(SPY) Archives

It?s ?RISK ON? Again

?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?

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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.

Will Candy Crush Crush the Market?

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Feed the ducks while they are quacking. That is one of the oldest nostrums heard on Wall Street, and feed them they have, to the point of absolute gluttony.

This year we have seen the market for new initial public offerings for newly listed companies explode to life. There have been 46 so far in 2014, some 26 from the biotechnology area alone. Last Friday, there were an astounding seven in one day. When the demand is there, investment bankers are more than happy to run the printing presses overtime to meet it, creating new stock as fast as they can.

This morning saw the debut of King Digital Entertainment (KING), maker of the kid?s digital game ?Candy Crush?. Much to the chagrin of the bankers and the existing shareholders, the stock immediately traded down -10%. You know that when you see huge, dancing lollypops on the floor of the New York Stock Exchange, it is time to get out of the market, post haste.

It all seems frighteningly familiar, like d?j? vu all over again. The last time things were this hot was in April of 2000. Then, an onslaught of IPO?s put in the top for NASDAQ, igniting the great Dotcom crash. Share prices have yet to recover those heady levels a decade and a half later.

Looking at the quality and quantity of the new companies being floated, with minimal earnings, sky high multiples, and market capitalizations in the tens of billions of dollars, a similar outcome is assured. Wall Street never fails to kill the golden goose. There is no limit on greed.

As a result, the IPO market is threatening to take the main market down with it. The number of short-term indicators that I am seeing roll over and die is nothing less than astounding. At the very least, I think we are in for the kind of 5%-7% correction of the sort that we saw in January and February. I?ll give you two big ones.

The scary tell here is the strength of the bond market (TLT), which just broke out to a new seven-month high. Today?s Treasury five-year bond auction went like a house on fire. Stocks and bonds rarely go up in unison, and bonds usually end up being right.

Another is the elevating bottom in the volatility Index (VIX). During November and December, the (VIX) put in rock solid bottoms at the $12 level. After the January dump, the support rose to $14. This means that investors are now more nervous, willing to pay a premium for downside protection, and intend to unload shares at the first sign of trouble. As much fun as rising bottoms can be, you never want to see them in volatility if you own stocks.

The only question is whether they can hold the market up until Friday, March 28, the month end on Monday, March 31, or the new start to the quarter on Tuesday, April 1.

So how best to participate in the coming debacle? Cut back any leveraged long positions that you have. If you want to keep your stocks for tax or other reasons, then write front month call options against them, known as ?buy writes.?

Use the good days to lay on positions in long dated put options for the S&P 500 (SPY), the NASDAQ (QQQ), and the Russell 2000 (IWM). Long dating heads off the time decay problem, reducing the volatility of your position, and helps preserve capital.

Traders can also buy volatility through the iPath S&P 500 VIX Short Term Futures ETN (VXX), an exchange traded note, which rises when stocks fall.

The set up here for the iPath S&P 500 VIX Short Term Futures ETN (VXX) is a no brainer. If we get the modest weakness that we saw in early March, the (VXX) should rise 10% from current levels to the $48 handle. If we get a January replay, that is worth 20% for the (VXX), potentially boosting it to $55. If we finally get the long overdue 10% correction, the (VXX) should rocket by 30% or more.

If the selloff decides to wait a few more days or weeks you can afford to be patient. Since this is an ETN, and not an option play, a flat lining or rising market isn?t going to cost you much money. The February low in the (VXX) at $42.25 looks pretty safe to me in a rising volatility environment. A revisit would only cost us pennies.

Take your pick, but all paths seam to lead skyward for the (VXX), sooner or later.

The Time to Trade Volatility is Here

Heed the Mad Day Trader?s Q2 Forecasts

Diary, Newsletter

Mad Day Trader, Jim Parker, thinks that the next three to six months will be a tough time for the financial markets. They won?t crash, but won?t break out to new highs either.

Instead, they will stay confined to technically driven, narrow, low volume ranges that will cause traders to tear their hair out. It will be an environment where it will be tough for anyone to make money. The long only crowd will be particularly challenged. Better to take your summer vacation early this year, and make it a long one.

Jim uses a dozen proprietary short-term technical and momentum indicators to generate buy and sell signals, which he has developed over 40 years of trading in the Chicago futures markets. Last year Jim?s Trade Alerts generated returns for followers well into triple digits. He absolutely nailed the performance of every asset class this year in his Q1 Medium Term Outlook (click here for the link at http://madhedgefundradio.com/january-2-2014-mdt-medium-term-outlook-1st-qtr-2014/ . Ignore him at your peril.

Parker has been using NASDAQ (QQQ) as his lead contract for 2014. When it rolled over two weeks ago, it broke momentum across asset classes. Look no further than the biotech area, formerly the hottest in the market. It?s dramatic, sudden reversal, along with the losses seen in other speculative names, like Tesla (TSLA), Netflix (NFLX), and Herbalife (HLF), indicate that the easy money is gone.

The big confirming move for this cautious stance has been in the Treasury bond market (TLT). Its failure to break down has amazed many strategists. Instead of the ten-year bond yield exploding to a 3.05% yield as expected, it ran all the way down to 2.58%. This was the tell that the bull markets days were numbered. Bond prices are now threatening to break to new highs, taking yields to 2.50% or lower.

The other clue to the behavior of this years markets has been the Japanese yen. While the yen was plunging, stocks and other risk assets soared. That came to an abrupt halt on the last trading day of 2013. Notice that since then, the major stock indexes have not been able to hold on to any gains whatsoever.

This is because traders borrow, and then sell the Japanese currency, to fund any new positions. A flat lining yen means that risk taking has ceased, and that?s exactly what we have seen so far in 2014.

It won?t always be this bad. A long period digesting the meteoric gains of the past two and five years could be followed by a bang up fourth quarter, much like we saw in 2013. The key to success will be not to lose all your money before then.

Here is Jim?s Q2 forecast for each major asset class:

Stocks ? The leadership of NASDAQ is dead and buried for now. Don?t go back in until it closes above 3,745 and holds it. The same is true for the S&P 500 (SPX), which must surpass 1,880 to buy.

Bonds ? It?s alright to hold them here (TLT). If we break the years high at $109.60, it could race up to $114. At that point get out, as risk will be high.

Foreign Currencies - $139.50 has got to be the top in the Euro (FXE). As long as the yen (FXY) is comatose, he doesn?t want to touch it. You want to buy the Australia dollar (FXA) on a break above $91.50. Until then, it will remain trapped in an $88.50-$91.50 range.

Commodities ? The fireworks are over for now for oil. We need some digestion of the $15 move from $92 before we can revisit the upside. Hands off, until we break above $101.50. Copper (CU) is at the bottom of an extended range. You would be nuts to go short here, unless of course, we slice through $2.95.

Precious Metals ? Gold (GLD), (GDX) is toast. To see the sell off accelerate when geopolitical risk remains high has to be especially disheartening for the bulls. A retest of the $1,265 low, then $1,180 is in the cards. Unless you went short the barbarous relic the day it peaked last week, avoid.

Agricultural ? Jim called the bottom on this one (DBA), (CORN) at the New Year. Since then, the ags have raced to an intermediate high. The Crimea crisis gave it an added boost. His long side targets for soybeans (SOYB) have all been hit.? Nothing to do here, unless the weather suddenly turns bad.

While the Diary of a Mad Hedge Fund Trader and Global Trading Dispatch focus on investment over a one week to six-month time frame, Mad Day Trader will exploit moneymaking opportunities over a ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. During normal trading conditions, you should receive two to five market updates and Trade Alerts a day.

As with our existing service, you will receive ticker symbols, entry and exit points, targets, stop losses, and regular real time updates. At the end of each day, a separate short-term model portfolio will be posted on the website.

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.

I have been following his alerts for the past five years, and his market timing has become an important part of the ?unfair advantage? that I provide readers.

A trading service with this degree of success and sophistication normally costs $20,000 a year. As a client of The Mad Hedge Fund Trader, you can purchase Mad Day Trader alone for $699 a quarter, or $2,000 a year. Or you can buy it as a package together with Global Trading Dispatch, which we call Mad Hedge Fund Trader PRO, for $4,000 a year, a 20% discount to the full retail price.

To learn more about The Mad Day Trader, please visit my website at http://madhedgefundradio.com/mad-day-trader-service/. To subscribe, please click here.

If you want to get a pro rata upgrade from your existing Newsletter or Global Trading Dispatch subscription to Mad Hedge Fund Trader Pro, which includes Mad Day Trader, just email Nancy in customer support at support@madhedgefundtrader.com.

Ignore Him at Your Peril

Charts to Watch For an End to the Crisis

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Bad China data?.Russia threatens the Ukraine?.more bad China data?.maneuvers at the Russia-Crimea border. The bull has been punched out with a market that was down every day last week, China and Russia both taking turns thrashing investors, like tag team wrestlers. When will it end?

The canaries in the coal mine will be found in the charts below. This is where you will first hear the all-clear signal, when it is safe to return with an aggressive ?RISK ON? posture.

As always, watch the bond market. If the current rally in the (TLT) fails anywhere short of $110, it?s a sign that traders are fleeing the safety of the Treasury bond market and are happy to return to riskier assets, like equities. That equates to a ten year Treasury bond yield of just over 2.50%. A breakout of prices above this, and yields below suggest that more trouble is coming.

Keep close tabs on the Chinese Yuan (CYB). After an unrelenting five-year appreciation, it started a swan dive two weeks ago. That is when a banking crises in the Middle Kingdom started picking up steam. This prompted currency traders to unload Chinese renminbi for more stable dollars. The collapse of copper mirrors this. New signs of life in the Yuan and copper will hint that trouble there is over for now.

The Japanese yen is another big one to monitor. Most hedge funds borrow yen and sell them to finance long positions around the world. This is why the yen has been perennially week for the past two years. But when they dump these positions and hide under their beds, the reverse happens.

They buy back their yen shorts, pushing it up. That?s why the latest round of jitters has the Japanese currency probing four-month highs. If the yen fails here, it?s because investors are going back into the market for other assets.

Of course, the Russian stock market (RSX) is a no brainer to watch. Thanks to the antics of Vladimir Putin, it is down 28% so far in 2014, making it the world?s worst performing market this year. Invading your neighbors and threatening to incite WWIII is not good for your equities. I doubt he cares, but emerging market investors do.

Gold (GLD) is certainly earning its pay as a flight to safety instrument. It has been flying like a bat out of hell all year and is now testing major resistance. If the barbarous relic suddenly loses its luster, the memo will go out to buy paper assets once more.

Finally, keep the chart for the Volatility Index (VIX) planted on the top of your screen. Recent tops have been around the $21 level, only $3 higher than the current level. When cooler heads prevail, the (VIX) will collapse once again. Puts on the (VXX) are the way to play this move.

The interesting thing about these charts is that they are all moving to the extreme edges of multi month ranges. So we could be one more flush away from the end of this move.

That?s unless Russia really does invade Crimea in force. Then all bets are off.

This a Sell Signal

All Asset Class Risk Reversal at Hand

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I believe that we are on the verge of seeing major reversals across all asset classes. Get this one right, and you will make a fortune. Screw it up, and you will soon be looking for your next job on Craig?s List.

I understand that there is a desperate need for code writers in the cloud.

As always, I am taking my cue from the bond market. The great anomaly in the financial markets during February was the big divergence between the stock and bond markets.

While it was off to the races for stocks, the S&P 500 rocketing an impressive 7%, bonds didn?t believe it for a nanosecond.

If you had asked any global strategist a month ago where the ten year Treasury yield would be if the (SPX) posted a new all time high at 1,865, to a man they would have said 3.05%. Instead, bonds closed the week at a parsimonious 2.65%.

Something is desperately wrong with this picture.

If it were just bonds blowing a raspberry at this stock rally, I wouldn?t be so concerned. However, both the Euro (FXE) and the Japanese yen (FXY), (YCS) moved from strength to strength. They should be falling in a real bull market for stocks.

Precious metals have also been calling foul. If shares were the new risk free investment, why did gold pop by 9% last month? Better yet, why is silver up a sparkling 18%?

The gold producers have done even better. When Barrick Gold (ABX) soars by 26% in s single month, you?ve got to be worried about the stock market.

So here?s what happens next. With an assist from the Russian takeover of the Ukraine (wasn?t it so polite of them to wait a full week after the Sochi Olympics ended?), bonds take a run at the highs for prices and the low for yields, in the mid 2.50%?s.

This is why Mad Day Trader, Jim Parker, shot out a quick, opportunistic long play in the (TLT) last week. There, they will fail once again, as we are now in the early stages of a multi decade bear market.

This will prompt stocks (SPX) to give up a third to a half of the recent rally, taking it to the bottom of an ascending channel at 1,800 (see below). Volatility (VXX) will spike from the current $12 handle back up to $20. This is why I bought the (SPY) $189 - $192 bear put spread on Thursday, which expires on March 21.

When the bond rally gives up the ghost, shares will resume their 2014 surge. Avoid emerging markets (EEM), because another dump in the bond market knocks the stuffing out of them one more time.

What will the currencies do? This will be the starting gun for great short plays on the yen, which returns to a ten-year bear market, and the Euro, which is just tweaking a three-year high.

In the meantime, the dollar basket ETF (UUP) launches into a multi month rally after putting in a double bottom. I shouldn?t need to draw lurid drawings for you on how to trade this.

As for gold? Sorry in advance to the hard money crowd, the inflationistas, and conspiracy theorists (who cares if Germany wants its gold reserves back from the Federal Reserve?). I think the 2014 rally in the barbarous relic dies a sudden, horrible death, and goes back to retest the $1,200 low one more time, possibly breaking it.

This scenario opens up great entry points across virtually all of the many asset classes that I track. When it?s time to strap on a position, I?ll shoot out Trade Alerts as fast as the speed of electricity permits (186,000 miles per second, or 300 meters per second in Europe).

Yes, I think we will finally get a real 10% correction in stocks going into the summer. But you better be nimble to trade it. My experience tells me that too many of you are selling at market bottoms, not buying.

I just thought you?d like to know.

Just Thought You?d Like to Know

Why I?m Selling Short the Market

Newsletter

Let me give you my thinking here. I am a long-term bull, expecting the S&P 500 to be up 10% or more to over 2,000 by yearend, and possibly 20,000 by 2030. But yearend is a long time off (even though every year seems to go by faster). We have just had a massive 11 point pop in the (SPY) during my two week trip to Australia. So a period of digestion is called for.

My (BAC) $15-$16 bull call spread is now naked long, so a little bit of downside protection is justified. Keep in mind that this is only a partial hedge, not a full one. But the additional potential profit from this SPDR S&P 500 March, 2014 $189-$192 bear put spread does lower the breakeven price of the (BAC) position by a respectable 46 cents.

The present dynamics of the market favor this trade. All of the action is now in speculative, momentum driven names like Tesla (TSLA), Netflix (NFLX), Facebook (FB), Priceline (PCLN), and Yelp (YELP), which are not even in the (SPY) index. The big leadership names, like financials (XLF) and energy (XLE) are pretty much dead in the water. As long as this is the case, don?t expect any big moves in the (SPY).

And with a short dated March 21 expiration, we only have 15 trading days where we need to be right on this.

As a rule of thumb, don?t chase this spread trade if the price has already moved more than 2% by the time you get the Trade Alert. Just put in a limit order and if it gets done, great. If not, wait for the next Trade Alert. There will be plenty of fish in the sea.

The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the trade to come to you. The middle market is the halfway point between the bid and the offered prices that you see on your screen with your online broker.

The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don?t execute the legs individually or you will end up losing much of your profit. Keep in mind that these are ballpark prices only. Spread pricing can be very volatile especially on expiration months farther out.

Dividend Hike Could Send Bank of America Flying

Newsletter

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 leans, while their cost of funds (deposits and equity) remains low. This rising spread falls straight to the bottom line.

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 rocketed from 3.05% to as high as 2.58%, pummeling bank shares.

What happens next? They go from 2.58% back up to 3.05%, 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, from a penny to five cents. The implications of such a move are broad.

For a start, the company would have to get the permission of the Federal Reserve to do so. If it pulls this off, it is only because of renewed confidence by the government in the improved financial condition of the country. 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.

If (BAC) can get this first dividend hike through, more will follow. To get the dividend yield on the shares up to industry standard of 2.5%, the company really needs to raise its dividend to 40 cents. If 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.

Take a look at the charts below, and it is clear that such a move is setting up. (BAC) is reaching the end of a classic triangle formation, which traditionally resolves itself to the upside. 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.

This is why I popped out the trade alert to buy the (BAC) March $15-$16 call spread on Monday. Thanks to the denial of service attack on our email provider, AWeber Communications, it has taken me until now to get this update out.

It is all another reason to sign up for the Mad Hedge Fund Trader?s text alert service, which readers around the world received within an incredible ten seconds of the original issue of the Trade Alert. I saw it work its magic when I was in Australia, and it is a sight to behold.

Tag Archive for: (SPY)

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It?s Happening Sooner Than You Think

Ignore Him at Your Peril