(TLT) Archives - Page 98 of 102 - Mad Hedge Fund Trader

She Speaks!

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.

The Case for Buying Financials

Newsletter, Research

Regular readers of this letter are probably weary of me harping away about the financials as a great place to put your money for the rest of 2014.

Never mind that these names have all jumped 10% in the past month. But this is not an ?I told you so? story. This is more of a ?But wait, there?s more,? story.

The basis for my call is quite simple. I believe that bond prices are peaking, and yields bottoming. As mining the yield curve is a major source of bank profits, borrowing short term and lending long term, a rise in interest rates falls straight to the bottom line. Thus, buying banks is an indirect way of selling short the bond market.

However, there are many more reasons to overweight this long neglected sector. In a market that has gone virtually straight up for the past three years, many large institutions are going to be forced to roll money out of leaders, like my favored technology, energy and health care, into laggards, such as the financials.

Expect this trend to accelerate as we head into yearend institutional book closing, which start as early as October 30.

Look at other important drivers of bank profits, and you?ll find them at multi decade lows.

Trading and investment banking volumes are off 30%-40% from mean historic levels. We options traders already know this all too well, as turnover has cratered and spreads widened due to investor lack of interest.

This is especially true of put options, which are now being given away virtually for free. Volatility that seems to permanently live at the $12 handle is another such indicator of this disinterest.

This will not last. If my ?Golden Age? scenario plays out in the 2020?s (click here for ?Get Ready for the Coming Golden Age?), trading and investment banking volumes will not only double to return to the norms, they will skyrocket tenfold from today?s tedious, moribund levels.

Indeed, I have recently discovered an entire subculture of financial oriented private equity firms currently amassing portfolios that are betting on precisely such an outcome. Think of big, smart, long-term money. The big bets on the coming decade are being made now.

There is another ripple in the case for banks. After passage of the Financial Stability Act of 2010, otherwise known as ?Dodd Frank?, banks became target numero uno of the federal government. The public?s demand for accountability for the 2008-09 crash knew no bounds.

As a result, the fines and settlements with the big banks, most of which were rescued from bankruptcy by the government, now well exceed $100 billion. Four years into the enforcement onslaught, the Feds are running out of scandals to prosecute. There is nothing left for the banks to plead guilty to.

This means that a major portion of the banks? costs are about to disappear, not only new massive fines, but hundreds of millions of dollars in legal fees and diverted management time as well. More money drops to the bottom line.

Dramatically rising income? Substantially falling costs? Sounds like ?Ka-ching? to me, and a ?BUY? for the bank stocks.

The bottom line is that bank stock could double from here in coming years. It is not hard to pick names. Bank of America (BAC) took the big hit on fines and settlements, and therefore should enjoy the largest bounce.

So should Citigroup (C), which came the closest to vaporizing. And for good measure, I?ll throw in American Express (AXP) as a play on the burgeoning credit card spending by the growing class of well to do.

Barney Frank Had a Few Things to Say

The Euro Breaks Down

Newsletter, Research

You usually don?t expect US housing data to cause the collapse of a foreign currency. But that is exactly what happened this morning.

The announcement by the Census Bureau that new home stats for July came in at a breathtaking 1.09 million, up 15.7%, blew away even the optimistic forecasts. Earlier figures for June were revised up substantially.

New building permits for July came in at a robust 1.1 million. Perma bears on the housing market were sent scampering to lick their wounds.

The real shocker was that the Euro promptly dropped 50 basis points, piercing a major support level on the long term charts. The short Euro ETF (EUO), which I have been recommending since the spring for my non-option clients skyrocketed. That clears the way for a run in the (FXE) down to $127.

The (FXE) wasn?t the only asset that saw a kneejerk reaction. The Treasury bond market (TLT) dove by 1 ? points. It is now 2 ? points off the short squeeze high last Friday, when false rumors of a Russian invasion of the Ukraine caused traders to panic. This sent the ProShares Ultra Short 20+ Year Treasury ETF (TBT) soaring, which I am also long.

You can come up with a nice academic theory as to why there is a connection between American housing data and the beleaguered continental currency. Stronger housing means a better economy and higher dollar interest rates, sooner.

As interest rates differentials are the primary driver of foreign exchange markets, this is great news for the greenback and terrible news for the Euro.

The truth is a little more complicated than that. The outlook for the European economy is now so poor, thanks to the sanctions against Russia, that traders and investors have been desperate to add to their short positions. After the prolonged, one-way move down we saw this summer, the Euro managed barely a one-cent short covering rally in the past week.

There is another factor that no one else is talking about. Scotland is about to hold a referendum on whether it should break away from the United Kingdom. Scottish nationalists are hoping for the best.

If successful, it could spur other independence movements across Europe. Catalonia is having a similar vote to break away from Spain in November, with some separatists avid followers of this letter (yes, that?s you, Joan!). The Basque region is not far behind. If this trend ripples across the continent, it would be hugely Euro negative.

The European Central Bank is almost certain to lower Euro interest rates and expand quantitative easing at a September or October meeting. This will weaken the Euro further, paving the way for a move to $127, and eventually $120.

That?s why I am doubling my shorts in the (FXE) today, even though we are at the low for the year. Non-options players should buy more of the ProShares Ultra Short Euro ETF (EUO).

The Euro is Not Looking So Hot

Bonds or Stocks: Who?s Right?

Newsletter, Research

Treasury bonds spike to new one year highs, closing at a 2.40% yield, and trading as low as a 2.30% yield in the overnight market at one point last week. Clearly, serious deflation is continuing for the indefinite future.

Buy more bonds!

US corporate profits are at all time highs, just closing one of the strongest reporting periods in history. What?s more, the outlook they painted for the rest of the year is rosy. With dividend yields for many shares in excess of interest rates paid by government bonds, the bull market is alive and well.

Buy more stocks!

Stocks! Bonds! Stocks! Bonds! Which group of talking heads is right? The stock bulls or the bond bulls?

Yikes! What is a poor money manager to do?

Here is the certain answer to your plaintive question: They are both right.

So how does one deal with this dilemma? It?s easy. You buy everything, both stocks and bonds. That has been the judgment of the markets, which have sent both bonds and stocks flying in tandem for most of 2014.

How is this possible? Doesn?t this violate Economics 101? Should I take my copies of Paul Samuelson and Graham & Dodd and sell them on Ebay?

Not really.

Here is the explanation for it all. The world is now facing a cash glut unprecedented in history. There is so much money chasing everything these days, it is truly unbelievable for those of us rather long in the tooth. Prices can only go northward, whatever they are for.

Take a look at the U.S. government?s accounts, and you get a partial explanation. Over the past four years, the budget deficit has nearly vaporized, from a stratospheric $1.6 trillion to only $600 billion. Next year, $300 billion is in the cards.

This has caused the Treasury to massively cut back on new issuance. In fact, some recent government bond auctions have faced an outright shortage of bonds, prompting bid prices to spike.

The incredible thing is that this has been happening in the face of the Federal Reserve?s winding down of quantitative easing. By October, it will have removed $80 billion a month in bond buying to zero. Imagine how low rates would be by now if my friend, Fed governor Janet Yellen, had kept it going.

This is why virtually everyone in the world got the bond market wrong this year, calling for a swan dive, except for bond maven and hedge fund guru, Jeffrey Gundlach. I include myself in this category of errant prognosticators.

However, I still have a chance to be right. I expect bonds to give up all of their gains going into yearend, ending dead unchanged on the year with 10 year Treasuries showing a 3.0% yield. Improving US growth prospects is the reason.

In my New Year forecast (click here for my ?2014 Annual Asset Review?)
I expected bonds to be weak, but not fall below a 3.50% yield. I was in a small minority of strategists who called for such a small decline in Treasuries. If I am right, and yields retrace to 3.0%, I will only be 50 basis points off my target, which is better than most.

But that is not to say that 10-year yields won?t first spike to 2.25% first, which happens to be Gundlach?s personal target.

I am a guy who puts his money where his mouth is, who eats his own cooking, and wears his opinions on his sleeve. So, I have been shorting bonds for all of this year.

But my trading approach is so forgiving, using price spikes to buy out of the money-put-spreads, that my followers have had more than adequate room to get profitably in and out.

Every single trade was either a winner, or broke even, except for one, adding an eye popping 10.61% to my 28% profit for 2014. It has been my most profitable trade this year.

While I have been dead wrong with the trend, I have been erring so slowly that we were able to coin it almost every month. Such is the forgiveness of the options spread strategy.

Physicists like ?unified theories? that explain everything, be they the movement of single electrons around nuclei, or galaxies in the universe. Here is a nice unified theory of everything for your investments: technology is curing all.

Hyper accelerating technology means that the price of things is falling faster than anyone believes. That means inflation stays at bay forever, which is great for bonds.

Technology is also reducing the cost, and even the need for labor by business. That is also disinflationary, and helps generate ever rising corporate profits, which is wonderful for stocks.

It all sounds like a ?buy stocks and bonds? explanation to me.

It reinforces the ?Golden Age? scenario for the 2020?s that I have been harping about all year, when the last impediment for growth, demographics, shifts from a headwind to a tailwind. That is when risk assets really go ballistic.

Maybe Google?s Ray Kurzweil is right? (click here for ?Peeking into the Future with Ray Kurzweil).

A Note on the Friday Options Expiration

Diary, Free Research, Newsletter

We have a couple of options positions that expire on Friday, and I just want to explain to the newbies how to best maximize their profits.

These include:

iShares Barclay 20+ Year Treasury Bond Fund (TLT) August, 2014 $115-$118 in-the-money bear put spread with a cost of $2.70

iShares Barclay 20+ Year Treasury Bond Fund (TLT) August, 2014 $117-$120 in-the-money bear put spread with a cost of $2.61

As long as the iShares Barclay 20+ Year Treasury Bond Fund (TLT) closes at $115.00 or below on Friday, you will achieve the maximum profit in both these positions. Today, the (TLT) closed at $114.76, so, so far, so good.

Both positions expire with a value of $3.00, giving you a profit of 11.1% on the $115-$118 put spread and 13% on the $117-$120 put spread.

In this case, the process is very simple. You take your left hand, grab your right wrist, pull it behind your neck and pat yourself on the back for a job well done.

Your broker (are they still called that?) will automatically use the long put to cover the short put, cancelling out the positions. The profit will be credited to your account on Monday, and he margin freed up.

Of course, I am watching this position like a hawk. If an unforeseen geopolitical event causes the (TLT) to take off to the upside once again, such as if Russia invades the Ukraine in the next two days, I will quickly STOP OUT for a small loss. You should get the text alert in seconds.

Those who were able to put both spreads on will probably still make money overall, as the expiration breakeven point for the pair has been boosted to $115.69.

If the (TLT) expires slightly in the money, like at $115.05, or $115.10, then the situation may be a little more complicated, and can become a headache.

On the close, your short position expires worthless, but your long put position is converted into an outright naked short position in the (TLT) with a cost of $118.

This you do not want on pain of death, as the potential risk is huge and unlimited, and your broker probably would not allow it unless you put up a ton of new margin.

Professionals caught in this circumstance then buy a number of shares of (TLT) equal to the short position they inherit with the expiring $118 put. Then the short (TLT) position is cancelled out by the long (TLT) position, and on Monday both disappear from your statement. However, this can be dicey to execute going into the close.

So for individuals, I would recommend just selling the $115-$118 put spread in the market if it looks like this situation may develop and the (TLT) is going to close very close to $115.00.

Keep in mind, also, that the liquidity in the options market disappears, and the spreads widen, when a security has only hours, or minutes until expiration. This is known in the trade as the ?expiration risk.?

One way or the other, I?m sure you?ll do OK, as long as I am looking over your shoulder, as I will be.

Well done, and on to the next trade.

What Do You Think? Will the (TLT) Close Over or under $115?

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

Why I?m Selling Short Treasury Bonds

Newsletter

This has really been one of those incredible, jaw dropping, knock your socks off kind of years. It seems like every asset class is doing exactly the opposite of what it should do.

A slowing economy delivered a huge move up in bonds, which is fine. The extent of the damage the harsh winter wrought on the economy was confirmed this morning, with a full one-point drop in Q1 GDP. But does this mean that stocks should go to all time highs as well?

Look at the volatility index, (VIX) (VXX), which is also sitting at multiyear lows. You would expect it to rise as we go into a traditional ?RISK OFF? season. It does truly seem that this time it?s different.

That is, until they are not different anymore. I believe that after five months of markets that are unpredictable, extraordinary, and difficult to trade, they are about to become predictable, ordinary, and easier to trade.

What does that mean for you and me? Buy stocks and sell bonds. We are about to shift from a reach for yield world to one where investors are reaching for capital gains. There isn?t much yield to reach for anyway.

We?ve just had a four point run in the latest leg up in the incredible bull market in bonds. So I am strapping on here the iShares Barclay 20+ Year Treasury Bond Fund (TLT) July, 2014 $118-$121 in-the-money bear put spread (see yesterday?s Trade Alert).

We could be in for some month end profit taking. The upper $118 strike works out to a ten year Treasury bond yield of 2.27%. The breakeven point in yield terms goes all the way down to 2.24%.

As long as yields stay above that by the July 18 expiration, we will keep the entire profit on this trade, a gain of some 1.76% for your total portfolio. Better yet, get a three point dip anywhere along the way, and we will immediately reap 75% of the potential profit, as we did with our last (TLT) bear put spread.

Sounds like a no brainer to me.

I think this week flushed out a lot of the hotter short-term money from the market in the humongous short squeeze that I warned you was coming. Positioning is now flatter. It is now time to digest.

Mad Day Trader Jim Parker also thinks we could be in for a major trend reversal with next week?s Friday nonfarm payroll report. Bonds rallied on the last six consecutive reports. This time they may disappoint, as bond prices are at such nosebleed levels. We could be setting up for a big ?buy the rumor, sell the news? move here in bonds.

In the meantime, the (TLT) could rise as much as a point higher to $116. That still gives me plenty of breathing room with this new position, which has a breakeven point at $118.45. That sounds like a pretty good bet, now that we are headed into the slower summer months.

For us to lose money on this trade, the world would have to end first, at which point we won?t care about our trading books.

For those who don?t have options coursing through their veins, please buy the ProShares UltraShort 20+ Year Treasury ETF (TBT), a 2X short Treasury bond fund.

As for stocks, it is looking like we are just completing a five month long ?time? correction. The ?price? correction never extended beyond 6%. We are about to enter nine months of increasingly positive economic data, as most of the growth lost in Q1 gets rolled forward to Q2, Q3, and Q4. That should take the S&P 500 (SPX) up to 2,100 by year-end.

In the meantime, the Mad Hedge Fund Trader?s Trade Alert service is now up 15.3% on the year, and is inches from a new all time high. Watch this space.

It?s Really Been One of Those Kinds of Years

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.