Posts

The Mad Hedge Dictionary of Trading Slang

The Diary of a Mad Hedge Fund Trader is read in 140 counties. About a quarter of our readers run the letter through Google Translate before reading.

That has created a problem.

Stock trading is probably the most slang- and acronym-ridden profession on the planet, second only to the United States Marine Corps. (Semper Fi).

And guess what? Google Translate has never worked on the floor of a major stock exchange.

That means its translations often come out as gobbledygook or complete nonsense. So, the customers email me asking what the heck I am talking about in my daily newsletters, eating up a portion of my day.

I am therefore enclosing The Mad Hedge Fund Trader’s Dictionary of Traders’ Slang” below.

To keep this a PG-rated publication, I have left some terms undefined, but you can make a good guess as to their true meaning. It turns out that most traders never went to finishing school, and many are not even gentlemen.

If any of you out there have additional terms you would like to add, please email them to me at support@madhedgefundtrader.com and put “DICTIONARY” in the subject line. I’ll use them in a future update. No doubt there are hundreds, if not thousands more.

Read, enjoy, and laugh.

Accelerated Time Decay: The increasing decline of the value of a stock option as it approaches its expiration date

Black Swan: A term made popular by Nassim Taleb that refers to a sudden, unexpected low probability event that has a disproportionately high impact on your portfolio

Boredom Trading: Reaching for marginally profitable trades during quiet markets because there is nothing else to do. Usually a bad idea.

Bottoming Process: When a market makes several failed attempts to make new lows, creating a medium-term bottom

Blow off Top: The top of a price spike upward usually associated with a volume spike as well

Bubble: Any assets class rising in price far above and beyond any rational valuation measures

Buy the Dip: BTD/BTFD/BTMFD – Buy the recent decline in prices.

Don’t Catch a Falling Knife: Don’t try and buy a stock in free fall

Don’t be a Hero: Keep positions small during volatile markets

“Be greedy when others are fearful, and fearful when others are greedy” is a classic Benjamin Graham quote which means “buy bottoms and sell top.”

Pigs Get Slaughtered: Buy a position that is too big for you and it will turn around and bite you

Bull Trap: A strong market move up that sucks in buyers and then dies as soon as the last one is in

Bear Trap: A strong market move down that sucks in lots of short sellers and turns around as soon as the last one sells

Buy When There is Blood in the Streets: Buy stocks at market bottoms

Capitulation Bottom: The last bull throws in the towel, gives up, and dumps all his stock, making the final bottom of a major move

Capitulation Top: The last bear throws in the towel, gives up, and jumps into the market late, making the final top of a major move

Choppy: Sudden and erratic price moves within a narrow range

Contrarian: One who trades against the general market consensus

Dead Cat Bounce: A brief rally in a stock that has just seen a sharp drop

Dialing for Dollars: Calling brokerage house customers to sell stocks for commissions

Don’t fight the Fed: Don’t expect markets to fall when interest rates are falling

Don’t Fight the Tape: Don’t trade against the market trend. Come for the paper ticker tapes that once transmitted stock prices by telegraph.

Dry Powder: Keeping cash in reserve for better trading opportunities

Dumb Money: What inexperienced retail investors are doing. Thanks to the Internet, they’re not as dumb as they used to be.

Get Filled: Your order is executed

The Greeks: Greek alphabet letters that refer to option valuation components, such as delta, theta, gamma, and vega

High-Frequency Traders (HFT): Firms using sophisticated computer programs to take positions for infinitesimally short periods of time taking microscopic profits in enormous volumes. They account for roughly 70% of the daily trading volume.

Holding the Bag: You are left holding stock in a falling market or short in a rising one

Honor Your Stops: Don’t make excuses for ignoring stop losses. This is where the really big hits come from.

Killing It: Making a series of successful trades

Locked Market: When the bid and offer are identical

Market Makers: Firms that provide market liquidity with two-sided bids and offers, now largely replaced by computers

Melt Up: A straight line move upward in shares with no pullbacks whatsoever, usually triggered by a news or earnings release

Momo: Momentum-based trading, buying rising markets and selling falling ones

Never Short a Dull Market: Quiet markets can often rally sharply because the selling is done

Noise: Random media reporting that has no true impact on the direction of stock prices

Pain Trade: The market is moving against the positions of the trading community

Permabear: A persona who is always bearish, usually driven by some bizarre, Armageddon-type ideology, or suffering from paranoia

Permabull: A person who is always bullish, despite deteriorating fundamental conditions

Picking Up Pennies in Front of a Steamroller: Sell short naked put options

Pump and Dump: Unethical brokers’ run of the prices of small illiquid stocks and then sell them to clients at market tops. The shares usually collapse afterward. See the movie The Wolf of Wall Street.

Resistance Level: A price on a stock chart offering technical resistance to further price appreciation

Sell in May and Go Away: The preference for selling shares ahead of a period of seasonal weakness

Sell the Rip: STR/STFR/STMFR

Short Squeeze: A sharp run-up in share prices that forces short seller to buy to avoid accelerating losses

Smart Money: What the best informed, most experienced investors are doing. Not as smart as they used to be.

Snakebit: A surprise news development that comes out of the blue and costs you money

Spoofing: Entering orders without any intention of executing them and canceling them before they can be executed. It is a common tactic of high-frequency traders.

Spoos: S&P 500 futures contracts

Squawk Box: A small loudspeaker on a desktop in a trading room constantly broadcasting news reports and large trades

Support Level: A price on a stock chart offering significant technical support

Stop Loss: A price at which when reached, a liquidation of the position is automatically triggered

The Trend is Your Friend: Trade with the market direction, not against it

Theta Burn: Time decay on options

Ticker Tape: A white 3/4-inch-wide paper tape used to transmit stock prices by telegraph at the rate of 500 characters a minute that was used until the 1950s to transmit stock prices. See ticker tape parade and delayed tape.

Topping Process: Occurs when a market makes several failed attempts to make a new high, creating a medium-term top

Turnaround Tuesday: The tendency of markets to reverse direction after the markets digest weekend news on a Monday

Yellen Put: An assumption that the Fed will come to the rescue with a monetary easing on any substantial market sell-off

 

Short Selling School 101

With the markets recently incredibly volatile, and now that we are solidly into the high risk, low return time of the year, I thought it’s time to review how to make money when prices are falling.

There is nothing worse than closing the barn door after the horses have bolted.

No doubt, you will receive a wealth of short selling and hedging ideas from your other research sources and the media right at the next market bottom.

That is always how it seems to play out.

So I am going to get you out ahead of the curve, putting you through a refresher course on how to best trade falling markets now while stock prices are still rich.

Markets could be down 10% by the time this is all over.

THAT IS MY LINE IN THE SAND!

There is nothing worse than fumbling around in the dark looking for the matches and candles after a storm has knocked the power out.

I’m not saying that you should sell short the market right here. But there will come a time when you will need to do so. Watch my Trade Alerts for the best market timing. So here are the best ways to profit from declining stock prices, broken down by security type:

Bear ETFs

Of course, the granddaddy of them all is the ProShares Short S&P 500 Fund (SH), a non-leveraged bear ETF that is supposed to match the fall in the S&P 500 point for point on the downside. Hence, a 10% decline in the (SPY) is supposed to generate a 10% gain in the (SH).

In actual practice, it doesn’t work out like that. The ITF has to pay management operating fees and expenses which can be substantial. After all, nobody works for free.

There is also the “cost of carry” whereby owners have to pay the price for borrowing and selling short shares. They are also liable for paying the quarterly dividends for the shares they have borrowed, around 2% a year. And then you have to pay the commissions and spread for buying the ETF.

Still, individuals can protect themselves from downside exposure in their core portfolios through buying the (SH) against it (click here for the prospectus). Short selling is not cheap. But it’s better than watching your gains of the past seven years go up in smoke.

Virtually, all equity indexes now have bear ETFs. Some of the favorites include the (PSQ), a short play on the NASDAQ (click here for the prospectus), and the (DOG) which profits from a plunging Dow Average (click here for the prospectus).

My favorite is the (RWM), a short play on the Russell 2000 which falls 1.5X faster than the big cap indexes in bear markets (click here for the prospectus).

Leveraged Bear ETFs

My favorite is the ProShares Ultra Short S&P 500 (SDS), a 2X leveraged ETF (click here for the prospectus). A 10% decline in the (SPY) generates a 20% profit, maybe.

Keep in mind that by shorting double the market, you are liable for double the cost of shorting which can total 5% a year or more. This shows up over time in the tracking error against the underlying index. Therefore, you should date, not marry this ETF, or you might be disappointed.

 

 

3X Leveraged Bear ETF

The 3X bear ETFs, like the UltraPro Short S&P 500 (SPXU), are to be avoided like the plague (click here for the prospectus).

First, you have to be pretty good to cover the 8% cost of carry embedded in this fund. They also reset the amount of index they are short at the end of each day, creating an enormous tracking error.

Eventually, they all go to zero and have to be periodically redenominated to keep from doing so. Dealing spreads can be very wide, further added to costs.

Yes, I know the charts can be tempting. Leave these for the professional hedge fund intraday traders for which they are meant.

Buying Put Options

For a small amount of capital, you can buy a ton of downside protection.  For example, some time ago, I bought (SPY) $182 puts for $4,872 allowed me to sell short $145,600 worth of large-cap stocks at $182 (8 X 100 X $6.09).

Go for distant maturities out several months to minimize time decay and damp down daily price volatility. Your market timing better be good with these because when the market goes against you, put options can go poof and disappear pretty quickly.

That’s why you read this newsletter.

Selling Call Options

One of the lowest risk ways to coin it in a market heading south is to engage in “buy writes.” This involves selling short call options against stocks you already own but may not want to sell for tax or other reasons.

If the market goes sideways, or falls, and the options expire worthless, then the average cost of your shares is effectively lowered. If the shares rise substantially, they get called away but at a higher price so you make more money. Then you just buy them back on the next dip. It is a win-win-win.

 

 

Selling Futures

This is what the pros do as futures contracts trade on countless exchanges around the world for every conceivable stock index or commodity. It is easy to hedge out all of the risk for an entire portfolio of shares by simply selling short futures contracts for a stock index.

For example, let’s say you have a portfolio of predominantly large-cap stocks worth $100,000. If you sell short 1 June 2019 contract for the S&P 500 against it, you will eliminate most of the potential losses for your portfolio in a falling market.

The margin requirement for one contract is only $5,000. However, if you are short the futures and the market rises, then you have a big problem and the losses can prove ruinous.

But most individuals are not set up to trade futures. The educational, financial, and disclosure requirements are beyond mom-and-pop investing for their retirement fund.

Most 401Ks and IRAs don’t permit the inclusion of futures contracts. Only 25% of the readers of this letter trade the futures market. Regulators do whatever they can to keep the uninitiated and untrained away from this instrument.

That said, get the futures markets right, and it is the quickest way to make a fortune, if your market direction is correct.

Buying Volatility

Volatility (VIX) is a mathematical construct derived from how much the S&P 500 moves over the next 30 days. You can gain exposure to it through buying the iPath S&P 500 VIX Short-Term Futures ETN (VXX) or buying call and put options on the (VIX) itself.

If markets fall, volatility rises, and if markets rise, then volatility falls. You can therefore protect a stock portfolio from losses through buying the (VIX).

I have written endlessly about the (VIX) and its implications over the years. For my latest in-depth piece with all the bells and whistles, please read “Buy Flood Insurance With the (VIX)” by clicking here.

 

 

 

Selling Short IPOs

Another way to make money in a down market is to sell short recent initial public offerings. These tend to go down much faster than the main market. That’s because many are held by hot hands known as “flippers” and don’t have a broad institutional shareholder base.

Many of the recent ones don’t make money and are based on an, as yet, unproven business model. These are the ones that take the biggest hits.

Individual IPO stocks can be tough to follow to sell short. But one ETF has done the heavy lifting for you. This is the Renaissance IPO ETF (click here for the prospectus). As you can tell from the chart below, (IPO) was warning that trouble was headed our way since the beginning of March. So far, a 6% drop in the main indexes has generated a 20% fall in (IPO).

 

 

Buying Momentum

This is another mathematical creation based on the number of rising days over falling days. Rising markets bring increasing momentum while falling markets produce falling momentum.

So, selling short momentum produces additional protection during the early stages of a bear market. Blackrock has issued a tailor-made ETF to capture just this kind of move through its iShares MSCI Momentum Factor ETF (MTUM). To learn more, please read the prospectus by clicking here.


Buying Beta

Beta, or the magnitude of share price movements, also declines in down markets. So, selling short beta provides yet another form of indirect insurance. The PowerShares S&P 500 High Beta Portfolio ETF (SPHB) is another niche product that captures this relationship.

The Index is compiled, maintained and calculated by Standard & Poor’s and consists of the 100 stocks from the (SPX) with the highest sensitivity to market movements, or beta, over the past 12 months.

The Fund and the Index are rebalanced and reconstituted quarterly in February, May, August, and November. To learn more, read the prospectus by clicking here.
 

 

Buying Bearish Hedge Funds

Another subsector that does well in plunging markets is publicly listed bearish hedge funds. There are a couple of these that are publicly listed and have already started to move.

One is the Advisor Shares Active Bear ETF (HDGE) (click here for the prospectus). Keep in mind that this is an actively managed fund, not an index or mathematical relationship, so the volatility could be large.

 

Oops, Forgot to Hedge

Why You Missed the Technology Boom and What to Do About It Now

I often review the portfolios of new subscribers looking for fundamental flaws in their investment approach and it is not unusual for me to find some real disasters.

The Armageddon scenario was quite popular a decade ago. You know, the philosophy that said that the Dow ($INDU) was plunging to 3,000, the U.S. government would default on its debt (TLT), and gold (GLD) was rocketing to $50,000 an ounce.

Those who stuck with the deeply flawed analysis that justified those conclusions saw their retirement funds turn to ashes.

Traditional value investors also fell into a trap. By focusing only on stocks with bargain basement earnings multiples, low price to book values, and high visible cash flows, they shut themselves out of technology stocks, far and away the fastest growing sector of the economy.

If they are lucky they picked up shares in Apple a few years ago when the earnings multiple was still down at 10. But even the Giant of Cupertino hasn’t been that cheap for years.

And here is the problem. Tech stocks defy analysis because traditional valuation measures don’t apply to them.

Let’s start with the easiest metric of all, that of sales. How do you measure the value of sales when a company gives away most of its services for free?

Take Google (GOOGL) for example. I bet you all use it. How many of you have actually paid money to Google to use its search function? I would venture none. What would you pay Google for search if you had to? What is it worth to you to have an instant global search function? Probably at least $100 a year. With 70% of the global search market comprising 2 billion users that means $140 billion of potential Google revenues are invisible.

Yes, the company makes a chunk of this back by charging advertisers access to these search users, generating some $26.26 billion in revenues and $3.2 billion in net income in the most recent quarter. It would have been an $8.2 billion profit without the outrageous $5 billion fine from the European Community.

But much of the increased value of this company is passed on to shareholders not through rising profits or dividend payments but through an ever-rising share price. If you’re looking for dividends, Google doesn’t exist. It is also very convenient that unrealized capital gains are tax free until the shares are sold.

I’ll tell you another valuation measure that investors have completely missed, that of community. The most successful companies don’t have just customers who buy stuff, they have a community of members actively participating in a common vision, which is then monetized. There are countless communities out there now making fortunes, you just have to know how to spot them.

Facebook (FB) has created the largest community of people who are willing to share personal information. This permits the creation of affinity groups centered around specific interests, from your local kids’ school activities, to municipality emergency alerts, to your preferred political party.

This creates a gigantic network effect that increases the value of Facebook. Each person who joins (FB) makes it worth more, raising the value of the shares, even though they haven’t paid it a penny. Again, it’s advertisers who are footing your tab.

Tesla (TSLA) has 400,000 customers willing to lend it $400 billion for free in the form of deposits on future car purchases because they also share in the vision of a carbon free economy. When you add together the costs of initial purchase, fuel, and maintenance savings, a new Tesla Model 3 is now cheaper than a conventional gasoline powered car over its entire life.

REI, a privately held company, actively cultivates buyers of outdoor equipment, teaches them how to use it, then organizes trips. It will then pursue you to the ends of the earth with seasonal discount sales. Whole Foods (WFC), now owned by Amazon (AMZN), does the same in the healthy eating field.

If you spend a lot of your free time in these two stores, as I do, the United States is composed entirely of healthy, athletic, good-looking, and long-lived people.

There is another company you know well that has grown mightily thanks to the community effect. That would be the Diary of a Mad Hedge Fund Trader, one of the fastest-growing online financial services firms of the past decade. We have succeeded not because we are good at selling newsletters, but because we have built a global community of like-minded investors with a common shared vision around the world, that of making money through astute trading and investment.

We produce a daily research service covering global financial markets, such as Global Trading Dispatch and the Mad Hedge Technology Letter. We teach you how to monetize this information with our books such as Stocks to Buy for the Coming Roaring Twenties and the Mad Hedge Options Training Course.

We then urge you to action with our Trade Alerts. If you want more hands-on support, you can upgrade to the Concierge Service. You can also meet me in person to discuss your personal portfolios at my Global Strategy Luncheons.

The luncheons are great because long-term Mad Hedge veterans trade notes on how best to use the service and inform me on where to make improvements. It’s a blast.

The letter is self-correcting. When we make a mistake, readers let us know in 60 seconds and we can shoot out a correction immediately. The services evolve on a daily basis.

It all comes together to enable customers to make 50% to 60% a year on their retirement funds. And guess what? The more money they make, the more products and services they buy from me. This is why I have so many followers who have been with me for a decade or more. And some of my best ideas come from my own subscribers.

So, if you missed technology now what should you do about it? Recognize what the new game is and get involved. Microsoft (MSFT) with the fastest-growing cloud business offers good value here. Amazon looks like it will hit my $2,000 target early. You want to be buying graphics card and A.I. company NVIDIA (NVDA) on every 10% dip.

You can buy the breakouts now to get involved, or patiently wait until the 10% sell-off that usually follows blowout quarterly earnings.

My guess is that tech stocks still have to double in value before their market capitalization of 26% matches their 50% share of U.S. profits. And the technologies are ever hyper-accelerating. That leaves a lot of upside even for the new entrants.

 

 

 

 

 

May I Show You to Your Table?

Cyber Security is Only Just Getting Started

It looks like the cyber security sector is about to take off like a rocket once again. There could be another 25%-50% in it this year.

The near destruction of Sony (SNE) by North Korean hackers last November has certainly put the fear of God into corporate America. Apparently, they have no sense of humor whatsoever north of the 38th parallel.

As a result, there is a generational upgrade in cyber security underway, with many potential targets boosting spending by multiples.

It?s not often that I get a stock recommendation from an army general. That is exactly what happened the other day when I was speaking to a three star about the long-term implications of the Iran peace deal.

He argued persuasively that the world will probably never again see large-scale armies fielded by major industrial nations. Wars of the future will be fought online, as they have been, silently and invisibly, over the past 15 years.

All of those trillions of dollars spent on big ticket, heavy metal weapons systems are pure pork designed by politicians to buy voters in marginal swing states.

The money would be far better spent where it is most needed, on the cyber warfare front. Needless to say, my friend shall remain anonymous.

The problem is that when wars become cheaper, you fight more of them, as is the case with online combat.

You probably don?t know this, but during the Bush administration, the Chinese military downloaded the entire contents of the Pentagon?s mainframe computers at least seven times.

This was a neat trick because these computers were in stand alone, siloed, electromagnetically shielded facilities not connected to the Internet in any way.

In the process, they obtained the designs of all of out most advanced weapons systems, including our best nukes. What have they done with this top-secret information?

Absolutely nothing.

Like many in senior levels of the US military, the Chinese have concluded that these weapons are a useless waste of valuable resources. Far better value for money are more hackers, coders and servers, which the Chinese have pursued with a vengeance.

You have seen this in the substantial tightening up of the Chinese Internet through the deployment of the Great Firewall, which blocks local access to most foreign websites.

Try sending an email to someone in the middle Kingdom with a gmail address. It is almost impossible. This is why Google (GOOG) closed their offices there years ago.

I know about these things because several Chinese readers are complaining that they are unable to open my Trade Alerts, or access their foreign online brokerage accounts.

As a member of the Joint Chiefs of Staff recently told me, ?The greatest threat to national defense is wasting money on national defense.?

Although my brass-hatted friend didn?t mention the company by name, the implication is that I need to go out and buy Palo Alto Networks (PANW) right now.

Palo Alto Networks, Inc. is an American network security company based in Santa Clara, California just across the water from my Bay Area office. The company?s core products are advanced firewalls designed to provide network security, visibility and granular control of network activity based on application, user, and content identification.

Palo Alto Networks competes in the unified threat management and network security industry against Cisco (CSCO), FireEye (FEYE), Fortinet (FTNT), Check Point (CHKP), Juniper Networks (JNPR), and Cyberoam, among others.

The really interesting thing about this industry is that there are no real losers. That?s because companies are taking a layered approach to cyber security, parceling out contracts to many of the leading firms at once, looking to hedge their bets.

To say that top management has no idea what these products really do would be a huge understatement. Therefore, they buy all of them.

This makes a basket approach to the industry more feasible than usual. You can do this through buying the $435 million capitalized PureFunds ISE Cyber Security ETF (HACK), which boasts Cyberark Software (CYBR), Infoblox (BLOX) and FireEye (FEYE) as its three largest positions. (HACK) has been a hedge fund favorite since the Sony attack.

For more information about (HACK), please click here: http://www.pureetfs.com/etfs/hack.html.

And don?t forget to change your password.

PANW
FEYE
HACK

 

Hacker

 

PANW2