Posts

January 6, 2020

Global Market Comments
January 6, 2019
Fiat Lux

2020 Annual Asset Class Review
A Global Vision

FOR PAID SUBSCRIBERS ONLY

Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE), (AMLP), (USO), (UNG),
(GLD), (GDX), (SLV), (ITB), (LEN), (KBH), (PHM)

October 18, 2019

Global Market Comments
October 18, 2019
Fiat Lux

Featured Trade:

(OCTOBER 16 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPX), (C), (GM), (IWM), ($RUT), (FB),
 (INTC), (AA), (BBY), (M), (RTN), (FCX), GLD)

October 16 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader October 16 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: How do you think the S&P 500 (SPX) will behave with the China trade negotiations going on?

A: Nobody really knows; no one has any advantage here and logic or rationality doesn’t seem to apply anymore. It suffices to say it will continue to be up and down, depending on the trade headline of the day. It’s what I call a “close your eyes and trade” market. If it’s down, buy it; if it’s, upsell it.

Q: How long can Trump keep kicking the can down the road?

A: Indefinitely, unless he wants to fold completely. It looks like he was bested in the latest round of negotiations because the Chinese agreed to buy $50 billion worth of food they were going to buy anyway in exchange for a tariff freeze. Of course, you really don’t get a trade deal unless you get a tariff roll back to where they were two years ago.

Q: Did I miss the update on the Citigroup (C) trade?

A: Yes, we came out of Citigroup a week ago for a small profit or a break-even. You should always check our website where we post our trading position sheet every day as a backstop to any trade alerts you’re getting by email. Occasionally emails just go completely missing, swallowed up by the ether. To find it go to www.madhedgefundtrader.com , log in, go to My Account, Global Trading Dispatch, then Current Positions. You can also find my newly updated long-term portfolio here.

Q: How much pain will General Motors (GM) incur from this standoff, and will they ever reach a compromise?

A: Yes, the union somewhat blew it in striking GM when they had incredibly high inventories which the company is desperate to get rid of ahead of a recession. If you wonder where all those great car deals are coming from, that’s the reason. All of the car companies want to go into a recession with as little inventory as possible. It’s not just GM, it’s everybody with the same problem.

Q: When does the New Daily Position Sheet get posted?

A: About every hour after the close each day. We need time to process our trades, update all the position sheets before getting it posted.

Q: What do you think about Bitcoin?

A: We hate it and don’t want to touch it. It’s unanalyzable, and only the insiders are making money.

Q: Are you predicting a repeat of Fall 2018 going into the end of this year to close at the lows?

A: No, I’m not. A year ago, we were looking at four interest rate increases to come. This year we’re looking at 1 or 2 more interest rate cuts. It’s nowhere near the situation we saw a year ago. The most we’re going to get is a 7% selloff rather than a 20% selloff and if anything, stocks will rise into the yearend then fall.

Q: Why are we trading the Russell 200 (IWM) instead of the ($RUT) Small Cap Index? We pay less commissions to brokers.

A: There’s more liquidity in the (IWM). You have to remember that the combined buying power of the trade alert service is about $1 billion. And that’s harder to do with smaller illiquid ETFs like the ($RUT), especially the options.

Q: If this is a “Don’t fight the Fed” rally for investors, where else is there to go but stocks?

A: Nowhere. But it’s happening in the face of an oncoming recession, so it’s not exactly a great investment opportunity, just a trading one. 2009 was a great time not to fight the Fed.

Q: Do you want to buy Facebook (FB) even though there are so many threats of government scrutiny and antitrust breakups?

A: The anti-trust breakups are never going to happen; the government can’t even define what Facebook does. There may be more requirements on disclosures, which means nothing because nobody really cares about disclosures—they just click the box and agree to anything. I was actually looking at this as a buy when we had the big selloff at the end of September and instead, I bought four other Tech stocks and (FB) had moved too far when we got around to it. I think there’s upside potential for Facebook, especially if we can move out of this current range.

Q: Would you sell short European banks? It seems like they’re cutting jobs right and left.

A: I always get this question after big market meltdowns. European banks have been underpricing risks for decades and now the chickens are coming home to roost. Some of these things are down 80-90% so it’s too late to sell short. The next financial crisis is going to be in Europe, not here.

Q: Is it time to short Best Buy (BBY) due to the China deal?

A: No, like Macys (M), Best Buy is heavily dependent on imports from China, and the stock has gotten so low it’s hard to short. And the problem for the whole market in general is all the best sectors to short are already destroyed, down 80-90%. There really is nothing left to short, now that all the bad sectors have been going down for nearly two years. There has been a massive bear market in large chunks of the market which no one has really noticed. So, that might be another reason the market is going up—that we’ve run out of things to short.

Q: Do you like Intel (INTC)?

A: Yes, for the long term. Short term it still could face some headwinds from the China negotiations, where they have a huge business.

Q: Would you buy American Airlines (AA) on the return of Boeing 737 MAX to the fleet?

A: Absolutely, yes. The big American buyers of those planes are really suffering from a shortage of planes. A return of the 737 MAX to the assembly line is great news for the entire industry.

Q: Do you like Raytheon (RTN)?

A: No, Trump has been the defense industry’s best friend. If he exits in the picture, defense will get slaughtered—it will be the first on the chopping block under a future democratic administration. And, if you’re doing nothing but retreating from your allies, you don’t need weapons anyway.

Q: Will Freeport McMoRan (FCX) benefit from a trade war resolution?

A: Yes, the fact that it isn’t moving now is an indication that a trade war resolution has not been reached. (FCX) has huge exposure to traditional metal bashing industries like they still have in China.

Q: Would you go long or short gold (GLD) here?

A: No, I’m waiting for a bigger dip. If you can get in close to the 200-day moving average at $129.50, that would be the sweet spot. Longer term I still like gold and it is a great recession hedge.

Good Luck and Good Trading!

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

Yes, I Still Like Gold

Risk Control for Dummies

There is a method to my madness, although I understand that some new subscribers may need some convincing.

Whenever I change my positions, the market makes a major move or reaches a key crossroads, I look to stress test my portfolio by inflicting various extreme scenarios upon it and analyzing the outcome.

This is second nature for most hedge fund managers. In fact, the larger ones will use top of the line mainframes powered by $100 million worth of in-house custom programming to produce a real-time snapshot of their thousands of positions in all imaginable scenarios at all times.

If you want to invest with these guys feel free to do so. They require a $10-$25 million initial slug of capital, a one year lock up, charge a fixed management fee of 2% and a performance bonus of 20% or more.

You have to show minimum liquid assets of $2 million and sign 50 pages of disclosure documents. If you have ever sued a previous manager, forget it. The door slams shut. And, oh yes, the best performing funds are closed and have a ten-year waiting list to get in. Unless you are a major pension fund, they don’t want to hear from you.

Individual investors are not so sophisticated, and it clearly shows in their performance, which usually mirrors the indexes less a large haircut. So, I am going to let you in on my own, vastly simplified, dumbed down, seat of the pants, down and dirty style of risk management, scenario analysis, and stress testing that replicates 95% of the results of my vastly more expensive competitors.

There is no management fee, performance bonus, disclosure document, lock up, or upfront cash requirement. There’s just my token $3,000 a year subscription fee and that’s it. And I’m not choosy. I’ll take anyone whose credit card doesn’t get declined.

To make this even easier, you can perform your own analysis in the excel spreadsheet I post every day in the paid-up members section of Global Trading Dispatch. You can just download it and play around with it whenever you want, constructing your own best case and worst-case scenarios. To make this easy, I have posted this spreadsheet on my website for you to download by clicking here.

Since this is a “for dummies” explanation, I’ll keep this as simple as possible. No offense, we all started out as dummies, even me.

I’ll take Mad Hedge Model Trading Portfolio at the close of October 29, the date that the stock market bottomed and when I ramped up to a very aggressive 75% long with no hedges. This was the day when the Dow Average saw a 1,000 point intraday range, margin clerks were running rampant, and brokers were jumping out of windows.

I projected my portfolio returns in three possible scenarios: (1) The market collapses an additional 5% by the November 16 option expiration, some 15 trading days away, falling from $260 to $247, (2) the S&P 500 (SPY) rises 5% from $260 to $273 by November 16, and (3) the S&P 500 trades in a narrow range and remains around the then current level of $260.

Scenario 1 – The S&P 500 Falls 5%

A 5% loss and an average of a 5% decline in all stocks would take the (SPY) down to $247, well below the February $250 low, and off an astonishing 15.70% in one month. Such a cataclysmic move would have taken our year to date down to +11.03%. The (SPY) $150-$160 and (AMZN) $1,550-$1,600 call spreads would be total losses but are partly offset by maximum gains on all remaining positions, including the S&P 500 (SPY), Salesforce (CRM), and the United States US Treasury Bond Fund (TLT). My Puts on the iPath S&P 500 VIX Short Term Futures ETN (VXX) would become worthless.

However, with real interest rates at zero (3.1% ten-year US Treasury yield minis  3.1% inflation rate), the geopolitical front quiet, and my Mad Hedge Market Timing Index at a 30 year low of only 4, I thought there was less than a 1% chance of this happening.

Scenario 2 – S&P 500 rises 5%

The impact of a 5% rise in the market is easy to calculate. All positions expire at their maximum profit point, taking our model trading portfolio up 37.03% for 2018. It would be a monster home run. I would make back a little bit on the (VXX) but not much because of time decay.

Scenario 3 – S&P 500 Remains Unchanged

Again, we do OK, given the circumstances. The year-to-date stands at a still respectable 22.03%. Only the (AMZN) $1,550-$1,600 call spread is a total loss. The (VXX) puts would become nearly a total loss.

As it turned out, Scenario 2 played out and was the way to go. I stopped out of the losing (AMZN) $1,550-$1,600 call spread two days later for only a 1.73% loss, instead of -12.23% in the worst-case scenario. It was a case of $12.23 worth of risk control that only cost me $1.73. I’ll do that all day long, even though it cost me money. When running hedge funds, you are judged on how you manage your losses, not your gains, which are easy.

I took profit on the rest of my positions when they reached 88%-95% of their maximum potential profits and thus cut my risk to zero during these uncertain times. October finished with a gain of +1.24. By the time I liquidated my last position and went 95% cash, I was up 32.95% so far in 2018, against a Dow average that is up 2% on the year. It was a performance for the ages.

Keep in mind that these are only estimates, not guarantees, nor are they set in stone. Future levels of securities, like index ETFs, are easy to estimate. For other positions, it is more of an educated guess. This analysis is only as good as its assumptions. As we used to say in the computer world, garbage in equals garbage out.

Professionals who may want to take this out a few iterations can make further assumptions about market volatility, options implied volatility or the future course of interest rates. And let’s face it, politics was a major influence this year.

Keep the number of positions small to keep your workload under control. Imagine being Goldman Sachs and doing this for several thousand positions a day across all asset classes.

Once you get the hang of this, you can start projecting the effect on your portfolio of all kinds of outlying events. What if a major world leader is assassinated? Piece of cake. How about another 9/11? No problem. Oil at $150 a barrel? That’s a gimme.

What if there is an Israeli attack on Iranian nuclear facilities? That might take you all of two minutes to figure out.  The Federal Reserve launches a surprise QE5 out of the blue? I think you already know the answer.

Now that you know how to make money in the options market, thanks to my Trade Alert service, I am going to teach you how to hang on to it.

There is no point in being clever and executing profitable trades only to lose your profits through some simple, careless mistakes.

So I have posted a training video on Risk Management. Note: you have to be logged in to the www.madhedgefundtrader.com website to view it. 

The first goal of risk control is to preserve whatever capital you have. I tell people that I am too old to lose all my money and start over again as a junior trader at Morgan Stanley. Therefore, I am pretty careful when it comes to risk control.

The other goal of risk control is the art of managing your portfolio to make sure it is profitable no matter what happens in the marketplace. Ideally, you want to be a winner whether the market moves up, down, or sideways. I do this on a regular basis.

Remember, we are not trying to beat an index here. Our goal is to make absolute returns, or real dollars, at all times, no matter what the market does. You can’t eat relative performance, nor can you use it to pay your bills.

So the second goal of every portfolio manager is to make it bomb proof. You never know when a flock of black swans is going to come out of nowhere, or another geopolitical shock occurs, causing the market crash.

I’ll also show you how to use my Trade Alert service to squeeze every dollar out of your trading.

So, let’s get on with it!

To watch the Introduction to Risk Management, please click here. 

 

 

 

 

 

 

Mad Hedge Market Timing Index

 

January 9, 2019

Global Market Comments
January 9, 2019
Fiat Lux

2019 Annual Asset Class Review
A Global Vision

FOR PAID SUBSCRIBERS ONLY

Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLI), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE),

(DIG), (RIG), (USO), (UNG), (USO), (OXY),
(GLD), (GDX), (SLV),
(ITB), (LEN), (KBH), (PHM)

December 14, 2018

Global Market Comments
December 14, 2018
Fiat Lux

Featured Trade:

(DECEMBER 12 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPX), (MU), (PYPL), (SPOT), (FXE), (FXY), (XLF), (MSFT), (AMZN), (TSLA), (XOM), 
(SIGN UP NOW FOR TEXT MESSAGING OF TRADE ALERTS)

June 25, 2018

Global Market Comments
June 25, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, OR IS THIS A 1999 REPLAY?),
(AAPL), (FB), (NFLX), (AMZN), (GE), (WBT),
(JOIN ME ON THE QUEEN MARY 2 FOR MY JULY 11, 2018 SEMINAR AT SEA),
(JUNE 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(SQ), (PANW), (FEYE), (FB), (LRCX), (BABA), (MOMO), (IQ), (BIDU), (AMD), (MSFT), (EDIT), (NTLA), Bitcoin, (FXE), (SPY), (SPX)

May 11, 2018

Global Market Comments
May 11, 2018
Fiat Lux

Featured Trade:
(WEDNESDAY, JUNE 13, 2018, PHILADELPHIA, PA, GLOBAL STRATEGY LUNCHEON),
(MAY 9 BIWEEKLY STRATEGY WEBINAR Q&A),
(FB), (MU), (NVDA), (AMZN), (GOOGL),
(TLT), (SPX), (MSFT), (DAL),
(MAD HEDGE DINNER WITH BEN BERNANKE)

April 19, 2018

Global Market Comments
April 19, 2018
Fiat Lux

Featured Trade:
(DIVING BACK INTO THE VIX),
(VIX), (VXX), (SPX),
(THE GREAT AMERICAN JOBS MISMATCH)

Why Technical Analysis Doesn?t Work

The S&P 500 has just bounced off the 214 level for the second time this month.

Is it safe to come out of your cave? Is to time to take the hard hat back to the basement?

If you had taken Cunard?s round-the-world cruise three months ago, as I recommended, you would be landing in New York about now, wondering what the big deal was. Indexes are unchanged since you departed.

This truly has been the Teflon market. Nothing will stick to it. In June when Brexit hit, many predicted the end of the world. The market crashed. Then within days, it recovered the loss and moved on to new all time highs..

Go figure.

It makes you want to throw up your hands in despair and throw your empty beer can at the TV. All this work, and I?ve delivered the perfectly wrong conclusions?

Let me point out a few harsh lessons learned from this most recent melt down, and the rip your face off rally that followed.

Remember all those market gurus poo pooing the effectiveness of the ?Sell in May and go away? strategy? This year it worked better than ever.

This is why almost every Trade Alert I shot out for the past five months has been from the short side. It is also why I was so quick to cover my most recent shorts for a loss.

We are about to move from a ?Sell in May? to a ?Buy in November? posture.

The next six months are ones of historical seasonal market strength (click here for the misty origins of this trend at ?If You Sell in May, What To Do in April??).? You must be logged into your account to read this article.

The other lesson learned this summer was the utter uselessness of technical analysis. Usually these guys are right only 50% of the time. This year, they missed the boat entirely.

When the S&P 500 (SPY) was meandering in a narrow nine point range, and the Volatility Index ($VIX) hugged the 12-15 neighborhood, they said this would continue for the rest of the year.

It didn?t.

When the market finally broke down in June, cutting through imaginary support levels like a hot knife through butter, they said the market would plunge to 175, and possibly as low as 158.

It didn?t do that either.

When the July rally started, pitiful technical analysts told you to sell into it.

If you did, you lost your shirt. The market just kept going, and going, and going like the Energizer Bunny.

This is why technical analysis is utterly useless as an investment strategy. How many hedge funds use a pure technical strategy?

Absolutely none, as it doesn?t make any money.

At best, it is just one of 100 tools you need to trade the market effectively. The shorter the time frame, the more accurate it becomes.

On an intraday basis, technical analysis is actually quite useful. But I doubt few of you engage in this hopeless pursuit.

This is why I advise portfolio managers and financial advisors to use technical analysis as a means of timing order executions and nothing more.

Most professionals agree with me.

Technical analysis derives from humans? preference for looking at pictures instead of engaging in abstract mental processes. A picture is worth 1,000 words and probably a lot more.

This is why technical analysis appeals to so many young people entering the market for the first time. Buy a book for $5 on Amazon, and you too can become a Master of the Universe.

Who can resist that?

The problem is that high frequency traders also bought that same book from Amazon a long time ago and have designed algorithms to frustrate every move the technical analyst makes.

Sorry to be a buzz kill, but that is my take on technical analysis.

Hope you enjoyed your cruise.

spy

John Thomas-breakfastCorrection? What Correction?