I love working in the stock market.

Not only can it be entertaining, it can be downright hilarious. All of the talking heads on TV who were ultra bearish on the December 24 Christmas Eve Massacre are now hyper bullish, stumbling over each other trying to buy back the shares they sold 20%-30% lower.

January is turning into a mirror image of December. Last month you never got the rally to sell into. This month you can’t get a decent dip to buy into. The worst December in history was followed by the best January in 30 years with the mere turning of a page of the calendar.

I suspected as much was coming. That’s why I lurched from 10% to 60% invested during the first few days of 2019. All that’s left now is to take profits.

We got a particularly nice 336-point gap up in the Dow Average ($INDU) on Friday with rumors of progress on the China trade talks. However, those who bought on such speculations over the past nine months have all been badly burned.

A few weeks ago, the biggest threat to the market was failure of the China trade talks and a new government shutdown. Now, with prices 3,250 points, or 15% higher, the biggest threat to the market is SUCCESS of the China trade talks and the END of the government shutdown. They could trigger a huge “buy the rumor, sell the news” market move.

And what if stocks rise virtually every day this month as they did during January a year ago? It could get followed by the February we saw last year which served up a horrific selloff.

Like a hot water heater with a corroded safety valve, pressure is building up in the stock market and it is just a matter of time before it explodes. The Volatility Index (VIX) has just halved from $36 to $17. The only question is whether the next big move will be to the upside or the downside.

Don’t get too bullish now. A ton of bad economic news will hit the market in February. China slowdown, European crash, Brexit, what’s not to hate?

Don’t forget that the deadline for the completion of the trade talks is March 1.

Special persecutor Robert Mueller could also drop his report on the market at any time. Just when you think that things can’t get any worse, they do so, in spades.

If nothing gets done, you can expect another Christmas Eve Massacre, except this time it will come nine months early. It could set up the double bottom for the entire correction.

On the other hand, if everything gets resolved all at once, you can count on share prices taking off to the upside and challenge the old highs. And it might all happen on the same day.

We started out the week discovering that  Newmont Mining bought Goldcorp for $10 billion to create the world’s largest gold miner.  That’s important because another classic sign of a long-term bottom for the barbarous relic is when the miners start taking over each other. I’ve seen it all before.

This was the week when economic data ceased to exist unless it comes from private sources. Entering the fifth week of the government shutdown, we are all now flying blind.

US Core Inflation rose only 2.2% YOY, after a miniscule 0.2% gain in December. Don’t count on that pay rise anytime soon. All your company’s money is going to share buybacks instead.

Apple’s Asian suppliers reported terrible numbers. iPhone prices in China were cut. Apple is also cutting back on hiring. Fewer iPhone sales mean fewer people are needed to make them. I think I’ll keep my Apple short position.

PG&E went Bankrupt in order to keep the lights on in the face of $30 billion in potential wildfire liabilities. It’s the second time in 20 years. Thank goodness for my solar panels. Power prices are about to spike up big time and I’m a net supplier to the grid.

Netflix raised prices and the stock soared. Their monthly take is jumping by 13%-18%. (NFLX) shares are now up by 50% since Christmas Eve. The Walking Dead and House of Cards just got more expensive.

Brexit went down in flames with a crushing 432 to 202 loss in the UK parliament, the worst in 100 years. The opposition tabled a vote of no confidence which failed by only ten votes, barely heading off a general election. Next to come is a new referendum on Brexit itself which will go down in flames. Buy the British pound (FXB).

What does the end of Brexit mean for the Global economy? It strengthens Europe, prevents Italy, Greece, Portugal, and France from leaving the European Community, preserves NATO, and stops the Russian hordes from overrunning Western Europe. Croissants will be cheaper in London too. That’s all.

The December Fed Beige Book came in moderate. “Trade war” was mentioned 20 times but “government shutdown" comes out only once. Inflation is low but companies can’t pass price increases on to consumers. Labor shortages are showing up everywhere, but with few wage increases. The auto industry is flatlining.

My January and 2019 year to date return exploded to +5.29%, boosting my trailing one-year return back up to +31.68%. 

My nine-year return climbed up to +306.19%, just short of a new all-time high. The average annualized return revived to +34.00%. 

I took profits on one of my big tech longs in Salesforce (CRM) which maxed out the gains in my options position. I love this stock and will be back in there again on the next dip.

I am keeping my option positions in Microsoft (MSFT) and Amazon (AMZN) to take advantage of the time decay over the four day weekend. I cashed in half of my short position in the bond market (TLT), taking advantage of the recent  4 ½ point decline there.

My long position in the Euro (FXE) survived the failure of Brexit and a no-confidence vote in Britain. It continues to bounce along the bottom.

I also kept my short positions in Apple (AAPL) and the S&P 500 (SPY). Happy days are definitely NOT here again, with a government shut down and a continuing trade war with China. I am now nearly neutral, with “RISK ON” positions “RISK OFF” ones.

We have recently seen a surge of new subscribers and for you I urge patience. In this kind of market the money is made on the “BUY”, so timing is everything. The goal is to make as much money you can, not to see how fast or how often you trade.

The upcoming week is very iffy on the data front because of the government shutdown. Some government data may be delayed and other completely missing. Private sources will continue reporting on schedule. All of the data will be completely skewed for at least the next three months. You can count on the shutdown to dominate all media until it is over.

Housing data will be the big events over the coming four days.

On Monday, January 21, markets are closed for Martin Luther King Day.
 
On Tuesday, January 22, 10:00 AM EST, the December Existing Home Sales are out. IBM (IBM) and Johnson & Johnson (JNJ) announce earnings.

On Wednesday, January 23 at 10:30 AM EST the Energy Information Administration announces oil inventory figures with its Petroleum Status Report. Lam Research (LRCX) and Procter & Gamble (PG) report.

Thursday, January 24 at 8:30 AM EST, we get Weekly Jobless Claims. At 10:00 AM, we learn December Leading Economic Indicators. Intel (INTC) and American Airlines (AA) report.

On Friday, January 25, at 10:00 AM EST, the latest read of December New Home Sales is released. The Baker-Hughes Rig Count follows at 1:00 PM. Schlumberger (SLB) announces earnings. Home Sales is released. AbbVie Inc (ABBV) and DR Horton (DHI) report.

As for me, I will be battling my way home from Lake Tahoe which received seven feet of snow last week. It was a real “snowmageddon.”

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

During the Christmas Eve Massacre, a close friend sent me a research report he had just received entitled “30 Reasons Equities Will Fall in 2019.” It was laughable in its extreme negativity.

I thought this is it. This is the bottom. ALL of the bad news was there in the market. Stocks could only go up from here.

If I’d had WIFI at 12,000 feet on the ski slopes and if I’d thought you would be there to read them, I would have started shooting out Trade Alerts to followers right then and there. As it turned out, I had to wait a couple of days.

Two weeks later, and here I am basking in the glow of the hottest start to a new year in a decade, up 6.45%. So far in 2019, I am running a success rate of 100% ON MY TRADE ALERTS!

Don’t expect that to continue, but it is nice while it lasts.

I can clearly see how the year is going to play out from here. First of all, my Five Surprises of 2019 will play out during the first half of the year. In case you missed them, here they are.

*The government shutdown ends quickly

*The Chinese trade war ends

*The House makes no moves to impeach the president, focusing on domestic issues instead

*Britain votes to rejoin Europe

*The Mueller investigation concludes that Trump has an unpaid parking ticket in Queens from 1974 and that’s it.

*All of the above are HUGELY risk-positive and will trigger a MONSTER STOCK RALLY.

After that, the Fed will regain its confidence, raise interest rates two more times, and trigger a crash even worse than the one we just saw. We end up down on the year.

My long-held forecast that the bear market will start on May 10, 2019 at 4:00 PM EST is looking better than ever. However, I might be off by an hour. Those last hour algo-driven selloffs can be pretty vicious.

I make all of these predictions firmly with the knowledge that the biggest factors affecting stock prices and the economy are totally unpredictable, random, and could change at any time.

It was certainly an eventful week.

Fed governor Jay Powell essentially flipped from hawk to dove in a heartbeat, prompting a frenetic rally that spilled over into last week.

On the same day, China cut bank reserve requirements, instantly injecting $200 billion worth of stimulus into the economy. That’s the equivalent of spending $400 billion in the US. The last time they did this we saw a huge rally in stocks. It turns out that the Middle Kingdom has a far healthier balance sheet than the US.

Saudi Arabia chopped oil production by 500,000 barrels a day, sending prices soaring. It's not too late to get into what could be a 40% bottom to top rally to $62 (USO).

Macy's (M) disappointed, crushing all of retail with it, and taking down an overbought main market as well. It highlights an accelerating shift from brick and mortar to online, from analog to digital, and from old to new. Online sales in December grew 20% YOY. Will Amazon sponsor those wonderful Thanksgiving Day parades?

Home mortgage rates hit a nine-month low with the conventional 30-year fixed rate loan now wholesaling at an eye-popping 4.4%. Will it be enough to reignite the real estate market? It is actually a pretty decent time to start picking up investment properties with a long view.

My 2019 year to date return recovered to +6.45%, boosting my trailing one-year return back up to 31.68%. 2018 closed out at a respectable +23.67%.

My nine-year return nudged up to +307.35, just short of a new all-time high. The average annualized return revived to +33.90. 

I analyzed my Q4 performance on the chart below. While the (SPY) cratered -19.5% in three short months, my Trade Alert Service hung in with only a -4.9% loss. The quarter was all about defense, defense, defense. It was the hardest quarter I ever worked.

While everything failed last year, everything has proven a success this year. I came back from vacation a week early to pile everyone into big tech longs in Salesforce (CRM), Microsoft (MSFT), and Amazon (AMZN). I doubled up my short position in the bond market.

I even added a long position in the Euro (FXE) for the first time in years. If Britain votes to stay in Europe, it is going to go ballistic.

I also top ticketed a near-record rally by laying out a few short positions in Apple (AAPL) and the S&P 500 (SPY). I am now neutral, with “RISK ON” positions “RISK OFF” ones.

The upcoming week is very iffy on the data front because of the government shutdown. Some data may be delayed and other completely missing. All of the data will be completely skewed for at least the next three months. You can count on the shutdown to dominate all media until it is over.

On Monday, January 14 Citigroup (C) announces earnings.

On Tuesday, January 15, 8:30 AM EST, the December Producer Price Index is out. Delta Airlines (DAL), JP Morgan Chase (JPM), and Wells Fargo (WFC) announce earnings.

On Wednesday, January 16 at 8:30 AM EST, we learn December Retail Sales. Alcoa (AA) and Goldman Sachs (GS) announce earnings.
 
At 10:30 AM EST the Energy Information Administration announces oil inventory figures with its Petroleum Status Report. 

Thursday, January 17 at 8:30 AM EST, we get the usual Weekly Jobless Claims. At the same time, December Housing Starts are published. Netflix (NFLX) announces earnings.

On Friday, January 18, at 9:15 AM EST, December Industrial Production is out. The Baker-Hughes Rig Count follows at 1:00 PM. Schlumberger (SLB) announces earnings.

As for me, my girls have joined the Boy Scouts which has been renamed “Scouts.” Their goal is to become the first female Eagle Scouts.

So, I will retrieve my worn and dog-eared 1962 Boy Scout Manual and refresh myself with the ins and outs of square knots, taut line hitches, sheepshanks, and bowlines. Some pages are missing as they were used to start fires 55 years ago. I am already signed up to lead a 50-mile hike at Philmont in New Mexico next summer.

As for the Girl Scouts, they are suing the Boy Scouts to get the girls back, claiming that the BSA is infringing on its trademark, engaging in unfair competition, and causing “an extraordinary level of confusion among the public.” 

Is there a merit badge for “Frivolous Lawsuits”?

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader