I have a feeling that you are going to really need to know how to trade a crash in the coming weeks.
Due to our recent blockbuster performance, up 39% last year alone, we have also taken in a large number of new subscribers. They should read this piece carefully and commit it to memory, and have the key points tattooed on their forearm.
There won?t be time to look for these words to the wise, once the market?s wheels really fall off.
In my half-century of trading stocks, I have been through quite a few crashes.
When the Nifty Fifty collapsed in 1973, everyone thought it was the end of the world. The Dow Average fell to 650. President Nixon resigned shortly afterwards.
The 1987 crash certainly left its scars. My equity department at Morgan Stanley lost $75 million in one day, then a staggering amount. We had to pedal triple time to make it all back by the end of the month. I remember that George Soros puked right at the very low.
The 1998 emerging market debacle certainly put our wits to the test. That little affair ultimately led to the Russian debt default and the blow up of Long Term Capital Management, Nobel Prize winners and all.
The 2000 Dotcom Crash was one to remember. At least the parties leading up to the peak made it all worth it. But a lot of friends lost their careers and their homes over that one.
2008-09? That one sent us all back to our history books searching for comparisons with the Great Depression.
It turns out that we were only in for a Great Recession instead and a 52% market decline instead of a 90% one. Not a single person alive thought markets would triple over the next six years, as they have done.
The 2010 Flash Crash, the last time we were down 1,000 points in a single day? Seems like it was only yesterday, just water off your back.
So given my long history of surviving market melt downs, I have to tell you that the August swoon doesn?t even rank in the top ten.
But then again, it?s not over yet either.
So trading crashes is a skill set that every long-term investor is going to need. It is an ability that may save your wealth, if not your life.
I have listed below my twelve rules for trading crashes that I have compiled off the back of decades of hard earned experience.
TWELVE RULES FOR TRADING A CRASH
1) Shrink your trading book to a single position so it?s easier to watch.
2) Shrink your size so it?s small enough for you to sleep at night?even during a crash.
3) Watch the (VIX) as a leading indicator. This time, junk bonds (HYG) and the Russell 200 (IWM) are functioning as pathfinders as well.
4) Don?t be afraid to trade, since now is when risk is the lowest and the rewards the highest. Don?t give up, throw up your hands in despair, and go into hiding like everyone else is.
5) You wanted to buy on a dip? This is a dip. Be careful what you wish for. 6) Time is compressed during a crash. Share price movements that normally take months occur in minutes. Be prepared to do a lot of trading.
7) Liquidity disappears and spreads widen dramatically. Basically, the market wants you to go away. Some of the lesser ETF?s take the biggest hits, as no one wants to touch them.
8) Expect system breakdowns everywhere as they are hyper stressed. Trading platforms can seize up, computers freeze, and the Internet noticeably slows down.
9) If you have any kind of leverage, now is when your brokers will come after you. Margin requirements can double or quadruple overnight with no notice. If you can?t cough up the extra money they will execute a forced liquidation of your account at terrible prices.
10) When you buy single names, focus on quality. It is a rare chance to buy Cadillacs at a discount. Be careful, because fundamentals mean nothing during a crash. Cash is King.
11) Don?t even think about calling your broker. You?re on your own. They?ll just put you on perpetual hold or throw the handset down on the floor and burst into tears, as happened to me during the 1987 crash when I tried to buy.
12) Maintain discipline, exercise strict risk control, and let the other people panic. Now is when you define yourself as a trader. Anyone can trade a bull market. But only a few can handle the bear version.
HAVING SAID ALL THAT, GOOD LUCK AND GOOD TRADING!
How to Keep Your Head Above Water in a Crash
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I believe that the global economy is setting up for a new golden age reminiscent of the one the United States enjoyed during the 1950?s, and which I still remember fondly.
This is not some pie in the sky prediction. It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.
What I call ?intergenerational arbitrage? will be the principal impetus. The main reason that we are now enduring two ?lost decades? of economic growth is that 80 million baby boomers are retiring to be followed by only 65 million ?Gen Xer?s?.
When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and ?RISK ON? assets like equities, and more buyers of assisted living facilities, health care, and ?RISK OFF? assets like bonds.
The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.
Fast forward six years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home. That is when you have 65 million Gen Xer?s being chased by 85 million of the ?millennial? generation trying to buy their assets.
By then we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes. The middle class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990?s.
The stock market rockets in this scenario. Share prices may rise very gradually for the rest of the teens as long as tepid 2% growth persists. A 5% annual gain takes the Dow to 20,000 by 2020. After that, we could see the same fourfold return we saw during the Clinton administration, taking the Dow to 100,000 by 2030. If I?m wrong, it will hit 200,000 instead. Emerging stock markets (EEM) with much higher growth rates do far better.
This is not just a demographic story. The next 20 years should bring a fundamental restructuring of our energy infrastructure as well. The 100-year supply of natural gas (UNG) we have recently discovered through the new ?fracking? technology will finally make it to end users, replacing coal (KOL) and oil (USO). Fracking applied to oilfields is also unlocking vast new supplies.
Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC?s share of global reserves is collapsing. This is all happening while automobile efficiencies are rapidly improving and the use of public transportation soars.? Mileage for the average US car has jumped from 23 to 24.7 miles per gallon in the last couple of years, and the administration is targeting 50 mpg by 2025. Total gasoline consumption is now at a five year low.
Alternative energy technologies will also contribute in an important way in states like California, accounting for 30% of total electric power generation by 2020. I now have an all-electric garage, with a Nissan Leaf (NSANY) for local errands and a Tesla Model S-1 (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow. The net result of all of this is lower energy prices for everyone.
It will also flip the US from a net importer to an exporter of energy, with hugely positive implications for America?s balance of payments. Eliminating our largest import and adding an important export is very dollar bullish for the long term. That sets up a multiyear short for the world?s big energy consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.
Accelerating technology will bring another continuing positive. Of course, it?s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos. But at the enterprise level this is enabling speedy improvements in productivity that is filtering down to every business in the US, lower costs everywhere.
This is why corporate earnings have been outperforming the economy as a whole by a large margin. Profit margins are at an all time high. Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development. When the winners emerge they will have a big cross-leveraged effect on economy.
New health care breakthroughs will make serious disease a thing of the past, which are also being spearheaded in the San Francisco Bay area. This is because the Golden State thumbed its nose at the federal government ten years ago when the stem cell research ban was implemented. It raised $3 billion through a bond issue to fund its own research, even though it couldn?t afford it.
I tell my kids they will never be afflicted by my maladies. When they get cancer in 20 years they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday. What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver?s seat on these innovations? The USA.
There is a political element to the new Golden Age as well. Gridlock in Washington can?t last forever. Eventually, one side or another will prevail with a clear majority.?
This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now, but nobody wants to be blamed for. That means raising the retirement age from 66 to 70 where it belongs, and means-testing recipients. Billionaires don?t need the maximum $30,156 annual supplement. Nor do I.
The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cuts defense spending from $800 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.
I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up. A Pax Americana would ensue. That means China will have to defend its own oil supply, instead of relying on us to do it for them. That?s why they have recently bought a second used aircraft carrier. The Middle East is now their headache.
The national debt then comes under control, and we don?t end up like Greece. The long awaited Treasury bond (TLT) crash never happens. Fed governor Janet Yellen has already told us as much by indicating that the Federal Reserve may never unwind its massive $3.9 trillion in bond holdings, but run them to maturity instead.
Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won?t kick in for another decade. But some individual industries and companies will start to discount this rosy scenario now.
Perhaps this is what the nonstop rally in stocks since 2009 has been trying to tell us.
Dow Average 1900-2015
Another American Golden Age is Coming
https://www.madhedgefundtrader.com/wp-content/uploads/2012/03/thunderbird_1.jpg230300Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-01-04 01:06:102016-01-04 01:06:10Get Ready for the Coming Golden Age
A few years ago, I went to a charity fund raiser 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.
Well 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 $15,000, $16,000, $17,000.
After all, it was for a good cause. But when it hit $17,750, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer?s remorse came to me and offered his date back to me for $17,000.? I said ?no thanks.? $16,500, $16,000, $16,250?
The altitude of the stock market right now reminds me of that evening.
If you rode the S&P 500 (SPX) from 700 to 2,100 and the Dow Average (INDU) from 7,000 to 17,750, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it did then?
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.? If you followed my Trade Alerts this year and are up now 38%, 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.
Time to Mend the Nets
https://www.madhedgefundtrader.com/wp-content/uploads/2013/03/Fishing-Nets.jpg155223Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-11-02 01:07:372015-11-02 01:07:37Bidding for the Stars
The second the day traders covered their last short in a rising market today, the European Central Bank announced that the Greek debt negotiations may not be successful.
The Dow Average fell 200 points, bonds jumped a full point and oil added to its 8% decline. Welcome to The Great Meat Grinder of 2015.
It seems that all anyone has to do is to blow their nose, and high frequency trading will amplify the movement a multiple of what we would have seen in past years.
The exit of institutional money to trading in in-house dark pools, the concentration of trading into single sector exchange traded funds (ETF?s), and the departure of the traditional individual investor, are all exaggerating these moves. It doesn?t help that stock markets are sitting just short of all time highs.
You could run off and trade something else besides stocks. That?s easier said than done, as virtually all other asset classes have become untradeable.
Bonds have gone crazy, rising to mathematically impossible levels, even reflecting negative interest rates. You?re still trying to catch a falling knife in commodities, as today?s action in oil proved. Precious metals are near the top of a multi month range. Foreign currencies have gone comatose, digesting January?s enormous declines.
What?s a poor trader to do? Take up the action in collectable Beanie Babies? Rare French postage stamps? Rare vintage Madeira?s?
There are only two ways to deal with a market like this. Turn off the TV, cancel your newswire feeds, quit reading research, and just look at your screens.
Buy the low numbers and sell the high ones.
It is no more complicated than that. Don?t confuse matters with the thought process. The markets are now so illogical you will only muddy the waters.
The other method is to become boring. Just find the cheapest, low fee index fund you can find, like one of Vanguard?s, buy it, and stuff it under your mattress. I?m pretty confident that it will be up 10% by the end of the year.
That means you will probably beat most hedge managers out there, as you would have done for the past seven consecutive years. Try to earn more than 10% in these choppy markets, and you could end up losing 10%, or 100%.
As for me, I am going to stick with trading. At least I?ll be there when it turns easy again, which has to be soon, and I?ll make a hell of a lot more than 10%.
I was never very good at the ?boring? thing.
My New Investment Strategy
One of My Rare Madeira?s
https://www.madhedgefundtrader.com/wp-content/uploads/2015/02/Money-Under-Mattress-e1423145916871.jpg289400Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-02-05 09:36:112015-02-05 09:36:11Trading Devoid of the Thought Process
Her red Tesla is parked in the driveway, her potted plants are back on the balcony, and the closet is once again filled with designer shoes.
Goldilocks is back!
It?s not like she was ever going to be gone for long. Once a woman of a certain maturity gets accustomed to the lifestyle of the rich and famous, it?s hard to give up the better things in life.
However, there were some doubts.
When the Dow Average opened down 400 points on October 15, a gigantic capitulation move saw $70 billion worth of stock sold at market at the absolute low of 15,850, and a spectacular 315 million shares of the S&P 500 ETF (SPY) were unloaded.
One might have thought that Goldilocks had changed her name and moved into a nunnery for good.
It was not to be.
The rally that ensued off of that print was one of the most ferocious in history. After having cleaned out hedge fund trader longs on the downside, the market then ripped their faces off on the upside.
It has not been a good year for hedge funds. It has been a fantastic year for high frequency traders, with September the most profitable month in the history of this arcane, computer trading strategy.
As for me, I never had any doubt that Goldilocks was coming back. As I miraculously pound into my followers on a daily basis, it?s all about the numbers. It?s always about the numbers.
The strength of the economy is such that the sudden 10% swoon we witnessed was in no way justified. All that was really required was that an extreme overbought condition in stocks we say six weeks ago be remedied. Now that is done, it is up, up, and away.
Corporate earnings obliged, with an eye-popping 80% delivering upside surprises. Corporate earnings are now growing at a robust year on year 11% annual rate.
Instead of focusing in on Ebola, Russia and ISIS, traders are now looking at improving Purchasing Managers Indexes in both Europe and China. The Middle East has gone quiet. There were even rumors, later quashed, of an extended quantitative easing for the US.
The European Central Bank announced the results of its bank stress test, and guess what? Almost everyone passed! Only 12 banks need to raise $12 billion in new capital.
Of course, this was never more than a window dressing exercise designed to make us all feel warm and fuzzy about the beleaguered continent.
Capital spending also remains robust for the first time in eight years. But I think most analysts are missing the reason why this is happening. It is too late for companies to add capacity for this economic cycle.
They are instead building factories now to accommodate demand for the next economic and financial boom in the early 2020?s, when the stiff demographic headwind created by the baby boomers flips to a brisk tailwind provided by the Gen Xer?s.
The true 800-pound gorilla on the trading landscape these days is the price of oil, which broke the $80 handle yesterday morning. As with every move by every financial instrument everywhere, the more it goes down, the more dire the forecasts become. The savings in energy costs at this level amount to $12,000 per family per year. Do the math.
$10 a barrel? Really?
I think it is safe to say, like interest rates, energy prices will stay lower for longer than anyone imagines possible. So add another 1% to US GDP growth this year, next year and the one after that.
When the stock market figures this out, new highs will follow, probably before year end.
Has Goldilocks Moved Back in For Good?
https://www.madhedgefundtrader.com/wp-content/uploads/2014/10/Goldilocks.jpg337131Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-10-28 09:12:302014-10-28 09:12:30Goldilocks is Back!
I don?t double up short positions very often. I am too old to lose all my money and go back to work as an entry-level analyst at Morgan Stanley. Besides, they probably wouldn?t have me back anyway. It is a different company than it was 30 years ago, a lot different.
However, the dead cat, short covering bounce we got off this morning?s Hong Kong dump does allow me to get back into the short side of the (SPY) one more time.
We managed to gain 20 (SPX) points, or 2 entire (SPY) handles from the Monday morning capitulation, puke on your shoes low. Except this time, we are a weekend closer to expiration, only 14 trading days until October 15.
And waiting all the way until Friday for the September nonfarm payroll buys us a free week.
Does anyone really care what?s going on in Hong Kong, China, or anywhere else in the world, for that matter? Not really. It appears only day traders do, and those of us who have family members there, like me.
The beginning of October is usually the scariest two weeks of the year. So a bet that the (SPY) doesn?t blast up to new all time highs during this period looks like a pretty good idea.
Buying the S&P 500 (SPY) October, 2014 $202-$205 vertical in-the-money bear put spread with the volatility index (VIX) just short of the $17 handle, the highest print in six months, is also getting us the best short term spread prices this year. It?s almost like the good old days.
If the prospect of executing this trade causes the hair on the back of your neck to stand up, take a look at the charts below.
The Russell 2000 (IWM) broke through to a new low this morning, proving that a solid, three-month downtrend in the small caps is still alive and well.
The chart looks even worse for the iShares iBoxx High Yield Corporate Bond ETF (HYG), which has become a very important lead security for traders to keep a laser like focus on.
NASDAQ (QQQ) and the Dow Jones Average ($INDU) are sitting bang on crucial support lines. Alibaba is still sucking all the oxygen out of the technology sector, with major institutions selling everything else to take instant 5% stakes in the new issue. This is great news for the sector for the long term, but not so great for the short term.
Finally, I asked my ace Mad Day Trader, Jim Parker, his thoughtful take here. He believes that short term, markets are oversold and due for a rallyette. He wouldn?t be shorting stocks here with My money! But is the (SPY) going to a new all time high in 14 trading days? Absolutely no way!
There is another factor to consider here. We have recently clocked substantial profits with our short positions in the Euro (FXE) and the Russell 2000 (IWM).
So we can afford the luxury of getting aggressive here when everyone else is running and hiding. We are essentially now playing with the house?s money. The only question is whether we will next post a larger gain, or a smaller one. That is a position of strength, and a great place to trade from.
So I think the net net of all of this is that best case, the risk markets all keep trending downward, worse case, they flat line sideways, at least for the next 14 trading days. Either way, it is a win-win for me. That makes the S&P 500 (SPY) October, 2014 $202-$205 in-the-money bear put spread a winner in my book.
You can buy this spread anywhere in a $2.60-$2.75 range and have a reasonable expectation of making money on this trade.
This is a rare instance where there is no outright stock or ETF equivalent to this trade. If you sell short the stock market here, such as through purchasing the ProShares Ultra Short S&P 500 ETF (SDS), we could rally all the way up to, but just short of the all time high, and you would get your head handed to you.
If this happens with the S&P 500 (SPY) October, 2014 $202-$205 in-the-money bear put spread, you make your maximum profit of 1.30% of your total portfolio. This is why I play in the options market. So non options players are better to stand aside on this trade and just watch it for educational purposes.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/09/Market-Floor-e1411743381455.jpg265400Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-09-30 01:04:502014-09-30 01:04:50Why I?m Doubling Up My Shorts