investors are abandoning the US at an unprecedented pace. It turns out that confidence in the US was worth a lot more than we thought. You don’t know what you have until you lose it.
Trump Cracks, Caves, and Does a U-Turn, announcing a 90-day delay in trade tariffs forced by the imminent collapse of global financial markets. The 10% tariffs remain. Inflation is still on track to skyrocket. A Fed interest rate cut is now on the table for June to head off a recession. What is the long-term trend now? It’s anyone’s guess. But Christmas shopping is certainly going to be a lot more expensive this year.
China Imposes 125% Retaliatory Tariffs, and Europe is yet to come. China’s biggest US imports are all agricultural, and many commodities hit multi-year lows on Friday, delivering a knockout blow to US farmers just as the planting season begins. Shiploads of American grain may be left to rot in the ports as Chinese importers refuse delivery due to the dramatic price increase. Also announced were antitrust investigations of US tech companies and export restrictions on rare earths needed for tech products. It’s 1930 all over again.
Chinese Tariffs Raised to 145%, in a US retaliation to the retaliation. Markets tanked again. Most of the goods and parts cannot be obtained elsewhere. Recession fears are now going mainstream, it’s not just me.
Unemployment rises to 4.2%, a multi-year high, says the March Nonfarm Payroll Report. Nonfarm payrolls in March increased to 228,000 for the month, up from the revised 117,000 in February. Health care was the leading growth area, consistent with prior months. The industry added 54,000 jobs, almost exactly in line with its 12-month average.
Federal Reserve’s Powell Says Inflation to Rise, as a result of the larger-than-expected tariffs. But don’t expect any interest rate cuts until yearend when the Fed has the benefit of 20/20 hindsight on inflation.
Volatility Hits 16-Year High at 60, in overnight Asia trading. The ($VIX) peaked at 95 during the Financial Crisis in 2009. ($VIX) may not have peaked yet.
Oil Crashes, down an amazing $13, or 18% in a week, from $72 to $59. High dividend-paying (XOM) has collapsed by 18%. It is the sharpest fall in Texas tea prices since the 1991 Gulf War. Recession fears are running rampant, and no one wants to pay for storage until a recovery, which may be years off. Sell all energy rallies.
JP Morgan Raises Recession Risk to 79%, while credit investors remain sanguine even as funding stress threatens to build. The small-cap focused Russell 2000, which has been battered in the recent selloff, is now pricing in a 79% chance of an economic downturn, according to JPMorgan’s dashboard of market-based recession indicators. Other asset classes are also sounding alarms.
Q1 Gold Inflows Hit Three-Year High, according to the World Gold Council. Gold ETFs saw an inflow of 226.5 metric tonnes worth $21.1 billion in the first quarter, the largest amount since the first quarter of 2022, when global markets were grappling with the immediate consequences of Russia’s invasion of Ukraine. This raised their total holdings by 3% to 3,445.3 tonnes by the end of March, the largest since May 2023. Their record was 3,915 tonnes in October 2020.
Canadian Visitors Fall 32%, in line with other forecasts of a collapse in international travel. That is why Delta Air Lines (DAL) crashed by 50% in three months. Conditions will get worse before they can get better. A weak dollar has caused the price of my Europe trip this summer to rise by 20%.
Consumer Confidence is in Free Fall. Friday brought a fresh signal that consumers were queasy even before Wednesday’s policy shift. US consumer sentiment tumbled to the second-lowest level on record in a University of Michigan survey, as inflation expectations soared to multi-decades highs. That result was based on interviews from March 25 through April 8, before the change in tack on tariffs.
Delta Pulls Guidance, citing the trade war’s impact on sales. The stock is down 50% in three months. No guidance from any company is possible or credible, as Q1 earnings took place in an ancient, more business-friendly world.
April is now up by -1.13% so far due to the explosion in implied volatilities in our hedged positions. A lot of the Friday options prices made no sense and may reflect broker efforts to increase margin requirements. That takes us to a year-to-date profit of +14.96% so far in 2025. My trailing one-year return stands at a spectacular +75.65%. That takes my average annualized return to +50.28% and my performance since inception to +765.85%, a new all-time high.
It has been another wild week in the market. I was forced out of longs in (GLD) and (TLT) thanks to panic-inspired out-of-the-blue freefall. I managed to hang on to my longs in (COST), (NVDA), and (NFLX) because they were so far in the money. I used a 25% rally in the leveraged long Bitcoin play (MSTR) to add a short. I also used a run by the Volatility Index ($VIX) to $54 to add the Proshares Short VIX Short Term Futures ETN (SVXY). Unusual times call for unusual trades.
Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 74 of 94 trades have been profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.
Try beating that anywhere.
My Ten-Year View – A Reassessment
We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. 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. My Dow 240,000 target has been pushed back to 2035.
On Monday, April 14, at 8:30 AM EST, the Consumer Inflation Expectations are announced.
On Tuesday, April 15, at 8:30 AM, the New York Empire State Manufacturing Index is released.
On Wednesday, April 16, at 1:00 PM, the Retail Sales are published.
On Thursday, April 17, at 8:30 AM, the Weekly Jobless Claims are disclosed. We also get Housing Starts and Building Permits.
On Friday, April 18, markets are closed for Good Friday.
As for me, in 1987, to celebrate obtaining my British commercial pilot’s license, I decided to fly a tiny single-engine Grumman Tiger from London to Malta and back.
It turned out to be a one-way trip.
Flying over the many French medieval castles was divine. Flying the length of the Italian coast at 500 feet was fabulous, except for the engine failure over the American air base at Naples.
But I was a US citizen, wore a New York Yankees baseball cap, and seemed an alright guy, so the Air Force fixed me up for free and sent me on my way. Fortunately, I spotted the heavy cable connecting Sicily with the mainland well in advance.
I had trouble finding Malta and was running low on fuel. So I tuned into a local radio station and homed in on that.
It was on the way home that the trouble started.
I stopped by Palermo in Sicily to see where my grandfather came from and to search for the caves where my great-grandmother lived during the waning days of WWII. Little did I know that Palermo had the worst windshear airport in Europe.
My next leg home took me over 200 miles of the Mediterranean to Sardinia.
I got about 50 feet into the air when a 70-knot gust of wind flipped me on my side perpendicular to the runway and aimed me right at an Alitalia passenger jet with 100 passengers awaiting takeoff. I managed to level the plane right before I hit the ground.
I heard the British pilot of the Alitalia jet say on the air, “Well, that was interesting.”
Fire engines flashing lights descended upon me, but I was fine, sitting in my cockpit, admiring the tree that had suddenly sprouted through my port wing.
Then the Carabinieri arrested me for endangering the lives of 100 tourists. Two days later, the Ente Nazionale per l’Aviazione Civile held a hearing and found me innocent, as the windshear could not be foreseen. I think they really liked my hat, as most probably had distant relatives in New York City.
As for the plane, the wreckage was sent back to England by insurance syndicate Lloyds of London, where it was disassembled. Inside the starboard wing tank, they found a rag that the American mechanics in Naples had left by accident.
If I had continued my flight, the rag would have settled over my fuel intake valve, cut off my gas supply, and I would have crashed into the sea and disappeared forever. Ironically, it would have been close to where French author Antoine de St.-Exupery (The Little Prince) crashed his Lockheed P-38 Lightning in 1944.
In the end, the crash only cost me a disk in my back, which I had removed in London and led to my funny walk.
Sometimes, it is better to be lucky than smart.
Antoine de St.-Exupery on the Old 50 Franc Note
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Ingenious writing John in your Monday morning strategy letter. I forwarded it to all my family and kids, and made my 16-year old read it out loud to my wife. I made sure he understood what he was reading. I got choked up by the whole article.
Go Ukraine!
Best regards,
Greg
Las Vegas, NV
With the Volatility Index back down to a bargain of $16, I am getting deluged with emails from readers asking if it is time to start hedging portfolios one more time and buying the iPath S&P 500 VIX Short Term Futures ETN (VXX).
The answer is not yet, but soon, possibly very soon. And here is the anomaly in the market today. Volatility is not reflecting actual short-term movements in the S&P 500.
While we have seen several 200-point moves in the market in the past three weeks, the volatility Index (VIX) has spent only hours over the $20 level. That is because the ($VIX) measures anticipated 30-day volatility, and for the past 30 days, the overall net move in the market has been zero.
They are inquiring at absolutely the wrong time.
And here is the problem. When the (VIX) rises, it usually spikes straight up, and then right back down again. This time, it spiked but has since hung around the $20 level rather than collapse back down. That suggests that there is another leg up to go in volatility until it hits $50 or more before it takes a much-deserved break. That means the stock market has one more sharp selloff left before we hit bottom and bounce.
Markets can ignore trade wars, rising interest rates, rocketing interest rates, and international political instability (Gaza, Ukraine) for a while, but not forever. When the time DOES come to pay the piper, prices will fall and volatility will rocket.
So I am more than usually interested in hedging the downside risk for my trading book. A good rule of thumb is to let the (VIX) sit at a bottom for a week, and then go buy the (VXX). Two weeks is even better. That way, you can ignore expensive and unnecessary time decay.
Which all brings me to the subject at hand.
If you are new to the service and have no longs, you probably should skip this trade and just watch it as a learning experience.
This can also be a great hedge for any long positions we may want to add in the coming weeks, such as in “trade peace” or technology plays.
As I never tire of telling people, no one ever complains when they buy fire insurance and their house doesn’t burn down.
If you are new to this service, don’t freak out. My daily research newsletters are not always about exploring the esoterica of options, or volatility trading.
I’ll let you know when I’m ready to pull the trigger with a Trade Alert.
I am always trying to get better prices.
If you are new to the (VIX) game, please read the educational piece below.
I am one of those cheapskates who buy Christmas ornaments by the bucket load from Costco in January for ten cents on the dollar because my 11-month theoretical return on capital comes close to 1,000%.
I also like buying flood insurance in the middle of the summer drought, when the forecast in California is for endless days of sunshine. That is what we had at the end of July when the (VIX) was plumbing the depths of $12.
Get this one right, and the profits you can realize are spectacular.
It gets better.
If the bottom in volatility exactly coincides with the peak in the stock market that it measures, volatility could be headed back up to the 30% handle, and maybe more.
I double dare you to look at the charts below and tell me this isn’t happening.
Watch carefully for other confirming trends to affirm this trade is unfolding. Those would include a strong dollar, and a weak Japanese yen, Euro, and rising fixed-income instruments of any kind.
Notice that every one of these is happening this week!
Reversion to the mean, anyone?
You may know of this from the many clueless talking heads, beginners, and newbies who call (VIX) the “Fear Index”.
For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of option contracts on the S&P 500 index (SPX).
The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front-month and second-month expirations.
The (VIX) is the square root of the par variance swap rate for a 30-day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever-useful Black-Scholes equation.
You will recall that this is the equation that derives from the Brownian motion of heat transference in metals. Got all that?
For the rest of you who do not possess a PhD in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don’t know what an SAT test is, this is what you need to know.
When the market goes up, the (VIX goes down. When the market goes down, the (VIX) goes up. Period. End of story. Class dismissed.
The (VIX) is expressed in terms of the annualized monthly movement in the S&P 500 (SPX) which, with the (VIX) today at $10, is at $72.54.
So for example, a (VIX) of $10 means that the market expects the index to move 2.89%, or $72.54 S&P 500 points, over the next 30 days.
You get this by calculating $10/3.46 = 2.89%, where the square root of 12 months is 3.46.
The volatility index doesn’t really care which way the stock index moves. If the S&P 500 moves more than the projected 2.89% in ANY direction, you make a profit on your long (VIX) positions.
I am going into this detail because I always get a million questions whenever I raise this subject with volatility-deprived investors.
It gets better.
Futures contracts began trading on the (VIX) in 2004, and options on the futures since 2006.
Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the “hedge” in hedge fund.
I’m not necessarily advocating a short sale here after markets have lost a staggering $10 trillion in market cap, from $50 trillion down to $40 trillion.
But a single tweet could trigger a 5% rip-your-face-off rally at any time and only then can you have another shot at betting the market will continue its downtrend.
So I am going to review my short-selling school once again so you can witness the spectacular performance that all of these short plays have delivered.
Some asset classes are reflecting the fact that we are already in a full-blown recession, while others are not. In case we DO go into a recession, knowing how to sell short stocks will be a handy skill to have.
It will become essential to be knowledgeable about all the different ways to add downside protection.
While you are all experts in buying stocks, selling them short is another kettle of fish.
I therefore think it is timely to review how to make money when prices are falling. I call it Short Selling School 101.
I don’t think we are going to crash to new lows from here, maybe drop only 10% at worst. So, some of the most aggressive bearish strategies described below won’t be appropriate.
If you have big positions in single stocks, like Apple (AAPL), you can execute the same kind of strategy. Selling short the Apple call options to hedge an existing long in the stock looks like the no-brainer here. You should sell one option contract for every 100 shares.
There is nothing worse than closing the barn door after the horses have bolted or hedging after markets have crashed.
No doubt, you will receive a wealth of short-selling and hedging ideas from your other research sources and the media right at the next market bottom.
That is always how it seems to play out, great closing the barn doors after the horses have bolted.
So I am going to get you out ahead of the curve, putting you through a refresher course on how to best trade falling markets now, while stock prices are still rich.
I’m not saying that you should sell short the market right here. But there will come a time when you will need to do so.
Watch my Trade Alerts for the best market timing. So here are the best ways to profit from declining stock prices, broken down by security type:
Bear ETFs
Of course, the granddaddy of them all is the ProShares Short S&P 500 Fund (SH), a non-leveraged bear ETF that is supposed to match the fall in the S&P 500 point for points on the downside. Hence, a 10% decline in the (SPY) is supposed to generate a 10% gain in the (SH).
In actual practice, it doesn’t work out like that. The ITF has to pay management operating fees and expenses, which can be substantial. After all, nobody works for free.
There is also the “cost of carry,” whereby owners have to pay the price for borrowing and selling short shares. They are also liable for paying the quarterly dividends for the shares they have borrowed, around 2% a year. And then you have to pay the commissions and spread for buying the ETF.
Still, individuals can protect themselves from downside exposure in their core portfolios by buying the (SH) against it (click here for the prospectus). Short selling is not cheap. But it’s better than watching your gains of the past seven years go up in smoke.
Virtual equity indexes now have bear ETFs. Some of the favorites include the (PSQ), a short play on the NASDAQ (click here for the prospectus), and the (DOG), which profits from a plunging Dow Average (click here for the prospectus).
My favorite is the (RWM), a short play on the Russell 2000, which falls 1.5X faster than the big cap indexes in bear markets (click here for the prospectus).
Leveraged Bear ETFs
My favorite is the ProShares Ultra Short S&P 500 (SDS), a 2X leveraged ETF (click here for the prospectus). A 10% decline in the (SPY) generates a 20% profit, maybe.
Keep in mind that by shorting double the market, you are liable for double the cost of shorting, which can total 5% a year or more. This shows up over time in the tracking error against the underlying index. Therefore, you should date, not marry this ETF, or you might be disappointed.
3X Leveraged Bear ETF
The 3X bear ETFs, like the UltraPro Short S&P 500 (SPXU), are to be avoided like the plague (click here for the prospectus).
First, you have to be pretty good to cover the 8% cost of carry embedded in this fund. They also reset the amount of index they are short at the end of each day, creating an enormous tracking error.
Eventually, they all go to zero and have to be periodically redenominated to keep from doing so. Dealing spreads can be very wide, further adding to costs.
Yes, I know the charts can be tempting. Leave these for the professional hedge fund intraday traders for which they are meant.
Buying Put Options
For a small amount of capital, you can buy a ton of downside protection. For example, the April (SPY) $182 puts I bought for $4,872 on Thursday allow me to sell short $145,600 worth of large-cap stocks at $182 (8 X 100 X $6.09).
Go for distant maturities out several months to minimize time decay and damp down daily price volatility. Your market timing better be good with these, because when the market goes against you, put options can go poof and disappear pretty quickly.
That’s why you read this newsletter.
Selling Call Options
One of the lowest-risk ways to coin it in a market heading south is to engage in “buy writes.” This involves selling short-call options against stocks you already own but may not want to sell for tax or other reasons.
If the market goes sideways or falls, and the options expire worthless, then the average cost of your shares is effectively lowered. If the shares rise substantially, they get called away, but at a higher price so you make more money. Then you just buy them back on the next dip. It is a win-win-win.
Selling Futures
This is what the pros do, as futures contracts trade on countless exchanges around the world for every conceivable stock index or commodity. It is easy to hedge out all of the risks for an entire portfolio of shares by simply selling short futures contracts for a stock index.
For example, let’s say you have a portfolio of predominantly large-cap stocks worth $100,000. If you sell a short 1 September 2025 contract for the S&P 500 against it, you will eliminate most of the potential losses for your portfolio in a falling market.
The margin requirement for one contract is only $5,000. However, if you are short, the futures and the market rise, then you have a big problem, and the losses can prove ruinous.
However, most individuals are not set up to trade futures. The educational, financial, and disclosure requirements are beyond mom-and-pop investing for their retirement fund.
Most 401Ks and IRAs don’t permit the inclusion of futures contracts. Only 25% of the readers of this letter trade the futures market. Regulators do whatever they can to keep the uninitiated and untrained away from this instrument.
That said, get the futures markets right, and it is the quickest way to make a fortune, if your market direction is correct.
Buying Volatility
Volatility (VIX) is a mathematical construct derived from how much the S&P 500 moves over the next 30 days. You can gain exposure to it by buying the iPath S&P 500 VIX Short-Term Futures ETN (VXX) or buying call and put options on the (VIX) itself.
If markets fall, volatility rises, and if markets rise, then volatility falls. You can therefore protect a stock portfolio from losses by buying the (VIX).
I have written endlessly about the (VIX) and its implications over the years. For my latest in-depth piece with all the bells and whistles, please read “Buy Flood Insurance With the (VIX)” by clicking here.
Selling Short IPOs
Another way to make money in a down market is to sell short recent initial public offerings. These tend to go down much faster than the main market. That’s because many are held by hot hands, known as “flippers,” and don’t have a broad institutional shareholder base.
Many of the recent ones don’t make money and are based on an as-yet, unproven business model. These are the ones that take the biggest hits.
Individual IPO stocks can be tough to follow to sell short. But one ETF has done the heavy lifting for you. This is the Renaissance IPO ETF (click here for the prospectus). As you can tell from the chart below, (IPO) was a warning that trouble was headed our way since the beginning of March. So far, a 6% drop in the main indexes has generated a 20% fall in (IPO).
Buying Momentum
This is another mathematical creation based on the number of rising days over falling days. Rising markets bring increasing momentum while falling markets produce falling momentum.
So, selling short momentum produces additional protection during the early stages of a bear market. Blackrock has issued a tailor-made ETF to capture just this kind of move through its iShares MSCI Momentum Factor ETF (MTUM). To learn more, please read the prospectus by clicking here.
Buying Beta
Beta, or the magnitude of share price movements, also declines in down markets. So, selling short beta provides yet another form of indirect insurance. The PowerShares S&P 500 High Beta Portfolio ETF (SPHB) is another niche product that captures this relationship.
The Index is compiled, maintained, and calculated by Standard & Poor’s and consists of the 100 stocks from the (SPX) with the highest sensitivity to market movements, or beta, over the past 12 months.
The Fund and the Index are rebalanced and reconstituted quarterly in February, May, August, and November. To learn more, read the prospectus by clicking here.
Buying Bearish Hedge Funds
Another subsector that does well in plunging markets is publicly listed bearish hedge funds. There are a couple of these that are publicly listed and have already started to move.
One is the Advisor Shares Active Bear ETF (HDGE) (click here for the prospectus). Keep in mind that this is an actively managed fund, not an index or mathematical relationship, so the volatility could be large.
Oops, Forgot to Hedge