Say goodbye to 2012. That was the harsh conclusion of the marketplace after the release of the devastating May nonfarm report that forced the Dow to give up its entire year to date performance.
The cat was really set among the pigeons this morning when the Department of Labor informed us that only 69,000 jobs were gained in the previous month. The unemployment rate ratcheted up to 8.2%. ?RISK OFF? returned with a vengeance, sending stocks, commodities and oil into a tailspin. Bonds roared, the ten year Treasury reaching the unimaginably low yield of 1.42%. Japanese style bond yields here we come.
The truly horrific numbers were the revisions, which saw the jobs figure for March cut by -11,000 and April by -38,000. The biggest gainers were in health care (+33,000), transportation and warehousing (+33,000), and manufacturing (+12,000). The losers were in construction (-28,000), government (-13,000), and leisure and hospitality (-9,000). The long term unemployment rate jumped from 5.1 million to 5.4 million. The inexorable trend of a shrinking government and a growing private sector continued.
Administration officials made every effort to put lipstick on this pig, and were at pains to point out that this was a seasonal slowdown that occurs every year. The operative word here is that jobs were ?added?. They argued that the real focus should be on the 4.3 million private sector jobs created in the last 27 months. The markets didn?t buy this glass half full interpretation for a nanosecond.
Of course, further talk of quantitative easing came to the fore once again, preventing an even bloodier sell off, forcing traders to keep a hair trigger on their shorts. From here on, the government is going to attempt to make life as uncomfortable as possible for short sellers who are seen to be restraining the grand design. As I always tell traders in these conditions, make the volatility work for you and run towards it, not against it.
Don?t expect the Federal Reserve to rise to the rescue of risk assets anytime soon. It has so little dry powder left that it is unlikely to move until market conditions dramatically worsen. My bet is that the Fed won?t take action until the S&P 500 hits 1,100. The problem is that we may get our wish.
Looking at the charts below, you can only conclude that there is more pain to come. Commodities, the first asset class to enter this selloff, look like they will be the first to hit bottom. Oil (USO) is at my downside target of $85, copper (CU) is rapidly approaching my $3.00/pound goal, and gold (GLD) keeps bouncing off of my $1,500 floor.
Since equities were the last to top, they may become the last to bottom. Therefore, I think we may be two thirds of the way through this downturn on a price basis, but only half way on a time basis. That analysis sees a new major rally postponed until August at the earliest. It also made 1,250 the next stop on the downside and 1,250 an obvious medium term target.
For those who took my advice to sell in May and go away, good for you. Go blow your profits on a vacation in the Hamptons this summer. And have a mojito for me.
The abject failure of the equity indexes to breach even the first line of upside resistance does not bode well for the ?RISK ON? trade at all. Only a week ago I predicted that the markets would be challenged to top 1,340 in the (SPX) and $78 for the Russell 2000 (IWM). In fact, we made it up only to 1,335 and $77.90 respectively.
To see the melt down resume ahead of the month end window dressing is particularly concerning. That?s the one day a month that investors really try to pretend that everything is alright. People just can?t wait to sell.
Blame Europe again, which saw Spanish bond yields reach a 6.6% yield on the ten year and the Italian bond market roll over like the ?Roma? (a WWII battleship sunk by the Germans while trying to surrender to the Allies). Facebook didn?t help, knocking another $8 billion off its market capitalization, further souring sentiment.
Urging traders to head for the exits was confirming weakness across the entire asset class universe. The Euro is in free fall. Copper took a dive. Oil is plumbing new 2012 lows. Treasury bond prices rocketed, taking ten year yields to new all-time lows at 1.65%. It all adds up to a big giant ?SELL!?
It is just a matter of days before we revisit the (SPX) 200 day moving average at 1,280. Thereafter, the big Fibonacci level at 1,250 kicks in. It is also exactly one half the move off of the October 2011 low, and unchanged on the year for 2012.
I am not looking for a major crash here a la 2011. There is just not enough leverage and hot long positions in the system to take us down to 1,060. It will be a case of thrice burned, four times warned. And remember, last year?s 1,060 is this year?s 1,100, thanks to the earnings growth we have seen since then. With 56% of all S&P 500 stocks now yielding more than the ten year Treasury bond, you don?t want to be as aggressive on the short side as in past years, when bond yields were 4 or higher.
By adding on a short in the (SPY) here, I am also hedging my ?RISK ON? exposure in the deep in-the-money call spreads in (AAPL), (HPQ), and (JPM), and my (FXY) puts. The delta on these out-of-the-money?s are so low that I can hedge the lot with one small 5% position in the at-the-money (SPY) puts.
If the (SPX) hits 1,280, the (SPY) puts will add 2.25% to our year to date performance. At 1,250 we pick up 4.00% and at 1,200 we earn 7.00%. I now have the option to come out at any of these points if the opportunity presents itself, depending on how the rapidly changing global macro situation unfolds. If we get another pop from here back up to the 1,340-1,360 range, I will double up the position and swing for the fences. There?s no way we are taking a run at new highs for the year from here.
Below, find today?s charts from my friends at www.StockCharts.com with appropriate support and resistance levels outlined. If I may make another observation, when you see the technicals work as well as they have done recently, it is only because the real long term end investors have fled. There are not enough cash flows in the market to overwhelm even the nearest pivot points. That leaves hedge fund, day, and high frequency traders to key off of the obvious turning points in the market. That also is not good for the rest of us.
It?s a good thing that I?m not greedy. If I had sold short a near money call spread for the (TLT) on May 23, I would be in a world of hurt right now. Instead, I went six point out of the money. So when we get dramatic moves like we saw today that take bond yields to all-time lows, I can just sit back and say, ?Isn?t that interesting.? This spread expired in six trading days, which should be enough time to digest the big move today and expire safely out of the money and worthless. What?s better, I can then renew the trade at better strikes after expiration into the July?s and take in more money.
If you are wondering why I am not doubling up on the short Treasury bond ETF (TBT) down here, it?s because it doesn?t have enough leverage. In these conditions you need to go for instruments that can generate immediate and large profits, such as through the options market. The topping process for the Treasury market could go on for another month or two. Until that ends, I am happy to use price spikes like today?s to sell short limited risk (TLT) call spreads 6-8 points out of the money, which can handle a 20 basis point drop in yields and still make you money.
If you own the (TBT) and are willing to take a multi month view, you should be doubling up here. This ETF will have its day in the sun, it is just not today. We could see the $20 handle again and maybe even $30 within the next year. That makes it a potential ten bagger off of today?s close.
I don?t want to touch gold (GLD) or silver here. The barbarous relic is clearly trying to base at $1,500 an ounce. If it fails, it will probably only go down to only $1,450 before major Asian central bank buying kicks in. Better to admire it from afar, or limit your activity to early Christmas shopping for your significant other. We are months away from the next major rally in the yellow metal.
The Roma
Time to Puke Out Again
https://www.madhedgefundtrader.com/wp-content/uploads/2012/05/300px-Italian_battleship_Roma_1940_starboard_bow_view.jpg164300DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-05-30 23:02:052012-05-30 23:02:05My Tactical View of the Market
The easy money has been made on the short side this year for a whole range of asset classes. While we will probably see lower lows from here, the risk/reward ratio for taking short positions in (SPX), (IWM), (FXE), (FXY), (GLD), (SLV), (USO), and (CU) are less favorable than they were two months ago.
Of course, the ultimate arbiter will be the news play and the economic data releases. It they continue to worsen as they have done, you can expect a brief rally in the (SPX) up to the 1,340-1,360 range before the downtrend resumes. First, we will revisit the old low for the move at 1,290. Then 1,250 cries out for attention, which would leave us dead unchanged on the year. Lining up next in the sites is 1,200. But to get that low, probably by August, we would need to see something dramatic out of Europe, which we may well get. For the Russell 2000, look to sell it at the old support range of $78-80, which now becomes overhead resistance, to target $72 on the downside.
Don?t underestimate the devastating impact the Facebook (FB) debacle will have on the overall market. Retail investors lost $6 billion on the deal after institutional investors were given the heads up on the impending disaster and stayed away in droves. The media has plenty of blood on its hands on this one. The day before the pricing, one noted Cable TV network reported that the deal was oversubscribed in Asia by 30:1. Morgan Stanley reached for the extra dollars, increasing the size, and boosting the price by 15%. It all came to tears.
Expect investigations, subpoenas, congressional hearings, prosecutions, multi million out of court settlements, thousands of lawsuits, and many careers ended ?to spend more time with families.? Horrible thought of the day: Apply Apple?s (AAPL) 8X multiple, which is growing at 100% a year, to Facebook, which is not, and you get a (FB) share price of $5. None of this exactly inspires confidence in the stock market.
Notice that emerging markets have really been sucking hind teat this year, dragged down by falling commodity prices, a slowing China, and a general ?RISK OFF? mood. This is probably the first sector you want to go back in at the summer bottom to take advantages of their higher upside betas.
The Euro went through the old 2012 low at $1.260 like a hot knife through butter. On the breach, a lot of momentum programs automatically kicked in and doubled up their short positions. That is what has taken us all the way down to the high $124 handle in the cash. Let?s see how the market digests this breakdown. The commitment of traders report out on Friday should be exciting, as we already have all-time highs in short positions in the beleaguered European currency.
The problem is that any good news whispers or accidental tweets on the sovereign debt crisis could trigger ferocious short covering and gap openings which the continental traders will get a head start on. So again, this is not the low risk trade that it was months ago.
Still, the 2010 lows at $1.18 are now on the menu. I would sell all the ?good news? rallies from here two cents higher. Aggressive traders might consider selling penny rallies, like the one we got today. Notice that the Euro is rallying into the US close every day. This is caused by American traders covering shorts, not wishing to run them into any overnight surprises.
The Japanese yen seems to be stagnating here once again, now that the Bank of Japan has passed on another opportunity to exercise more much needed quantitative easing. Therefore, I will use the next dip to get out of my September put options at a small loss. There is a better use of capital and bigger fish to fry these days.
The Australian dollar has been far and away the world?s worst major currency this year, falling from $110 all the way down to $94 on a spike. It now languishes at $97. I long ago stopped singing ?Waltzing Matilda? in the shower. I hope all my Ausie friends took my advice at the beginning of the year and paid for their European and American vacations while their currency was still dear. We could see as low as $90 in the months to come.
Gold (GLD) and silver (SLV) still look week, as this week?s failed rally attests. The strength of the Indian rupee still has the barbarous relic high priced for the world?s largest buyer, and this will continue to weigh on dollar based owners. But we are also reaching the tag ends of this move down from $1,922. Speculative short positions are at a multi-year low. It would take something pretty dramatic to get me to sell short gold again. For the time being, I am targeting gold at $1,500 on the downside, $1,450 in an extreme case, and $25 in silver.
We are well into the move south for oil, which peaked just at the March 1 Iranian elections just short of $110/barrel. The market now seems to be targeting $87 for the short term. The global economic slowdown is the clear culprit here. But in the US, we are starting to see a clear drag on oil prices caused by the insanely low price of natural gas. You can see this clearly on the charts below where gas has been rising while Texas tea has been plunging. Utilities and industry are switching over to the cleaner burning ultra cheap fuel source as fast as they can. As a result, greenhouse gas emissions are falling faster in the US than any other developed country, according to the Paris based International Energy Agency. Sell any $4 rally in crude and keep a tight stop.
When China catches cold, copper gets pneumonia. So does Australia (FXA), (EWA), for that matter. The China slowdown will most likely continue on into the summer, knocking the wind out of the red metal. If copper manages to rally back up to $3.60, grab it with both hands and throw it out the window. Cover when you hear a loud splat. That works out to about $26.50 in the ETF (CU).
It all points to a highly choppy and volatile ?RISK ON? rally that could last a week or two. It will be a time when you wish you took your mother in law?s advice to get a real job by becoming a cardiologist or plastic surgeon. Do you want to know when I want to reestablish my shorts? If you get a modestly positive nonfarm payroll on at 8:30 am on Friday, June 1, that could deliver a nice two day rally that would be ideal to sell into.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-05-24 23:03:212012-05-24 23:03:21My Tactical View of the Market
They say a picture is worth a 1,000 words, so here are 4,000 words worth. My friends at www.stockcharts.com put together this series of charts establishing beyond any reasonable doubt that the ?RISK ON? trade is breaking down across all asset classes.
Everything is breaking down, simultaneously and in unison, including the S&P 500 (SPX), Gold (GLD), Silver (SLV), Oil (USO), Copper (CU), the Euro (FXE), the Australian dollar (FXA), and the Canadian dollar (FXC). In the meantime, Treasury bonds (TLT), (TBT) are moving from strength to strength.
The news from Europe can only get worse. An American recession, considered impossible by strategists only a month ago, is now looming large as our own economic data continues to deteriorate. The flight safety has exploded into a stamped, driving the US dollar index up 12 consecutive days, a new record.
I have included a cartoon below from my old employer, The Economist, that neatly sums up the implications of the Socialist win in the French presidential elections. German chancellor, Angela Merkel, is meeting French president, Fran?ois Hollande, for dinner at Das Austerity Euro-Caf?. Austerity preaching Merkel is having a miniscule single sausage for dinner, while Hollande is enjoying a sumptuous repast and obviously ordering the most expensive wine from the list.
The cartoon would be funnier if it weren?t so true. Austerity is now suffering a retreat on the order of Napoleon?s retreat from Russia in the winter of 1815. Her Christian Democratic Union party suffered its worst post WWII defeat in last weekend?s North Rhine-Westphalia elections. It is now looking like Germany will have to accept a higher inflation rate as the price for bailing out Europe, something it is loath to do. Needless to say, this is terrible news for the Euro.
If these charts continue to break down, as the news flow dictates they should, here are my immediate downside targets.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-05-15 23:03:122012-05-15 23:03:12Charts Are Breaking Down All Over
While scouring the markets looking for great ways to participate in the current slide in the equity indexes, I discovered a real gem. The Advisor Shares Active Bear ETF (HDGE) offers a rifle shot at the true garbage in the market, low dividend companies with deteriorating fundamentals. Run by former Bass Brothers associate Brad Lehmansdorf, it includes such well known losers as Goodyear (GT), Green Mountain Coffee (GMCR), and Open Table (OPEN). Think of it as garbage distilled.
The fund addresses many of the shortcomings in other short index ETF?s like (SH) and the 2X (SDS).While they get the direction right in a down market, they also throw out the baby with the bathwater. Sure, you are happy to sell short a lot of stocks with bleak futures. But you are also shorting Apple (AAPL), IBM (IBM), Intel, and Cisco (CSCO), not something you necessarily ever want to do on pain of death.
It has been working like a charm since the April 2 peak in the markets. (HDGE) delivered an awesome +15.2% gain, against a much more modest +6.6% for the 1X ProShares Short S&P 500 fund (SH) and a fall of only -5.8% in the S&P 500 (SPX). (HDGE) is in effect delivering a downside outperformance compared to the (SH) of more than 2:1, which makes a long (HDGE)/short (SH) strategy look kind of interesting. What is particularly impressive is that it does this without leverage, qualifying it for investment in many plain vanilla IRA?s and 401k?s, and posting it on the menu for many individual investment advisors.
Of course, quality comes at a price, as I am always at pains to point out to my own readers. Management fees are a hefty 3.39%, although that comes down to a reasonable 1.5% when manager rebates are factored in. The dealing spreads on these esoteric ETF?s can be quite wide, so it is wise to place a limit day order in the middle market to avoid being taken to the cleaners. If we get a brief short covering rally in the market you might find me in this one with a trade alert. To learn more about this enticing exchange traded fund, please visit their website at http://advisorshares.com/ .
Looking for Some Good Short Plays
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-05-09 23:03:072012-05-09 23:03:07Check Out (HDGE) to Limit Downside Exposure
A few years ago on the Old Square in Brussels, a delicious luncheon of moules marini?res paired with an excellent white burgundy with some European Central Bank officials ran far longer than expected. They were attempting to convince me of the long term viability of the Euro, to no avail.
That seriously delayed my departure from Belgium to Salisbury in the English countryside to visit some clients resident at Highclere Castle, which is now the subject of a major TV series. I raced my twin engine Cessna at full power into the sunset, across the English Channel, past the white cliffs of Dover, because my destination airfield had no lights. By the time I arrived it was too dark to land, my alternate airport at Southampton had suddenly closed because of a crash, and I only had 15 minutes of fuel left.
I knew that the pub at the end of the grass runway kept a radio with the tower frequency always tuned in. So circling at 1,500 feet overhead in the pitch black darkness I called in and ordered a full bottle of Ron Rico rum. I told the bartender to pour out 16 shot classes and line then up on the bar. I then broadcast my predicament and said that anyone who would take a rolled up newspaper and dip it in the rum, set it on fire, then line up to light the runway would get a free pint if I landed successfully. I said that if I didn?t get help immediately, I might take out nearby Stonehenge, or perhaps Salisbury Cathedral, in the imminent crash.
Within seconds, I could see the flaming torches dispersing along the field, some in a somewhat drunken fashion. I landed right between the two ragged lines of my improvised landing lights, which lit up the field as clear as day. It was the first time that I landed on a runway that was living, breathing, and even staggering.
As I taxied to my parking space, the starboard engine ran out of fuel and shuddered to a halt. So I just abandoned the plane there to retrieve the next morning. Needless to say, I bought rounds for the house that night until no one was left standing.
Watching the Euro shatter its four month support line this morning at $1.2950, I felt exactly as I did all those years ago in the dark skies over the Wiltshire countryside. The concern was that my put options would run out of fuel before the currency made its big break, forcing me to crash and burn, as I almost did over England. The move sent my short position in the beleaguered currency soaring, and rendered the calls that I sold short only yesterday into dust. It was a good P&L day for the Mad Hedge Fund Trader?s model portfolio.
I am now seriously thinking of becoming a card carrying member of the Greek Communist Party, for it is their young leader, a Mr. Alexis Tsipras, who provided the final straw that broke the camel?s back. Its leaders threatened to challenge the legality of the recent bailout in court. Is Greek rescue package number three now in the cards? The development threatens to undo all of the hard won progress made this year towards resolution of the continent?s sovereign debt crisis. Did anyone expect that asking people to vote for their own austerity and starvation was going to work?
Long term currency watchers had been mystified as to why the Euro had held up so well in the face of such obviously collapsing fundamentals. The markets were rife with rumors of European Central Bank support at $1.30 to prevent a widespread panic that would ignite wholesale Euro dumping. My own theory was that the trade became so obvious and one sided that hedge fund short covering prevented it from falling further. Today, the fundamentals turned so dire that massive selling finally? cleared out? those positions, which is how these things always end.
All I can say is that when it rains, it pours. The profusion of the market developments that I have been predicting all year have suddenly come true in the last few days; the awful April nonfarm payroll, a global synchronized recession that is accelerating to the downside, and the end of the grotesque overpricing of the US stock markets. Also coming home to roost are the contagion effects on all ?RISK ON? assets, including equities (IWM), commodities (CU), oil (USO), the Euro (FXE) (EU), gold (GLD), silver (SLV), and a huge flight to safety bid for the dollar (UUP) and Treasury bonds (TBT).
I thought this summer might be boring. Perhaps I could be wrong. And you wanted me to manage your money? Anyone for a return flight to Brussels to finish that bottle of wine?
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Highclere Castle
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A White Burgundy
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The Brussels Old Square
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A Cessna 340
My Advanced Instrument Landing System
https://www.madhedgefundtrader.com/wp-content/uploads/2012/05/dtabbey.jpg240360DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-05-08 23:03:462012-05-08 23:03:46Euro Crash Warns of More to Come
If I had a nickel for every time that I heard the term ?Sell in May and go away? this year, I could retire. Oops, I already am retired! In any case, I thought that I would dig out the hard numbers and see how true this old trading adage is.
It turns out that it is far more powerful than I imagined. According to the data in the Stock Trader?s Almanac, $10,000 invested at the beginning of May and sold at the end of October every year since 1950 would be showing a loss today. Amazingly, $10,000 invested on every November 1 and sold at the end of April would today be worth $702,000, giving you a compound annual return of 7.10% .
My friends at the research house, Dorsey, Wright & Associates, (click here for their site at http://www.dorseywright.com/ ) have parsed the data even further. Since 2000, the Dow has managed a feeble return of only 4%, while the long winter/short summer strategy generated a stunning 64%.
Of the 62 years under study, the market was down in 25 May-October periods, but negative in only 13 of the November-April periods, and down only three times in the last 20 years! There have been just three times when the "good 6 months" have lost more than 10% (1969, 1973 and 2008), but with the "bad six month" time period there have been 11 losing efforts of 10% or more.
Being a long time student of the American, and indeed, the global economy, I have long had a theory behind the regularity of this cycle. It?s enough to base a pagan religion around, like the once practicing Druids at Stonehenge.
Up until the 1920?s, we had an overwhelmingly agricultural economy. Farmers were always at maximum financial distress in the fall, when their outlays for seed, fertilizer, and labor were at a maximum, but they had yet to earn any income from the sale of their crops. So they had to borrow all at once, placing a large cash call on the financial system as a whole. This is why we have seen so many stock market crashes in October. Once the system swallows this lump, it?s nothing but green lights for six months.
After the cycle was set and easily identifiable by low end computer algorithms, the trend became a self-fulfilling prophesy. Yes, it may be disturbing to learn that we ardent stock market practitioners might in fact be the high priests of a strange set of beliefs. But hey, some people will do anything to outperform the market.
It is important to remember that this cyclicality is not 100%, and you know the one time you bet the ranch, it won?t work. But you really have to wonder what investors are expecting when they buy stocks at these elevated levels, over 1,400 in the S&P 500.
Will company earnings multiples further expand from 14 to 15 or 16? Will the GDP suddenly reaccelerate from a 2% rate to the 4% expected by share prices when the daily data flow is pointing the opposite direction?
I can?t wait to see how this one plays out.
Thank Goodness I Sold in May
https://www.madhedgefundtrader.com/wp-content/uploads/2012/05/sunbathing.jpg320320DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-05-01 23:02:272012-05-01 23:02:27The Hard Numbers Behind Selling in May.
Last week saw a dramatic deterioration in the economic data that has been the foundation of the Great Bull Market of 2012.
First, we read minutes from a Federal Reserve meeting suggesting that QE3 has been put on a back burner. Then the Department of Labor?s Friday nonfarm payroll report poured gasoline on the fire, coming in at 120,000, versus an expected 210,000. Until this week, the best you could say about the data flow was that it was mixed. Now it is decidedly negative.
Whenever we see sea change events like this bunch up over a short time period, I like to show readers my cross asset class review, which I conduct on a daily basis. This discipline is great at showing which securities are trading in line with the rest of the world, and which ones aren?t. And guess what is looking outrageously expensive right now?
The charts show that trouble has in fact brewing for a few months. Asset classes have been rolling over like a line of dominoes. This is the way bull markets always end, and this time should be no different.
The Australian dollar (FXA) saw the weakness coming first, which peaked on April 6.
The Australian stock market (EWA) followed, peaking on February 28.
Copper (CU) warned that trouble was coming, peaking on February 12.
Then Gold (GLD) faded on April 12.
And Silver (SLV) on February 28.
Bonds never bought the ?RISK ON? on scenario. The ten year Treasury ETF (IEF) is down less than three points from its 2011 peak, instead of the 15 points we should have gotten if the economy had truly entered a sustainable stage in the recovery.
Only equities (SPX) didn?t see ?RISK OFF? coming
Because it was all about Apple (AAPL), which added $225 billion in new market capitalization this year. That amounts to creating the third largest company from scratch, right after Exxon (XOM).
The final message of all of these charts is that equities alone have been powering up for months while every other asset class in the world has been dying a slow death. Experience shows that this only ends in tears for equity holders. I?ll let you adjust your own positions accordingly.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/aapl-14.png530700DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-08 23:03:582012-04-08 23:03:58Cross Asset Class Analysis Warned ?RISK OFF? Was Coming
That is the conundrum facing traders, investors, and individuals as we enter the new quarter. For some hedge fund managers, Q1, 2012 was clearly the quarter from hell.
I have been in the market for four decades, long enough to collect an encyclopedia worth of words of wisdom. One of my favorites has always been ?Sell in May and Go? away. On close inspection you?ll find there is more than a modicum of truth is this time worn expression.
Refer to your handy Stock Traders Almanac and you?ll find that for the last 50 years the index yielded a paltry 1% return from May to October. From November to April it brought in a far healthier 7% return.
This explains why you find me with my shoulder to the grindstone from during the winter, and jetting about from Baden Baden to Monte Carlo and Zermatt in the summers. Take away the holidays and this is really a four month a year job.
My friends at StockCharts.com put together the data from the last ten years, and the conclusions on the chart below are pretty undeniable. They have marked every May with a red arrow and Novembers with green arrows.
What is unusual this year is that we are going into the traditional May peak on top of a prodigious 12 % gain in the S&P 500, one of the sturdiest moves in history. History also shows that the bigger the move going into the April peak, the more savage the correction that follows. What do they say in golf? Fore?
Being a long time student of the American, and indeed, the world economy, I have long had a theory behind the regularity of this cycle. It?s enough to base a pagan religion around, like the once practicing Druids at Stonehenge.
Up until the 1920?s, we had an overwhelmingly agricultural economy. Farmers were always at maximum financial distress in the fall, when their outlays for seed, fertilizer, and labor were at a maximum, but they had yet to earn any income from the sale of their crops. So they had to all borrow at once, placing a large call on the financial system as a whole. This is why we have seen so many stock market crashes in October. Once the system swallows this lump, its nothing but green lights for six months.
Once the cycle was set and easily identifiable by low end computer algorithms, the trend became a self fulfilling prophesy. Yes, it may be disturbing to learn that we ardent stock market practitioners may in fact be the high priests of a strange set of beliefs. But hey, some people will do anything to outperform the market.
Are the Bull?s Days Numbered?
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/bull-2.jpg300400DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-02 23:03:182012-04-02 23:03:18If You Sell in May and Go Away, What to do in April?
This time I am going to start with the fundamental argument first, then follow up with the Trade Alert.
We are getting perilously close to a substantial pull back in global risk assets. While this has already started in commodities, the ags, oil, copper, and precious metals, we have yet to see the whites of their eyes in equities. I believe at these levels stocks are the planet?s most overvalued assets, at least on a short term trading basis. So I have begun more aggressively searching for plays that would benefit from substantial moves southward.
My personal preference is to gain downside exposure on small capitalization stocks. You can achieve this through buying put options on the Russell 2000 iShares ETF (IWM).
You have several things going for you in falling markets with this ETF. Small stocks are illiquid and therefore suffer the biggest pullback during market corrections. If Heaven forbid, double dip fears return this summer, small caps will fall the farthest and the fastest. They are most dependent on outside financing which rapidly dries up during times of economic distress.
You can see this clearly during last year?s summer swoon. The last time we thought the world was going to end, the (SPX) fell by 20% while the (IWM) plunged by 29.5%. This means that small cap stocks are likely to deliver 150% of the downside compared to big cap stocks. Making money then with shorts in the (IWM) was like shooting fish in a barrel.
You see this on the upside as well. Since the October, 2011 lows, the (SPX) leapt by 30% compared to a much more virile 38% move by (IWM). The (IWM) really does present the scenario where the smaller (or higher) they are, the harder they fall.
If you go into the options market you get this extra volatility at a discount. June at-the-money puts for the (SPY) carry an implied volatility of 15%, compared to 20% for the (IWM) puts. That means you get 50% more anticipated movement in the index for a premium of only 33%.
For those who wish to avoid options, you can buy the inverse ETF on the sector, the (RWM). But the liquidity for this instrument is a mere shadow of its upside cousin, the (IWM). You are better off shorting the (IWM) than buying the (RWM).
These Look Pretty Interesting
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/497909.jpg961735DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-01 23:03:222012-04-01 23:03:22Where to Play From the Short Side
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