($SPX) Archives

A Very Bad Chart Day

I spoke to the best traders I know in the market Thursday night, and to a man they said the market looked terrible. Although prices were high, the momentum was totally gone and volume was shrinking.

Worse, these conditions prevail as we head into May, the onset of the traditional ?RISK OFF? season (click here for ?The Hard Numbers Behind Selling in May?).

Best case, it continues to grind sideways in a narrow range. Worst case, our long awaited 10% correction is finally here.

The big ?tell? would be how stocks responded to the Friday nonfarm payroll. If it turned into a ?buy the rumor, sell the news,? or made a marginal new high and then sells off hard, then it would herald the onset of a new correction.

That was exactly what we got.

You knew immediately that things were heading south, even though the Dow opened up $44. The big momentum like Tesla (TSLA), Facebook (FB), Netflix (NFLX), and Amazon (AMZN) rolled over like the Bismarck right out of the gate. Bonds (TLT) also took off like a bat out of hell, not exactly what you want to see when you own stocks.

I spent Thursday night writing up Trade Alerts to sell short the (IWM), the (SPY), and the (QQQ). You only had about 30 minutes when the market waffled indecisively to get these off. As it turned out, I could only get the first two done before the market fell away like a house of cards.

I have already received ecstatic emails from nimble traders who got into the (IWM) August, 2014 $113 puts as low as $3.65 and then saw them soar to $5.25, an instant profit of 44%. This also boosts my year to date performance back to double digits, a welcome development

I have a number of cross hedges going on now in my model portfolio which I should explain, just to show you there is a method to my Madness. The May (SPY) $193-$196 put spread is a short volatility trade that balances out the long volatility and time decay in the (IWM) August $113 puts.

I am long the higher beta (IWM) puts and short the lower beta (SPY) puts. The 35% ?RISK OFF? position I have in the (SPY), (IWM), and the (VXX) will also offset lost profits in my one 10% ?RISK ON? position in the Japanese yen (FXY) put spread. This balancing of multiple risks is what a real live hedge fund trading book looks like.

Fasten your seat belts. This could be the big one.

Fasten Your Seatbelt, This Could Be the Big One

Mad Day Trader Jim Parker?s Q2 Views

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Mad Day Trader Jim Parker is expecting the second quarter of 2014 to be an uneventful, low volume, range trading affair. There is insufficient momentum in the major indexes to substantially break out of the ranges established in Q1.

He does see a modest upward bias to the market. But it is going to have to fight for every point. Sector leadership will change daily, with a brutal rotation. The market is still paying the price of having pulled forward too much performance into 2013.

Jim is a 40-year veteran of the financial markets and has long made a living as an independent trader in the pits at the Chicago Mercantile Exchange. He has worked his way up from a junior floor runner to advisor to some of the world?s largest hedge funds. We are lucky to have him on our team and gain access to his experience, knowledge, and expertise.

Jim uses a dozen proprietary short-term technical and momentum indicators to generate buy and sell signals. Below are his specific views for the new quarter according to each asset class with specific pivot points.

Stocks ? It will be a ?RISK ON? quarter for equities, but not by much. Stocks are still digesting the meteoric gains of 2013. A solid close in the S&P 500 (SPX) over 1,895 will take us right to 1,950. A failure brings us back to 1,800 quickly. Far more important is the NASDAQ, which has been the lead index for some time now. A convincing break of 3,700 will take us to the old high at 4,800. Old, big tech (XLK) will provide the leadership.

Bonds ? Are not going anywhere and Jim is a better seller of rallies. The 30-year futures contract is providing the guidance here, and it has been acting particularly poorly. The flattening of the yield curve has been one of the most dramatic in recent memory. If the (TLT) breaks the 50-day moving average at $107, the next stop will be $105. Demolish that, and we plunge to $101, which equates to a 3.05% yield on the ten year Treasury bond.

Foreign Currencies - The big focus of the currency markets now is to be long the British pound (FXB) and short the Japanese yen (FXY). It would be best to buy the cross, but the individual legs should work as well, as I have done in my The Mad Hedge Fund Trader?s model trading portfolio with a short yen position. The Australian dollar (FXA) decisively broke $91.50 to the upside and is now targeting $93. You should buy any pullbacks to $91.50, as long as central bank governor George Stevens keeps his mouth shut. The Euro (FXE) will be a safer sell after this week?s ECB meeting in order to avoid an ambush from president Mario Draghi.

Precious Metals - Gold (GLD) looks terrible and should be avoided at all costs. Gold bugs would be better off finding a long dark cave and hiding. We are dead in the middle of a six-month range and are likely to test the bottom at $1,200 next. Only a major rally would negate this view. As for silver (SLV), it is dead in the water, so don?t bother.

Energy - Oil (USO) looks sickly as well, now that the boost we got from the Crimean crisis is fading. The $92-$107 range continues. Get a good break of $98.50 and it will target $92. Jim is a better seller of Texas tea than a buyer. Jim also wants to sell the next decent rally in natural gas (UNG) going into the summer, looking for surging fracking supplies to swamp the market by then.

Ags - Soybeans (SOYB) are definitely the crop of the year, and the ETF could easily tack on another 10% from here. Corn (CORN) got a boost from yesterday?s bullish USDA report and could follow through. Only wheat (WEAT) is looking poorly from a technical perspective, and lacks the global fundamentals to help it.

Volatility - Buy the dips and sell the rips. The current $13 low is attractive, and Jim expects it to trade as high $22 sometime in Q2 if we break resistance at $15.50. A long VIX position also makes a nice hedge for your other ?RISK ON? positions as well.

If you are not already getting Jim?s dynamite Mad Day Trader service, please get yourself the unfair advantage you deserve. Just email Nancy in customer support at support@madhedgefundtrader.com and ask how to upgrade your existing Global Trading Dispatch service for an additional $1,000 a year.

It?s Time for a Strategy Change

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There is absolutely no doubt that both risk and volatility are rising in the financial markets. The higher the indexes rise, the sharper the intraday breaks. That is never a healthy sign for a bull market that has thrived for more than two years without a 10% correction.

The Crimean referendum should have been a yawn, not worthy of the 400 point swan dive that the Dow Average delivered last week. When the markets over react to the downside, and then rally back only on small volume, that is another excuse to pare back risk.

Some 45 years in the markets have taught me that whenever I have a great run, they will then suddenly reverse and bite me back. And let?s face it, the last two years have been spectacular, the Trade Alert Service nearly doubling the assets of loyal followers. It?s time to learn some humility, before the markets impose it upon you.

All of the recent US economic data has been good. But this isn?t about the data. It is all about market sentiment. And the current rumblings in Crimea are definitely not market friendly, pro global growth, pro risk ones.

If serious economic sanctions are imposed on Russia by Europe and the US, the impact on global growth will be negative, even if it is small. Traders are all about the next incremental change, not necessarily the magnitude.

So I am inclined to take small profits when they arise. No more hanging on for the last dollar. That was a 2013 play. Look for a market that grinds for days, and then concentrates all of the volatility for the week in a single day, like today.

Take the money and run, while it?s there.

Three Charts That Will Turn the Markets

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I wrote at length yesterday about why this is not a new bear market, but a traditional 7%-10% correction instead. Now, I?ll show you three charts that will call the exact turnaround.

The ten-year Treasury bond (TLT), (TBT) is clearly the lead contract. It has, far and away, been the most accurate in anticipating the future direction of all asset classes. Get this one right, and everything else falls into line.

Take a look at the chart for the (TLT) below, which has clearly broken the 200 day moving average. I think that this is a false breakout, and that we are not trading in a new $108-$112 trading range that prevailed last spring. Note that while the 200-day average is busted, the 200-week is still putting up fierce resistance. This may well be the line in the sand that counts.

Next, take a look at the chart for the Japanese yen (FXY), (YCS). This is crucial because the yen is the world?s funding currency, thanks to its zero interest rates. When traders are in ?RISK OFF? MODE, they dump their positions in all asset classes and buy yen to repay their broker loans. This forces the yen to appreciate against the US dollar, something the Japanese government is loathe to seeing. This occurs on a scale of trillions of dollars.

When investors throw caution to the wind and pile back into ?RISK ON? portfolios, the reverse happens. They borrow yen and sell them to finance new positions, sending the yen down. Weakness in the yen is therefore the first place you will see a recovery in global markets.

The yen chart bellows shows that it is taking a run at its 200 day moving average at $97.91. That is only $1.70 up from here, and in line with ?100 to the dollar in the cash market, another important resistance level.

My expectation is that the yen will fail here and return to its longer-term downtrend, bringing a major 6% rally against the greenback to an end. That will send a great flashing green light to traders that the buyers strike is over and that its time to get back to work.

You see a very similar inverse chart with the S&P 500 (SPX). The bottom here also appears to be the 200 day moving average at 1,708, a mere 32 points below today?s low. That is only one bad day away. Watch for a rally from here to trigger simultaneous sell offs in the Treasury bond and yen markets.

You can play this game all day long. A confirming move of a top in interest rates would be a big rally in bank shares, which need higher interest rates to make more money. So keep a laser focus on Bank of America (BAC) and Citigroup (C). At the same time, gold (GLD) will once again get thrown out with the trash, since higher rates punish holders here with a greater opportunity cost.

This all may happen sooner than you think. The Friday January nonfarm payroll neatly sets up a double top in the volatility index at $21. Get a good number, like over 200,000, and see substantial back month revisions up, and volatility will collapse back to the mid teens. Everything else I described above will come to pass.

However, I won?t find out what transpired until Saturday. When the Department of Labor releases the anxiously awaited report, I should be fast asleep in my first class cabin somewhere over French Polynesia on my way to New Zealand. Send me an email on what happens.

The Nonfarm What?

I was Wrong...But it Didn?t Matter

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Ben Bernanke finally did the deed. He tapered his quantitative easing program, from $85 to $75 billion a month. I thought he would wait until next month for incoming Fed governor Janet Yellen to take the helm, and the responsibility. It was not to be.

The good news for followers of my Trade Alert Service was that it didn?t matter. $85 or $75 billion is really six of one and half dozen of another, almost. As we used to say on the trading desk at Morgan Stanley, just take the difference out of my next paycheck. It is a win-win, which I had expected.

The one certainty today was that the Fed would make a decision. Now that it?s out of the way, stocks can only go up.

Market?s reacted as if there had been no taper at all. Stocks and the dollar rocketed, led by financials, technology, health care, and industrials. Softbank gapped up and is approaching a new high for the year. Bonds, gold, volatility, and the yen collapsed. My model trading portfolio is almost a perfect reflection of what you should be doing with your money.

Big Ben?s incredibly dovish talk we received during the press conference that followed was fantastic news for risk assets everywhere. It means that interest rates will remain lower for longer than most expected. ?Highly accommodative money monetary policy remains appropriate? is still ringing in my ears. This will remain the case until unemployment falls ?well below 6.5%? and inflation returns to 2%. ?The Fed balance sheet will continue to expand.?

What all this does is deliver a ?goldilocks? scenario for the foreseeable future. The potential disasters for January, a Fed taper and a Washington shut down have suddenly gone missing.

Ben?s Christmas present to us all is a printing press to print money in the markets for the next three months.

That?s Ben! That?s Just What I Wanted!

Taking Profits on the Yen?.Again!

Diary, Newsletter

This is my 14^th consecutive closing Trade Alert, and the 20^th including my remaining profitable open positions. I have only six more to go until a break my previous record of 25. It doesn?t get any better than this.

The yen is now in free fall, and the Japanese stock market is going ballistic, as I expected. Both the ProShares Ultra Short Yen double short ETF (YCS) and the Wisdom Tree Japan Hedged Equity ETF (DXJ) have pierced new five-month highs, and loftier levels beckon.

The immediate trigger was a meeting at the Bank of Japan, where the governors voted to maintain their ultra low, 0.1% discount rate. They also reiterated their commitment to growing the money supply by a blistering $600-$700 billion a year, or nearly triple the US monetary easing rate on a per capita GDP basis.

On the same day, we received month old Fed minutes showing a definite lean towards tapering our own quantitative easing. When this eventually does happen, the interest rate differential for dollar/ yen will rise dramatically. Needless to say, this is all terrible news for Japan?s beleaguered currency, as interest rate differentials are the primary drivers of foreign exchange markets.

Given all this, I am going to take profits on my existing short position in the yen through the Currency Shares Japanese Yen Trust (FXY) December, 2013 $101-$104 in-the-money bear put spread. At this mornings shockingly high prices for the spread, we can harvest 83% of the potential profit with one full month still to run to the December 20 expiration.

The outlook for the yen is no so bleak that I want to have plenty of cash to reload on the short side during the slightest recovery. I will move to closer strikes and more distant maturities to maximize your profits. It is now looking like we will soon challenge the 2013 low for the (FXY) of $94.80 and the $72 high for the (YCS).

We have a lot of new readers on board now, as my white-hot performance has become a talking point in the hedge fund community. So for the newbies to familiarize themselves with the basic structural flaws in the yen, please click here http://madhedgefundradio.com/rumblings-in-tokyo-2/, here http://madhedgefundradio.com/new-boj-governor-craters-yen/, and finally here http://madhedgefundradio.com/new-boj-governor-crushes-the-yen/.

The Final Act for the Yen Is Just Beginning

When Great Minds Think Alike

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Exactly 84 years ago from yesterday, the Great 1929 stock market crash occurred. The Dow Average plunged a stunning 30 points to 230, a one-day decline of 12%. The ticker tape lagged the market by two hours, and the newly bankrupt were jumping out of downtown windows. I remember it like it was yesterday.

Well not really.

But a number of friends over the decades lived through that fateful day, and relived it for me, men like Sir John Templeton and Tubby Burnham. My grandfather prided himself on never buying a stock in his life, and was deluged by entreaties from reckless and freshly busted relatives to move into his Bay Ridge, Brooklyn basement.

The S&P 500 came just eight points short of my 2013 target of 1,780 yesterday. By the time you read this, it may already be there.

To refer back to my many pleadings for you to load the boat with US equities, please click here to read ?Why US Stocks Are Dirt Cheap? and ?My 2013 Stock Market Outlook?.

When I made this prediction in January, abuse was hurled upon me. Clearly, the sequester, debt ceiling crisis, taper, sluggish economic growth, a China crash, and a government shutdown were going to collapse the market, taking the (SPX) as low as 300. Gold was the safe place to be, I was told. The only way I could conclude that stocks were headed northward was if I was smoking one of California?s largest agricultural products.

It turns out they were right, but only if you hold your charts upside down.

So it was with some amusement that I listened to the comments of Dr. Jeremy Siegel of the Wharton School of Business. He has been one of the most unremittingly bullish commentators all year, to the point of becoming a Wall Street laughing stock. There is only one catch: he has been dead right. And when people are that right, I sit up and take notice.

Dr. Siegel?s view on the economy mirrors my own. The absence of further spending cuts and tax increases should enable US GDP growth to spring from 2% to 3.5%. At that robust rate the Federal Reserve could completely eliminate quantitative easing with no serious market impact. All surprises will be to the upside. Only a ten year Treasury yield falling to 2% would signal that this scenario has run off the rails.

The Federal Reserve will keep interest rates ultra low for longer than most expect because of its mortal fear of deflation. Endemic and structurally falling prices have the effect of increasing the real debts of individuals and corporations. The central bank clearly wants debt loads to move in the other direction.

While major entitlement reform poses some risk, the likelihood is that the committee convened to make recommendations will simply kick the can down the road, well past the 2014-midterm elections. That?s because both parties believe they can then gain the upper hand. Only one of them can be right.

Dr. Siegel observes that November and December have the calendar working for them as historically positive months. There will be an extra tailwind coming from highly favorable Q4 YOY earnings comparisons. Dividends are up a healthy 10%-15% YOY, and will continue to improve. This action should spill into the first half of 2014.

There is no doubt that the taper has been delayed. In fact, there are no major uncertainties of any kind until well into next year. Periodically, premature fears of tightening will trigger market setbacks. But they will be of the smaller kind, typically 4%-7%.

Welcome to the Goldilocks market.

The only development that could bring this parade to an end would be a second and more prolonged government shutdown, possibly as early as January. But the Republicans have been severely chastised for their behavior in the opinion polls, so it is highly unlikely we will see a repeat, unless we are about to become a one party state.

Welcome to the Goldilocks market.

Welcome to the Goldilocks Market

The Worst is yet to Come

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I was not surprised to see the belated September nonfarm payroll come in at a miserable 148,000. It clearly shows that companies were already hunkering down with their overheads in the run-up to the recent DC slugfest. The figure had been delayed by the Washington shutdown, which froze all government data releases.

In fact, the job market is weaker than even this number suggests because it includes the one time only addition of hundreds of thousands of part time teachers who went back to work for the new school year.

I think that this will be only the first of many data releases showing that the economy completely fell off a cliff in October. I have received emails from readers all over the country supplying a treasure trove of anecdotal evidence of how bad conditions got. It sounds like business came to a complete standstill in the metro Washington DC area.

If November comes and we suddenly get a whole raft of bad October numbers at once, the talking heads who drive the short term market will go into a tizzy. They?ll predict that the bull market is over, that we are going into a long awaited recession, and that it is time to dump all your stocks. A forecast of ?Dow 3,000? will once again show its ugly face. The net net of all this will likely be a 4.7% or 8% correction in the S&P 500 of the sort I discussed yesterday.

Take the gift.

That?s when you want to jump in with both feet. Because, after the politically induced October hiccup, the economy will roar once again.

The outlook for 2014 is looking mighty damn fine. For the first time in many years, we will be looking at a global synchronized recovery, with the US, Europe, China, and Japan all delivering multi year highs in GDP growth at once. The fiscal drag emanating from falling government spending will be the lowest in years. Corporate profits everywhere will soar.

The taper, the reduction of the Federal Reserve?s $85 billion a month in bond buying, is now not slated to start until June. It may not happen at all in 2014 if the jobless rate falls insufficiently and the ruckus in Washington continues. The Fed has clearly concluded that in order to prevent the US from falling back into recession it must continue to pump money into the economy as long as the gridlock lasts.

All of this is a magic formula for higher stock prices. Many of the spectacular gains in share prices we are seeing this year are in fact a front run of next year?s best case scenario. But there will still be more to run. My guess is that we could tack on another 10% to 15% from current levels in the New Year. That takes the (SPX) as high as 2,100.

So buy the next dip with reckless abandon. And write a letter to your congressmen thanking him for being such an ?hole and creating a great entry point in this melting up bull market.

What to Do Now?

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I am completing one of the best trading years of my 45-year career in the stock market. The Trade Alert service is up by a stunning 41.5% so far in 2013 and by 96.55% since inception 35 months ago.

Pretty much every forecast I made for the year came true (click here for ?My 2013 Annual Asset Class Review?). The question now is: ?What to do here??? How do I beat the performance of the ages?

It seems that the world has come around to my point of view on virtually every asset class. Stocks are soaring, lead by the sectors I suggested, technology, industrials, health care, and consumer cyclicals. Since I wrote ?Apple is About to Explode? the shares have been up nine consecutive trading days, and are now 36% above its June lows.

Commodities have, at last, begun their long crawl off the bottom, with copper producer Freeport McMoRan (FCX) massively outperforming the market since August. Gold, silver, and the agricultural commodities have been dead in the water, as expected. Bonds are going nowhere. Oil is falling, as it should. It took a poison gas attack to squeeze me out of my short position there, (thanks a lot Bashar!).

The Washington shutdown came to a big nothing, and translated into ?BUY,? as I expected. Of course, the data flow is going to be gobbledygook for the rest of the year, as different parts of the economy shut down, restart, and then report at different rates. Only privately sourced information, like corporate earnings and the endless torrent of real estate numbers, will be reliable. You can bet that the Federal Reserve is watching these numbers more than usual too.

It looks like we lost about a fifth of our economic growth for the year, while achieving absolutely nothing. For this, the Republicans will have hell to pay next year. More on that later.

There is only one problem with this scenario. When the world agrees with me, I get nervous. Much of my money is made betting against the consensus, not agreeing with it. I am getting run over by bulls on stocks catching up with me from behind. As a result, I have sold out of all of my positions and let my remaining options positions expire well in-the-money. For the first time in years, I am 100% cash. What a bizarre feeling.

Any experienced, seasoned trader will tell you that the best thing to do now is nothing. Maintain your discipline and don?t chase. Buying something that is up ten days in a row is idiotic. Leave that behavior to the wanabees, newbies, and dummies. Just wait for an extreme move in something, anything, and then go the other way.

Let?s take a look at corrections in the S&P 500 this year, which have been few and far between. It has been a market where once you got out, it has really been hard to get back in. Someone else always came by to take your seat. Here were those rare points:

May - 8%
July - 4.7%
September - 4.6%

The primordial, lizard brained trader will look at this chart and come to the same conclusion, regardless of its ticker symbol. They?ll buy once on a 4.6% dip, double up on an 8% dip, and place a stop loss order not far below there.

If the market continues to run away to the upside, then just sit back and watch it. If you already have a monster year, and you should if you have been following the advice of this letter, that?s fine. Let your friends pick up the tab for the next dinner.

Some of the indicators I follow are starting to shout about a top. Individual margin debt is at an all time high. And my buddy, Henry Blodget, of Business Insider sent me the chart below. It shows the funds held in Rydex money market funds, one of the best contrarian indicators out there.

Peaks in assets held by this very low risk family of funds are highly coincident with stock market bottoms, the last two of which were found in November, 2012 and July, 2013. The markets roared after that. Bottoms of assets held in the Rydex funds very roughly coincide with stock market tops, although they may take months to play out. This presages a selloff in risk assets that could start at anytime.

Sometimes, discretion is the better part of valor.

Hey, Save My Place, Will You?

Cutting Back My Risk

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By now, you have figured out that I executed a major ?derisking? of my model trading portfolio today, cutting my exposure by two thirds. Most of these positions only had a few basis points in maximum profit left, so bailing here was a no brainer, a case of ?Basic Risk Control 101.? Better to laugh about the market in a few days or weeks, than cry. My profits this year are so huge that they are well worth defending.

There is an eerie silence going on in the markets now. All real news has ceased. The government data releases that dictate the short-term direction of prices have come to a complete halt, thanks to the government shutdown. The rest of the news is all political, which is to say that it is useless. When markets are driven by opinions instead of facts and data, you want to run a mile.

I recently spoke to some Tea Party activists, and the extent to which they hate President Obama is frightening. They would happily subject the country to another Great Depression if it meant they could be rid of the community activist from Chicago for good.

The debt ceiling crisis gives them the means to do exactly that. Therefore, I believe that the current impasse in Washington will last longer than the market expects. What the Tea Party doesn?t understand is that once you shatter confidence, it is very hard to get it back.

As a result, my friends in the high frequency trading community tell me that the risk of a flash crash is rising. All you need is for the wrong comment at the wrong technical point in the charts on the wrong day and a deluge of cascading selling could result. That day could be October 17.

This is clearly a minority view, but it is not impossible. Take a look at how the momentum names, like Netflix (NFLX) and Herbalife (HLF) are getting hammered today and you?ll see what I mean. This was further confirmed by the volatility index (VIX) breaking through $20 today, up more than 50% from a month ago.

So I?ll let valor be the better part of judgment here and move from a serious ?RISK ON? trading book, to one that is more clearly market neutral. That demands I cash in my winnings in short positions in the Japanese yen (FXY), and my long in Apple (AAPL).

As for my long in the Japanese stock market (DXJ), I?ll have to settle for a stop out with a moderate loss. It?s not the first time that I have lost money in Japan, nor certainly the last. This was the ?Bridge Too Far? among my trades this year.

I still am sticking with my medium term bull case, which sees us moving to new highs by yearend. But we could see one big final flush before we turnaround. That?s when I want to jump in wit both hands and go fully invested once again. To best profit from such a scenario, you have to go into the next dump with the most cash possible. Today?s action gets us close to that point.