($INDU) Archives

Watch Out for Bears!

I just got off the phone with a hedge fund veteran who I have long known and respected. He showered me with 27 reasons why stocks were peaking out and were about to crash.

I told him he was right on every point, but that these were all arguments that future historians will put forward giving the origins of a bear market that started years before.

Right now there is only one bit of analysis that counts for traders and that is the amount of cash in the system, and that indicator is screaming “BUY.”

There is $50 trillion is excess liquidity sitting in cash accounts around the world looking for a home. With both Europe and Japan still in the quantitative easing business that number is expanding.

And what is the primary target of all this money? U.S. stocks, particularly technology ones.

In fact, I have been recently showered with charts, reports, and even tea leaves showing that stock markets are ridiculously high and headed for a fall. Look at the chart below showing the yield curve for the bond market and it shows that whenever it inverts, recessions and bear markets follow in every single case!

Warning: Yield curves are only months away from inverting.

There is another chart below a friend sent in illustrating the ratio of stock prices to home prices for the past 123 years. It is now approaching a peak seen only three times over the past century.

And it’s not like home prices have been sitting stationary either. The price for your personal residence has been rocketing as well, no matter where you live.

However, this chart shows something far more important. Market tops aren’t one-off events. They can take five or more years to play out. And we have just entered one of those long-term topping processes now.

Roll back the video tape. Remember our old friend, Federal Reserve governor Alan Greenspan? He uttered his “irrational exuberance” prediction for the stock market in 1996.

The Dow Average ($INDU) rose for four more years, nearly doubling in the process. Portfolio managers who followed his sage advice were later seen driving taxis in Manhattan.

So, while markets may be topping, this action could continue for quite some time, possibly well into the next decade. Therefore, don’t let news like we received today about the president imposing tariffs on $200 billion worth of Chinese imports scare you out of the market.

And I say this in full knowledge that September and October are usually the worst-performing months of the year. The six months after a midterm election are usually the best, always.

Proceed With Caution

August 28, 2018

Diary, Newsletter, Summary

Global Market Comments
August 28, 2018
Fiat Lux

Featured Trade:
(VERTICAL BULL CALL SPREADS REVISITED),
(HD), ($INDU),
(THE RECEPTION THAT THE STARS FELL UPON),
(TESTIMONIAL)

Vertical Bull Call Spreads Revisited

Diary, Newsletter

For those readers looking to improve their trading results and create the unfair advantage they deserve, I have posted training video on How to Execute a Vertical Bull Call Spread.

This is a pair of positions in the options market that will be profitable when the underlying security goes up, sideways, or down small in price over a defined period of time.

It is the perfect position to have onboard during markets that have declining or low volatility, much like we have experienced over the past year.

I have strapped on quite a few of these babies across many asset classes over the years and they are a major reason why I am up 54.28% on a trailing 12-month basis, with the Dow Average gaining a lowly 6.3%.

To understand this trade, I’ll outline the math on a Home Depot (HD) vertical bull call spread which I executed on August 7.

Followers of my Trade Alert service received text messages and emails to add the following position:

Trade Alert - (HD) - BUY

BUY the Home Depot (HD) September, 2018 $180-$185 in-the-money vertical BULL CALL spread at $4.10 or best

To accomplish this, they can execute the following trades:

Buy 24 September 2018 (HD) $180 calls at…….………$17.60

Sell short 24 September 2018 (HD) $185 calls at……….$13.50
Net Cost:………………………….…………..…….….....$4.10

Potential Profit: $5.00 - $4.10 = $0.90

(24 X 100 X $0.90) = $2,150 or 21.95% in 32 trading days.

This gets traders into the position at $4.10, which cost them $9,840 ($4.10 per option X 100 shares per option X 24 contracts).

The vertical part of the description of this trade refers to the fact that both options have the same underlying security (HD), the same expiration date (September 21, 2018) and only different strike prices ($180 and $185).

The great thing about these positions is that your risk is defined. You can’t lose any more than the $9,840 you put up.

If Home Depot goes bankrupt, we get a flash crash, or suffer another Brexit type event, you will never get a margin call from your broker in the middle of the night asking for more money. This is why hedge funds like them so much.

As long as Home Depot traded at or above $184.10 (The lower $180 strike price plus your $4.10 cost) on the September 21 expiration date, you will make a profit on this trade.

At the time I sent out this trade alert, Home Depot traded at $196.15. So, the stock could have fallen by $12.05, or a hefty 6.14% over the next 32 trading days, and you would still make a profit on the trade.

The shares only need to close at $185 on expiration day for you to capture the maximum potential profit, which can be calculated as:

$5.00 expiration value - $4.10 cost = $0.90 profit

($0.90 profit X 100 contracts per option X 24 contracts) = $2,160, or a gain of 21.95%.

That is not a bad profit in this ultra-low return world in only 32 days.

As it turned out my timing was perfect and Home Depot Shares have since risen to $202.06 a share. The current market value of the Home Depot (HD) September, 2018 $180-$185 in-the-money vertical BULL CALL spread is now $4.90.

This means you can take 88.88% of the maximum potential profit now without having to wait the extra 18 trading days until the September 21 option expiration.

Now you know why I like Vertical Bull Call Spread so much. So, do my followers.

Occasionally, these things don’t work. As hard as it may be to believe, I am not infallible.

So, if I’m wrong and I tell you to buy a vertical bull call spread, and the shares fall not a little, but a lot, you will lose money.

On those rare cases when that happens, I’ll shoot out a Trade Alert to you with stop-loss instructions before the damage gets out of control.

To watch the video edition of How to Execute a Vertical Bull Call Spread, complete with more detailed instructions on how to execute the position with your online platform, please click here.

Vertical Bull Call Spreads Are the Way to Go in a flat to Rising Market

August 27, 2018

Diary, Newsletter, Summary

Global Market Comments
August 27, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD),
(AAPL), (TLT), (SPY),
(BIDDING MORE FOR THE STARS),
(SPY), (INDU), (AAPL), (AMZN)

Bidding More for the Stars

Diary, Newsletter

The stock market has turned into the real estate market, where everyone is afraid to sell their shares for fear of being unable to find a replacement. Will it next turn into the Bitcoin market?

Risk assets everywhere are now facing a good news glut.

My 2019 market top target of 28,000 for the Dow Average is rushing forward with reckless abandon.

Today's price action really gives you the feeling of an approaching short-term blow-off market top.

A few years ago, I went to a charity fundraiser at San Francisco's priciest jewelry store, Shreve & Co., where the well-heeled men bid for dates with the local high society beauties, dripping in diamonds and Channel No. 5.

Amply fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area's premier hotties, whom shall remain nameless. Suffice to say, she is now married to a tech titan and has a sports stadium named after her.

Obviously, I didn't work hard enough.

The bids soared to $23,000, $24,000, $25,000.

After all, it was for a good cause. But when it hit $26,000, I suddenly developed a severe case of lockjaw.

Later, the sheepish winner with a severe case of buyer’s remorse came to me and offered his date back to me for $24,000. I said, “No thanks.” He then implored, “$23,000, $22,000, $21,000?"

I passed.

The altitude of the stock market right now reminds me of that evening.

If you rode the S&P 500 (SPX) from 667 to 2,790 and the Dow Average (INDU) from 7,000 to 25,790, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it does now?

Here we are eight months into the year, and my top picks for the year have gone ballistic. Amazon (AMZN) has doubled off its February low of $1,000, and Apple (AAPL) shares have soared from $150 to $217. Today, an analyst raised his forecast to $245.

As my late mentor, Morgan Stanley’s Barton Biggs, always used to tell me, “Always leave the last 10% for the next guy.”

I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands.

But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: "There is a time to fish, and a time to hang your nets out to dry.

You don't have to chase every trade.

At least then I'll have plenty of dry powder for when the window of opportunity reopens for business. So, while I'm mending my nets, I'll be building new lists of trades for you to strap on when the sun, moon, and stars align once again.

What Am I Bid?

August 23, 2018

Diary, Newsletter, Summary

Global Market Comments
August 23, 2018
Fiat Lux

Featured Trade:
(WHY THE DOW IS GOING TO 120,000),
(X), (IBM), (GM), (MSFT), (INTC), (DELL),
($INDU), (NFLX), (AMZN), (AAPL), (GOOGL),
(THE MAD HEDGE CONCIERGE SERVICE HAS AN OPENING),
(TESTIMONIAL)

Why the Dow is Going to 120,000

Diary, Newsletter, Research

For years, I have been predicting that a new Golden Age was setting up for America, a repeat of the Roaring Twenties. The response I received was that I was a permabull, a nut job, or a conman simply trying to sell more newsletters.

Now some strategists are finally starting to agree with me. They too are recognizing that a ganging up of three generations of investment preferences will combine to drive markets higher during the 2020s, much higher.

How high are we talking? How about a Dow Average of 120,000 by 2030, up another 465% from here? That is a 20-fold gain from the March 2009 bottom.

It’s all about demographics, which are creating an epic structural shortage of stocks. I’m talking about the 80 million Baby Boomers, 65 million from Generation X, and now 85 million Millennials. Add the three generations together and you end up with a staggering 230 million investors chasing stocks, the most in history, perhaps by a factor of two.

Oh, and by the way, the number of shares out there to buy is actually shrinking, thanks to a record $1 trillion in corporate stock buybacks.

I’m not talking pie in the sky stuff here. Such ballistic moves have happened many times in history. And I am not talking about the 17^th century tulip bubble. They have happened in my lifetime. From August 1982 until April 2000 the Dow Average rose, you guessed it, exactly 20 times, from 600 to 12,000, when the Dotcom bubble popped.

What have the Millennials been buying? I know many, like my kids, their friends, and the many new Millennials who have recently been subscribing to the Diary of a Mad Hedge Fund Trader. Yes, it seems you can learn new tricks from an old dog. But they are a different kind of investor.

Like all of us, they buy companies they know, work for, and are comfortable with. During my Dad’s generation that meant loading your portfolio with U.S. Steel (X), IBM (IBM), and General Motors (GM).

For my generation that meant buying Microsoft (MSFT), Intel (INTC), and Dell Computer (DELL).

For Millennials that means focusing on Netflix (NFLX), Amazon (AMZN), Apple (AAPL), and Alphabet (GOOGL).

That’s why these four stocks account for some 40% of this year’s 7% gain. Oh yes, and they bought a few Bitcoin along the way too, to their eternal grief.

There is one catch to this hyper-bullish scenario. Somewhere on the way to the next market apex at Dow 120,000 in 2030 we need to squeeze in a recession. That is increasingly becoming a topic of market discussion.

The consensus now is that an impending inverted yield curve will force a recession sometime between August 2019 to August 2020. Throwing fat on the fire will be a one-time only tax break and deficit spending that burns out sometime in 2019. These will be a major factor in U.S. corporate earnings growth dramatically slowing down from 26% today to 5% next year.

Bear markets in stocks historically precede recessions by an average of seven months so that puts the next peak in top prices taking place between February 2019 to February 2020.

When I get a better read on precise dates and market levels, you’ll be the first to know.

To read my full research piece on the topic please click here to read “Get Ready for the Coming Golden Age.”

Dow 1982-2000 Up 20 Times in 18 Years

Dow 2009-Today Up 4.3 Times in 9 Years So Far

July 25, 2018

Diary, Newsletter

Global Market Comments
July 25, 2018
Fiat Lux

Featured Trade:
(JOIN US AT THE MAD HEDGE LAKE TAHOE, NEVADA
CONFERENCE, OCTOBER 26-27, 2018),
(WHY YOU MISSED THE TECHNOLOGY BOOM
AND WHAT TO DO ABOUT IT NOW),
($INDU), (TLT), (GLD), (GOOGL), (FB),
(AAPL), (NVDA), (MSFT), (AMZN)

June 28, 2018

Diary, Newsletter

Global Market Comments
June 28, 2018
Fiat Lux

Featured Trade:
(FRIDAY, AUGUST 3, 2018, AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(TRAPPED IN PURGATORY),
(INDU), (SPY), (NASDAQ), (IWM), (TLT)

Trapped in Purgatory

Diary, Newsletter, Research

I can't believe my eyes.

Here we are at the midpoint of 2018 and the main markets are virtually unchanged. The Dow Average is down 1.5%, the S&P 500 is up +1%, NASDAQ has gained 8.79%, and the Russell 2000 has tacked on 7.18%.

Despite all the promises that happy days are here again, here we are dead in the water. Since the passage of one of the most simulative tax bills in December, we have gone absolutely nowhere.

We are essentially stuck in stock market purgatory.

Of course, you can blame the trade wars, the onset of which marked the top of the bull market on January 24 at 26,252.

The president got one thing right. Trade wars are easy to win, but for dictatorships not for democracies.

If you complain about trade policies in China you are told to shut up or face getting sent to a re-education camp. Worst case you might disappear in the night as has happened to a number of Chinese billionaires lately.

In America any restraint of trade anywhere invites 10,000 highly paid lobbyists desperate to reverse the action. Offer any resistance and the reprobates are thrown out of office, as may happen here in four months.

The Chinese have one weapon against which we have no defense. They can go hungry. They'll just tell their people to toughen up for the greater good of the nation. When I first arrived in the Middle Kingdom 45 years ago they were still recovering from the aftereffects of a famine that killed 50 million (there are NO substitutes for food). Try doing that in the U.S.

The Chinese have another secret weapon at their disposal. They paid $3.63 a week for a subscription to the New York Times (including Sundays). Because of this they know that the president is going into the midterm elections with the lowest approval ratings in history.

And they are doing this running on a policy of sending children to concentration camps, which they don't even do in China anymore. This will cost the party votes in every state except in Oklahoma.

So the Chinese are content to hang tough, meet every tit with a tat, match every escalation, and wait out the current administration. The only question for them is whether the president will be gone in 2 1/2 years or in six months, so it pays to stall.

This is a country where history is measured in millennia. When I asked premier Zhou Enlai in the 1970s what the outcome of the 1792 French Revolution was, he responded "It's too early to say."

None of this is good for stock prices.

So I will continue with my now five-month-old prediction that markets will remain trapped in narrow ranges until before the midterms, and then rally strongly. It will do this not because of who wins, but because of the mere fact that it is over.

If you are a trader, unless you can buy stocks on those horrific capitulation panic days and sell on the most euphoric peaks, it's better just to stay away. I can do that, but I bet most of you can't. But then I've been practicing for 50 years. This is why I dumped the last of my positions yesterday morning at the highs of the day, shooting out three Trade Alerts in rapid succession.

By the way, these are excellent reasons to avoid the bond market as well. While the fundamentals tell us that interest rates should continue to rise for years, the charts tell us a different story.

With 10-year U.S. Treasury bond yields (TLT) hitting a five-month low today, it is hinting that a recession isn't a 2019 event, it in fact has already started. Bulls better fall down on their knees and pray to their chosen idol that this is nothing more than an extended short covering rally.

It all sounds like a great time to take a long cruise to me.