(QQQ) Archives - Page 15 of 15 - Mad Hedge Fund Trader

What the Markets Will Do from Here

For the last couple of nights, I have left my iPhone logged into the Argentina peso market, one of several troubled currencies igniting the emerging market contagion. Whenever the peso losses another handle to the US dollar, an alarm goes off. That gives me a head start on how American markets will behave the next day.

I have not been getting a lot of sleep lately. My poor phone has recently been sounding off like a winning slot machine at a Las Vegas casino.

Take a look at the long-term chart for the peso, and it?s clear that some traders have not gotten any sleep for five years, when the peso cratered 50% against the greenback. An imploding currency, soaring national debt, and sliding economy promise to send it lower.

Incompetent leadership doesn?t help either. You know that things are bad when your ships get seized by creditors when they land at foreign ports.

When I wrote my all asset class forecast for 2014, there was only one thing I knew for sure: this year would be harder than last. That has been my best prediction for 2014 so far.

The guaranteed shorts, those for the Japanese yen (FXY) and the Treasury bond market (TLT), have been rocketing to the upside since the opening bell rang on January 2. The no brainer longs, like financials (XLF) and consumer discretionaries (XLY), have been plummeting.

The heart wrenching 4.3% correction we saw for the S&P 500 (SPY), and the 5% hit for the Dow average this month, the worst weekly draw down in two years, has predictably brought the Armageddon crowd out of the closet once again. All of a sudden, a 10% correction best case, and Dow 3,000 worst case, are on the table once again. Do they have a leg to stand on?

Not really.

To achieve these big numbers on the downside, your really need a global systemic financial crisis. There isn?t one remotely on the horizon. Yes, there are difficulties in Argentina, the Ukraine, and Turkey. But they are locally confined.

Together, these countries account for less than 1% of global GDP. If they disappeared completely, they would barely make a blip in world GDP. They certainly are not important enough to panic you into emptying your ATM at the local mall on your next lunch break.

You also need excessive leverage. But that has been banned by prime brokers since the 2008 crash. An aggressive long today is 20% net long, not 200% as in the bad old days of yore. Nothing systemic there.

Sure, we aren?t getting the juice that we used to from the Federal Reserve. It is likely that they will further reduce the taper from $75 billion to $65 billion of bond buying per month at their 1:00 PM Wednesday press release.

If there were a one in a million chance that this would trigger a real market meltdown, my friend, Fed governor Janet Yellen, would run that release through the shredder as fast as you could say ?Go Bears?, sending markets flying.

Others are accusing a looming financial crisis in China as another culprit. Yes, the economic data has been soggy of late, to be sure. However, that is just the continuation of a four year old trend. You can safely forget about that one.

No country in history ever suffered a financial crisis with $4 trillion in foreign exchange reserves on hand, including over $1 trillion in US Treasury bonds close to all time highs in value. In fact many of the emerging markets said to be in trouble also boast large reserves, the product of running massive trade surpluses with a hyper consuming West for the past decade.

So if we can?t blame emerging markets or the taper for the downside, then what is causing the January swoon? You can blame it all on the hedge funds.

I have seen this time and again. Whenever too many people crowd into one end of a canoe, it rolls over. When the majority of funds have identical positions, they are guaranteed to fail. That is why we have had a looking glass market performance since the beginning of this year.

Except that this time we got a turbocharger. The peaking of concentration in the most popular trades perfectly coincided with the big New Year reallocation trade, taking prices to greater extremes. Much of the selling you are seeing down here is from latecomers who bought stock only three weeks ago and are now puking them out.

Of course, I saw all of this coming a country mile off. This is why I cut my net long from 100% 10 days ago to only 10%. It is why I am maintaining a year to date performance of +5.13%, compared to a Dow that is down -5%. It is one of my best gains relative to the index over a short period ever.

The same is true of my colleague, Mad Day Trader, Jim Parker. He is almost all in cash and is also well up on the year. He stuck his toe in the water with a small position in some calls on the (TBT) last week, but it got bit off by a shark almost immediately. So he quickly stopped out, as is his way. Of course, we have been comparing notes and sharing input throughout the selling. It appears that great minds think alike.

Jim?s proprietary in-house analysis predicts that the (SPX) will bottom out just above 1,730, the market close on the November 15 options expiration. If correct, that would give us a total start to finish correction of only 6.7%, which is in line with every other correction for the past two years. But the bottoming process could last a few weeks, and provide several more gut churning dumps. Fasten your seat belt.

When will this end? Watch for the parallel confirming cross market trends. The Treasury bond market is a big one, which appears to be peaking already, right at its 200 day moving average and the top of a six month trading range.? Announcement of the next taper could spark the selloff we need there. The Japanese yen is also important. A top here could signal a return to the carry trade and ?RISK ON?.

Since Emerging markets were the instigator of the crisis, look there as well for the first signs of a turnaround. Scrutinize the chart below, and you gain some heart.? It shows that we are a scant 70 cents from setting up a potential multiyear triple bottom at $37, and worst-case $36.

More specifically, you want to see Turkey (TUR), another instigator of this crisis, recoil from $39. Expect it to bounce hard there, as long as the world is really not ending.

Then it will be off to the races once more. I?ll be keeping my powder dry until then. Watch this space.

The Argentine Peso Against the US Dollar

Time To Keep Your Powder Dry

Where?s This Market Bottom?

Newsletter

After yesterday?s 217 point swoon, the S&P 500 (SPX) has fallen 4.3% from its late May peak. It looks like the ?Sell in May? crowd is having the last laugh after all, of which I was one.

Is this a modest 5% correction in a continuing bull market? Or is it the beginning of a Harry Dent style crash to (SPX) 300 (click here for the interview on Hedge Fund Radio)? Let?s go to the videotape.

This was one of the most overbought stock markets in my career. I have to think back to the top of the dotcom boom in 2000 and the pinnacle of the Tokyo bubble in 1989 to recall similar levels of ebullience. In fact, two weeks ago we were at a real risk of a major melt up if we didn?t encounter some sort of pullback. So the modest selling we have seen so far has been welcome, even by the bulls.

There is still a reasonable chance the final decline will be nothing more than a pit stop on the way to new highs. Institutional weightings in equities are at a lowly 31%, compared to 50% 20 years ago. It seems that everyone in the world is overweight bonds (see yesterday?s piece on ?Welcome to the Sack of Rome?).

In recent weeks, the S&P 500 yield ratio has fallen behind that of the 10 year Treasury bond, at 2.10%, but only just. With a price/earnings multiple of 16, we are bang in the middle of a long time historic range of 10-22. Zero overnight interest rates argue that we should be at the top end of that range. The argument that the ?Buy the Dip? crowd is still lurking under the market is real, just a little further than the recent dips allowed.

So how much lower do we have to go? After the close, I enjoyed an in depth discussion with my old friend, Jim Parker, of Mad Day Trader fame about the possible permutations. The following is an itinerary of what your summer trading might look like, expressed in (SPX) terms:

6.2% - 1,605 was the Wednesday low, the 50 day moving average, and the downside of the most recent upward sloping channel on the chart below. This trifecta of support is many traders? first stop for a bounce.

5.4% - 1,590 is the first major downside Fibonacci level. We could see this as soon as the May nonfarm report payroll is announced on Friday.

6.0% - 1,580 is the old 13-year high. Markets always love to retrace to old breakout levels.

6.5% - 1,570 represents a give back of one third of the November-May 330 point rally.

8.3% - 1,540 is the double bottom off the April low.

11.1% - 1,493 is the 200-day moving average. This is the worst-case scenario. I doubt we?ll get there, unless the fundamentals change, which they always do.

Jim gave me a couple more cogent insights. The average big swing move is 100-110 points. The last 100-point move sprung off of the March nonfarm payroll report, which came out on April 5. Big swings also often start and finish around an options expiration, the next one of those is coming on June 21. So for the short term, 1580-1590 is looking good.

To confuse you even further, contemplate the concept that I refer to as the ?Lead Contract.? There is always a lead contract around, one on which all traders maintain a laser like focus, which leads every other financial product out there. It says ?Jump,? and we ask ?How High?? It is also always changing.

Right now, the Nikkei average (DXJ) is the lead contract. The Japanese yen ETF (FXY) is the close inverse. Every flight from risk during the past two weeks has been preceded by a falling Nikkei and a rising yen.
If you want to get a preview of each day?s US trading, stay up the night before and watch the action in Tokyo, as I often do.

You might even learn a word or two of Japanese, which will come in handy when ordering in the better New York sushi shops.

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Bidding for the Stars

Diary, Newsletter

A few years ago, I went to a charity fundraiser at San Francisco?s priciest jewelry store, Shreve & Co. The well-heeled masters of the universe 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 has a sports stadium named after her.

The bids soared to $12,000, $13,000, $14,000. After all, it was for a good cause, Pari Livermore?s California State Parks Foundation. But when it hit $12,400, 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 $14,000.? I said ?no thanks.? $13,000, $12,000, $11,000? I passed.

The current altitude of the stock market reminds me of that evening. If you rode gold (GLD) from $800 to $1,920, oil, from $35 to $149, and the (DIG) from $20 to $60, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it does now?

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.? That?s why my cash position has steadily been rising over the last few weeks.

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.

As for that date? She eventually married one of California premier technology titans, an established billionaire in his own right, and now has two cute kids. It?s all part of life?s rich mosaic. And sorry, I?m not saying who because gentlemen don?t talk.

Buy Every Black Swan

Newsletter

At least that?s what Ben Bernanke thinks. He said as much in his press conference yesterday in the wake of the latest Fed statement. He might as well have waved a red Flag at a bull.

The central bank took the opportunity to downgrade its US growth forecasts going forward as a result of sequestration imposed government spending cuts. What is impressive is how minimal the impact will be, each year only pared back 0.1%. Armageddon, not! Here are the new GDP numbers:

2013? +2.55%
2014? +3.15%
2015? +3.30%

These are at the high end of most private sector predictions. Does Uncle Ben know something that he is not telling us? If the Fed is anywhere close to being right on these predictions, it justifies the meteoric rise in share prices we have seen so far this year. It also suggests we have more upside to go.

Let me throw out a theory here. Ben Bernanke is so fearful of repeating the Federal Reserve mistakes of 1938 that he is going to ere on the side of caution on the monetary easing front. That is when the government tightened too soon, triggering the second leg of the Great Depression and another 50% fall in the Dow average. He certainly is getting a free pass on the inflation front. When is the last time you heard of a worker getting a pay increase?

All of this paints an outlook for stocks that is pretty bullish. We could well continue on up for the rest of 2013, save for a 5%-10% correction in the summer. In the meantime, I added more longs to my model-trading portfolio this morning, using the Oracle (ORCL) inspired dip to tack on positions in United Continental Holdings (UAL) and Apple (AAPL).

By the way Ben, how much is a gallon of milk at the supermarket? Watch this space.

Something on Your Mind, Ben?

Is It Time to Buy Technology Stocks?

Newsletter

Call it the shot heard round the world. David Einhorn?s lawsuit against tech goliath Apple (AAPL) has focused a giant spotlight on what has been one of the worst performing stock market sectors of 2013-- large old technology stocks. Could this be the set up for the biggest sector rotation of the year?

Most of the price action in this year can be divided into kinds: big cap banks and industrials, and what I call garbage. So the shares of Bank of America (BAC), JP Morgan (JPM), Caterpillar (CAT), Procter & Gamble (PG), and Exxon (XOM) have been going through the roof. Garbage stocks, best represented by Netflix (NFLX) have done even better, largely driven by the desperate short covering of big hedge funds.

The Einhorn suit resonated with many of the long suffering owners of Apple, which has seen the value of their holdings plunge 38% since the September $706 peak. His basic message is that the company?s many past near death experiences have fostered a depression mentality where there is no such thing as too much cash.

As a result, $130 billion sits in T bills and money market funds earning nothing, the largest such accumulation in history. Just this hoard, alone, would rank as America?s 19^th largest company by market capitalization.

Such conservatism in management is laudable. But Einhorn argues that it has been taken to such extremes at Apple that it has crossed the boundary into mismanagement and malfeasance. The activist shareholder wants the company to return money to shareholders in the form of high dividends and stock buybacks. Such action could trigger a rapid doubling in the value of the stock.

The litigation was enough to ignite a 10% in Apple stock last week. I think David is interested in far more than just this. Is this the final bottom for the beleaguered company? Is it time to buy? The NASDAQ Index certainly things so. Check out the chart below and you?ll see that the action in Apple enabled it to bust out of its recent torpor to the upside.

The really interesting possibility is that the rebirth of Apple could have major implications for the market as a whole. Survey the landscape these days, and you find shares that are either extremely overbought, or extremely oversold. If money shifts from the leaders to the laggards, it could give the indexes enough juice to take another, and possibly final leg upward.

I just thought you?d like to know.

Apple: More Than Just a Bounce?

How This Bull Market Will Die

Newsletter

The universal question in the market today was ?Why is it down? when all the news was good? The weekly jobless claims dropped 5,000 to 366,000, near a five-year low, confirming that the jobs recovery is still on track. Activist shareholder, David Einkorn?s, lawsuit against Apple (AAPL) to unfreeze its cash mountain should have boosted the market?s major buzz kill.

Sure, ECB president said that European growth would continue to slow. No news there, and certainly not enough to prompt a triple digit decline in the Dow.

The harsh truth is that after the near parabolic move we have seen since the beginning of the year, you don?t need a news event to trigger a market sell off. The mere altitude of the (SPX) at 1,515 should, alone, be enough to do it, a mere 3.8% off the all time high.

The fact is that almost every manager has seen the best start to his track record in decades. Prudence requires that one book some profit, deleverage, reduce risk, and take some money off the table at these euphoric highs.

That especially applies to myself. If I make any more than the 22% I have clocked so far in 2013, nobody will believe it anyway. So why risk everything I?ve made just to make another 20%. Who wants to start over again if the wheels suddenly fall off the market?

That is what prompted my flurry of Trade Alerts at the Thursday morning opening, which saw me bail on my most aggressive positions in the (SPY) and the (IWM), taking profits on my nearest money strikes. I did maintain the bulk of my portfolio, which is still in much farther out-of-the-money strikes, and in short positions in the Japanese yen. I also added to my short positions, buying out-of-the-money bear put spreads on the (SPY), betting that even if we continue up, it won?t be in the ballistic, devil may care fashion that we saw in January.

There are, in fact, real reasons out there for the market to fall. You need look no further than the calendar, which I eloquently outlined the dangers of, in my piece ?February is the Cruelest Month? (click here).

On March 1, the sequestration cuts hit. The 2% increase in payroll taxes has yet to be reflected in slower consumer spending. Federal income taxes have already gone up on those earning over $450,000 a year. This is important, as the top 20% of income earnings account for 40% of consumer spending, and consumer spending delivers 70% of all consumption.

Although it has been postponed by three months, we have a debt ceiling crisis looming that will have to result in spending cuts across the board. My favorite stealth drag on the economy, the paring back of major tax deductions, will be the next big issue to be fought over publicly (the oil depletion allowance versus alternative energy tax credits, and so on, and so on).

All of this adds up to a 1.5% reduction in US GDP growth this year. When you are starting with a feeble, tepid, and flaccid 2% rate, that does not leave much for us to live on. This is how disappointments turn into recession. IT is no empty threat, as many US corporations are seeing earnings slow, and could well disappoint with the next quarter?s results.

This is why I predicted an ?M? shaped year in my ?2013 Annual Asset Class Review? which I am still standing by (click here). We are already well into the heady run up to construct the left leg of the ?M?. Next comes the heart rending ?V? in the middle. Some analysts are amazed that we have gone this far in front of such daunting challenges and haven?t already collapsed. I think that is going to be April or May business, given the humongous cash flows we have witnessed.

This Bull May Not Have Long to Live

This Party is About to End

Newsletter

They are really rocking the market today, with the Dow up nearly 200 points off the back of a non-disastrous Chinese GDP growth figure of 7.7%. However, there is a serious disconnect going on in our markets which suggests to me that our own party may be about to end.

Yesterday?s blockbuster weekly jobless claim took applications for unemployment benefits down to a four-year low of 350,000. But if you ignore this, you have an unending series of data reports that shows an economy clearly decelerating to a growth rate of 1% per annum or less. That is one-seventh China?s rate.

And yet, you have an S&P 500 with a top end range that is a mere 3% within the high for the year. You don?t need a PhD in math from MIT to understand that rising stock prices and falling growth are an anomaly that can?t last and can only end in tears.

I think this is happening for a couple of reasons. Many traders are awaiting Q2, 2012 earnings reports and are willing to give companies the benefit of the doubt until they are out. Stocks are at the historic low end of valuation ranges. Many institutions are still underweight, and willing to use dips to pick up some bargains. This is why this summer has been a short seller?s nightmare, volatility has fallen through the floor, and many hedge funds have bailed for the duration.

I also think that many institutions are waiting for the Federal Reserve to announce QE III at their end of July meeting, thus powering the market to new yearly highs. I?m betting that they will be sorely disappointed. Ben Bernanke has so few bullets left to protect the economy that he will wait until the Indians are circling the wagons and unleashing a barrage of arrows, before he takes action. Quantitative easing is meant to be a safety net, not a stepladder from which to boost ever-higher asset prices. The Fed?s failure to deliver could give us the trigger we need to break to new lows in August.

Take a look at the charts below to see how clearly defined the recent channels and ranges are. Next time the SPX approaches 1,370, I might think about going short, taking out some downside insurance, selling out of the money calls, and generally getting yourself into a risk off posture. If you don?t, your summer could turn into a giant rainstorm.

This Party is Nearly Over

Is an Apple Short the Trade of the Year?

Diary

When Apple (AAPL) made its three day, $50 move up last week, it created $55 billion in new market capitalization. That 72 hour addition alone would rank it as the 100th largest company in the world besides Boeing (BA), Union Pacific Railroad (UNP), and Nike (NKE). Trading volume in Apple calls is has smashed all records. The action has been more frenzied than seen in any single name since the height of the dotcom bubble 12 years ago.

I tried to take a bite out of Apple, selling 20% deep out of the money, front month calls. It looked clever for exactly two weeks. Instead, Apple took a bite out of me. When the appreciation suddenly accelerated on no news specific to Apple, implied volatility for the options popped from 30% to 40% in an hour, and I got stopped out.

Moves like this are unprecedented in the history of the options market. I know people who are doubling their money every week, buying out of the money Apple weekly calls, and rolling their way all the way up, knowing full well that their last trade will result in a total loss.

So that got me to thinking. Is the greatest shorting opportunity of the year setting up here? I started playing around with some numbers when Steve Jobs? creation hit $600 a share yesterday. I looked at the April, 2012 put series, which expire in 25 trading days, on April 20. Then, the $500 puts were trading at $2.00. What would happen if the stock fell? I did some back of the envelop calculations and came up with the following:

Apple Option
Fall??? Price?????? % Gain
$10??? $2.50???????? 25%
$20??? $3.25???????? 62%
$30??? $4.50???????? 125%
$40??? $6.00???????? 300%
$50??? $8.00???????? 400%
$60??? $10.50?????? 425%
$70??? $13.75?????? 587%
$80??? $17.75?????? 787%
$90??? $22.25?????? 1012%
$100? $27.50?????? 1275%

I thought ?well, that?s pretty interesting?, and set to write up a Trade Alert to buy the $500 puts. But by the time I finished writing it, Apple fell $25 and the puts doubled. I missed the entry point so I decided to wait.

I love Apple stock, and it now looks like it will hit my long term $1,000 target sooner than later. I have been filling up my house with Apple gadgets as fast as I can, like everyone else, picking up an iPhone, a MacBook Pro, and a MacBook Air. The ecstatic people on TV this morning piling into Apple stores at the crack of dawn to buy the new iPad behave like they?re just won the lottery.

But I also know what a parabolic stock move looks like on the charts, and I have never seen them end in anything but tears. At some point they end, falling back down to a trend line, even if that trend remains up. The volume on the downside is even greater than on the upside. I image that quite a lot of the recent buying has been on margin or with huge leverage. Apple stock is cruising for a bruising, and no one would be surprised to see a sudden $100 sell off.

I?ll tell you when to put on this trade. Wait for the next three day, $50 spike, and then commit 1% or 2% of your capital, no more. You are looking to risk 1% to make 10%, not 100% to make 1,000%. I frequently get resumes from those who tried the later and are now unemployed, and believe me, you don?t want to try this.

Of course, it is possible that the final $50 spike is behind us, in which case this entire discussion has been academic. But it is still a good exercise to carry out to learn what is possible. And since St. Patrick?s Day is upon us, you might want to down a quick shot of Irish whiskey first, neat, if you end up doing the trade.

Sign of a Top?

Bear Trap Sprung

Diary

The coming bear trap that I warned about last week sprung this morning on the non-subscribing unwary, triggering panic buying by short sellers in all ?RISK ON? assets. Oil (USO), gold (GLD), silver (SLV), copper (CU), and foreign currencies all moved in lockstep to the upside. The trigger was news that leaked out over the weekend that the International Monetary Fund would make available several hundred billion dollars to bail out the beleaguered European ?PIIGS?.

Never mind that the IMF immediately denied any such moves from multiple offices around the world. The tipoff that something big was coming was the strong performance during Friday?s stock market opening, ostensibly off the back of healthy ?Black Friday? figures, which rapidly faded at the close. I suppose the big money was too busy fighting turkey indigestion to maintain the ephemeral gains. Once the buying started during the Sunday Asian market hours, it was all over but the crying.

With many managers poo-pooing today's move, one has to ask if this is a one day wonder, a much needed 24 hour holiday from the deluge of bad news from the Continent?

The charts below suggest that this is more than a one day wonder and that there is more juice to go. Certainly breaking the 50 day moving average at 1,205 would be a positive development. At the very least, we should take a run to the old S&P 500 support level at 1,230, which should now pose substantial resistance. Break that, and the 200 day moving average at 1,266 comes into play, close to the three month highs we saw two weeks ago.

The interesting mover today was the Euro, which hardly moved at all, the ETF (FXE) gained a scant 0.53%. You would think that the troubled European currency would be the primary beneficiary of any rescue attempts. It wasn?t. This feeble response tells me that the Euro is fundamentally flawed, is still the currency that everyone loves to hate, and is looking at more downside than upside. That is why I didn?t join the lemmings this morning scrambling to cover shorts.

Cover Those Shorts!

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