?I don?t know where the next 1,000 points is coming from, but I know where the next 10,000 points is coming from,? said Sir John Templeton, when he was playing chess with me at his home at Lyford Cay in the Bahamas many years ago.
Given the failure of the ?RISK OFF? trade to develop any serious downside momentum this week, I am using the dip this morning to take a small profit on my S&P 500 ETF (SPY) puts.
We had every reason to go down, given the Standard and Poor?s threatened European debt downgrade on Monday night. If this despised and deeply flawed ratings agency had made this announcement in September or October it would have been worth at least ten (SPY) points to the downside.
But they didn?t announce it then, they announced it now, and in the post Armageddon world this gets you only a modest two point dip. It?s an old trader?s adage that if you throw bad news on a market and it doesn?t go down, then you buy it. The risks have just risen that the Santa Claus rally continues for a few more weeks. Plus, if I can duck a major headline risk this weekend and still keep some change in my pocket, like the European ministers meeting, I am going to take it.
As it is way too late to buy, this means cover your shorts. This is doubly true for options holders who have a heavy price to pay in time decay and falling volatility over the holidays.
On top of this, we are looking at retail holiday sales that are coming in better than expected and a seasonal liquidity push to year end. Although consumers are depressed about the outlook for the economy in 2012, they are apparently dealing with their sorrows through buying a big screen TV, an Apple iPad, an Xbox 360, or a Snuggie.
There is another factor at work here. Any hedge fund manager who has had a great 2011 tends to step out of the market now and go flat. This locks in their gains until their 20% performance bonuses are paid out in January. Any profits in hand now get paid out in cash in 30 days. With a 42% year to date return, I certainly fall into that category.
My profit on this trade came to (9 contracts X 100 X $.32) = $288. For the model $100,000 virtual portfolio this adds 29 basis points to the total return. It?s better than a poke in the eye than a sharp stock, and will afford me some silver eagles to toss in the Salvation Army pot next time I go to the mall.
For those who wish to participate in my Trade Alert Service, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put ?Trade Alert Service? in the subject line, as we are getting buried in emails.
I am pulling the plug on my short position in the Euro here, selling my Euro ETF (FXE) January, 2012 $134 puts at cost.
It?s not that I have suddenly fallen in love with the beer drinkers and the garlic eaters. This is an option driven decision. With market volatility falling across all asset classes, the short dated options are eroding away faster than the underlying is moving in my favor.
Time decay is also taking its toll, accelerating into the January 19, 2012 expiration. This continues even while the markets are closed over the holidays. In fact, Christmas and New Years are the best time of the year to run a volatility short. So while I managed to catch a two cent move down in the (FXE) since I added this position on November 18, the options are trading at my cost. There is nothing worse than being right and not getting rewarded for it. All work and no pay makes the Mad Hedge Fund Trader an irritable boy.
On my last four trade alerts the options quickly rose substantially, only to give back all the profits within days. That happened with Jeffries (JEF), the Euro (FXE), silver (SLV), and the S&P 500 (SPY). The time frame that markets allow traders to make money has suddenly shortened. The lesson here is to take the money and run.
By going neutral on the Euro here, I now have dry powder to sell it again on the next short lived ?feel good? rally to $1.3550 or higher. The headline risk going into this weekend is also large. I can roll into the next strike in February to partially sidestep the holiday time decay. With the (FXE) bang in the middle of its recent $1.3180-$1.3550 range, this is no time to let positions grow hair on them.
Live on the fight another day.
?Europe is in the terminal phase of its life,? said David Murrin of Emergent Asset Management.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
Take a look at the charts below, and you will see what prompted me to knock out some shorts on the S&P 500 (SPY) on Friday. The longer the current trading range in the index works, the more traders pile into it, confining it to an ever narrowing range.
I am even hearing that fundamental managers who normally shun charts and technical analysis as a pagan religion are starting to track such alien indicators as Bollinger bands, relative strength indicators, and stochastics. The 200 day average presents such formidable upside resistance that it will take spectacularly good news to close substantially above it on big volume. A little bit of ?kiss and make up? in Europe just isn?t going to cut it, especially when they continue to bad mouth each other among their close friends in private.
Since I am such an inveterate seeker of cross market correlations, I always like to refer to the Volatility Index before taking decisive action on a trade. And guess what? Just as stocks are bumping up against resistance, the (VIX) is bouncing along support at its 200 day moving average. This further reinforces my belief that the indexes are ripe to give back a chunk of their recent gains.
Watch your news service headlines. This contest will ultimately be determined by what does, or does not happen in Europe. And once again, thank you Standard and Poor?s for another belated downgrade of European debt!
Yes! Technical Analysis Can Work!
I heard the magic words today from German chancellor Angela Merkel and French president Nicolas Sarkozy: ?treaty changes?. That will be the gist of their joint proposal at the European summit this coming Friday to deal with the sovereign debt crisis.
To me, this means that the two besieged leaders are finally biting the bullet and laying the groundwork for the sweeping changes needed to solve their formidable financial challenges.
The plan will implement greater budget discipline with automatic sanctions for budget busters like Greece, who exceed the 3% of GDP deficit guidelines. Expect the European Financial Stability Council (EFSF) to move into action next year to help keep Greece in the monetary union.
You can also expect the European Central Bank to launch some fireworks this week. Among them will be:
1) ECB president Mario Draghi will cut interest rates by 25-50 basis points.
2) The ECB will relax collateral rules for borrowing banks.
3) It could also increase sovereign debt purchases of paper from the weaker countries, like Italy and Spain, from last week?s feeble $3.5 billion to as much as $20 billion a week.
The bottom line here is to expect a lot of ?feel good? news flashes in coming days, which could cause the Euro to edge back up to the top of its current trading range at $1.3550.
But don?t hold your breath for any panaceas. The European treaty includes 27 members, with 17 employing the Euro as a common currency, and all have to agree to any changes. Substantial modifications will require national referendums. On top of that, Sarkozy is still blocking pan Eurobonds advocated by Merkel, which is the only supra national fund raising mechanism that can possibly work.
The reality here is that Germany is imposing austerity and fiscal discipline on the rest of Europe, and non-Germans may not necessarily like it. So the next wave of optimism is likely to once again bear the bitter fruit of disappointment, taking the beleaguered European currency down to $1.29 in Q1, 2012.
For those of you who have followed my advice to sell short the euro, there is an 800 pound gorilla in the room to deal with. The trading community is now short over 100,000 contracts in the futures market, an all-time high, matching the peak seen in the spring of last year, when the Euro just fell short of $1.60. The risk of a snap back rally going into the coming European love fest is high.
I have noticed that in recent weeks, the market is allowing the nimble ever smaller profits from their quick in and out trades. This may be a function of the declining volatility going into the holidays and the year end. So those with itchy trigger fingers may want to take profits sooner than they usually might and celebrate Christmas early. The value of dry powder is rising.
A One Night Stand or a Long Term Relationship?
?Bull markets don?t die, they are killed by central bankers,? said JJ Burns of JJ Burns & Co., an investment advisor.
Last week marked the one year anniversary of my Trade Alert Service, and subscribers could not be happier with the results. The first year return came in at 42.2%, putting us in the top one tenth of one percent of all hedge fund managers. By comparison, the S&P 500 Index came in wheezing with a moribund 1.3% gain during the same time period, which is hardly worth getting out of bed for.
It was off to the races on day one of my innovative online trade mentoring program. The strategies employed generated positive returns for my model portfolio all year, producing a continuous, stair stepping performance illustrated on the chart below that so many managers would kill for. I was able to generate this track record during one of the most volatile and difficult markets in history, when the indexes ratcheted up, down, and sideways in the most unpredictable and hair tearing manner possible. At the high for the year in early November, I was up over 47%.
My home run trade for the year was a short position in the Swiss franc (FXF) in September, initiated just before the central bank devalued their currency and pegged it to a collapsing Euro, which brought in a welcome 9.07%. A call spread in Bank of America (BAC) that I strapped on right after the launch of QE2 and last year?s tax compromise made me 8.93%. A short position in the Euro (FXE) during the spring, right when the sovereign debt crisis exploded, seized a profit of 5.14%. I caught the Euro once again on the short side in the autumn melt down for another 5.35% profit.
It hasn?t all been fun and games. The bane of my existence in 2011 has been the (TBT), an ill-considered bet that long dated Treasury bonds will fall. While I made good money betting on rising bonds in the first half of the year, my failure to observe my own stop loss rules cost me 6.93% in the (TBT) in the second half. The Federal Reserve?s ?twist? policy certainly didn?t help, which my contacts there failed to warn me of in advance, probably because they opposed it. I also lost 4.96% with a long position in the S&P 500 right when the market was topping in July. Wasn?t it Shakespeare that said ?To err is human.?
For those who wish to participate in my Trade Alert Service, my highly innovative and successful online mentoring program, email John Thomas directly at madhedgefundtrader@yahoo.com . Please put ?Trade Alert Service? in the subject line, as we are getting buried in emails. Hurry up, because our software limits the number of subscribers, and we are running out of places.
What a Year It?s Been!
The November nonfarm payroll came in at 120,000, better than the consensus. The unemployment rate plunged an eye popping 0.5% to 8.6%, the lowest level in 32 months and one of the sharpest contractions on record.
Some 140,000 private jobs were added, bringing the 32 month total to an even 3 million, an impressive feat given the arthritic pace of the growth in the US economy. Governments lost 20,000 jobs, a continuation of what I will believe will be a decade long trend of a shrinking public sector at the federal, state, and municipal levels.
Hiring by retailers was up 50,000, clearly gearing up for the Christmas season. Professional and business services gained 33,000 jobs, leisure and hospitality 23,000, and health care 17,000. As usual, construction led the losers, dropping 12,000 jobs.
There are now 13.3 million unemployed, down an amazing 594,000 from the previous month, with 5.7 million jobless for 6 months or longer. The numbers were boosted by a 300,000 drop in the job force as many simply gave up looking for work, thus artificially skewing the headline unemployment rate to the downside. The broader U-6 number shrank from 16.2 million to 15.6 million, putting the true unemployment rate at 10.1%.
The real news was hidden behind the headlines. The shocker here is that September and October were revised up for a total of 72,000, providing further proof that the September stock market swoon was discounting a double dip recession that was never there. Such is the value of tracking the raw economic data and ignoring the blabbering talking heads on TV who appear to sift all news through a political filter. It seems that when the job figures are bad, they believe them, and when they are good, they are rigged.
For some real insight on the long term trends driving the global economy, take a look at the chart below showing ?Percent Job Losses in Post WWII Recessions?.? It demonstrates that the current employment recovery is lagging past ones by about 5%. That works out to 7.5 million jobs. These were the jobs that were exported to China over the past decade and are never coming back, no matter how many promises are made by our political and business leaders.
The bottom line here is that you should expect our unemployment to remain structurally high for at least another decade, as it did in Germany during the eighties and nineties. After that, we will flip from a surplus to a shortage of workers as more favorable demographic trends finally start to kick in. So work those assumptions into your long term forecasting models.
