Featured Trade: (MY YEAREND STOCK MARKET VIEW), (SPY), (QQQ), (PANW), (GILD), (IBB), ?(AAPL), (KBE), (GS), (LEN), (USO), (DIS), (SAN FRANCISCO?S LONG SUFFERING RENTERS ?TAKE ANOTHER HIT)
SPDR S&P 500 ETF Trust (SPY) PowerShares QQQ Trust, Series 1 (QQQ) Palo Alto Networks, Inc. (PANW) Gilead Sciences Inc. (GILD) iShares Trust - iShares Nasdaq Biotechnology ETF (IBB) Apple Inc. (AAPL) SPDR Series Trust - SPDR S&P Bank ETF (KBE) The Goldman Sachs Group, Inc. (GS) Lennar Corporation (LEN) United States Oil Fund LP (USO) The Walt Disney Company (DIS)
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But I think the choppy, volatile, trendless, trading conditions we are all suffering right now will continue for a few more weeks, and possibly all the way out to the September 17-18 Federal Reserve interest rate decision.
Man! I wish I were still back in the Sahara Desert. There, I only had to worry about scorpions, poisonous snakes, heat stroke, and raiding Berber tribesmen.
I can afford to be flippant. I have just enjoyed my best trading summer ever, adding 10% to the value of my trading book since I took off for Europe in June.
This, I did with rickety Internet access, only occasional access to market information, and a six-hour time difference.
My secret? I kept my book small, my cash levels high, and didn?t check prices every 15 minutes.
Above all, I stayed patient, holding back from buying stocks that suddenly became cheap. Apple (AAPL) at $120? Disney (DIS) at $110? Tesla (TSLA) at $250?
Most importantly, whenever I thought about buying energy or commodity plays, I lay down and took a long nap instead. When I woke up, the temptation went away.
That said, we are clearly in a capitulation mode for the entire oil space (USO), and could reach a bottom in weeks, given the current rate of decay (an old nuclear physics term). The $30 handle seems to be begging for attention.
In fact, a bottom in energy could signal a bottom for the entire market, and trigger one of the great generational buys of all time. China, the marginal big buyer of all things energy, hasn?t died; it is just resting.
So back to the stock market.
Since April, I have seen a long sideways triangle unfolding for the S&P 500 (SPY). I think we will reach an apex in September, right around a confluence of several news events (Fed decision, energy bottom).
The initial direction will be down, probably through the 200 day moving average. But that will be a head fake, and the real move will start right after that.
Around then, the calendar will flip from hostile to friendly, as we enter the half year period which sees the greatest amount of stock buying (at least it has for the past 60 years). Also about now, the daily data releases will show a dramatic improvement in the economy.
That presents us with a rally into 2016 and a new all time high.
Sectors? You want to know about sectors? Jeez, you?re a tough crowd to please.
I think we can go back to our old reliables of technology (QQQ), health care (GILD), consumer discretionaries (DIS), cyber security (PANW), and biotech (IBB).
This coming cycle will see some new additions. They include interest sensitives, like banks (GS) and regional banks (KBE), homebuilders (LEN), energy (XOM), (OXY), (COP) and solar (SCTY), (FSLR), if oil doesn?t go to zero.
As for Apple, expect the slumber to continue until the next new product cycle for the iPhone 7 launches next year. In between cycles is never a great time to buy Apple, although we may get a pop going into the Christmas selling season.
For those who have been prudently sitting on their hands all year waiting for a chance to put more long term, non-trading money to work, this is it. Your entry point will open up over the next few weeks.
Let me tell you that I have an unfair advantage in making market calls like this that are bold, confident, and possibly bordering on hubris.
I have the good fortune to live in the San Francisco Bay area. It is like living 10-20 years in the future.
The GDP here is definitely not growing at a feeble 2% annual rate, as it may be for much of the rest of the country (like North Dakota, Oklahoma, and Texas). It is really growing at a 5% rate, and possibly much more.
The technology boom in the City by the Bay is reaching a 1990?s fever pitch. You can?t get restaurant reservations or lease office space. Companies have launched serial poaching of staff with only the most limited experience at eye-popping salaries. Contractors everywhere have turned into prima donnas.
Housing is a joke. A friend of mine managed to score a tiny, rent controlled pre-war studio apartment for $2,000 a month after winning a lottery against 50 other entrants. He had to pay a $100 ?application fee? just to enter the lottery.
Oh, and since this is one of the few dog friendly buildings in the city, the whole place smells like crap and dog hair, as every resident owns a pet. Open the door, and you get a slap in the face.
Yes, I know that the United States is not San Francisco. However, the tools and services they are creating here, at a breakneck pace, can be used by the rest of the world to dramatically improve productivity and profitability. That boosts growth and share valuations everywhere.
By the way, if any of you has a twenty something kid looking for a job and a purpose in life, send them to San Francisco immediately. With any luck, they will be able to gain a foothold and pick up some skills before the next crash occurs.
As for me, I am going to try and maintain discipline and not chase every little gyration of the market.
You can?t take advantage of the coming best buying opportunity in a year if you blew all your money trying to catch the small fry.
I Much Prefer Being Here Than in the Market
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I?m sorry, but I just don?t believe that we will see a weak dollar potentially going into the first interest rate rise in nine years.
If my friend, Janet, pulls the trigger, then the greenback will become the only currency in the world that is raising rates. Currencies just don?t decline in those circumstances.
In that case, we want to go out and sell short the weakest link in the currency milieu, and that is the Japanese yen.
Even if Janet doesn?t move in September, the prospect will hang over then yen like a Damocles sword.
In addition, the yen is bumping up key chart resistance around ?125. A decisive breakout would clear the way towards ?130, my yearend target for the beleaguered Japanese currency.
A short in the yen is a safe, low risk trade right here in a world gone crazy.
?Oh, how I despise the yen, let me count the ways.?
I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.
To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:
* With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials are the greatest driver of foreign exchange rates. * This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets. * Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re not making enough Japanese any more. * The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 280% of GDP, or 140% when you net out inter agency crossholdings, Japan is at the top of the list. * The Japanese long bond market, with a yield of only 0.36%, is a disaster waiting to happen. * You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters.
When the big turn inevitably comes, we?re going to ?130 then ?150, then ?180. That works out to a price of $200 for the (YCS), which last traded at $94.93. But it might take a few years to get there.
If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360.
To me the ?125 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.
It?s All Over For the Yen
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Featured Trade: (CHINA?S FIRECRACKER SURPRISE), ($SSEC), (FXI), (CYB), (EWH), (ALL I WANT TO DO IS RETIRE), (THE TWELVE DAY YEAR)
Shanghai Stock Exchange Compostite Index ($SSEC) iShares Trust - iShares China Large-Cap ETF (FXI) WisdomTree Trust - WisdomTree Chinese Yuan Strategy Fund (CYB) iShares, Inc. - iShares MSCI Hong Kong ETF (EWH)
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Don?t waste your time trying to analyze financial markets right now.
There is only one ticker symbol you need to know about, that for the Shanghai Stock Exchange Composite Index, the ($SSEC).
When Shanghai goes up, the rest of the world?s risk assets happily join the party. When it drops, ?RISK OFF? fever goes pandemic.
China upped the ante this week when it allowed its currency, the Yuan, or the renminbi as it is known locally (the people?s currency), to float freely for the first time in 25 years. That produced a two-day devaluation of 3.6%.
In the very long history of currency debasements, this one was barely a whimper.
Ancient Sumerians used to shave the edges off of gold and silver coins 5,000 years ago.
When President Nixon took the US off of the gold standard in 1973, the dollar eventually fell 75% against the European currencies.
More recently, the Euro has given up 37% against the greenback, moving from a position of grotesque over valuation to dealing with the Greek credit crisis.
So Beijing?s move this week barely tips the needle in the official history of devaluations.
What it does do is create a giant psychological effect, and therein lies the problem.
Since June, the Mandarins in China have been pulling out all the stops to halt a free fall in the country?s share prices.
It has cut interest rates and relaxed reserve requirements. It banned high frequency trading, blaming the collapse on foreign short sellers (sound familiar?). It has even made stock selling illegal in roughly 94% of the country?s free float.
Still, the bears remain emboldened by their recent success.
By cutting the value of the Yuan, the government is providing a modest boost to the economy. A cheaper currency means less expensive exports and more of them, thus, making local businesses more profitable and creating jobs.
But not by much.
There are not a lot of products that live or die on a 3.6% margin. America has not just lost a chunk of its own exports from the additional competition, contrary to the claims of the TV networks and bogus newsletters with which I compete.
But by taking the first such move to undercut the Yuan in 25 years, it is showing the world how serious a problem is the stock crash.
Will the stock collapse feed into the main economy? Is 10% of the world?s GDP going into a Great Recession? Yikes!
SELL, SELL!
There are a few other problems with the Chinese firecracker.
It violates a secret agreement with the US government, made a decade ago, to allow a steady 3-4% a year appreciation of the Yuan against the dollar.
This was designed to slowly eliminate the artificial under valuation of the Yuan that gave the Middle Kingdom an unfair export advantage. The arrangement was responsible for the 20% rise of the Yuan since 2009.
(Sorry Donald, but you?re holding the chart upside down. Yes, I know, stock charts can be pesky things).
Reneging on the deal is ruffling feathers at the US Treasury in Washington. But it won?t amount to more than that, as long as it is temporary.
Which it will be.
China still has a massive trade surplus with the United States. In 2014, it totaled a staggering $343 billion. It maintained that heady pace, totaling $171 billion during the first half of 2015.
There are an awful lot of Chinese clothes, electronics, and toys sitting on the shelves of American retailers.
Its imports are falling, thanks to the collapse of the price of oil and other bulk commodities.
The natural state of the currency of any country running such huge surpluses is for it to rise in value. That will continue in China?s case for the foreseeable future.
Once the waters settle in the stock market, you can count on the Yuan to regain its upward path.
However, this isn?t going to happen in a day. It could be weeks or months until order returns to Chinese equity markets. Until then, expect some scary days there and here as well.
Compound these problems with the uncertainty over the Federal Reserve?s decision on interest rates in September and slower than expected US growth.
It certainly leaves traders and investors alike, with a full plate of issues to consider.
As if we didn?t have enough to worry about.
For some background on my 45 year coverage of the Middle Kingdom, please click here for my 2011 SPECIAL CHINA ISSUE.
Surprise!
https://www.madhedgefundtrader.com/wp-content/uploads/2015/08/China-Firecracker-e1439470828256.jpg272400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-08-13 01:05:262015-08-13 01:05:26China?s Firecracker Surprise
We have an options positions that is deep in the money, and I just want to explain to the newbies how to best maximize their profits.
This comprises:
S&P 500 (SPY) August $214-$217 in-the-money vertical bear put spread with a cost of $2.50.
As long as the (SPY) closes at $214.00 or above on Friday, August 21, the position will expire worth $3.00 and you will achieve the maximum possible profit.
This will worth out to a 20% gain, something you have been able to achieve in only 17 trading days. Better than a poke in the eye with a sharp stick, as they say.
In this case, the expiration 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 the following Monday, and the margin freed up.
Of course, I am watching these positions like a hawk, as always. If an unforeseen geopolitical even causes the (SPY) to take off to the upside once again, such as Janet Yellen announces that there will never be another interest rate hike again.
You should get the Trade Alert in seconds.
If the (SPY) expires slightly out-of-the-money, like at $214.10, then the situation may be a little more complicated, and can become a headache.
On the close, your short put position expires worthless, but your long put position is converted into a large, leveraged outright naked short position in the (SPY) with a cost of $217.50.
This position 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.
This is not what moneymaking is all about.
Professionals caught in this circumstance then buy a number of shares of (SPY) on expiration day equal to the short position they inherit with the expiring $217 put to hedge out their risk.
Then the long (SPY) position is cancelled out by the short (SPY) 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 $214-$217 put spread outright in the market if it looks like this situation may develop and the (SPY) is going to close very close to the $214 strike.
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.
Well Done and On to the Next Trade
?
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While I was away at a car show today, my sell order was filled for my iShares Barclays 20+ Year Treasury Bond Fund (TLT) August, 2015 $125-$128 in-the-money vertical bear put spread at $2.90.
I bought it at $2.62 after your Trade Alert. My profit was $2.89 - 2.62 = 0.27 x 3800 = $1,026.
Mort New Jersey
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Featured Trade: (AUGUST 12 GLOBAL STRATEGY WEBINAR), (MIXING WITH THE 1% AT THE PEBBLE BEACH CONCOURSE D? ELEGANCE)
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