My next global strategy webinar will be held on Wednesday, February 14 at 12:00 PM EST, which I will be broadcasting live from Silicon Valley in California.
We'll be giving you my updated outlook on stocks, bonds, commodities, currencies, precious metal, and real estate.
The goal is to find the cheapest assets in the world to buy, the most expensive to sell short, and the appropriate securities with which to take positions.
I will also be opining on recent political events around the world and the investment implications therein.
I usually include some charts to highlight the most interesting new developments in the capital markets. There will be a live chat window with which you can pose your own questions.
The webinar will last 45 minutes to an hour. International readers who are unable to participate in the webinar live will find it posted on my website within a few hours. I look forward to hearing from you.
We recently have taken in a large number of new subscribers. If you miss it the webinar will be posted on the website within the hour.
To log into the webinar, please click on the link we emailed you yesterday entitled "Next Bi-Weekly Webinar - February 14, 2018" or click here
https://www.madhedgefundtrader.com/wp-content/uploads/2017/09/john-pogo2.jpg605365Arthur Henryhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngArthur Henry2018-02-13 01:08:572018-02-13 01:08:57Don't Miss the February 14 Global Strategy Webinar
It was perhaps the worst timed IPO (initial public offering) of the decade.
Cardlytics (CDLX) went public at the Friday open, one of the worst days in the history of Wall Street.
The shares were priced at $13, and closed later in the day at a strong $13.33. The Dow Average then collapsed some 1,100 points in hours.
A lesser underwriter would have delayed the issue, given the dark stormclouds building on the horizon. Not so for JP Morgan Chase, which had heavily presold the deal, and went ahead, come hell or high water.
Cardlytics is a data platform that specializes in the collecting purchase and transaction data from financial institutions and converting the data into highly targeted marketing offers.
Cardlytics' flagship offering is called Cardlytics Direct - advertisements to customers that are placed directly in their banks' webpages and mobile apps in the form of "cash back" offers that most are familiar with.
Firms that purchase intelligence data from Cardlytics can target ads to customers who are most likely to respond.
A major part of the appeal of Cardlytics was its use of artificial intelligence in matching the buyers and sellers of ads.
AI is the hottest investment theme in Silicon Valley these days. However, there are very few public companies that allow investors a pure, or even peripheral AI play.
The Cardlytics IPO raises the urgent question of whether there are more unicorns to come. Unlike past market and economic cycles, unicorns, or successful companies still in the private startup stage, are delaying public filings longer than at any other times in the past.
Managers say they want to mature their companies and delay the high legal and regulatory costs that come with going public. The REAL reason is that founders want to milk their firms for all they're worth and sell them only after they go ex-growth.
The end result has been to create a shortage of high tech firms with the most cutting-edge technologies. This has caused investors to price the few public firms that are out there at even higher valuations.
Music streaming service Spotify is thought to be next in the IPO parade, followed by cloud firm Dropbox, followed by AirBnB and the $70 billion mammoth, Uber.
In the nine months ending in September, Cardlytics lost $16 million on sales of $91 million.
Cardlytics has raised more than $200 million in venture funding from ITC Holding Co. LLC, Kinetic Ventures, Canaan Partners, Polaris Venture Partners and TTV Capital, which are all cashing big paychecks today.
Given the recent performance of small tech IPO's, I'll be holding back on sending out a "BUY" recommendation on (CDLX) at this time.
Traders are still too freshly burned from their 2017 experience with SNAP (SNAP) (for more on this unfortunate company, please read the Mad Hedge Technology Letter piece "Don't Fall Into the SNAP Trap" by clicking here for tech letter subscribers only.
SNAP launched in March at $17, and then soared 44% on the first day to $29. It then collapsed to a low of $11.40, off a heartbreaking 60.68%. It was a classic case of investment banker incompetence, greed, and mispricing.
Once burned, twice forewarned, as they say.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/02/cardlytics-logo.jpg148632Arthur Henryhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngArthur Henry2018-02-13 01:07:132018-02-13 01:07:13The Unicorns are Out of the Corral
I like the turkey, the gravy, the cranberry sauce, and especially the pumpkin and mince pies loaded with whipped cream.
I like Thanksgiving so much that I got to repeat it last week. For that is how far back I have to go, some four months, to find the stock prices that cheap that printed on Friday.
It was the most violent week in the history of stock markets, with the Dow average suffering two 1,000-point swan dives, and two intraday 1,000-point rallies.
Never in history has the Dow made an all-time high, then plunged 13.33% in only ten trading days, some 3,300 points. Entire classes of securities were entirely wiped out.
It was like watching a Netflix movie at 16X fast forward. You saw a week???s worth of price action in an hour.
After enjoying the best January in 21 years, we got hit in between the eyes with the fifth worst February since the (SPY) was created in 1923.
Add up all the up and down moves of the week, and they add up to a staggering 22,000 points.
We went from a long overdue correction to a correction that is seriously overdone, in the blink of an eye.
So this is my retirement?
The last time markets suffered the current level of volatility, they were facing the 2008 Financial Crisis crisis:
The stock market fell 52%.
The top 20 US banks were effectively bankrupt.
All credit markets were frozen.
ATM???s across the country came within a week of shutting down.
The housing market was in free fall.
Bernie Madoff was discovered to have stolen $50 billion from his clients.
Unemployment hit 12%.
Today, conditions are a little different:
The stock market is within 13.33% of an all-time high, and is 400% higher than the 2009 low.
The top 20 US banks are the best capitalized in the world.
Bond prices are close to all-time highs, and interest rates at lows.
There is a national structural shortage of homes.
Companies in almost every industry are reporting record profits.
A small, specialized, niche ETN blew up, causing $1.5 billion in losses.
The unemployment rate is at 4.1% and falling.
Is there something wrong with this picture?
The market action is in no way reflective of America???s current economic backdrop.
I probably delivered the best trading week of my career. On the huge down days there was always a brief 200-point rally that allowed me to stop out of my highest risk short dated option positions.
I then used the giant 1,000-point dives to add long dated positions much deeper in-the-money in the highest quality technology. They are throwing the babies out with the bathwater, and I am catching the babies with a net. It worked like a charm, with my year to date performance still in positive territory.
The ballsiest trade of the week was my bet that the IPath S&P 500 VIX Short Term Futures ETN (VXX) would fall from $55, a six-month high, while the Volatility Index (VIX) flirted with the $37 level.
After all, the best time to sell flood insurance is right after a category five hurricane has destroyed everything and bankrupted all the other insurers.
You would think this was Mad, as the entire short (VIX) industry went bust only two days before. But then, that???s what you pay me to do, come up with these impossible trades, which then magically work.
I ran the numbers, and with the (VIX) futures for April trading at a lowly $18, I thought it was worth a shot. So far, so good. The (VIX) closed on Friday at $29.06, while the (VXX) dropped to $50.
I then made a major bet that the 200-day moving average for the (SPY) would hold, triggering a massive institutional rally. It did, and the mark roared 600 Dow points.
I figured that without a recession the 200-day is where the major institutions would come in on the buy side. After all the (SPY) Price earnings multiple has just cratered from 19X to 16X, or back to 2016 levels. By the way, Apple???s PE level is down to a subterranean 14X.
Certainly, this is enough to compensate them for a ten year Treasury yield that has just soared from 2.03% to 2.90% and on its way to 3.25%.
A note on the (XIV) trade. I have taken this off the position sheet pending a legal settlement with Credit Suisse. Interestingly, they have been buying up the (XIV) in the open market at the $5-$6 level to reduce their legal liability.
Hedge funds have also been buying, looking for a 10:1 return on any potential settlement. When I learn more, I will adjust our year-to-date performance numbers accordingly.
I have to tell you that this has been a heck of a week for the staff of the Mad Hedge Fund Trader. We launched the Mad Hedge Technology Letter a week ago, doubling our work load. Then, the market crashed, doubling our workload again. All this happened while we all had the flu.
Kudos to the staff of the Mad Hedge Fund Trader!
Economic data and corporate earnings are now completely meaningless as long as the market is facing a??historic liquidity crisis. However, I shall go through the motions.
We are now well into Q4 earnings season so those should be the dominant data points of the coming weeks.
On Monday, February 12, nothing of note takes place, except for a stock market opening that should be a real hair raiser.
On Tuesday, February 13 at 6:00 AM the NFIB Small Business Optimism Index comes out. ??
On Wednesday, February 14, at 8:30 AM EST, we get the all-important Consumer Price Index, crucial now that inflation is a concern.
Thursday, February 15 leads with the 8:30 AM EST release of the Weekly Jobless Claims. January Industrial Production follows at 9:30.
On Friday, February 16 at 8:30 AM EST, we learn the January Housing Starts.
At 1:00 PM we receive the Baker-Hughes Rig Count, which saw a monster rise of 22 last week.
As for me, I am going to spend the entire weekend going over charts, running numbers on options spreads, looking for the best way to commit my remaining capital in the coming weeks.
With my Mad Hedge Market Timing Index at an eye-popping number of ten, this is the lowest risk, highest return time to buy stocks within the last three or nine years, depending on how you do the math.
Friday night, I took a break from the financial carnage to watch the Winter Olympics opening ceremony at PyeongChang, South Korea. I only got as far as Belarus before I passed out from exhaustion.
I Think I???ll Go Back to My Day Job as a Surfing Instructor
https://www.madhedgefundtrader.com/wp-content/uploads/2018/02/john-camel.jpg391378Arthur Henryhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngArthur Henry2018-02-12 01:07:532018-02-12 01:07:53Market Outlook for the Week Ahead, or So That's a Correction!
The Diary of a Mad Hedge Fund Trader is a global daily investment research and trade mentoring service with 6,000 customers in 135 countries.
We are looking for a highly motivated all-around support person to assist with every aspect of a cutting edge online publishing business. It would be a big plus if you had an interest in stock markets, options trading, and investments.
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There will be many responsibilities, and the new hire will have to answer customer calls, respond to emails, send out email and text message Trade Alerts, edit and publish original content on our website, set up newsletter mailings, set up, run, record, and transcribe webinars, manage subscriptions and expirations, update the pricing for daily position sheets, and manage Facebook and Twitter accounts.
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Knowledge of any of the following apps will be helpful. If you don't know them, we'll train you.
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With the stock market falling for the next few weeks, or even months, it's time to rehash how to profit from falling markets one more time.
There is nothing worse than closing the barn door after the horses have bolted.
No doubt, you will receive a wealth of short selling and hedging ideas from your other research sources and the media at the next market bottom. That is always how it seems to play out.
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.
Market's could be down 10% by the time this is all over.
THAT IS MY LINE IN THE SAND!
There is nothing worse than fumbling around in the dark looking for the matches after a storm has knocked the power out.
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 point on the downside. Hence, a 10% decline in the (SPY) is supposed to generate a 10% gain the in the (SH).
In actual practice, it doesn't work out like that. The ETF 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 through 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 last seven years go up in smoke.
Virtually all equity indexes now have bear ETF's. 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 ETFs
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 added to costs.
Yes, I know the charts can be tempting. Leave these for the professional hedge fund intra day traders they are meant for.
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 allowed 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 stock 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.
I'll give you a concrete example. Let's say you own 100 shares of Apple (AAPL), which closed on Friday at $95.13, worth $9,513. If you sell short 1 July, 2016 $100 call at $1.30 against them, you take in $130 in premium income ($1.30 X 100 because one call option contract is exercisable into 100 shares).
If Apple closes below $100 on the July 15, 2016 expiration date, the options expire worthless and you keep your stock and the premium. You are then free to repeat the strategy for the following month. If (AAPL) closes anywhere above $100 and your shares get called away, you still make money on the trade.
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 risk 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 short 1 June, 2016 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 rises, then you have a big problem, and the losses can prove ruinous.
But 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 through 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 through 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 (VXX)by clicking here.
Selling Short IPO's
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).
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 are 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
00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2018-02-09 01:06:362018-02-09 01:06:36Short Selling School 101
"Every recession sows the seeds for the next business recovery, and every recovery sows the seeds of the next recession." said hedge fund manager Leon Cooperman of Omega Advisors.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/10/Wheat-Fields-Van-Gogh-e1413925789396.jpg180300DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2018-02-09 01:05:532018-02-09 01:05:53Quote of the Day - February 9, 2018
I found a new great way to predict the stock market. Launch a new technology research and trade mentoring newsletter and it will crash within days. It works 100% of the time.
It is often said that that the stock market has discounted 11 out of the last five recessions.
This is one of those times that the stock market has discounted a recession that isn't going to happen, not for at least two years anyway.
With my Mad Hedge Market Timing Index at a very rare "Extreme Buy" reading of 18, I have to buy stocks here or shoot myself in the head.
Not only is the index shouting out its strongest "BUY" signal in three years, all 30 of the data inputs are individually at the lowest levels in three years, or in nine years!
I believe the bottom in the stock market is in.
We may see continued high volatility. May see a terrifying marginal new low. We may see the Mad Hedge Market Timing Index bounce around here in the teens for a couple of weeks.
But for grizzled veterans like me it is now time to back up the truck and load up on the high-quality names which are on sale. The risk/reward of adding new positions here is overwhelmingly in favor of RISK.
It's "RISK ON" baby.
This is why I stopped out of my gold (GLD) long position with a small loss with only seven trading days to go. There is no need for a hedge in a rising market. Watching gold's price action today, other traders obviously feel the same way as me.
If you CAN'T bring yourself to hoover up stocks here, you better get out of the business.
Let me give you a few reasons why.
The short volatility industry is now completely gone. It disappeared in a few frantic hours on Monday night, leaving investors with some $8 billion in losses.
Never again will we see (VIX) short covering on such a massive scale, which then feeds into the stock market, triggering these massive 1,000 point air pockets we saw (more pilot talk here).
Not only that, all of the hot money is out of the market as well, stopped out when shares cratered. There is now a ton of money looking to get back in.
We also still have three more months of seasonal strength for shares, which usually ends in May.
Finally, the economy is getting stronger, not weaker. The last two weeks have been similar to 1987, when the Dow Average collapsed by 22% in a single day, but the economy just kept blithely powering on.
Those who held on in October, 1987, as I did, made back all their losses by the end of the year.
Even though the "BUY" signals are among the highest I have ever seen, I am still remaining my usually cautious, circumspect self.
As they teach you at the Marine Corps Flight School in Pensacola, "There are old pilots, and there are bold pilots, but there are no old, bold pilots."
All of my options spreads I am adding here will remain at their maximum potential profit point, even if the underlying shares fall another 10%-20%. You have to allow them room to breathe.
Keep in mind that I am taking a "Tiffany's approach to investment here. All of these companies I have been sending Trade Alerts on I have either been covering for 45 years, or with the tech names, since they were founded in the seventies, eighties, nineties, or 2000's.
In other words, I know them extremely well. You are only getting the best of the best.
So load the boat, fill your boots, and go pedal to the metal. If these stocks go wrong, they can always move in with you.
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
