(SPY) Archives

Holder Retirement Could Send Bank of America Flying

Watching the market melt down today, I have been hurriedly compiling a shopping list of stocks to buy, and writing the Trade Alerts in advance for readers to execute.

If I am right about interest rates remaining flat or rising for the rest of the year, then financials have to be at the absolute top of such a list.

Bank of America (BAC) certainly was the chief whipping boy of the financial crisis. Since 2008, it has paid out more than $50 billion in fines and lawsuit settlements for every transgression under the sun.

After getting a bail out from the US Treasury, it was forced to cut its dividend payment to a token one cent. Do any Google search on the company and you are inundated with a flood of bad news.

All that is now ancient history. The entire banking industry is now moving into the sweet spot in the economic cycle. This is because rising interest rates mean that they will be able to charge more for loans, while their cost of funds (deposits and equity) remains low. These rising spreads fall straight to the bottom line.

Now with the bank?s Torturer-in-Chief, US Attorney General Eric Holder, announcing his retirement, the way is clear for better days ahead.

With the 30-year bull market in bonds now at an end, substantially higher rates in the near future are now included in virtually every economic forecast out there. Since the beginning of 2014 the ten-year Treasury yield has collapsed from 3.05% to as low as 2.32% at he end of August, pummeling bank shares.

What happens next? They go from 2.32% back up to 3.05%, possibly by yearend, then a lot more. Bank shares will ride on the back of this bull.

The jungle telegraph is now ringing with the prospect of a dividend hike by the company, currently at a lowly four cents. We may get the good news as soon as the next reporting period on October 14. The implications of such a move are broad.

If it pulls this off, it is only because of renewed confidence by the markets in the improved financial condition of the company. After several capital raises and the liquidation of the wreckage of the 2008 crash, US banks are now the healthiest in history, with balance sheets of bedrock stability.

Ahem, they are also too big to fail, again.

To get the dividend yield on the shares up to industry standard of 2.5%, the company really needs to raise its dividend to 42 cents. It certainly has the cash flow to do this. In 2013, (BAC) reported net income of $11.4 billion, more than four times to amount needed to cover such a payout.

Needless to say, this is all great news for the share price. The prospective return of increasing amounts of capital to shareholders should suck in new and wider classes of shareholders. It won?t be just about hedge fund punters anymore. Respectable, large and long term holding institutions will be in there as well.

Take a look at the charts below, and it is clear that such a move is underway. (BAC) broke out from the end of a classic triangle formation, which traditionally resolves itself to the upside. New post crash highs beckon.

You can find more dry powder in the chart for the Financials Select Sector SPDR ETF (XLF), which clearly rejected a complete breakdown at long-term trend support in early February.

Finally, take a gander at the chart for the S&P 500. New life from the financials will be the adrenaline shot this market needs to break it out of its current low volume sideways consolidation, taking it to new highs as well.

Finally, for those who are concerned that the bull market was killed off by last week?s massive Alibaba IPO (BABA), take a look at he chart below provided by my friends at Business Insider. Certainly, the collapse of the iShares iBoxx High Yield Corporate Bond ETF (HYG) has put the fear of God into traders.

The chart tracks long-lived bull markets in terms of their price earnings multiples. It shows that we have only reached half the length of the great 1987-2000 bull market. The implication is that this bull could live another five or more years.

This bull is not dead, it is just resting.

So far, the S&P 500 has declined by a feeble 2.8% off the $202 top. If we break the 50-day moving average here, we could make it down to the 200-day moving average at $1,880, a more substantial 7% pullback. Take that as a gift, and load the boat for the year-end rally.

I?ll send out the Trade Alert to buy (BAC) when I think the timing is ripe.

(XLF) Weekly

(XLF) Daily

Time to Visit the ATM Again

The Bull is Not Dead, It is Resting

Time to Bail on the Small Caps

Diary, Newsletter, Research

It now appears that the ?Alibaba? correction (BABA) is at hand.

I warned you, pleaded with you, and begged you about this yesterday, and on May 8 (click here for ?Will Alibaba Blow Up the Market?).

The longer the company postponed the mother of all IPO?s, the higher the prices flew, until we finally got a print at the absolute apex of the market. Now, it?s time to pay the piper.

The development is part of a broader move out of riskier, higher beta stocks into safe, large caps that has been underway for several weeks now. Those traders who are ahead want to protect their years. Those who aren?t are screwed anyway, so don?t bother returning their phone calls.

Look no further than my favorite, Tesla (TSLA), which topped out on September 3, along with the rest of the MoMo high technology, biotechnology and Internet names.

Still love the cars, though.

The (IWM) has really been sucking hind teat all year, falling by 3% year to date compared to an 8% gain in the S&P 500.

Yesterday, the sushi really hit the fan when the 50-day moving average pierced the 200-day moving average for the first time since August, 2011. Known as a much dreaded ?death cross,? this is the technical equivalent of slitting both wrists and thrashing about in shark-invested waters, heralding more declines to come.

Let me list the reasons why this is the sector traders love to hate when markets move from ?RISK ON? to ?RISK OFF?:

*Since small companies borrow more than large companies, they are far more sensitive to rising interest rates. Guess what? Rates have been rocketing this month.

*Since small companies are more leveraged (indebted) than big ones, they are more sensitive to a slowing economy.

*Small companies don?t have the international diversification of their bigger brethren, and therefore have less of a financial cushion to fall back on.

*The (IWM) has roughly 1.5 times the volatility of the S&P 500, making a short position here fantastic downside protection for a broader based portfolio of stocks. So you get a lot of selling here, as managers try to lock in performance for fiscal years that start ending as early as October 31.

*Did I mention that the stock market is at one of its most overbought levels in history, the worst since 1928? Bearish sentiment is at only 13%, the lowest since 1987. These are more reason to sell, as if you needed any.

My readers have made tons of money over the years playing the (IWM) on the short side. It?s time for another visit to the trough. I?m not finishing my year early.

Not yet, anyway.

If you can?t trade options, then buy the Short Russell 2000 Fund ETF (RWM) as a 1X play, or the Direxion Daily Small Cap Bear 3X ETF (TZA) for a 3X trade. However, 3X ETF?s of any kind are for intra day traders only.

Time to Bail on a Burning House

She Speaks!

Diary, Newsletter, Research

Like a deer frozen in a car?s onrushing headlights, markets have been comatose awaiting Federal Reserve governor Janet Yellen?s decision on monetary policy and interest rates.

Interest rates are unchanged. Quantitative easing gets cut by $15 billion next month, and then goes to zero. Most importantly the key ?considerable period? language stayed in the FOMC statements, meaning that interest rates are staying lower for longer.

Personally, I don?t think she?s raising interest rates until 2016. The number of dissenters increased from one to two, but then both of them (Fisher and Plosser) are lame ducks. And, oh yes, the composition of the 2015 Fed will be the most dovish in history.

The latest data points made this a no brainer, what with the August nonfarm payroll coming in at a weak 142,000, and this morning?s CPI plunging to a deflationary -0.20% for the first time since the crash.

Of course, you already knew all of this if you have been reading the Mad Hedge Fund Trader. You knew it three months ago, six months ago, and even a year ago, before Janet Yellen was appointed as America?s chief central banker. Such is the benefit of lunching with her for five years while she was president of the San Francisco Fed.

The markets reacted predictably, with the Euro (FXE), (EUO), and the yen (FXY), (YCS) hitting new multiyear lows, Treasury bonds (TLT), (TBT) breaking down, and precious metals (GLD), (SLV) taking it on the kisser.

What Janet did not do was give us an entry point for an equity Trade Alert (SPY), with the indexes close to unchanged on the day. The high frequency trader?s front ran the entire move yesterday.

Virtually all asset classes are now sitting at the end of extreme moves, up for the dollar (UUP) and stocks, and down for the euro, yen, gold, silver, the ags, bonds and oil. It?s not a good place to dabble.

Putting on a trade here is a coin toss. And when you?re up 30.36% on the year, you don?t do coin tosses. At this time of the year, protecting gains is more important than chasing marginal gains, which people probably won?t believe anyway.

If you want to understand my uncharacteristic cautiousness, take a look at the chart below sent by a hedge fund buddy of mine. It shows that investor credit at all time highs are pushing to nosebleed altitudes. Not good, not good. Oops! Did somebody just say ?Flash Crash??

This is not to say that I?m bearish, I?m just looking for a better entry point, especially as the Q????????? 3 quarter end looms. I?ve gotten spoiled this year. Maybe the Scottish election results, the Alibaba IPO, or the midterm congressional elections will give us one. Buying here at a new all time high doesn?t qualify.

It?s time to maintain your discipline.

Sorry, no more pearls of wisdom today. I?ve come down with the flu.

Apparently, this year?s flu shot doesn?t cover the virulent Portland, Oregon variety. Was it the designer coffee that did it, the vintage clothes, or those giant doughnuts dripping with sugar?

Back to the aspirin, the antibiotics, the vitamin ?C?, and a chant taught to me by a Cherokee medicine man.

My End 2014 Stock Market Forecast

Newsletter, Research

If anyone had any doubts about the future direction of stocks this year, you better take a look at the chart below for the S&P 500.

It shows a very convincing trend upward at almost a perfect 45-degree angle going back for the past year. The range is 100 points wide. It?s almost as if an architect drew it with drafting tools.

To take maximum advantage of this trend, you have to buy every 80 dip, as the floor is constantly rising. It?s as simple as that. Think of Trading 101 for Dummies.

We have had a host of challenges that threatened to knock us out of this channel for the past year.

A second Cold War with Russia? Wake me up when it?s over.

The ongoing collapse of Iraq? Snore?

The suspension of oil exports from Libya barely elicited a blip on your screen, as did the horrific civil war in Syria, a replay of the Middle Ages.

China slowdown? Pshaw! ?Sell in May and Go Away?? Cancelled!

Subpar American economic growth? No problemo.

All of these problems the market has weathered nicely, much like a wet dog shakes off water.

In fact, it has been three years since we endured the distress of a 10% correction, the self-inflicted wound triggered by the government?s hand wringing debt ceiling crisis.

In the end, it amounted to nothing, and was the last decent buying opportunity traders have seen. It has all be one giant ?chase? for performance and reach for yield since then.

The lesson of all of this is that what counts is the good old USA. That is what really is driving markets. All of those foreign distractions are just so much noise. At the end of the day, only the health of the American economy is what matters.

That?s all great news, because our economy is looking pretty darn muscular. Just last week, we saw the Markit August Purchasing Managers Index rocket from 55.8 to 58.0. Weekly jobless claims, the most accurate predictor of true business activity in this cycle, is plumbing seven-year lows. Housing data has just engineered a dramatic turnaround.

It gets better. The upshot of last week?s gathering of Federal Reserve officials at Jackson Hole, Wyoming is that ?normalization? is the new word du jour. What does this mean to us plebeians?

That the economy is so healthy that the government is actually thinking of raising interest rates sometime in the far future, possibly at the end of 2015, and then only by a little bit. That would bring to an end eight years of zero interest rate policy.

Until then, you have a government issued license to print free money. Buy the dips and sell the rallies, and work the 100-point range. If we continue ascending as we have done, the (SPX) should reach 2,100 by December, which happens to be my long held yearend target.

My bet is this could run all the way until April, when the next round of seasonal weakness kicks in again. If there is a risk of anything, it is that the buyers start to panic over missing the move and the (SPY) melts up, possibly as high as 2,200 by January, and 2,300 by March.

Of course, it?s always useful to engage in what my role model, Albert Einstein, called ?thought experiments? and consider what might cause the wheels to fall off of the bull market. To consider that in depth, please read ?What Could Derail the Coming Golden Age? by clicking here.

So what individual sectors should you focus on now? I hate to sound redundant and repetitive. As you may have noticed, ?boring? is not in my DNA (sending Trade Alerts on my iPhone while hanging by ropes from a cliff in the Swiss Alps during a ferocious storm?).

However, I?ll hark back to my favorite three legs for the economy, technology, energy, and health care. Biotechnology continues to sizzle, as do the car companies. And if bonds are peaking, as I believe, the entire financial sector is a screaming buy here.

One unknown is how the markets will take the Alibaba IPO in September, with an expected $150-$200 billion valuation, the largest in history. If institutions have to unload their existing holdings to make room for the new issues, it could trigger our next 4% correction. If that happens, buy the dip with both hands.

By the way, now that the summer is ending, subscription renewals are coming, so don?t forget to ?re-up? if you want to continue with your 41% average annualized returns.

Hey, the house is starting to shake. I think it?s an earthquake, a big one. Better get this out before the broadband goes down?

Uncle Sam is Looking Pretty Muscular These Days

Is the Turnaround at Hand, and Ten Stocks to Buy at the Bottom?

Newsletter, Research

War threatens in the Ukraine. Iraq is blowing up. Rebels are turning our own, highly advanced weapons against us. Israel invades Gaza. Ebola virus has hit the US. Oh, and two hurricanes are hitting Hawaii for the first time in 22 years.

Should I panic and sell everything I own? Is it time to stockpile canned food, water and ammo? Is the world about to end?

I think not.

In fact the opposite is coming true. The best entry point for risk assets in a year is setting up. If you missed 2014 so far, here is a chance to do it all over again.

It is an old trading nostrum that you should buy when there is blood in the streets. I had a friend who reliably bought every coup d? etat in Thailand during the seventies and eighties, and he made a fortune, retiring to one of the country?s idyllic islands off the coast of Phuket. In fact, I think he bought the whole island.

Now we have blood in multiple streets in multiple places, thankfully, this time, it is not ours.

I had Mad Day Trader, Jim Parker, do some technical work for me. He tracked the S&P 500/30 year Treasury spread for the past 30 years and produced the charts below. This is an indicator of overboughtness of one market compared to another that reliably peaks every decade.

And guess what? It is peaking. This tells you that any mean reversion is about to unleash an onslaught of bond selling and stock buying.

There is a whole raft of other positive things going on. Several good stocks have double bottomed off of ?stupid cheap? levels, like IBM (IBM), Ebay (EBAY), General Motors (GM), Tupperware (TUP), and Yum Brands (YUM). Both the Russian ruble and stock market are bouncing hard today.

There is another fascinating thing happening in the oil markets. This is the first time in history where a new Middle Eastern war caused oil price to collapse instead of skyrocket. This is all a testament to the new American independence in energy.

Hint: this is great news for US stocks.

If you asked me a month ago what would be my dream scenario for the rest of the year, I would have said an 8% correction in August to load the boat for a big yearend rally. Heavens to Betsy and wholly moley, but that appears to be what we are getting.

It puts followers of my Trade Alert service in a particularly strong position. As of today, they are up 24% during 2014 in a market that is down -0.3%. Replay the year again, and that gets followers up 50% or more by the end of December.

Here is my own shopping list of what to buy when we hit the final bottom, which is probably only a few percent away:

Longs

JP Morgan (JPM)
Apple (AAPL)
Google (GOOG)
General Motors (GM)
Freeport McMoRan (FCX)
Corn (CORN)
Russell 2000 (IWM)
S&P 500 (SPY)

Shorts

Euro (FXE), (EUO)
Yen (FXE), (YCS)

No, Not This Time

Mad Hedge Fund Trader Sets New All Time High with 19.74% Gain in 2014

Diary, Newsletter

I am writing this to you from the ancient city of Bodrum on the southwest coast of Turkey. Coming here, I had to set my watch ahead ten hours, then back 3,000 years.

As I sit here on my balcony, a flotilla of yachts, both large and small, motor by with the Greek island of Kos hovering in the background in the haze. Smoke from the gurgling water pipes below waft in my direction.

The carnage in Syria goes on 400 miles to my east and worse in Iraq another 300 miles in the distance. The security forces are on a nervous alert and machine guns held by jumpy, sweating teenagers are everywhere. My five star hotel is eerily vacant, even though it is peak season, but the service is great.

Despite these ominous signs, I am happy to report that the industry beating performance of the Mad Hedge Fund Trader?s Trade Alert Service has punched through to a new all time high.

The total return for my followers so far in 2014 has reached 19.74%, compared to a far more feeble 1.4% for the Dow Average during the same period. June came in at a robust 4.32%.

I managed to pull this off during some of the most difficult trading conditions in market history. Turnover across all asset classes is hitting decade lows (see chart below), and volatility has crashed through the floor. Most of the rest of the hedge fund industry is getting destroyed.

The three and a half year return is now at an amazing 142.24%, compared to a far more modest increase for the Dow Average during the same period of only 36%.

That brings my averaged annualized return up to 39.7%. Not bad in this zero interest rate world. It appears better to reach for capital gains than the paltry yields out there.

This has been the profit since my groundbreaking trade mentoring service was first launched in 2010. Thousands of followers now earn a full time living solely from my Trade Alerts, a development of which I am immensely proud of.

Like most of the industry, I expected May and June to be poor months for risk assets. The market has had a tremendous run over the last two years, and the spring historically heralds a period of seasonal weakness.

Wrong!

One of the toughest things to do in this business is to admit you blew it, and then execute an immediate risk reversal in your portfolio.

In the end, the failure of the market to fall meant that it could only go up. We got additional help from month end window dressing, calming events in the Ukraine, and a 7:1 share split at Apple.

Another particularly vexing challenge is that the principal market driver has shifted from economics to geopolitics. The global economic recovery continues, but at a pace so modest that it hardly moves the needle on the volatility front.

The world is waiting to see whether the US can deliver a second half GDP growth rate of 4% per annum?.. or not.

In the meantime, a megalomaniac in Russia and terrorists in the Middle East are determining the short-term direction of asset prices. No hedge fund trader has any edge here, so calls on the coming price action are little more than educated guesses and wishing.

Good luck outperforming in that environment!

I played June predominantly from the long side, accumulating a basket of positions in old technology and traditional industrial names like IBM (IBM), Google (GOOGL), Caterpillar (CAT), and Microsoft (MSFT). I then opportunistically laid out hedging shorts in the S&P 500 (SPY) and the Treasury bond market (TLT).

As the market has tortuously ground up, I have whittled back my portfolio. I figured out that the way to make money trading in this market was not to trade, to ignore the day-to-day counter trend moves.
As a result, almost every day in June was profitable for my followers.

Quite a few were able to move fast enough to cash in on the move. To read the plaudits yourself, please go to my Testimonials Page . They are all real, and new ones come in almost every day.

My esteemed colleague, Mad Day Trader Jim Parker, was no slouch either, dodging in an out of the raindrops to make money on an intraday basis.

What would you expect with a combined 85 years of market experience between the two of us? Followers are laughing all the way to the bank.

Don?t forget that Jim clocked an amazing 2013 with a staggering 374% trading profit. That was just for an eight-month year!

The Opening Bell with Jim Parker, a quickie but insightful webinar giving followers an instant snapshot of the market opening every day, has been an overwhelming success. Many customers have already reported dramatic improvements in their trading results.

Watch this space, because the crack team at Mad Hedge Fund Trader has more new products and services cooking in the oven. You?ll hear about them as soon as they are out of beta testing.

Our business is booming, so I am plowing profits back in to enhance our added value for you. Next out will be the Mad Hedge Fund Trader Channel on YouTube that will enable me to post videos from my frequent travels around the world.

The coming year promises to deliver a harvest of new trading opportunities. The big driver will be a global synchronized recovery that promises to drive markets into the stratosphere by the end of 2014.

Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011, 14.87% in 2012, and 67.45% in 2013.

Our flagship product,?Mad Hedge Fund Trader PRO, costs $4,500 a year. It includes my Global Trading Dispatch?(my trade alert service and daily newsletter). You get a real-time trading portfolio, an enormous research database, and live biweekly strategy webinars. You also get Jim Parker?s?Mad Day Trader?service and?The Opening Bell with Jim Parker.

To subscribe, please go to my website at?www.madhedgefundtrader.com, find the?Global Trading Dispatch??or ?Mad Hedge Fund Trader PRO??box on the right, and click on the blue??SUBSCRIBE NOW??button.

Hello from Istanbul

It?s ?RISK ON? Again

Newsletter

?Well, I?ll either be up 25% by the end of June or I just blew up my 2014 performance.?

That is what I told my esteemed colleague, Mad Day Trader Jim Parker, right after I engineered a major ?RISK ON? adjustment for my model trading portfolio.

If I am right, and bonds peaked and yields bottomed for the year, then my followers will make a fortune. Money will pour out of bonds into shares and other risk assets, taking the indexes up substantially through December.

If I am dead wrong, then the market?s judgment could be harsh.

Welcome to show business.

Starting two weeks ago, a whole range of short-term risk indicators started flashing green lights.

Most importantly, the bond market (TLT), (TBT) topped out, taking with it the entire fixed income space into the toilet, including corporates (LQD), munis (MUB), junk (JNK), and emerging market debt (ELD). Only high yield master limited partnerships (LINE) and REIT?s were spared the decimation.

Then we saw the prices for credit default swaps utterly collapse or the cost of insurance for individual debt instruments. Why buy insurance if you are going to live forever?

Volatility hit decade lows at the $10 handle. Hundreds of large cap and technology stocks broke out to the upside on the charts, taking off like a scalded chimp.

Out went my Trade Alerts to buy (JPM), (IBM), (CAT), and (MSFT). Mad Day Trader Jim Parker successfully sold the euro short (FXE) and bought the grains against it (JJG).

Distress short covering of equities by hedge funds also showed it?s ugly hand. That is, ugly if you?re a hedge fund. Visions of resumes posted on Craig?s List danced in their minds or maybe a future as an Uber taxi driver. All we needed was a few prints of new all time highs by the major indexes, and it was off to the races.

Of course, the spark for the melt up was the healthy May nonfarm payroll report showing a gain of 217,000. The headline unemployment rate maintained a seven year low of 6.3%. When the (SPY) gapped up, it was all over but the crying.

Clearly, the pain trade is to the upside. Many hedge funds are still running net shorts, albeit of substantially reduced size. Active portfolio managers are underweight stocks. Even Apple (AAPL) is under owned as it approaches a new all time high. Hey Apple, post split under $100? Sounds like a bargain to me!

To see all of this happening in June, when stocks are entering a seasonally slow, weak period, is nothing less than amazing. To witness a flat line ?time? correction take place instead of a long overdue ?price? correction over the last three months, right at an all time high, is also a shocker.

This time it really is different.

That means the move in the S&P 500 up 10% by yearend is now a chip shot. It makes my own target of 15% to 2,200, derided by many as ?Mad? when I made it at the New Year, as far more realistic. It?s the story of my life.

Add in 3% of dividend income, and the large cap index could bring in a total return of 18% in 2014. That?s less than the 30% gain we saw in 2013. But it?s better than a poke in the eye with a sharp stick.

If you want to hear me expound on my current views at length, please listen to my interview on PreMarketPrep at Benzinga TV, by clicking: https://www.youtube.com/watch?v=-PQMtT_a7EE .

Could my ?Golden Age? scenario be unfolding early?

It?s Happening Sooner Than You Think

The 60-40 Correction

Newsletter

Traders have been tearing their hair out this year, if they have any left.

The indecisive, flip flopping, ?RISK ON?/?RISK OFF? state of play has been devoid of any direction clues for the past three months. Gold (GLD), the yen (FXY), and bonds (TLT) have been even worse, flat lining inside of narrow ranges.

Hedge fund P & L?s have been hemorrhaging everywhere. The brokers are doing not much better, with some big ones reporting profits down by 50% or more. For many, it is shaping up to be the worst year of the decade.

I have to confess that I have not seen conditions like this during my own long and varied career. I can make money in up markets, and in down markets. But I am helpless in that go nowhere, with option implied volatilities at all time lows.

Better to go take a long nap.

Bulls hate the market because it won?t go up, and bears despise it because it fails to fall. So, what gives?

A page out of the Investing 101 handbook might explain everything.

For eons now, possibly for entire epochs, investment advisors have recommended that their clients place 60% of their liquid assets in stocks, and the remaining 40% in bonds. When extreme market moves knock portfolios out of this cherished balance, they should buy and sell securities to bring it back in line.

And therein lies the problem.

2013 delivered one of the most spectacular stock performances in history, with the S&P 500 up 26%, and 29% when you include dividends. Bonds fell, the (TLT) plunging from $114 to $101, taking the ten-year Treasury yield up from 1.80% to 3.02%. Those who started last year with a traditional belt and suspenders 60%-40% balance ended up 2013 with a portfolio closer to 70%-30%.

So what have investors been doing since the beginning of 2014? Selling stocks and buying bonds to return their desired 60%-40% balance.

This all sounds nice in theory. How much money are we talking about to achieve this rebalancing? A lot. A whole lot. I?d say about $600 billion.

The markets certainly believe in this theory. Bonds have been the most ardent followers, going up since the first trading day of the year. It has posted this blowout return despite the Fed throttling back its monthly bond buying by a massive $40 billion a month since the end of last year.

Stocks are more skeptical, befuddled by the random noise of earnings reports, geopolitical events, ultra low interest rates, and the residual effects of the Fed?s quantitative easing.

Selling was largely confined to the sectors that had risen the most, technology (QQQ), small caps (IWM) and biotechnology (IBB). So instead of a move down in any appreciable way, stocks have given us monotonous sideways action.

How does all this end?

Get everyone?s portfolio back to 60%-40% and the way then becomes clear to fall out of balance again. How will this be resolved? Stocks will gain and bonds will take a nosedive, until we approach the 70%-30% ratio again.

This paves the way for a blowout fourth quarter in the stock market that I have been predicting all year. That should take the (SPX) to 2,100, or up about 10% on the year. What will take the lead? Technology (QQQ), small caps (IWM), and biotechnology (IBB), the sectors that were hit the hardest earlier in the year.

This is why I started piling on risk positions last week, buying Apple (AAPL) and Google (GOOGL), and selling short Treasury bonds (TLT) and the Japanese yen (FXY).

So Which Balance is the Right One?

Beware the ?Spinning Tops?

Newsletter

Winter is definitely over here in Incline Village, Nevada. When I started my daily ten-mile hikes from the Tunnel Creek Caf? ten days ago, I had to don snowshoes in the parking lot. Yesterday, I had to climb for two hours to find snow at 8,000 feet.

It?s definitely time to put my winter equipment into storage. The aspen trees are budding and yellow crocuses are breaking out all over.

That was also the conclusion of the killer April nonfarm payroll report, which brought in an eye popping 288,000. March was revised up from 192,000 to 203,000. Even more stunning was the plunge in the headline unemployment rate from 6.7% to 6.3%. It was a perfect number. Almost. We?re almost back to normal again.

I thought we were home free on our iShares Barclay 20+ Year Treasury Bond Fund (TLT) May, 2014 $113-$116 in-the-money bear put spread.
The blockbuster release should have driven a stake through the heard of the bond market.

And fall it did?.for about 15 minutes. Then news of the White House press conference announcing a further ratcheting up of tensions with Russia over the Ukraine triggered one of those rip your face off short covering rallies that have become so common this year. Prices for the (TLT) jumped to new 2014 highs, just short of our near short strike at $113. Stocks sagged.

If you had a mole at the Department of Labor who leaked to you the April nonfarm payroll a day in advance, you would have loaded the boat with long stock/short bond positions. Instead, we got the opposite. Welcome to a trader?s dull, brutish, and short life in 2014.

Throw bad news on the market, and if it fails to go down, you buy the heck out of it. That is a valuable lesson that I have learned over the decades, and I think it applied to the Treasury (TLT) bond market on Friday.

This was not weekend I wanted to go into short of bonds so close to the money. Putin is on a roll and appears to be willing to toss the dice once again. Now, he?s calling for a United Nations Security Council Meeting. Better to talk than shoot, I always say. It?s cheaper. I?ve tried both, and definitely prefer the latter.

If there has been another valuable lesson this year, it has been to keep positions small, and stop out of losers fast. So, as much as I hate to, I pulled the ripcord on my short, taking another nick on my performance this year.

?Markets can remain irrational longer than you can remain liquid,? said the great economist and primordial hedge fund trader, John Maynard Keynes. So true, so true.

The goal here is to maintain iron discipline in risk control and be the last man still standing when trading conditions improve and markets become easy again later this year. Until then, I?ll be engaging in small, short term opportunistic trades. I?ll also be doing a ton of deep research, building short lists of positions to Hoover up when life gets better.

Mind you, yields at these levels make absolutely no sense. They are predicting that deflation is now a permanent aspect of our lives. (To understand how that might be possible, read my interview in tomorrow?s letter with Google engineering director, Ray Kurzweil). Bonds are also shouting at us that we will remain stuck at a subpar 2% economic growth rate for years to come.

The inverse of bad news is also true. If you shower good news on a stock market and it fails to rise, you sell it. This suggests that a big dump in stocks is imminent, which is long overdue.

The markets certainly think this. Take a look at the chart below showing the ?spinning tops? in the S&P 500 in recent days, where shares trade across a wide range, but remain unchanged on the day. So named because the bar looks like a child?s toy, a spinning top suggests indecision among investors and a possible coming selloff. This is what happened in the beginning of March and April, opening the way for drops of 50 and 85 (SPY) handles.

This means that the ?head and shoulders? scenario I talked about a week ago is still on the table (click here for the article ?Watch Out for the Head and Shoulders?). That?s why I quickly knocked out a (SPY) June $193-$196 put spread.

In the meantime the media deluge for the upcoming midterm elections has already started, which are still five months away. Nevada governor Brian Sandoval is basing his entire campaign on his failed attempt to stop Obamacare in the courts. It is a strategy that will be repeated across the Midwest this year.

It sounds like this will be a good summer to stay out of the country. Sell in May and go away?

Going Into Storage

Beware the Spinning Tops

Cashing in on My Shorts

Newsletter

Take the easy money and run. No one every got fired for taking a profit. That?s the mood I was in when I came in and saw my long volatility ETF (VXX) spiking and my short in the S&P 500 (SPY) cratering. I sent out Trade Alerts immediately that took my model-trading portfolio into a rare 100% cash position.

The Volatility Index (VIX) is up a breakneck 35% in a week, while the ETF (VXX) has tacked on 11%. You don?t get such heart palpitating moves like this very often, especially when they are all going in your favor.

It helped that Mad Day Trader Jim Parker, rushed the chart below to me right after the opening showing that the NASDAQ 100, the chief whipping boy in this selloff, is becoming severely oversold and fast approaching a major area of support (the lime green line). Bonds (TLT) are stalling at $110.60, and the ?RISK OFF? move in the Japanese yen (FXY) is approaching the upper limit of its 2014 range.

This all adds up to the possibility that another one of those ?rip your face off? short covering rallies could be near.

The rule in this type of market is to take the quick profits. You especially want to date, and not marry, the (VXX), since the contango over time can cost you your shirt.

Trading on the short side is a totally different animal than traditional long side plays. It is much harder work, as shorts behave totally differently than longs. The movie is on fast forward and you must act quickly.

To be up 15.45% so far in 2014, a down year when most investors are tearing their hair out, and up a meteoric 7.89% in April, is nothing less than heroic. Eight out of my last ten Trade Alerts have been profitable. The email plaudits have already started pouring in. Now all your friends at the country club can hate you, but only if you followed my advice.

Let me tell you what I did right this week, so you can take a page from the playbook of the master.

1) I kept the positions small, so I could sleep at night
2) I did the hard trade, selling when everyone else loved this market
3) I took trading profits quickly
4) I ignored the talking heads on TV so I wouldn?t puke out at the bottom
5) I didn?t take the Princess cruise from San Francisco to Los Angeles, where 50 passengers and 25 crew came down with norovirus. Imagine getting sick before your get to Mexico.

Is it possible that I am improving with age? That I?m becoming a better trader as I get older? That the payoff for a 45-year accumulation of market experience keeps increasing? What a concept!

I don?t think this correction is over. Vladimir Putin can drop a bombshell on the markets at any time. We are going into the traditional May-October ?RISK OFF? seasonal with markets still very near all time highs. The midterm elections in November are introducing a new level of uncertainty. The IPO bubble continues unabated (there are seven today!), and will only end in tears.

And who knows when another cruise ship is going to come down with norovirus?

But nothing moves in a straight line. It?s time to move to the sidelines so I can reload on the short side after the next short covering rally exhausts itself.

As for me, I am going to spend the rest of the day writing checks to the US Treasury to pay taxes for myself, the numerous entities I control, and a gaggle of impoverished relatives. All American tax returns are due on Tuesday.

Then I?m going down to Union Square in San Francisco and buy myself a new Brioni pin stripe suit, another pair of Bruno Magli alligator skin shoes, and have a kir royal at the top of the Mark Hopkins Hotel, thankful for my good fortune that I can pay all these bills.