High multiple tech stocks often overshoot on the way up and overshoot on the way down.
This is predominately driven by uncontrolled momentum as investors and traders resort to margin to borrow money and add leverage to positions and trends that seem to be working at the time.
Since the start of the year, technology has had to come to grips with a sudden rerating of valuations.
For example, a bellwether stock for the future success of tech, Tesla (TSLA) has corrected 20% year-to-date after more than 700% move up in 2020.
Reliable big-cap tech has been more steadfast in 2021 such as the likes of Apple (AAPL) who have only experienced a less than 2% year-to-date decline in shares.
The biggest winner so far of big-cap tech has to be Alphabet (GOOGL) whose shares have risen around 25% since the beginning of the year.
Even with sky-high expectations, Google is hitting it out of the ballpark and then some.
Simply meeting or doing a nudge over expectations this past earnings season has proved not enough for underlying shares to surge on the results meaning we are fully priced.
Naturally, the more speculative business has felt the worst of the carnage with SPACs down half from their peaks and “artisanal” tech down 30%-50%.
This doesn’t mean tech is over.
Hardly so – It’s just resting.
But readers and investors will need to traverse through a period of multiple contraction and consolidation as high-priced tech stocks are re-rated lower until we reach appetizing multiples.
Simply put, we got ahead of ourselves and there is only so much leverage that can be taken out to chase the rainbows and feed off the momentum.
Microsoft (MSFT) has been another stout stock that is up around 12% year-to-date and a great place to hide out during the consolidation phase.
The cause of the rerating derives specifically from upper management guiding down future revenue and profitability targets.
I have read countless earnings reports that describe a comprehensive dilemma in which the overall structure of the company couldn’t be healthier yet beating prior years’ Covid performance is impossible on a year-to-year basis.
Readers need to understand this year is still priced as a Covid year, but tech companies won’t nearly do as well because the conditions that engulfed Covid like work-from-home and the absence of a vaccine are not here anymore.
There is a health solution in the U.S. and in parts of Europe there are partial solutions and certainly, no lockdown as the Chief of the CDC signals masks are not needed for the vaccinated in public.
The tech market needs to readjust its expectations that will hand off to more of a normalized metric environment and that will happen naturally as we move closer to 2022 and into it.
On a calculation basis, comparing data from 2022 and 2021 will strip out the volatility from the 2020 and 2021 comparisons.
Remember that management uses the prior year as reference points for performance and that phenomenon is now hurting the appearance of relative outperformance.
A top executive at a fintech company had this to say, “The pandemic has accelerated a digital wave of change across almost every industry by three to five years, unleashing a profound and permanent structural transformation.”
I’ll take a 5-year digital transformation in one year if the second year is a time that is needed for earnings’ expectations to consolidate for half a year or so.
I would take that deal anytime if it was my company.
The data also suggests how breathtaking companies like Google and Microsoft are if their future guidance is immune to any expectation.
They are beating whatever consensus is in a Covid year or not.
Take a look at some of the darlings of tech in the height of pandemic like Teladoc (TDOC), and shares are off around 33% year-to-date and even went through a 40% drop from mid-February to the beginning of March.
Avoid those now!
Even if it's not related to cloud software stocks, the dearth of semiconductor chips is beginning to cause pain in every nook and cranny of the global economy catalyzing many firms to delay or even cancel production let alone roll out new models.
This adds to the global malaise of a supply chain that many managements describe as “topsy-turvy.”
Not only is the bottleneck happening as we speak, but it appears as though it could last at least 2 or more years.
When the Fed talks about “transitory” inflationary pressures, at least as it relates to tech, I am not sure what they are smoking.
There has been no concrete data in which they have offered to suggest that it will be transitory unless they have a different definition of transitory from mine.
The accumulation effect of these pressures is why the tech-heavy Taiwan stock market, FTSE TWSE Taiwan 50 Index, comprised of tech stalwarts like Taiwan Semiconductor Manufacturing (TSM) and Hon Hai Precision Industry, declined over 2% today after losing over 8% last week.
Ultimately, investors are moving to higher ground and seeking predictable profitability and raw size over elevated growth rates and loss-making EPS figures.
When the goalposts move, we must move with them and that is what has happened.
Tech investors are more conservative than last year and until the goalposts widen a bit as I expect as we move into Q3 and Q4, we need to be aware of the new rules of the game or who gets penalized for them.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-05-17 11:02:502021-05-25 02:20:07Multiple Contradiction
The 19th century humorist and writer, Mark Twain, said, “History never repeats itself, but it rhymes.” This is certainly one of those rhyming times.
Remember back in 2011 when the Dow hit a short-term peak at $12,300 in May of 2011? The Cassandras had a heyday. The bull market was over, stocks were imminently going to crash, and the next stop for the Dow was $3,000. Gold and bonds were the only safe places.
Those who drank the Kool-Aid missed the greatest investment opportunity of the century and are now driving for Uber cars to earn their crust of bread. Those who drank the Kool-Aid twice sold their homes as well ahead of the greatest real estate boom of all time.
Not that a correction wasn’t sorely needed, we needed to scare money out of what I call the “super liquidity” investments like Bitcoin, SPACS, and tech companies selling at 100 times sales with failing business models.
We also needed to put the fear of god into newbie day traders by teaching them that stocks go down as well as up. We’ve already made good progress on this front. With many of the “meme” stocks down by half or more since February, we are already making good progress on that front.
What will power the Dow to my now very prescient looking $40,000 target by yearend? The unwind of the 40-year-old bull market in bonds has barely just begun. Ten-year US Treasury bond yields ($TNX) have only appreciated from 0.32% to 1.68%, compared to 5.6% at the last 2007 peak. That means there are still many tens of trillions of dollars to shift out of bonds (TLT) and INTO STOCKS!
Once the current correction ends, money will pour back into the recent leaders, the economic cyclicals, including financials, commodities, industrials, and commodities.
Technology will stay in the penalty box for the foreseeable future until they become under-owned and cheap again. The good news here is that tech earnings are growing at such a prolific rate that the sector is losing two price earnings multiple points a month and will return to the bargain basement in the not-too-distant future.
The long term view here is that you want to rent growth, but own tech, which still has double the growth rate of everything else.
It all makes my 2021 $40,000 Dow Average target look like a piece of cake, and my 2030 goal of $120,000 positively conservative, cautious, and circumspect.
Notice that our 2,000 point-swan dive in the Dow last week lasted only three days, and then delivered the sharpest fall in the Volatility Index (VIX) in history, from $29 to $19 in only 24 hours. The writing is still on the wall. People want to BUY.
Inflation explodes, with the Consumer Price Index posting a ballistic 4.2% YOY rate, the fastest gain since 2009. The Fed believes this is a temporary surge, the markets not so much. Bonds take it on the nose. Keep selling rallies in the (TLT). We’re making a fortune here.
Volatility Index (VIX) soars to $29, almost doubling in a week. Call me when it tops $30. That’s the usual signal for a short-term stock market bottom. I’m relaxed because I’m going into this with 80% cash and have just made a huge fortune on bond shorts. Value and cyclicals are still the Big Play. That was the message of the stock market on Friday’s wild day which saw an 11-basis point trading range in the ten-year US treasury bond. If you think the next big move in rates is up, then Cyclicals will roar, and techs will fade.
It’s all about buying what people are underweight and selling what they are overweight. I’m looking for cyclicals that have recently corrected. Stay tuned to this station.
US Inventories see solid gains as retailers load the boat for the biggest economic recovery of all time. March was up 1.3%. One of an endless series of data points pointing to the best business conditions in a century.
The Home Buying Frenzy continues, with the median price for a single-family home soaring by 16.2% to $319,200 in Q1, according to the National Association of Realtors. Record high prices are hitting all markets. The perfect upside storm continues.
Weekly Jobless Claims come in at 473,000, a new post-Covid low. Continuing claims fall to 3,655,000. The greatest economic recovery of all time continues.
Producer Prices leap in April, up 0.6% following a 1% gain in March. It is a natural follow-on from the hot CPI. The PPI tracks changes in production costs, and supply bottlenecks and shortages tied to the pandemic recovery have caused commodity prices to soar. Temporary or continuing, that is the big debate. Watch the bond market for clues.
Stanley Druckenmiller says Bonds are Toast, and The Dollar is Worse. I couldn’t agree more with my old friend and trading counterparty. Current Fed policies are now the most extreme in history and threaten the reserve status of the US dollar. Sell all rallies in the (TLT) and the (UUP). My Ten Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch profit reached 3.83% gain so far in May on the heels of a spectacular 15.67% profit in April. That leaves me 30% invested and 70% cash.
My 2021 year-to-date performance soared to 63.59%. The Dow Average is up 13.47% so far in 2021.
During the stock market meltdown, my hedges with shorts in the S&P 500 (SPY), NASDAQ (QQQ), and the United States Treasury Bond Fund (TLT) performed spectacularly well, leaving me up on the week. I managed to limit myself to only two stop losses, in Microsoft (MSFT) and Delta Airlines (DAL).
While everyone else was running around like chickens with their heads cut off, I was as relaxed as ever. Our worst case for May is that we will be only up single digits, instead of the double-digit gains of the past six months. That is not a bad “worst case” to have.
That brings my 11-year total return to 486.14%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.45%, easily the highest in the industry.
My trailing one-year return exploded to positively eye-popping 127.09%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 33million and deaths topping 586,000, which you can find here.
The coming week will be a weak one on the data front.
On Monday, May 17, at 9:45 AM, the New York Empire State Manufacturing Index for May will be out
On Tuesday, May 18, at 10:00 AM, the Housing Starts for April are announced.
On Wednesday, May 19 at 2:00 PM, Minutes from the last Federal Reserve FOMC Meeting are published.
On Thursday, May 20 at 8:30 AM, the Weekly Jobless Claims are published.
On Friday, May 21 at 10:00 AM, Existing Homes Sales for April are announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, we had a big 4.7 earthquake at Lake Tahoe last week. The healthy live trees vibrated and swayed. But all of the brittle dead trees killed by pine beetles during the draught snapped at the base and fell over.
Those blocked all the fire roads, so every emergency and public service organization on the lake was called up and sent up into the mountains with chain saws. That included me, a member of Lake Tahoe Search and Rescue.
I hiked up to 9,000 feet with a 50-pound load and went to work. We cut these enormous 100-foot conifers into one-foot rounds and then rolled them off the road. Everyone else on the job was under 40.
After a day of heavy lifting, I hiked down the mountain and collapsed into bed. I slept for 12 hours, which is why the Monday letter was late. They say 70 is the new 40. I am the proof of that.
So can 100 be the new 60? One can only hope.
How was your weekend?
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
20 Year Chart of Ten Year US Treasury Yields
https://www.madhedgefundtrader.com/wp-content/uploads/2021/05/jtfootlog.jpg484433Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-05-17 10:02:372021-05-17 10:22:00The Market Outlook for the Week Ahead, or Why History Rhymes
Below please find subscribers’ Q&A for the May 12 Mad Hedge Fund TraderGlobal Strategy Webinar broadcast from Lake Tahoe, NV.
Q: Is it too risky to run a double position on the US Treasury Bond Fund (TLT)?
A: Absolutely not, if anything it’s now risky enough. You need to be running triple and quadruple short positions in the (TLT) and skipping all the other marginal trades out there.
Q: Where do I find the put LEAPS recommendations?
A: If you did not get the put LEAP recommendation as part of your regular Global Trading Dispatch service, just log in to the www.madhedgefundtrader.com website and do a search on put LEAPS. Our concierge members get many more LEAPS recommendations, and they get them earlier. I happen to have an opening now, provided you can afford $10,000 a year for the service.
Q: With the inflation numbers coming at 4.2% YOY, how does that affect our strategy?
A: It kills techs, gets them too much lower levels that are much more attractive, and you make a fortune on all of your US Treasury (TLT) shorts. That's the main goal of our strategy right now. In other words, it’s great news.
Q: Would you sell technology stocks here and wait for a bounce?
A: No, ideally you would have hedged last week, buying Invesco QQQ Trust NASDAQ (QQQ) and TLT put spreads, and that hedged all your losses in your technology portfolio. The next move is to take profits on your (QQQ) and bond (TLT) shorts and then go unhedged on your tech longs. This is how hedge funds are executing their barbell strategies.
Q: Is the (TLT) $130-$135 vertical bear put spread okay for September, or should I pay more for January?
A: I would go to January because, as you noticed, this market could enter a long sideways period that goes on for months, like we just had. If you have a September and we go into another one of those sideways moves, you’re going to be wishing you did January. You don’t have to pay much more for January, only a few cents and even then, you’re looking at a 100% return.
Q: Is Tesla (TSLA) under $600 a good buy?
A: It's even a better buy at $545, which is the double bottom low of the last selloff; so, I would wait for that. And then I would essentially not do the stock, but a $450 call spread to reduce your risk even further.
Q: I just entered the Freeport McMoRan (FCX) LEAPS today. Should I average in a lower price?
A: Absolutely yes, I don't think it drops much from here since everyone expects it to double. And if you have the 8- or 20-month LEAPS, the day-to-day price move isn’t very big, given how much the stock is moving. That's the great thing about LEAPS—it reduces the volatility of your portfolio because you have such enormous time value in these long-dated LEAPS. It's really good to have a couple of these in your portfolio, just to act as a sort of sea anchor to reduce volatility; and of course, the (TLT) and (FCX) are two of the best trades out there.
Q: Would you roll a losing position?
A: I do that maybe once a year, in extraordinary circumstances. I would rather take a short-term loss on Microsoft (MSFT) and if it drops $10 more, then I go back into the position. You never know when you get one of these huge selloffs and you can take the full 10% hit on these call spreads. Remember these are highly leveraged positions; they are leverage ten to one or more. When the stock moves even a little bit against you, you don't want leverage whatsoever. Better to get out of a small hole now than a much bigger hole later. But that's just me after 52 years of trading.
Q: The hedge fund legend Stanley Druckenmiller said the current Fed monetary policy puts the US dollar at risk of losing its reserve currency status. What do you think about this?
A: I’m totally in line with him on being short the dollar and short treasuries, but I don't think the dollar will lose reserve status in my lifetime. What would they replace it with? Anything you look at has far more problems with liquidity and stability than the US dollar. I literally have been asked this many times a year for the last 50 years, ever since the US went off the gold standard in 1972. The strongest reserve currency in the world has the strongest military, and as long as that’s true, the US dollar will not lose its reserve status. That has been true since the Roman Empire. In fact, you still find Roman coins floating around.
Q: When do we stop out of Delta (DAL)?
A: When we break 43. Very simple. You break your first strike price at $43.00 and you are out of there, losing about $800 on the position, which is our hard and fast stop loss rule. Never let emotion into the equation. Stop losses should be automatic and mechanical.
Q: What do you think of Nordstrom (JWN)?
A: I think they were close to bankruptcy, but I'm looking at the higher end retailers to make a recovery. While the bricks and mortar were shut down, they did develop pretty big online businesses. That's true for Macy’s (M), Kohls (KSS) and a lot of the other businesses that survived the pandemic.
Q: Is Mastercard (MA) better than Visa (V)?
A: All three credit card companies are more or less six of one and half a dozen of the other. So, buy all three if you’re not sure. American Express (AXP) has more exposure to business travel, so if you’re looking for a business travel recovery, that's the one you want to own.
Q: Is it too late to get into (TLT) LEAPS today?
A: I think it is kind of late for the short term. We have dropped $5.00 since I put this thing out on Friday, and I would rather let it wait and fall two more points and then rally five points and then put more on. You should sell the next rally peak, wherever that is, even if we start from $130. You can even do in the money LEAPS, like a $135-$140 (TLT) going out to January—the profit on that is still well over 50%. So even today returns are very high on that position.
Q: Would you buy more Palantir (PLTR) on the recent dip?
A: Yes, but only if you have a long-term view. The CEO said he could care less about the stock price, and when CEOs say that, the stock sells off huge. If the CEO doesn't care about the stock, then nobody else does either. I think their business model is interesting for the long term and I think eventually some kind of tech rally will take it back up. That is not now.
Q: Is First Solar (FSLR) a buy?
A: We’re getting into buy territory. They had a monster 4X rally off the bottom last year. But the entire green sector got wildly overbought by February and was then dragged down with the rest of the tech selloff. I think solar is going to have a major long-term bull market. Look to buy for the long term. It’s not in call spread or LEAP territory for me yet, but it will be. Another good one to buy is SunPower (SPWR).
Q: Do you have several different subscriptions? How do I find out about them?
A: Yes, go to the www.madhedgefundtrader.com store. We have services that go from free all the way up to $10,000 a year. Just pick one that suits your level of experience, risk tolerance, and the amount of capital you have to work with.
Q: How do I get trade alerts?
A: Email customer support at support@madhedgefundtrader.com , send them your cell number and they will set you up with the trade alert service which goes straight to your phone.
Q: How do existing subscribers get a price break on your other subscriptions?
A: You make so much money trading from your existing service, that you never have to ask a price on anything again. JP Morgan once said that “If you have to ask the price of a yacht you don’t need to know.
Q: I’m doing extremely well in the Invesco Currency Shares Australian Dollar Trust (FXA) that you recommended a year ago.
A: Yes, you and everyone else who believed my story. Australia is a call option on a global economic recovery with all its commodity exports like iron ore and natural gas. My target is $100 in two years.
Q: Should I buy the US dollar (UUP) or wait for another down move?
A: I wouldn't touch it with a 10-foot pole. I think the move down in the dollar is a 10-year event that we’re one year into. By the way, currencies do go down for decades at a time because it will take that long to cut back our borrowing and start paying back some of the principle. That is a long way off.
Q: If Bitcoin drops do tech stocks drop as well?
A: I don't think there's that much of a correlation between Bitcoin and tech stocks. Tech stocks have major valuation support about 10% down and for sure 20% down. That gets you a price-earnings multiple for the big tech stocks of only 18X, which was the low in the 2008 crash and the 2000 Dotcom crash. So major historical support at an 18X multiple Bitcoin has no technical or fundamental support whatsoever because there are no fundamentals, there are only charts.
Q: Do you think Chinese carmakers like Nio (NIO) and Xpeng Inc. (XPEV) will ever catch up with Tesla?
A: No, never. China has never been able to reach the safety standards necessary to export cars to the US. They've been making electric cars in China longer than Tesla has. I was visiting electric car factories in China around 2007-2008, and they just can’t get the quality up. In the meantime, Tesla is moving ahead at warp speed, so I don't see a risk to them.
Q: I have a big position in Clorox (CLX) that I’ve made a lot of money on; should I sell it?
A: Yes, you’ll never get more reasons to buy Clorox at a great price than in a pandemic. There's actually a shortage of Clorox right now. So yes, take profits on (CLX).
Q: Would you buy Kathy Wood’s Ark Innovation ETF (ARKK) right here today?
A: No, I think we have more interest rate rallies to go and more tech selloffs to go. I would wait and buy it with ten-year US Treasury yields at 2.00%. I would rather be buying this on the way up and averaging up, than buying on the way down and averaging down.
Q: How will stocks be affected at 2.00% yields in the ten-year?
A: I think what happens is we run up 2.00%, bonds collapse, and then it stops. And when it stops and starts to pull back from 2.00%, then you get a new rally in the stock market, especially in technology stocks.
Q: Is it a good idea to hold 30-year US treasury bonds?
A: It's a terrible idea. I would be selling short US Treasury bonds up the wazoo—especially the 30 year which has the greatest price sensitivity to a move up in interest rates.
Q: Should we buy put LEAPS on oil (USO) and energy (XLE)?
A: Yes but not yet; as long as you have a red hot economy in the short term, you don’t want to be shorting anything in energy. Next year, however, may be a different story. The economic growth rate will start to slow down, oil demand starts to slow down, and the rate of replacement of gasoline cars by EV’s accelerate with all the new production. So that's next year’s trade, not this year’s trade, but it’s a good idea.
Q: When the Volatility Index (VIX) hits $30, what would be your first choices to pick up?
A: I would go for all the domestic recovery, interest rate, and industrial plays that have been working so well this year. They will continue to lead the market until we get a major reversal down in interest rates.
Q: When do I buy semiconductor stocks (SOX)?
A: When the rest of tech bottoms out and starts its way back up. It’s better to average up than average down.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Below please find subscribers’ Q&A for the April 28 Mad Hedge Fund TraderGlobal Strategy Webinar broadcast from Silicon Valley, CA.
Q: There is talk of digital currencies being launched in the US. Is there any truth to that? How would that affect the dollar?
A: There is no truth to that; there is not even any serious discussion of digital currency at the US Treasury. My theory has always been that once Bitcoin works and is made theft-proof, the government will take it over and make that the digital US dollar. So far, Bitcoin has existed regulation-free; in fact, the IRS is counting on a trillion dollars in capital gains being taxed going forward in helping to address the budget deficit.
Q: If you have a choice, what’s the best vaccine to get?
A: The best vaccine is the one you can get the fastest. I know you’re a little slow on the rollout in Canada. Go for Pfizer (PFE) if you’re able to choose. You should avoid Moderna (MRNA) because 15% of people getting second shots have one-day symptoms after the second shot. But basically, you don’t get to choose, only kids get to choose because only Pfizer has done trials on people under the age of 21. So, if you take your kids in, they will all get Pfizer for sure.
Q: Should I buy Freeport McMoRan (FCX) here or wait for a bigger dip?
A: Freeport has just had a 25% move up in a week. I wouldn’t touch that. We put out the trade alert when it was in the mid $30s, and it's essentially at its maximum profit point now. So, you don't need to chase—wait for a bigger dip or a long sideways move before you get in.
Q: How do I trade copper if I don't do futures?
A: Buy (FCX), the largest copper producer in the US, and they have call options and LEAPS. By the way, if we do get another $5 dip in Freeport, which we just had, I would really do something like the (FCX) $45-$50 2023 LEAP. You can get 5 times your money on that.
Q: Time to buy oil stocks (USO) for the summer?
A: No, the big driver of oil right now is the pandemic in India. They are one of the world's largest consumers—you find out that most poor countries are using oil right now as they can’t afford the more expensive alternative sources of power. And when your biggest customer is looking at a billion corona cases, that’s bad for business. Remember, when you trade oil, you’re trading against a long-term bear trend.
Q: Would you buy Delta Airlines (DAL) at today’s prices?
A: Yes, I’m probably going to go run the numbers on today's call spread; I actually have 20% of cash left that I could spend. So that looks like a good choice—summer will be incredible for the entire airline industry now that they have all staved off bankruptcy. Ticket prices are going to start rising sharply with an impending severe aircraft shortage.
Q: What are your thoughts on the Buffet index which shows that stocks are more stretched vs GDP at any time vs 2000?
A: The trouble with those indicators is that they never anticipated A) the Fed buying $120 billion a month in US Treasury bonds, B) the Fed promising to keep interest rates at zero for three years, and C) an enormous bounce back from a once-in-a-hundred-year pandemic. That's why not just the Buffet Index but virtually all technical indicators have been worthless this year because they have shown that the market has been overbought for the last six months. And if you paid attention to your indicators, you were either left behind or you went short and lost your shirt. So, at a certain point, you have to ignore your technical indicators and your charts and just buy the damn market. The people who use that philosophy (and know when to use it, and it’s not always) are up 56% on the year.
Q: What trade categories are getting fantastic returns? It’s certainly not tech.
A: Well, we actually rotated out of tech last September and went into banks, industrial plays, and domestic recovery plays. And you can see in the stocks I just showed you in our model portfolio which one we’re getting the numbers from. Certainly, it was not tech; tech has only performed for the last four weeks and we jumped right back in that one also with positions in Microsoft (MSFT). So yes, it’s a constantly changing game; we’re getting rotations almost daily right now between major groups of stocks. The only way to play this kind of market is to listen to someone who’s been practicing for 52 years.
Q: I am 83 years old and have four grandchildren. I want to invest around $20,000 with each child. I was thinking of your bullish view on Tesla (TSLA) on a long-term investment. Do you agree?
A: If those were my grandchildren, I would give them each $20,000 worth of the ProShares Ultra Technology Fund (ROM), the 2x long technology ETF. Unless tech drops 50% from here, that stock will keep increasing at twice the rate of the fastest-growing sector in the market. I did something similar with my kids about 20 years ago and as a result, their college and retirement funds for their kids have risen 20 times. So that’s what I would do; I would never bet everything on a single stock, I would go for a basket of high-tech stocks, or the Invesco QQQ NASDAQ Trust (QQQ) if you don’t want the leverage.
Q: Do you like Amazon (AMZN) splitting?
A: I don’t think they’ll ever split. Jeff Bezos worked on Wall Street (with me at Morgan Stanley) and sees splits as nothing more than a paper shuffle, which it is. It’s more likely that he’ll break up the company into different segments because when they get to a $5 trillion market cap, it will just become too big to manage. Also, by breaking Amazon up into five companies—AWS, the store, healthcare, distribution, etc., —you’re getting a premium for those individual pieces, which would double the value of your existing holdings. So, if you hold Amazon stock, you want it to face an antitrust breakup because the flotation will double the value of your total holdings. That has happened several times in the past with other companies, like AT&T (T), which I also worked on.
Q: When is Tesla going to move and why is it going up with earnings up 74%?
A: Well, the stock moved up a healthy 46% going into the earnings; it’s a classic sell the news market. Most stocks are doing that this quarter and they did so last quarter as well. And Tesla also tends to move sideways for years and then have these explosive moves up. I think the next double or triple will come when they announce mass production of their solid-state batteries, which will be anywhere from 2 to 5 years off.
Q: How can I renew my subscription?
A: You can call customer support at 347-480-1034 or email support@madhedgefundtrader.com and I guarantee you someone will get back to you.
Q: Top gene-editing stock after CRISPR Therapeutics (CRSP)?
A: There are two of them: one is Intellia (NTLA); it’s actually done better than CRISPR lately. The second is Editas (EDIT) and you’ll find out that the same professionals, including the Nobel prize winner Jennifer Doudna here at Berkeley, rotate among all three of these, and the people who run them all know each other. They were all involved in the late 2000's fundamental research on CRISPR, and they’re all frenemies. So yes, it's a three-company industry, kind of like the cybersecurity industry.
Q: What about PayPal (PYPL)?
A: I would wait for the earnings since so many companies are selling off on their announcements. See if they sell off 3-5%, then you buy it for the next leg up. That is the game now.
Q: Do you like any 3D printing stocks like Faro Technologies (FARO)?
A: No, that’s too much of a niche area for me, I’m staying away. And that's becoming a commodity industry. When they were brand new years ago, they were red hot, now not so much.
Q: Do you see the chip companies continuing their bull run for the next few months?
A: I do. If anything, the chip shortage will get worse. Each EV uses about 100 chips, and they’re mostly the low-end $10 chips. Ford (F) said production of a million cars will be lost due to the chip shortage. Ford itself has 22,000 cars sitting in a lot that are fully assembled awaiting the chips. Tesla alone has $300 worth of chips just in its inverters, and there are two inverters in every car. So, when you go from production of 500,000 cars to a million in one year, that's literally billions of chips.
Q: The airlines are packed; what are your thoughts?
A: Yes, one of the best ways to invest is to invest in what you see. If you see airlines are packed, buy airline stocks. If you can’t hire anyone, you know the economy is booming.
Q: What about the Russel 2000 (IWM)?
A: We covered it; it looks like it wants to break out to new highs from here. By the way, there are only 1,500 stocks left in the Russell 2000 after the pandemic, mergers, and bankruptcies.
Q: Are there other ways to play copper out there like (FCX)?
A: Yes; one is the (COPX)— a pure copper futures ETF. However, be careful with pure metal ETFs of any kind because they have huge contangos and you could get a 50% move up in your commodity while your ETF goes down 50% over the same time. This happens all the time in oil and natural gas, and to a lesser degree in the metals, so be careful about that. Before you get into any of these alternative ETFs, look at the tracking history going back and I think you'll see you're much better off just buying (FCX).
Q: How long do you typically hold onto your 2-year LEAPS? Based on my research, the time decay starts to accelerate after about 3 months to one year on LEAPS.
A: Actually, with LEAPS, the reason I go out to two years is that the second year is almost free, there's almost no extra cost. And it gives you more breathing room for this thing to work. Usually, if I get my timing right, my LEAP stocks make big moves within the first three months; by then, the LEAP has doubled in value, and then you have to think about whether you should keep it or whether there are better LEAPS out there (which there almost always are). So, you sell it on a double, which only took a 30% move in the stock, or you may be committed to the company for the long term, like a Microsoft or an Amazon. And then you just run it through the expiration to get a 400% or 500% profit in two years. That is how you play the LEAP game.
Q: Are these recorded?
A: Yes, we record these and we post them on the website after about 2 hours. Just log into the site, go to “my account”, then select your subscription type (Global Trading Dispatch or Technology Letter), and “webinars” will be one of the button choices.
Q: Can you also sell calls on LEAPS?
A: Yes and the only place to do that is the US Treasury market (TLT). There you either want to be short calls far above the market, out two years, or you want to be long puts. And by the way, if you did something like a $120-$125 put spread out to January 2023, then you’re looking at making about a 400% gain. That is a bet that 20-year interest rates only go up a little bit more, to 2.00%. If you really want to bet the ranch, do something like a $120-$122 and you might get a 1000% return.
Q: What is the best LEAP to trade for Microsoft (MSFT)?
A: If you want to go out two years, I would do something like a June 2023 $290-$300 vertical bull call spread. There is an easy 67% profit in that one on only a 20% rise in the stock. I do front monthlies for the trade alert service, so we always have at least 10 or 20 trade alerts going out every month. And the one I currently have for is a deep in the money May $230-$240 vertical bull call spread which expires in 12 days.
Q: What is the best way to play Google (GOOG)?
A: Go 20% out of the money and buy a January 2023 $2,900-$3,000 vertical bull call spread for $20—that should make about 400%. If you want more specific advice on LEAPS, we have an opening for the Mad Hedge Concierge Service so send an email to support@madhedgefundtrader.com with subject line “concierge,” and we will reach out to you.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
I Think I See Another Winner
https://www.madhedgefundtrader.com/wp-content/uploads/2019/11/john-rifle.png700525Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-04-30 09:02:212021-04-30 12:12:05April 28 Biweekly Strategy Webinar Q&A
During the Middle Ages, when explorers sought new lands and their rich treasures, large sections of their navigational charts were marked with the term “terra incognita.”
That meant what lays beyond was unknown and that they should enter only at their own risk. Often there was a picture of a dragon or a sea monster to mark the spot.
There was also often a warning that you might even sail off of the edge of the earth.
Financial markets have entered a “terra incognita” of their own recently.
Here is the big unknown: How high can ten-year US Treasury bond yields soar when the Federal Reserve is promising to keep overnight interest pegged at 25 basis points until 2024 in the face of essentially unlimited monetary and fiscal stimulus?
So far, the answer is: more.
That is a really big question because we’ve never really been here before.
In fact, some Cassandras from the right are even predicting such a policy will cause us to sail off of the edge of the earth. The modern-day equivalent of running into dragons is inviting runaway inflation.
I can tell you from my own vast, almost immeasurable navigational experience (I am licensed by the US government) that “terra incognita” does not invite inordinate risk-taking or betting of ranches by traders or investors. Instead, they tend to sit on their hands, work on their golf swing, or update their Facebook pages.
That is what the Volatility Index (VIX) last week is essentially screaming at us by touching the $19 handle for the first time in a year.
Almost everyone I know has made more money in the markets than at any time in their lives. That is what a near doubling of the stock market in a year gets you.
And the new wealth was not attained because their intelligence and market insight have suddenly doubled, although a strong case for such can be made for readers of Mad Hedge Fund Trader.
So I used the Friday, March 19 option expiration to go into a rare 100% cash position. I really have gotten away with too much lately.
Then feeling guilty, I slapped on a single long in Tesla (TSLA), that old reliable money-maker. It’s worked for me since it was $3.50 a share. After all, a gigantic green energy infrastructure bill is about to pass in Congress. What better to own than the world’s largest EV car maker.
And what a tear it has been.
After bringing in a ballistic 66.64% profit in 2020, I reeled in another 40.38% gain in the first 2 ½ months of 2021. I did this via 40 trades which generated 38 wins and only two losses. That’s a success rate of an incredible 95%. I have to pinch myself when I read these numbers.
I am concerned because numbers any higher than this will look fake. It’s a rule of thumb in the investment business that when managers claim a 100% success rate, they are either high-frequency traders back by super-fast mainframe computers or running a scam.
So, I have been advising clients to pare back their biggest positions that became massively overweight purely through capital appreciation. Financials come to mind. JP Morgan (JPM) up 81% in three months? Sounds like a Ponzi Scheme.
So let me give you some upside targets in the bond market. We doubled bottomed in 2012 and 2016 at a 1.37% yield in the ten-year Treasury bond yield. We have already surpassed that level like a hot knife through butter.
At the depths of the 2008-2009 Great Recession, rates bottomed at 2.0% yield, which now seems within easy reach. The lowest yield we saw after the 2003 Dotcom Crash was a 3.0%.
When the upside targets in interest rates in this cycle are the lows of the previous economic cycles, that augurs pretty well for the future of stock prices. That is the guaranteed outcome of the tidal wave of cash now sweeping the global financial system.
The permabears are warning that the “Roaring Twenties” have already happened. I argued that they are only just getting started and that the indexes have another 4X of upside in them over the rest of the decade. When the last “Roaring Twenties” occurred, you didn’t sell in 1921.
It also reminds me of the huge “rip your face off” rally we saw from March 2009 to 2010. A lot of market gurus said then that was the peak. They were wrong. Today, they are driving for Uber and Lyft.
So when a talking head warns you that higher interest rates will cause the stock market to crash, just turn off the boob tube and go back to practicing your golf swing.
The Mad Hedge Summit Videos are Up, from the March 9,10, and 11 confab. Listen to 27 speakers opine on the best strategies, tactics, and instruments to use in these volatile markets. The product discounts offered last week are still valid. Start, stop, and pause the videos at your leisure. Best of all, access to the videos is FREE. Access them all by clicking here at www.madhedge.com, click on CURRENT SUMMIT REPLAYS in the upper right-hand corner, and then choose the speaker of your choice.
Ten Year Bond Yields (TLT) soar to a 1.75%, setting financials on fire and demolishing tech (QQQ). We are rapidly approaching a 2.00% yield, which could trigger a huge round of profit-taking on bond shorts, a domestic stock selloff, and a tech rally. The next great rotation may be just ahead of us.
Oil (USO) dives 8% on fears of an imminent Saudi production increase and a worsening Covid-19 outlook in Europe. Are we next with all these early reopening’s? Gone 100% cash at the close with the March quadruple witching option expiration.
A Tax Hike is next on the menu. Corporate tax rates are returning from 21% to 28% for the small proportion of companies that actually PAY tax. Raising taxes on earnings of more than $400,000. Pass through entities to get a haircut. Increasing estate taxes. You better die soon if you want your kids to stay rich. Increase in capital gains taxes over $1 million. I want my SALT deduction back! The grand negotiation begins on who needs bridges, rail lines, and subway extensions. Hint: for some reason, there have been no new federal projects started in California for the past four years and all the existing ones were cut back.
Value Stocks (IWM) are beating growth ones, reversing a decade-long trend. The Russell Value Index is up 11% this year, while growth is unchanged. It’s a total flip from last year when growth was tech-led. This could continue for years, or until the tech becomes the new value stocks. Big winners include Boeing (BA), JP Morgan (JPM), and Morgan Stanley (MS), all Mad Hedge moneymakers.
Bitcoin tops 61,000. Nothing else to say but that because there are no fundamentals. It’s up 80% in 2021 and 540% YOY. But it is becoming a good risk-taking indicator thought, and right now it is shouting a loud and clear “Risk On.”
It’s going to be All About Stock Picking for the Rest of 2021, says Morgan Stanley strategist Mike Wilson. Dragging on the index from here on will be the prospects of rising rates, tax hikes, and inflation. Mike especially dislikes small caps (IWM) which have already had a terrific run, with a 19% YTD gain. Stock picking? Boy, did you come to the right place!
Fed to hold off on rates hikes through 2023, said Governor Jay Powell after the open Market Committee Meeting. Bonds rallied a full half-point on the news and then crashed again, taking yields to a new 1.70% high. It sees inflation reaching a positively stratospheric 2.0% sometime this year, after which it will die, so nothing to do here. This is what a 100% dovish FOMC gets you. Let the games begin!
New Housing Starts Collapse, from an expected +2.5% to -10.3%, as high lumber, land, labor, and interest rates take their toll. This will only drive new home prices high at a faster rate and the little remaining supply dries up. Millennials need some place to live.
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
It’s amazing how well patience can help your performance. My Mad Hedge Global Trading Dispatch profit reached a super-hot 16.89% during the first half of March on the heels of a spectacular 13.28% profit in February.
It was a tough week in the market, so I held fire and ran my seven remaining profitable positions into the March 19 options expiration. I took advantage of a meltdown in Tesla (TSLA) shares to put on my only new position of the week with a very deep-in-the-money long. That leaves me with 90% cash and a barrel full of dry powder.
This is my fifth double-digit month in a row. My 2021 year-to-date performance soared to 40.38%. The Dow Average is up a miniscule 7.7% so far in 2021.
That brings my 11-year total return to 462.93%, some 2.12 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 41.14%.
My trailing one-year return exploded to 121.60%, the highest in the 13-year history of the Mad Hedge Fund Trader. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 29.8million and deaths topping 542,000, which you can find here. Thankfully, death rates have slowed dramatically, but Obituaries are still the largest sector in the newspaper.
The coming week will be a boring one on the data front.
On Monday, March 22, at 9:00 AM, Existing Home Sales for February are released.
On Tuesday, March 23, at 9:00 AM, New Home Sales are published.
On Wednesday, March 24 at 8:30 AM, we learn US Durable Goods for February are printed.
On Thursday, March 25 at 8:30 AM, Weekly Jobless Claims are out. We also get the final read of US Q4 GDP.
On Friday, March 26 at 8:30 AM, US Personal Income & Spending for February are released. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, I have been doing a lot of high altitude winter mountain climbing lately, and with the warm spring weather, the risk of avalanches is ever present. It takes me back to the American Bicentennial Everest Expedition, which I joined in 1976.
It was led by my old friend, instructor, and climbing mentor Jim Whitaker, who pulled an ice ax out of my nose on Mt. Rainer in 1967 (you can still see the scar). Jim was the first American to summit the world’s highest mountain. I tried to break a high-speed fall and an ice ax kicked back and hit me square in the face. If I hadn’t been wearing goggles I would have been blinded.
I made it up to 22,000 feet on Everest, to Base Camp II without oxygen because there were only a limited number of canisters reserved for those planning to summit. At that altitude, you take two steps, and then break to catch your breath.
There is a surreal thing about that trip that I remember. One day, a block of ice the size of a skyscraper shifted on the Khumbu Ice Fall and out of the bottom popped a body. It was a man who went missing on the 1962 American expedition. Everyone recognized him as he hadn’t aged a day in 15 years, since he was frozen solid.
I boiled my drinking water, but at that altitude, water can’t get hot enough to purify it. So I walked 100 miles back to Katmandu with amoebic dysentery. By the time I got there, I’d lost 50 pounds, taking my weight to 120 pounds.
Jim was an Eagle Scout, the first full-time employee of Recreational Equipment Inc. (REI), and last climbed Everest when he was 61. Today, he is 92 and lives in Seattle, WA.
Jim reaffirms my belief that daily mountain climbing is a great life extension strategy, if not an aphrodisiac.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2012/01/everest19760012.jpg640465Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-03-22 11:04:002023-10-03 16:48:17The Market Outlook for the Week Ahead, or Entering Terra Incognita
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