Well, so much for the 200 day moving average! It?s like that girlfriend who has been ferociously loyal for the last year, and suddenly she is busy every weekend and never returns phone calls.
Not that this ever happens to me. Ahem.
I knew there would be trouble when the perma bulls on TV told me the market would bounce hard off this inviolable line in the sand, with the (SPX) at 1,905. I cut my bullish equity positions by two thirds on the first market rally and never looked back.
For proof that you still make beginner mistakes after 45 years in the business, take a look at how I handled my Tesla (TSLA) position last week. Elon Musk teased us all with his ?D? tweet two weeks ago, and the stock levitated magically while all other momentum stocks were being mercilessly thrown overboard.
?Women and traders? first comes to mind.
Did I sell into the rumor and capture the 80 basis point profit I had in hand? Nope. I held on until yesterday morning and bailed after a $40 plunge in the stock, taking a 1.62% hit.
This happened while the rest of Texas was coming down with Ebola Virus. I fall victim to the bout of over confidence whenever my Trade Alert success rate exceeds 90%, as it recently has done. I start to believe my own research, always a fatal flaw.
Fortunately, I?m still running double shorts in the S&P 500 (SPY) and the Russell 2000 (IWM) to hedge these losses. The ?Hedge? in ?Mad Hedge Fund Trader? is a well-earned one, I assure you.
You would think I would get hate mail for making such a stupid mistake. Au contraire! Readers thanked me for pulling the plug so quickly and with all humility. It appears that when most other newsletters put out a bad call they develop a sudden case of amnesia, leaving their customers to thrash about in bloody, shark-invested waters on their own.
Not here!
So, should we be burning up the Internet trunk lines with frenzied clicks to unload our long-term stock portfolios?
I think not. Here are ten reasons why I believe the bull market in shares is still alive and well:
1) Stocks are selling at only 14 X 2015 earnings, in the middle of the historic range.
2) The $23 plunge in oil prices we have enjoyed over the last five months amounts to a gigantic tax cut for the world economy, and could add a full 1% to US GDP growth, which has essentially come out of nowhere. Saudi Arabia told us today that this could go on for another year. Remember, it is our oil that is crushing prices.
3) The Christmas selling seasons is setting up to be a strong one, thanks to a friendly calendar and renewed consumer confidence. This is why retailers and credit card companies like American Express (AXP) have been reviving.
4) The November 4 midterm elections are still a big unknown for the market to discount. The next day could signal the beginning of the yearend bull market.
5) I think we are seeing the final blow off top in the bond market. A reversal would be very stock friendly, especially for financials (BAC).
6) Mergers and acquisitions are continuing at a torrid pace. This is happening because companies see each other as cheap, not expensive, and usually happens at market bottoms.
7) Those who aren?t merging are buying their own stock back with both hands, like Apple, at a staggering $400 billion annualized rate.
8) Volatility spikes (VIX) also signal market bottoms (see chart below). We are nearing another top with the closely followed indicator closing at $24.64 today, a high for the past two years.
9) Capital spending is accelerating, not only in technology, but across most other industries as well. This is why the IMF boosted its growth forecast for America next year to 3.8%, and that is probably a low number.
10) Ever heard of ?Sell in May and Go Away?? Well, ?Buy in November and stay put? is also true. That is only weeks away. October is usually the worst month of the year to sell and is not the path to untold riches.
The big question now is how much additional pain we have to suffer before the promised turnaround occurs.
My colleague, Mad Day Trader Jim Parker, went over his screens with a fine tooth comb and came up with $1,846 and $1,810 for the (SPX). Similarly, NASDAQ could trade down to the $3,700-$3,800 range.
My personal favorite is on the calendar, the Midterm elections on November 4. Whatever the outcome, we could see an upside explosion that lasts for six months, once thus unknown disappears. Not only could this make your year in 2014, but 2015 as well.
And I already know who is going to win! It is gridlock, whether the Democrats control one House of congress, or none!
https://www.madhedgefundtrader.com/wp-content/uploads/2014/03/John-Thoms-Black-Swans-e1413901799656.jpg337400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-10-14 09:48:062014-10-14 09:48:0610 Reasons Why the Bull Market is Still Alive
It looks we are going to have to start watching the appalling Zombie shows on TV and in the movies. That is so we can gain tips on how to survive the coming Apocalypse that will unfold when the Ebola virus escapes Texas and spreads nationally.
I?m not worried. I?m actually pretty good with a bow and arrow.
Thank you United Airlines!
I happy to report that the total return for my followers so far in 2014 has topped 35%, compared to a pitiful 1% gain for the Dow Average during the same period.
In September, my paid Trade Alert followers have posted a blockbuster 5.01% in gains. This is on the heels of a red-hot August, when readers took in a blistering 5.86% profit.
The nearly four year return is now at an amazing 157.8%, compared to a far more modest increase for the Dow Average during the same period of only 37%.
That brings my averaged annualized return up to 39.7%. Not bad in this zero interest rate world. It appears better to reach for capital gains than the paltry yields out there.
This has been the profit since my groundbreaking trade mentoring service was first launched in 2010. Thousands of followers now earn a full time living solely from my Trade Alerts, a development of which I am immensely proud.
It has been pedal to the metal on the short side for me since the Alibaba IPO debuted on September 19. I have seen this time and again over four decades of trading.
Wall Street gets so greedy, and takes out so much money for itself, there is nothing left for the rest of us poor traders and investors. They literally kill the goose that lays the golden egg. Share prices have nowhere left to go but downward.
Add to that Apple?s iPhone 6 launch on September 8 and the market had nothing left to look for. The end result has been the worst trading conditions in two years. However, my double short positions in the S&P 500 (SPY) and the Russell 2000 (IWM) provided the lifeboat I needed.
The one long stock position I did have, in Tesla (TSLA), is profitable, thanks to a constant drip, drip of leaks about the imminent release of the Model X SUV. The Internet is also burgeoning with rumors concerning details about the $40,000 next generation Tesla 3, which will enable the company to take over the world, at least the automotive part.
Finally, after spending two months touring dreary economic prospects on the Continent, I doubled up my short positions in the Euro (FXE), (EUO).
Those positions came home big time when the European Central Bank adopted my view and implanted an aggressive program of quantitative easing and interest rate cuts. Hint: we are now only one week into five more years of Euro QE!
The only position I have currently bedeviling me is a premature short in the Treasury bond market in the form of the ProShares Ultra Short 20+ Treasury ETF (TBT). Still, I only have a 40 basis point hickey there.
Against seven remaining profitable positions, I?ll take that all day long. And I plan to double up on the (TBT) when the timing is ripe.
Quite a few followers were able to move fast enough to cash in on the move. To read the plaudits yourself, please go to my testimonials page by clicking here. They are all real, and new ones come in almost every day.
Watch this space, because the crack team at Mad Hedge Fund Trader has more new products and services cooking in the oven. You?ll hear about them as soon as they are out of beta testing.
The coming year promises to deliver a harvest of new trading opportunities. The big driver will be a global synchronized recovery that promises to drive markets into the stratosphere by the end of 2014.
Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011, 14.87% in 2012, and 67.45% in 2013.
Our flagship product,?Mad Hedge Fund Trader PRO, costs $4,500 a year. ?It includes?Global Trading Dispatch?(my trade alert service and daily newsletter). You get a real-time trading portfolio, an enormous research database, and live biweekly strategy webinars. You also get Jim Parker?s?Mad Day Trader?service and?The Opening Bell with Jim Parker.
To subscribe, please go to my website at?www.madhedgefundtrader.com, click on ?Memberships? located on the second tier of tabs.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/John-Thomas4.jpg325331Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-10-03 01:05:282014-10-03 01:05:28Mad Hedge Fund Trader Tops 30% Gain in 2014
I don?t double up short positions very often. I am too old to lose all my money and go back to work as an entry-level analyst at Morgan Stanley. Besides, they probably wouldn?t have me back anyway. It is a different company than it was 30 years ago, a lot different.
However, the dead cat, short covering bounce we got off this morning?s Hong Kong dump does allow me to get back into the short side of the (SPY) one more time.
We managed to gain 20 (SPX) points, or 2 entire (SPY) handles from the Monday morning capitulation, puke on your shoes low. Except this time, we are a weekend closer to expiration, only 14 trading days until October 15.
And waiting all the way until Friday for the September nonfarm payroll buys us a free week.
Does anyone really care what?s going on in Hong Kong, China, or anywhere else in the world, for that matter? Not really. It appears only day traders do, and those of us who have family members there, like me.
The beginning of October is usually the scariest two weeks of the year. So a bet that the (SPY) doesn?t blast up to new all time highs during this period looks like a pretty good idea.
Buying the S&P 500 (SPY) October, 2014 $202-$205 vertical in-the-money bear put spread with the volatility index (VIX) just short of the $17 handle, the highest print in six months, is also getting us the best short term spread prices this year. It?s almost like the good old days.
If the prospect of executing this trade causes the hair on the back of your neck to stand up, take a look at the charts below.
The Russell 2000 (IWM) broke through to a new low this morning, proving that a solid, three-month downtrend in the small caps is still alive and well.
The chart looks even worse for the iShares iBoxx High Yield Corporate Bond ETF (HYG), which has become a very important lead security for traders to keep a laser like focus on.
NASDAQ (QQQ) and the Dow Jones Average ($INDU) are sitting bang on crucial support lines. Alibaba is still sucking all the oxygen out of the technology sector, with major institutions selling everything else to take instant 5% stakes in the new issue. This is great news for the sector for the long term, but not so great for the short term.
Finally, I asked my ace Mad Day Trader, Jim Parker, his thoughtful take here. He believes that short term, markets are oversold and due for a rallyette. He wouldn?t be shorting stocks here with My money! But is the (SPY) going to a new all time high in 14 trading days? Absolutely no way!
There is another factor to consider here. We have recently clocked substantial profits with our short positions in the Euro (FXE) and the Russell 2000 (IWM).
So we can afford the luxury of getting aggressive here when everyone else is running and hiding. We are essentially now playing with the house?s money. The only question is whether we will next post a larger gain, or a smaller one. That is a position of strength, and a great place to trade from.
So I think the net net of all of this is that best case, the risk markets all keep trending downward, worse case, they flat line sideways, at least for the next 14 trading days. Either way, it is a win-win for me. That makes the S&P 500 (SPY) October, 2014 $202-$205 in-the-money bear put spread a winner in my book.
You can buy this spread anywhere in a $2.60-$2.75 range and have a reasonable expectation of making money on this trade.
This is a rare instance where there is no outright stock or ETF equivalent to this trade. If you sell short the stock market here, such as through purchasing the ProShares Ultra Short S&P 500 ETF (SDS), we could rally all the way up to, but just short of the all time high, and you would get your head handed to you.
If this happens with the S&P 500 (SPY) October, 2014 $202-$205 in-the-money bear put spread, you make your maximum profit of 1.30% of your total portfolio. This is why I play in the options market. So non options players are better to stand aside on this trade and just watch it for educational purposes.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/09/Market-Floor-e1411743381455.jpg265400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-09-30 01:04:502014-09-30 01:04:50Why I?m Doubling Up My Shorts
It now appears that the ?Alibaba? correction (BABA) is at hand.
I warned you, pleaded with you, and begged you about this yesterday, and on May 8 (click here for ?Will Alibaba Blow Up the Market?).
The longer the company postponed the mother of all IPO?s, the higher the prices flew, until we finally got a print at the absolute apex of the market. Now, it?s time to pay the piper.
The development is part of a broader move out of riskier, higher beta stocks into safe, large caps that has been underway for several weeks now. Those traders who are ahead want to protect their years. Those who aren?t are screwed anyway, so don?t bother returning their phone calls.
Look no further than my favorite, Tesla (TSLA), which topped out on September 3, along with the rest of the MoMo high technology, biotechnology and Internet names.
Still love the cars, though.
The (IWM) has really been sucking hind teat all year, falling by 3% year to date compared to an 8% gain in the S&P 500.
Yesterday, the sushi really hit the fan when the 50-day moving average pierced the 200-day moving average for the first time since August, 2011. Known as a much dreaded ?death cross,? this is the technical equivalent of slitting both wrists and thrashing about in shark-invested waters, heralding more declines to come.
Let me list the reasons why this is the sector traders love to hate when markets move from ?RISK ON? to ?RISK OFF?:
*Since small companies borrow more than large companies, they are far more sensitive to rising interest rates. Guess what? Rates have been rocketing this month.
*Since small companies are more leveraged (indebted) than big ones, they are more sensitive to a slowing economy.
*Small companies don?t have the international diversification of their bigger brethren, and therefore have less of a financial cushion to fall back on.
*The (IWM) has roughly 1.5 times the volatility of the S&P 500, making a short position here fantastic downside protection for a broader based portfolio of stocks. So you get a lot of selling here, as managers try to lock in performance for fiscal years that start ending as early as October 31.
*Did I mention that the stock market is at one of its most overbought levels in history, the worst since 1928? Bearish sentiment is at only 13%, the lowest since 1987. These are more reason to sell, as if you needed any.
My readers have made tons of money over the years playing the (IWM) on the short side. It?s time for another visit to the trough. I?m not finishing my year early.
Not yet, anyway.
If you can?t trade options, then buy the Short Russell 2000 Fund ETF (RWM) as a 1X play, or the Direxion Daily Small Cap Bear 3X ETF (TZA) for a 3X trade. However, 3X ETF?s of any kind are for intra day traders only.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/04/Burning-Building-e1430840521423.jpg308400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-09-24 01:05:532014-09-24 01:05:53Time to Bail on the Small Caps
Many commentators are warning of a top, a bubble and Armageddon to come in the stock market. There has not been a 10% correction in the indexes since the debt ceiling crisis three years ago.
But I think that we are just getting started.
Share prices have the rocket fuel for the Dow average to make it to 18,000 by the end of 2014, and possibly 100,000 by 2025. To understand why, you have to focus on major long-term structural changes occurring in the global economy which at this point only a handful for strategists can see, and then, only faintly.
The evidence couldn?t be more undeniable. The major stock indexes have repeatedly broken out to new all time highs in 2014. The more volatile and economically sensitive Russell 2000 small cap index has left it in the big caps dust.
Inflows to equity mutual funds have been the most prolific since 2008. It all paints a picture of a run up (SPX) to and of 2,100 by year-end, which by the way, has been my own forecast all year. Perma bears be damned!
Betting on the Federal Reserve?s fears of a replay of 1937, when premature tightening tipped the US economy into the second leg of the Great Depression, has been a huge winner for me for years now. It means that it is willing to err on the side of over stimulation, by a lot.
With wages growth stagnant for decades, and many commodity prices and precious metals down 30% or more year to date, the Fed certainly has a free pass on the inflation front to do so. Corporate earnings are also helping, consistently surprising to the upside.
However, I think the market is trying to tell us infinitely more than what appeared in yesterday?s headlines, or what flew by in the last tweet or text. There is something deeper going on here beyond the noise of the daily data releases. Asset prices are acting like there is a major structural change underway in the world economy, which so far has remained invisible to all except the market.
Yes, there are a few professionals out there who can see imminent momentous change within their own narrow industries. But no one has yet aggregated all these changes together, so I?ll take a whack at it.
Here are ten theories for you to contemplate.
1) There is more Peace Dividend to Pay - Is it possible that the markets have not yet fully discounted America?s victory in the Cold War? That the payout was interrupted by the dotcom and housing crashes, and that it is now resuming?
Yes, we priced in a chunk with the run up in the Dow average from 2,500 to 11,000 during the 1990?s. But could there be more to go? After all, 22 years since the fall of the Soviet Union and the US still faces no industrial strength enemy, and there are none on the horizon either.
At the very least, this reality should be enough to chop our current defense spending by half, and eliminate most of our budget deficit. Much of the defense establishment agrees with me. They?d rather be spending money on inexpensive, high value, targeted programs, like cyber warfare and drones, rather than the costly, politically inspired, heavy metal weapons systems of old.
2) Obama Care Works ? With the House of Representatives voting to repeal the President?s health care plan for the 50th time, and closing down the government for 16 days in protest, conservative antipathy towards Obamacare couldn?t be more clear. But what if, instead of doubling health care costs as the right has claimed, it drops them by half? What if the plan does add 0.5% to annual GDP and creates 2 million jobs?
This, after all, was the original plan. Health care is expensive in the US because of the lack of competition, and Obamacare delivers that in spades for the first time. Of course there were going to be teething problems. After all, the government is trying to create 50 Amazons overnight at once. It took 20 years for my former Morgan Stanley colleague, Jeff Bezos, to create just one.
The early evidence shows that the competitive health insurance exchanges the plan sets up are delivering price reductions of 30% to 50% in New York and California. I walked into Costco the other day and was offered a plan for $235 a month with an $8,000 deductable, just so I could avoid the penalties for the uninsured. The best offer I previously received from Blue Cross of California was $3,500 a month, typical for an elderly white male like myself.
If this, in turn, solves the health care and Social Security crisis, it will do a lot to wipe out that ?uncertainty? you hear so much about. The predictions of the eventual insolvency of the United States, a perennial Internet conspiracy favorite, also go down the drain.
3) Another Technology Revolution ? Are we on the verge of another great technology breakthrough like the one we saw during the dotcom boom, when PC?s, the Internet, and the World Wide Web simultaneously came together to supercharge corporate earnings for a decade? What if the cost of treating cancer drops from $100,000 to $200, as my friend, Dr. Michio Kaku, believes. What if new Apples and Googles (GOOG) continue to appear out of nowhere?
If you lived in San Francisco and were barraged by venture capital pitches on a daily basis, as I am, you would think this new Golden Age is going to start any minute. There are a thousand innovations percolating out there.
The only question is whether the lead industry will be communications, health care, energy, or all three. Ride your bike south of Market Street someday and see how much research capacity is being built now, the size of a small city. It is awe-inspiring.
4) The Real Cost of Energy Collapses ? We all know about the new 100-year supply of natural gas discovered under our feet that will turn us into Saudi America. But there are 100 additional ways that energy supply is improving and demand is falling.
Conservation will be huge, as will grid and utility modernization. What if Tesla?s (TSLA) Elon Musk is able to deliver a $40,000 electric car with a 300-mile range in three years, as he has promised? This will be a game changer. His track record so far is pretty good.
This is the man so brimming with confidence that he just bought James Bond?s submarine car for $1 million (see the cool modified Lotus in The Spy Who Loved Me). Falling energy costs mean that the profitability of virtually every listed company goes through the roof.
It is likely that if Iran ever does make good on its threat to close the Straights of Hormuz, no one will care. Some 80% of that oil, and soon to be 100%, goes to China, and that will be their problem, not ours.
5) Productivity Accelerates ? By relentlessly introducing new technologies and cutting costs, corporate profitability has soared for the past 30 years. Pessimists now say things can?t get any better. But what if they do?
As I tell guests at my strategy luncheons, this is not a mean reverting data series. Having invested in the machine that took your labor force from 1,000 to 100, what if the next one brings it to 10? Guess which country is about to lose millions of jobs from offshoring and new technology? China. Just talk to any European CEO about their new ?American Strategy.?
6) Interest Rates Stay Low for Another Decade ? If wages stay in check, oil prices fall, and commodity places stay low, then the Fed has absolutely no reason to substantially raise interest rates for another ten years, no matter what the economy does. The next demographic push that creates a worker shortage and higher wages doesn?t start until the early 2020?s.
Sure, the Fed will probably normalize overnight rates back to 2% by next year, as the safety net for the economy is no longer needed. But rates could remain historically very low for quite a long time. This savings immediately drops to the bottom line of any borrower, be they individual, corporate, or government.
In fact, looking at the main causes of the recessions for the last 50 years?a spike in interest rates or a sudden cut off in oil supplies, and absolutely none are visible on the horizon, for now.
7) Shinzo Abe Saves Japan ? The conventional wisdom is that the new government in Japan is resorting to a last desperate act to save their economy that will fail, and that a complete collapse of their over leveraged financial system will result.
But what if Abe gets his necessary reforms through and the country regains its powerhouse status. If Japan?s $6 trillion economy, the world?s third largest, bounces back from a 1% to a 4% GDP growth rate, there will be positive implications for all of us.
8) Europe Gets Its Act Together ? It seems that all we ever hear about from the continent is debt crisis and stagnation and a political system so fragmented that no one can do anything about it. But what if new leadership emerges and takes the initiative to coalesce and solidify Europe?
That would involve creating a single Ministry of Finance, issuing pan Euro bonds, and a European Central Bank with teeth and courage. Their economic problems would disappear and growth would double. As part of my consulting arrangements with governments there, I have been recommending these measures for years, and everyone agrees. All that is missing is the political will to carry them out.
9) The Dollar Stays Strong ? With America?s debt to GDP now over 100% and rising, many analysts believe it is just a matter of time before we see a major crash in the dollar. This is only the continuation of a 220-year-old trend.
What if it goes up instead? Energy independence means we will no longer ship $250 billion a year to the Middle East to pay for oil imports. CEO?s in Europe and Asia are stumbling over each other to find ways to get capital into the US to take advantage of a stronger economy. Higher growth rates mean the feared American deficits start shrinking on their own, with no action from congress whatsoever. This is all long-term dollar positive.
10) Multiples Keep Expanding ? Most strategists believe that the S&P 500 is fairly valued at 1,983 with a price earnings multiple of 15 times, dead in the middle of its historic 9-22 range. But if any of my theories above unfold, then much higher multiples are justified. If they all unfold, then investors wouldn?t hesitate to pay a 25 multiple for American stocks, as their future outlook is so unremittingly positive.
You may say this sounds crazy, and you?d be right. But remember, twice in the last 25 years we have seen market multiples skyrocket to 100. Japanese share valuations reached that nosebleed summit in 1989, and American Dotcom stocks did so in 2000. And they reached those numbers with fundamentals far less substantial than we are facing now. Just take multiples on today?s market up from 15X to 20X, and the Dow should be worth 26,000.
Sure, all of the above represents a pie in the sky best-case scenario. Some, or none, of them may actually play out in the real world. But the ones that do occur will have a super-leveraged effect on each other. The net impact will be US GDP growth easily leaps back from today?s feeble 2% to the virile 4% or more that we grew comfortable with during the fifties, sixties, and eighties.
That growth rate will solve America?s Social Security, Medicare, and deficit problems in fairly short order, without any action by the government.
Needless to say, all of the above is hugely positive for the stock market. It brings forecasts for a Dow 18,000 by the end of 2014, and 100,000 by 2025 out of the realm of fantasy. It kind of makes today?s stock prices look dirt-cheap.
Maybe that?s what the market is trying to tell us, if we only had the patience and the foresight to listen.
This doesn?t mean that you need to rush out and buy more stocks today. Some of these trends will take a decade or more to play out. Better entry points will no doubt present themselves. But the writing is on the wall for higher equity prices, not just in the US, but globally.
I can tell you from the vast expanse of my own 45 years in the prediction business, I have learned one thing. All that is forecast never happens, and all that happens was never forecast.
I?m still waiting for my flying car, although the Tesla S-1 comes close.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/05/JT-with-Tesla-e1427723768460.jpg227400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-08-21 01:03:432014-08-21 01:03:43Why US Stocks Are Dirt Cheap
War threatens in the Ukraine. Iraq is blowing up. Rebels are turning our own, highly advanced weapons against us. Israel invades Gaza. Ebola virus has hit the US. Oh, and two hurricanes are hitting Hawaii for the first time in 22 years.
Should I panic and sell everything I own? Is it time to stockpile canned food, water and ammo? Is the world about to end?
I think not.
In fact the opposite is coming true. The best entry point for risk assets in a year is setting up. If you missed 2014 so far, here is a chance to do it all over again.
It is an old trading nostrum that you should buy when there is blood in the streets. I had a friend who reliably bought every coup d? etat in Thailand during the seventies and eighties, and he made a fortune, retiring to one of the country?s idyllic islands off the coast of Phuket. In fact, I think he bought the whole island.
Now we have blood in multiple streets in multiple places, thankfully, this time, it is not ours.
I had Mad Day Trader, Jim Parker, do some technical work for me. He tracked the S&P 500/30 year Treasury spread for the past 30 years and produced the charts below. This is an indicator of overboughtness of one market compared to another that reliably peaks every decade.
And guess what? It is peaking. This tells you that any mean reversion is about to unleash an onslaught of bond selling and stock buying.
There is a whole raft of other positive things going on. Several good stocks have double bottomed off of ?stupid cheap? levels, like IBM (IBM), Ebay (EBAY), General Motors (GM), Tupperware (TUP), and Yum Brands (YUM). Both the Russian ruble and stock market are bouncing hard today.
There is another fascinating thing happening in the oil markets. This is the first time in history where a new Middle Eastern war caused oil price to collapse instead of skyrocket. This is all a testament to the new American independence in energy.
Hint: this is great news for US stocks.
If you asked me a month ago what would be my dream scenario for the rest of the year, I would have said an 8% correction in August to load the boat for a big yearend rally. Heavens to Betsy and wholly moley, but that appears to be what we are getting.
It puts followers of my Trade Alert service in a particularly strong position. As of today, they are up 24% during 2014 in a market that is down -0.3%. Replay the year again, and that gets followers up 50% or more by the end of December.
Here is my own shopping list of what to buy when we hit the final bottom, which is probably only a few percent away:
Longs
JP Morgan (JPM) Apple (AAPL) Google (GOOG) General Motors (GM) Freeport McMoRan (FCX) Corn (CORN) Russell 2000 (IWM) S&P 500 (SPY)
https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/Gun-Ammunition-War-Room.jpg280438Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-08-11 01:05:382014-08-11 01:05:38Is the Turnaround at Hand, and Ten Stocks to Buy at the Bottom?
Feed the ducks while they are quacking. That is one of the oldest nostrums heard on Wall Street, and feed them they have, to the point of absolute gluttony.
This year we have seen the market for new initial public offerings for newly listed companies explode to life. There have been 46 so far in 2014, some 26 from the biotechnology area alone. Last Friday, there were an astounding seven in one day. When the demand is there, investment bankers are more than happy to run the printing presses overtime to meet it, creating new stock as fast as they can.
This morning saw the debut of King Digital Entertainment (KING), maker of the kid?s digital game ?Candy Crush?. Much to the chagrin of the bankers and the existing shareholders, the stock immediately traded down -10%. You know that when you see huge, dancing lollypops on the floor of the New York Stock Exchange, it is time to get out of the market, post haste.
It all seems frighteningly familiar, like d?j? vu all over again. The last time things were this hot was in April of 2000. Then, an onslaught of IPO?s put in the top for NASDAQ, igniting the great Dotcom crash. Share prices have yet to recover those heady levels a decade and a half later.
Looking at the quality and quantity of the new companies being floated, with minimal earnings, sky high multiples, and market capitalizations in the tens of billions of dollars, a similar outcome is assured. Wall Street never fails to kill the golden goose. There is no limit on greed.
As a result, the IPO market is threatening to take the main market down with it. The number of short-term indicators that I am seeing roll over and die is nothing less than astounding. At the very least, I think we are in for the kind of 5%-7% correction of the sort that we saw in January and February. I?ll give you two big ones.
The scary tell here is the strength of the bond market (TLT), which just broke out to a new seven-month high. Today?s Treasury five-year bond auction went like a house on fire. Stocks and bonds rarely go up in unison, and bonds usually end up being right.
Another is the elevating bottom in the volatility Index (VIX). During November and December, the (VIX) put in rock solid bottoms at the $12 level. After the January dump, the support rose to $14. This means that investors are now more nervous, willing to pay a premium for downside protection, and intend to unload shares at the first sign of trouble. As much fun as rising bottoms can be, you never want to see them in volatility if you own stocks.
The only question is whether they can hold the market up until Friday, March 28, the month end on Monday, March 31, or the new start to the quarter on Tuesday, April 1.
So how best to participate in the coming debacle? Cut back any leveraged long positions that you have. If you want to keep your stocks for tax or other reasons, then write front month call options against them, known as ?buy writes.?
Use the good days to lay on positions in long dated put options for the S&P 500 (SPY), the NASDAQ (QQQ), and the Russell 2000 (IWM). Long dating heads off the time decay problem, reducing the volatility of your position, and helps preserve capital.
Traders can also buy volatility through the iPath S&P 500 VIX Short Term Futures ETN (VXX), an exchange traded note, which rises when stocks fall.
The set up here for the iPath S&P 500 VIX Short Term Futures ETN (VXX) is a no brainer. If we get the modest weakness that we saw in early March, the (VXX) should rise 10% from current levels to the $48 handle. If we get a January replay, that is worth 20% for the (VXX), potentially boosting it to $55. If we finally get the long overdue 10% correction, the (VXX) should rocket by 30% or more.
If the selloff decides to wait a few more days or weeks you can afford to be patient. Since this is an ETN, and not an option play, a flat lining or rising market isn?t going to cost you much money. The February low in the (VXX) at $42.25 looks pretty safe to me in a rising volatility environment. A revisit would only cost us pennies.
Take your pick, but all paths seam to lead skyward for the (VXX), sooner or later.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/03/Girl-on-Pogo-Stick.jpg380330Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-03-27 09:21:512014-03-27 09:21:51Will Candy Crush Crush the Market?
A few years ago, I went to a charity fundraiser at San Francisco?s priciest jewelry store, Shreve & Co. The well-heeled masters of the universe bid for dates with the local high society beauties, dripping in diamonds and Channel No. 5. Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area?s premier hotties, whom shall remain nameless. Suffice to say, she has a sports stadium named after her.
The bids soared to $12,000, $13,000, $14,000. After all, it was for a good cause, Pari Livermore?s California State Parks Foundation. But when it hit $12,400, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer?s remorse came to me and offered his date back to me for $14,000.? I said ?no thanks.? $13,000, $12,000, $11,000? I passed.
The current altitude of the stock market reminds me of that evening. If you rode gold (GLD) from $800 to $1,920, oil, from $35 to $149, and the (DIG) from $20 to $60, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it does now?
I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands. But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: ?There is a time to fish, and a time to hang your nets out to dry.? That?s why my cash position has steadily been rising over the last few weeks.
At least then I?ll have plenty of dry powder for when the window of opportunity reopens for business. So while I?m mending my nets, I?ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again.
As for that date? She eventually married one of California premier technology titans, an established billionaire in his own right, and now has two cute kids. It?s all part of life?s rich mosaic. And sorry, I?m not saying who because gentlemen don?t talk.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/04/Shreve-Co..jpg378431Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-04-16 01:33:032013-04-16 01:33:03Bidding for the Stars
The S&P 500 is now at 1,564, and most strategist forecasts for the end of 2013 hover around 1,550-1,600, plus or minus some spare change. So the next nine months are going to be incredibly boring. Or they won?t.
Even in a bull market, one expects to see pullbacks of at least one third of the recent gain. Apply that logic towards the 224 points the (SPX) has tacked on since the November low, and that adds up to a 74 point, or a 4.7% correction down to 1,490.
There is massive liquidity in the system, many individuals and institutions are underweight, and interest rates are still at incredibly low levels. It also appears that every foreign financial disaster results in more money getting sent to the US for safety.
Usually, the (SPX) never rises more than 9% above the 200 day moving average without hitting a correction. This year is different. I can?t remember the last time the index spent this much time at that level without a pullback.
We are therefore likely to see a rolling type market top that unfolds over the next several months. That is in contrast to a spike top, which you can spot on a chart without your glasses from 20 feet away. These tops can be devilishly difficult to trade, with the limits defined more by time than price.
If you want to see what such a rolling top looks like, take a peak at the chart for my old friend, Dr. Copper, that great prognosticator of future economic activity. He put in such a rolling top during the first eight months of 2011, and has been trying to recover ever since, to no avail.
This no doubt reflects the slowing economy and the building copper inventories in China, where the red metal is widely used as a monetary instrument. China, in effect, is on a copper standard. It is rare to see the (SPX) going up and copper dropping like, well, a bar of copper.
While the broader indexes are likely to deliver a rolling top, that is not the case with individual sectors and stocks. That means you can use these individual spikes to assist in your timing of the overall market. You need to watch the market leaders like a hawk, such as the financials and the transports. If Bank of America (BAC) and United Continental Group (UAL), suddenly crash and burn, you can bet the rest of the market won?t be far behind. This is one of the reasons why I have these two names in my model-trading portfolio, on which you should maintain your laser focus.
The consumer discretionary and retail sectors are two additional pathfinder sectors that are the most economically sensitive in the market, which also make great canaries in the coalmine. As long as consumers are packing MacDonald?s (MCD), Home Depot (HD), and Target (TGT), or burning up their Comcast (CMCSA) broadband connections buying stuff from Amazon (AMZN), you won?t see appreciable market weakness. Earnings disappointments at these businesses, which could start in three weeks, are another great precursor of market trouble.
Finally, there is another class of stocks that may lead the charge on the downside, and that is small caps. Look at the chart below for the ETF for the Russell 2000 (IWM). Small companies are always hardest hit in any slowdown because they are more highly leveraged and have less access to external financing, like bank loans and equity floatations. I made a bundle last year shorting the (IWM) into the ?Sell in May? market meltdown, and plan to do so again this year.
Of course, timing is everything, and I?ll tell you what worries me the most. The overdependence of this bull market on the largess of the Federal Reserve cannot be underestimated. Any hint that quantitative easing is about to join the dustbin of history will take the market with it.
The conventional wisdom is that our esteemed central bank won?t embark on this path until year-end. What if it surprises us with a June tightening? The bull market would die of an instant heart attack. What would trigger this? A blowout monthly nonfarm payroll number approaching 300,000, which would quickly take the headline unemployment rate close to the Fed?s publicly announced 6.5% target. With the economy perhaps growing at a 3% rate this quarter, such a development might be only a handful of Friday?s away.
So how is the genius, aggressive hedge fund trader going to deal with these opaque markets? Bet that the market is going to stay in a broad range for a few more months. We aren?t going to the moon, nor are we going to crash. We are more likely to die of ice than fire. That?s what the volatility markets (VIX) are telling us.
There are several ways to play this kind of market. If you have a plain vanilla stock portfolio, you should be executing ?buy writes? against your existing holdings to take in extra premium income. With the bull move five months old, call options are trading at historically rich levels. This low risk, high return strategy involves selling short call options against existing stock positions. If your stock gets called away, you just say ?thank you very much? and buy it back on the way down.
For the more aggressive, you can add naked short sales of deep out of the money calls one month out. You don?t get rich with a strategy like this, but you earn a living.
You might also buy some deep out-of-the-money index puts for pennies. They are now trading near the cheapest prices in history. One market hiccup, and these things double very quickly.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/03/Gorilla.jpg203181Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-03-26 09:15:452013-03-26 09:15:45Here Comes the Rolling Top
That was the questions traders were scratching their heads and asking this morning in the wake of this morning?s shocking Q4, 2012 GDP figure.
While most analysis were expecting the government to report a more robust 1%-2% number we got negative -0.1%, the worst since 2009. With growth flipping from a positive 3.1% figure in Q3 many thought that a Dow down 500 points was in the cards. Instead we pared back a modest 44 points. What gives?
Ahhh, the devil is in the details. The main culprit was in defense spending, down a mind numbing 22.2%, the worst since the wind down of the Vietnam War in 1972. I remember it like it was yesterday. In fact, government spending was weak across the board as a quasi shut down in advance of the fiscal cliff brought spending to a grinding halt.
In the end, the fiscal cliff never happened. But the downshift shows you how severe such a slowdown would be, if we ever go over the cliff sometime in the future.
There were other one off factors. Hurricane Sandy put a dent into the economies of the US east coast, especially in the transportation sector. The effects of last summer?s drought, which triggered a serious shrinkage in a broad swath of the agricultural sector, were also felt.
What traders instead decided to focus on were the impressive strength of the private sector. Business investment rocketed 8.4%, while consumer spending jumped by 2.2%. It all confirms my theory that the passage of the presidential election broke the dam for private economy, and got people off their behinds once all the negativity and uncertainty was gone. Businesses suddenly began investing and hiring, while consumers stepped up consuming.
What this data tells us is that there will be a sizable postponement of growth from Q4 into Q1, 2013. The Pentagon will ramp up spending once again in the knowledge their budget is secure, at least for the time being. In the meantime, the private sector continues on fire. Q1 could well turn out to be a monster quarter. This is what the unremitting rise in share prices is shouting at us.
In the end, traders don?t really care what the GDP is. In fact, most can?t even spell it. The focus of the street is on the future, not the past. And the data promises to improve.
This morning we saw private sector job growth of 182,000 from the ADP. If Thursday morning delivers another five year low in jobless claims, the market will be primed for a hot January nonfarm payroll on Friday. It?s become ?a glass is half full, glass three quarters full? kind of market. Is either goes up, or up more.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/01/Headline.jpg336281Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-01-31 09:45:372013-01-31 09:45:37Where?s the Crash?
Legal Disclaimer
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.
Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.
Essential Website Cookies
These cookies are strictly necessary to provide you with services available through our website and to use some of its features.
Because these cookies are strictly necessary to deliver the website, refuseing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.
We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.
We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.
Google Analytics Cookies
These cookies collect information that is used either in aggregate form to help us understand how our website is being used or how effective our marketing campaigns are, or to help us customize our website and application for you in order to enhance your experience.
If you do not want that we track your visist to our site you can disable tracking in your browser here:
Other external services
We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.