While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
November 10, 2017
Fiat Lux
Featured Trade:
(SELLING SHORT THE STOCK MARKET),
(IWM), (RWM), (SPY),
(A TRIBUTE TO A TRUE VETERAN)
As much as you may think I have just gone MAD, I believe it is time to start dipping your toe in on the short side in the stock market.
I don't want to boast, take credit, or run a victory lap about the Trade Alert I sent out yesterday.
After all, two hours after I sent out the Trade Alert to sell short the Russell 2000, the small cap index has plunged $2, or 1.36%, creating an instant $1,480 profit for my nimbler followers.
No, I won't go there.
Instead, I want to continue on with the finer points of the rationale for doing this trade.
I didn't have time earlier because I was in a rush to get the Trade Alert out while the (IWM) was still rallying to its high for the day.
The new Republican plan floated yesterday to delay corporate tax cuts to 2019 has certainly put the cat among the pigeons with equity investors.
It has reminded them how high stocks have run, and how much now withering unrealized profits are sitting on their books.
The Russell 2000 is actually misnamed, as it now has only 1,700 stocks.
The rest have disappeared over the years through mergers, privatizations, or bankruptcies, and have not been replaced, as happens quarterly with the S&P 500 (SPY).
For you and me this means that the (IWM) is more illiquid that the (SPY). When stock markets fall, the (IWM) falls about 1.5 times faster than the (SPY).
In other words, it's a great short to have in a falling market.
I think stocks markets may be starting to either top out, or roll over here, at least for the short term.
That is especially true of the Russell 2000, which has not participated in the rally for the past month.
An approaching yearend is a big risk for the markets, as are overstretched valuations and prices.
The warning signs of a selloff are absolutely everywhere, but until now, have been ignored.
My Mad Hedge Fund Trader Market Timing Index has been living in overbought territory for the past two months. The normal life of a medium-term top is, guess what? Two months.
To see how risky markets are right now, take a look at the three-year history of my market timing index.
It shows that the normal life of a medium-term topping process is two months.
When will that two months end?
About mid-December, two weeks before gigantic deferred tax selling hits the market in January.
Another way to play this is to buy the ProShares Short Russell 2000 ETF (RWM), a bet that small cap stocks will fall.
If you are looking for other ways to hedge your portfolios you might consider the Trade Alert I also sent yesterday to buy gold (GLD).
Look at the chart below for the barbarous relic and you see that we have a sideways triangle formation setting up over the past month that will be a nice springboard for a sudden move upward.
All we need is one more threat to the tax cuts, which these days, seem to be coming out of the woodwork.
Listening to subscribers in all 50 states, I don't know a single individual who is seeing the prospect of lower taxes as a result of the Republican plan.
It appears that those earning between $200,000 and $500,000 a year will bear the entire burden of the package, who make up the bulk of my readers.
The benefits gained through a doubling of the personal exemption don't even come close to offsetting losses from lost tax and mortgage interest deductions.
And where is the cut in capital gains taxes, long a Republican goal?
If you make anything over $500,000 a year, you're golden.
Since job prospects for high school graduates in rural Pennsylvania in 1936 were poor, Mitch walked 200 miles to the nearest Marine Corp recruiting station in Baltimore.
After basic training, he spent five years rotating between duty in China and the Philippines, manning the fabled gunboats up the Yangtze River.
When WWII broke out, he was a seasoned sergeant in charge of a machine gun platoon. That put him with the seventh regiment of the First Marine division at Guadalcanal in October, 1942.
When the Japanese counterattacked, Mitch was put in charge of four Browning .30 caliber water-cooled machine guns and 33 men, dug in at trenches on a ridge above Henderson Field.
The Japanese launched massive waves of suicide attackers in a pouring tropical rainstorm all night long, frequently breaking through the line and engaging in fierce hand-to-hand combat.
If the position fell, the flank would have been broken, leading to a loss of the airfield, and possibly the entire battle. WWII would have lasted two more years.
After the first hour, all of Mitch's men were either dead or severely wounded, shot or slashed with samurai swords.
So Mitch fired one gun until it was empty, then scurried over to the next, and then the next. In between human waves, he ran back and reloaded all the guns.
To more easily pitch hand grenades, he cut the arms off his herringbone fatigues. When the Japanese launched their final assault, and then retreated, he picked up a 40-pound Browning and ran down the hill after them, firing all the way, and burning all the skin off his left forearm.
Mitch's commanding officer, Col. Herman H. Hanneken, heard the guns firing all night from the field below.
He was shocked when he visited the position the next morning, finding Mitch alone in front of a twisted sea of 1,000 Japanese bodies, not a scratch on him.
The iconic fictional hero in the 1949 film, Sands of Iwo Jima, Sergeant John M. Striker, was modeled after Mitch.
Tradition dictated that all military officers salute Mitch, even five star generals, and he was given a seat to attend every presidential inauguration from FDR on. Pacific countries issued stamps with his image, and Mattel sold a special GI Joe in his likeness.
When Mitch got older and infirm, I used my captain's rank to escort him on diplomatic missions overseas to attend important events, like the 40th anniversary of D-Day in Normandy.
Whenever Mitch was in town, he would join me for lunch with some of my clients with a history bent, and a more humble and self-effacing guy you never met. Mitch passed away in 2003 while he was working as a technical consultant for the pre-production of the HBO series, The Pacific. The funeral in Riverside, California was marked by an eagle continuously circling overhead which, according to the Indian shaman present, only occurs at the services for great warriors.
When I got back from the parade, I took out the samurai sword Mitch captured on that fateful day, a 1692 Muneshige, the hilt still scarred with 30-caliber slugs, and gave it a ritual polishing in sesame oil and powdered deer horn, as samurai have done for millennia.
To learn more about the First Marine Division's campaign during the war, please read the excellent paperback, The Island: A History of the First Marine Division on Guadalcanal by Herbert Laing Merillat, which you can buy from Amazon by clicking on the title.
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
BUY the iShares Russell 2000 ETF (IWM) December, 2017 $152-$155 in-the-money vertical BEAR PUT spread at $2.50 or best
Opening Trade
11-9-2017
expiration date: December 15, 2017
Portfolio weighting: 10%
Number of Contracts = 40 contracts
I'm not sending out this update because I want to boast, take credit, or run a victory lap.
After all, since I sent out the Trade Alert to sell short the Russell 2000 two hours ago, the small cap index has plunged $2, or 1.36%, creating an instant $1,480 profit for nimble followers.
No, I won't do that.
Instead, I want to continue on with the finer points of the rational for doing this trade.
I didn't have time earlier because I was in a rush to get the Alert out while the (IWM) was still rallying to its high for the day.
The new Republican plan floated today to delay corporate tax cuts to 2019 has certainly put the cat among the pigeons with equity investors.
It has reminded them how high stocks have run, and how much now withering unrealized profits are sitting on their books.
The Russell 2000 is actually misnamed, as it now has only 1,700 stocks.
The rest have disappeared over the years through mergers, privatizations, or bankruptcies, and have not been replaced, as happens quarterly with the S&P 500 (SPY).
For you and me this means that the (IWM) is more illiquid that the (SPY). When stock markets fall, the (IWM) falls about 1.5 times faster than the (SPY).
In other words, it's a great short to have in a falling market.
I think stock markets may be starting to either top out, or roll over here, at least for the short term.
That is especially true of the Russell 2000, which has not participated in the rally for the past month.
An approaching yearend is a big risk for the markets, as are overstretched valuations and prices.
The warning signs of a sell off are absolutely everywhere, but until now, have been ignored.
My Mad Hedge Fund Trader Market Timing Index has been living in overbought territory for the past two months. The normal life of a medium-term top is, guess what? Two months.
I am therefore going to pick up a position in the IShares Russell 2000 ETF (IWM) December, 2017 $152-$155 in-the-money vertical BEAR PUT spread at $2.50 or best.
This is a bet that the Russell 2000 will trade at or below $152 by theDecember 15 option expiration in 26 trading days, compared to the current $147.00.
Don't pay more than $2.70 for this position or you'll be chasing.
If you don't do options, this would be a great level to scale into a long in the ProShares Short Russell 2000 ETF (RWM), which has recently started to move.
Here are the specific trades you need to execute this position:
Buy 40 December, 2017 (IWM) $155 puts at............................................$9.00
Sell short 40 December, 2017 (IWM) $152 puts at.................................$6.50
Net Cost:....................................................................................................
Potential Profit: $3.00 - $2.50 = $0.50
(40 X 100 X $0.50) = $2,000 or 20.00% in 26 trading days.
To see how to enter this trade in your online platform, please look at the order ticket above, which I pulled off of Interactive Brokers.
If you are uncertain on how to execute an options spread, please watch my training video on How to Execute Vertical Call and Put Debit Spreads by clicking here.
You must be logged into your account to view the video.
Please keep in mind that these are ballpark prices only. There is no telling how much the market can move by the time you get this.
Be sure you've signed up for our FREE text alert service. When seconds count, this feature offers a trading advantage. In today's market, investors need every advantage they can get.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you.
The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don't execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile close to expiration.
If you don't get done, don't worry. There are another 250 Trade Alerts coming at you over the coming 12 months.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
November 9, 2017
Fiat Lux
Featured Trade:
(NOVEMBER 8 2017 GLOBAL STRATEGY WEBINAR Q&A),
(TAKE A RIDE IN THE NEW SHORT JUNK ETF),
(THE COOLEST TOMBSTONE CONTEST)
