Down three of six trading days so far in 2025, with the S&P 500 off 2.2%. Worse yet, there is an almost perfect head and shoulders topsetting up on the charts portending lower lows. Lead names like Tesla (TSLA) have taken it on the nose, down 25%.
Tax-deferred selling has definitely been the dead weight hanging on the market since January 1. High-net-worth individuals would have shot the financial advisors off if they had saddled them with big tax bills during the last weeks of 2024. After two 20% back-to-back years, many of these positions had doubles and triples in them. How long it will be anyone’s guess.
Once the selling does end, the market will go into “show me” mode, waiting for the new administration to deliver the promised action. This could be a long wait. The earliest Congress can vote on a new economy-changing bill in May. Until then, the market could be entering a tedious trading range until action is delivered.
The good news? There were many times in my life when I never thought I’d live until 2025. Also, we get two extra holidays in January, Jimmy Carter’s funeral and Martin Luther King Day on the 23rd.
So, what’s a trader to do in these suddenly benighted times? 90-day US Treasury bill looks fantastic right now with a 4.21% yield. Nothing is better than getting paid to wait. Big tech is entering a long-range trade from which it will eventually escape to the upside. A lot of the AI trade needs to be digested and earnings spun off before a major new upleg can begin.
One of the great things about a 16-day cruise from Los Angeles to Fort Lauderdale, Florida is the many fascinating people you meet. It turned out that I missed the start of the Great Los Angeles fires by a week.
I attended a wine tasting and learned that the entire event had been bought out by the preeminent aviation family of Alaska. The 93-year-old grandmother treated her extended 25-member family to a free cruise, great-grandchildren and all, at a cost of only $250,000. Apparently, aviation in Alaska pays well.
The subject of airplanes inevitably came up. They mentioned that they still had their original aircraft, a 1928 Travelaire D4D, which Grandpa bought second-hand and brought up to Alaska during WWII. They couldn’t get any of their current pilots to fly it, which they deemed too dangerous to fly.
I mentioned that I happened to be one of ten living pilots rated to fly the plane and showed them videos of me flying my kids over the Malibu coast (click here for the link).
I believe an invitation is pending.
We closed out December at +3.26%.Some 11 out of 12 months were profitable in 2024.The final number for 2024 came in at a sky-high +75.26%.I went all cash on the December 20 options expiration, expecting the current trouble that we are in. I would be thrilled if we even came close to these numbers in 2025.
I started out the New Year with 80% cash and two small hedged positions. I went long 10% (TLT) and long 10% (TSLA). These expire in four days on the January 17 option expiration, when we flip back to a 100% cash position.
Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 74 of 94 trades have been profitable so far in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.
Try beating that anywhere.
My Ten-Year View – A Reassessment
When have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties is now looking at a headwind. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. My Dow 240,000 target has been pushed back to 2035.
On Monday, January 13 at 11:00 AM EST, the Consumer Inflation Expectations are released.
On Tuesday, January 14 at 8:30 AM, the Producer Price Index is published.
On Wednesday, January 15 at 8:30 AM, the Inflation Rate is printed.
On Thursday, January 16 at 8:30 AM, the Retail Sales are announced.
On Friday, January 17 at 8:30 AM EST, Housing Starts and Building Permits are published. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, Iwas recently in Los Angeles visiting old friends, and I am reminded of one of the weirdest chapters of my life.
There were not a lot of jobs in the summer of 1971, but Thomas Noguchi, the LA County Coroner, was hiring. The famed USC student jobs board had delivered! Better, yet, the job included hours at night and free housing at the coroner's department.
I got the graveyard shift, from midnight to 8:00 AM. All I had to do was buy a black suit from Robert Halls, for $25.
Noguchi was known as the “coroner to the stars” having famously done the autopsies on Marilyn Monroe and Jane Mansfield. He did not disappoint.
For three months, whenever there was a death from unnatural causes, I was there to pick up the bodies. If there was a suicide, gangland shooting, or horrific car accident, I was your man.
Charles Manson had recently been arrested and I was tasked with digging up the victims. One, cowboy stuntman Shorty Shay, had his head cut off and neatly placed in between his ankles.
The first time I ever saw a full set of women’s underclothing, a girdle, and pantyhose, was when I excavated a desert roadside grave that the coyotes had dug up. She was pretty far gone.
Once, me and another driver were sent to pick up a teenage boy who had committed suicide in Beverly Hills. The father came out and asked us to take the mattress as well. I regretted that we were not allowed to do favors on city time. He then said, “Can you take it for $200”, then an astronomical sum.
A few minutes later, I found a hearse driving down the Santa Monica Freeway on the way to the dump with a double mattress expertly tied on the roof with Boy Scout knots with a giant blood spot in the middle.
Once, I was sent to a cheap motel where a drug deal gone wrong had produced several shootings. I found $10,000 in a brown paper bag under the bed. The other driver found another ten grand and a bag of drugs and kept them. He went to jail. I didn’t.
The worst pick-up of the summer was also the most disgusting and even made the old veterans sick. A 300-pound man had died of a heart attack and was not discovered for a month. We decided to each grab an arm or leg and all tug on the count of three. One, two, three, and all four limbs came off!
Eventually, I figured out that handling dead bodies could be hazardous to your health, so I asked for rubber gloves. I was fired.
Still, I ended up with some of the best summer job stories ever.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2024/10/John-Thomas-hammer.png1000718april@madhedgefundtrader.comhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngapril@madhedgefundtrader.com2025-01-13 09:02:492025-02-20 12:40:40The Market Outlook for the Week Ahead, or What's Next?
I am once again writing this report from a first-class sleeping cabin on Amtrak’s legendary California Zephyr.
By day, I have a comfortable seat next to a panoramic window. At night, they fold into two bunk beds, a single and a double. There is a shower, but only Houdini can navigate it.
I am anything but Houdini, so I foray downstairs to use the larger public hot showers. They are divine.
We are now pulling away from Chicago’s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American exceptionalism.
I am headed for Emeryville, California, just across the bay from San Francisco, some 2,121.6 miles away. That gives me only 56 hours to complete this report.
I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure and to keep me up to date with the onboard gossip. The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Microsoft’s Spellchecker can catch most of the mistakes, but not all of them.
Chicago’s Union Station
As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied Internet searches during stops at major stations along the way, like Omaha, Salt Lake City, and Reno, to Google obscure data points and download the latest charts.
You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.
Who knew that 95% of America is off the grid? That explains so much about our country today.
I have posted many of my favorite photos from the trip below, although there is only so much you can do from a moving train and an iPhone 16 Pro.
Somewhere in Iowa
The Thumbnail Portfolio
Equities – buy dips, but sell rallies too Bonds – avoid Foreign Currencies – avoid Commodities – avoid Precious Metals – avoid Energy – avoid Real Estate – avoid
1) The Economy – Cooling
I expect a modest 2.0% real GDP growth with a 4.0% inflation rate, giving an unadjusted shrinkage of the economy of negative -2% for 2025. That is down from 0% in in 2024. This may sound discouraging, but believe me, this is the optimistic view. Some of my hedge fund buddies are expecting a zero return over the next four years.
Virtually all independent economists expect the new administration's economic policies will be a drag on both the US and global economies. Trade wars are bad for everyone. When your customers are impoverished, your own business turns south. This is a big deal, since the Magnificent Seven, which accounted for 70% of stock market gains last year, get 60% of their profits from abroad.
The ballooning National Debt is another concern. The last time Trump was in office, he added $10 trillion to the deficit through aggressive tax cuts and spending increases. If this time, he adds another $10-$15 trillion, the National Debt could reach $50 trillion by 2030.
There are two issues here. For a start, Trump will find it a lot harder and more expensive to fund a National Debt at $50 trillion than $20 trillion. Second, borrowing of this unprecedented magnitude, double US GDP, will send interest rates soaring, causing a recession.
The only question then is whether this will be a pandemic-style recession, which took stocks down 30% and recovered quickly, or a 2008 recession which demolished stocks by 52% and dragged on for years.
Hope for the best but expect the worst, unless you want to consider a future career as an Uber driver.
The outlook for stocks for 2025 is pretty simple. You are going to have to work twice as hard to make half the money you did last year with twice the volatility. You will not be able to be as nowhere near aggressive in 2025 as you were in 2024It’s a dream scenario for somebody like me. For you, I’m not so sure.
It’s not that US companies aren't growing gangbusters. I expect 2% GDP growth, 15% profit growth, and 12% net margin growth in 2025. But let’s face reality. Stocks are the most expensive they have been in 17 years and we know what happened after 2008. Much of the stock market gain achieved last year was through hefty multiple expansions. This is not good.
Big tech companies might be able to deliver 20% gains and are still the lead sector for the market. Normally that should deliver you a 15%, or $800 gain in the S&P 500 (SPX). We might be able to capture this in the first half of 2025.
Financials will remain the sector with the best risk/reward, and I mean the broader definition of the term, including banks, brokers, money managers, and some small-cap regional banks. The reason is very simple. Their income statements will get juiced at both ends as revenues soar and costs plunge, thanks to deregulation.
No passage of new laws is required to achieve this, just a failure to enforce existing ones. The hint for this is a new SEC chair whose primary interest is promoting the Bitcoin bubble. Buy (GS), (MS), (JPM), (BAC), (C), and (BLK).
However, this is anything but a normal year. Uncertainty is at an eight-year high, thanks to an incoming administration. If the promised policies are delivered, inflation will soar and interest rates will rise, as they already have. We could lose half or all of our stock market gains by the end of 2025.
The big “tell” for this was the awful market performance in December, down 5%. The Dow Average was down ten days in a row for the first time in 70 years. Santa Claus was unceremoniously sent packing. People Are clearly nervous. But then they should be with a bull market that is approaching a decrepit five years in age.
There is a bullish scenario out there and that has Trump doing absolutely nothing in 2025, either because he is unwilling or unable to take action. After all, if the economy isn’t actually broken, why fix it? Better yet, if you own an economy it is better not to break it in the first place.
Nothing substantial can pass Congress with a minuscule one-seat majority in the House of Representatives. There will be no new presidential action through tariffs and only a few token, highly televised deportations, not enough to affect the labor market.
Stocks will not only hold, but they may add to the 15% first-half gains for the year. I give this scenario maybe a 50% probability.
The first indication this is happening is when the presidential characterization of the economy flips in a few months from the world’s worst to the world’s best with no actual change in the numbers. Trump will take all the credit.
You heard it here first.
Frozen Headwaters of the Colorado River
3) Bonds (TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD) Amtrak needs to fill every seat in the dining car to get everyone fed on time, so you never know who you will share a table with for breakfast, lunch, or dinner.
There was the Vietnam Vet Phantom Jet Pilot who now refused to fly because he was treated so badly at airports. A young couple desperately eloping from Omaha could only afford seats as far as Salt Lake City. After they sat up all night, I paid for their breakfast.
A retired British couple was circumnavigating the entire US in a month on a “See America Pass.” Mennonites returned home by train because their religion forbade travel by automobiles or airplanes.
The big question to ask here after a 100-basis point rise in bond yields in only three months is whether the (TLT) has suffered enough. The short answer is no, not quite yet, but we’re getting close. Fear of Trump policies should eventually take ten-year US Treasury bond yields to 5.00%, and then we will be ready for a pause at a nine-month bottom. After that, it depends on how history unfolds.
If Trump gets everything he wants, inflation will soar, bonds will crash, and 5.00% will be just a pit stop on the way to 6.00%, 7.00%, and who knows what? On the other hand, if Trump gets nothing he says he wants, then both bonds stocks and bonds will rise, creating a Goldilocks scenario for all balanced portfolios and investors.
That also sets up a sweet spot for entry into (TLT) call spreads close to 5.00% yields. A politician campaigning on one policy, then doing the opposite once elected? Stranger things have happened. The black swans will live.
If your basic assumption for interest rates is that they stay flat or rise, then you have to love the US dollar. Currencies are all about expected interest rate differentials and money always pours into the highest-paying ones. Tariffs will add fat to the fire because any reduction in international trade automatically reduces American trade deficits and is therefore pro-dollar.
This means that you should avoid all foreign currency plays like the plague, including the Euro (FXE), Japanese yen (FXY), British Pound (FXB), Canadian dollar (FXE), and Australian dollar (FXA).
A strong greenback comes with pluses and minuses. It makes our exports expensive and less competitive and therefore creates another drag on the economy. It demolishes traditional weak dollar plays like emerging markets and precious metals. On the other hand, it attracts substantial foreign investments into US stocks and bonds, which has been continuing for the past decade.
Above all, be happy you are paid in US dollars. My foreign clients are getting crushed in an increasingly expensive world.
5) Commodities (FCX), (BHP), (RIO), (VALE), (DBA) Look at the chart of any commodity stock and you see grim death. Freeport McMoRan (FCX), BHP (BHP), and Rio Tinto (RIO), they’re all the same. They’re all afflicted with the same disease, over-dependence on a robustly growing China, which isn’t growing robustly, if at all.
I firmly believe that this will continue until the current leadership by President Xi Zheng Ping ends. He has spent the last decade globally expanding Chinese interests, engaging in abusive trade practices, hacking, and attacking American allies like Taiwan and the Philippines.You can only wave a red flag in front of the US before it comes back to bite you. A trade war with the US is now imminent.
This will happen sooner than later. The Chinese people don’t like being poor for very long. This is why I didn’t get sucked in on the Chinese long side in the fall, as many hedge funds did.
If China wants to go back to playing nice, as they did in the eighties and nineties, China should return to return to high growth and commodities will look like great “Buys” down here. If they don’t, American growth alone should eventually pull commodities up, as our economy is now growing at a long-term average gross unadjusted 6.00% rate. So the question is how long this takes.
It may pay to start nibbling on the best quality bombed-out names now, like those above.
Snow Angel on the Continental Divide
6) Energy (DIG), (USO), (DUG), (UNG), (USO), (XLE), (LNG), (CCJ), (VST), (SMR) Energy was one of the worst-performing sectors in the market for the second year in a row and 2025 is looking no better. New supplies are surging, while demand remains stuck in the mud, with the US now producing an incredible 13.5 million barrels a day. OPEC is dead.
EVs now make up 10% of the US auto fleet, and much more in other countries, are making a big dent. Some 50% of all new car sales in China, the world’s largest market, are EVs. The number of barrels of oil needed to increase a unit of American GDP is plunging, as it has done for 25 years, through increased efficiencies. Remember your old Lincoln Continental that used to get eight miles per gallon? Now it gets 27.
Worse yet, a major black swan hovers over the sector. If the Ukraine War somehow ends, some ten million barrels a day of Russian oil will hit the market. Oil prices should plunge to $50 a barrel.
There are always exceptions to the rule, and energy plays not dependent on the price of oil would be a good one. So is natural gas, which will benefit from Cheniere Energy’s (LNG) third export terminal coming online, increasing exports to China. Ukraine cutting off Russian gas flowing to Europe will assure there is plenty of new demand.
But I prefer investing in sectors that have tailwinds and not headwinds. Better leave energy to the pros who have the inside information they need to make money here.
If someone is holding a gun to your head tell you that you MUST invest in energy, go for the new nuclear plays like (CCJ), (VST), and (SMR). We are only at the becoming of the small modular reactor trend, which could accelerate for decades.
The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.
On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders.
The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly, that it blew a passenger train over on its side. In the snow-filled canyons, we saw a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It’s a good omen for the coming year. We also see countless abandoned 19th-century gold mines and the broken-down wooden trestles leading to huge piles of tailings, relics of previous precious metals booms. So, it is timely here to speak about the future of precious metals.
We certainly got a terrific run on precious metals in 2025, with gold at its highs up 33% and silver up 65%. The miners did even better. Even after the post-election selloff, it was still one of the best-performing asset classes of the year.
But the heat has definitely gone out of this trade. The prospect of higher interest rates for longer in 2025 has sent short-term traders elsewhere. That’s because the opportunity cost of owning precious metals is rising since they pay no interest rates or dividends. And let’s face it, there was definitely new competition for hot money from crypto, which doubled after the election.
The sector is not dead, it is resting. Central bank buying of the barbarous relic continues unabated, especially among sanctioned countries, like Russia and China. Gold is still the principal savings vehicle for many Chinese. They are not going to recover confidence in their own currency, banks, or government anytime soon. And there is still slow but steadily rising industrial demand from solar sectors.
Gold supply has also been falling for years, while costs are rising at least at double the headline inflation rate. So it’s just a matter of time before the supply/demand balance comes back in our favor. Where the final bottom is anyone’s guess as gold lacks the traditional valuation parameters of other asset classes, like dividends or interest paid. We’ll just have to wait for Mr. Market to tell us, who is always right.
Give (GLD), (SLV), (GDX), (GOLD), and (WPM) a rest for now but I’ll be back.
Crossing the Great Nevada Desert Near Area 51
8) Real Estate (ITB), (LEN), (KBH), (PHM), (DHI)
The majestic snow-covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write.
My apologies in advance to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada. It is a route long traversed by roving bands of Indians, itinerant fur traders, the Pony Express, my own immigrant forebearers in wagon trains, the Transcontinental Railroad, the Lincoln Highway, and finally US Interstate 80, which was built for the 1960 Winter Olympics at Squaw Valley, California. Passing by shantytowns and the forlorn communities of the high desert, I am prompted to comment on the state of the US real estate market.
Real estate was a nice earner for us in 2024 in the new homes sector. The election promptly demolished this trade with the prospect of higher interest rates for longer. Expect this unwelcome drag to continue in 2025.
I am not expecting a housing crash unless interest rates take off. More likely it will continue to grind sideways on low volume. That’s because the market has support from a structural shortage of 10 million homes in the US, the debris left over from the 2008 housing crash. That’s why there is still a Millennial living in your basement. Homebuilders now prioritize profit margins over market share.
I expect this sector to come back someday. New homebuilders have the advantage of offering free upgrades and discounted in-house financing. Avoid for now (DHI), (KBH), (TOL), and (PHM).
Crossing the Bridge to Home Sweet Home
9) Postscript We have pulled into the station at Truckee amid a howling blizzard.
My loyal staff have made the ten-mile trek from my estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne, which has been cooling in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.
After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.
Well, that’s all for now. We’ve just passed what was left of the Pacific mothball fleet moored near the Benicia Bridge (2,000 ships down to six in 80 years). The pressure increase caused by a 7,200-foot descent from Donner Pass has crushed my plastic water bottle. Nice science experiment!
The Golden Gate Bridge and the soaring spire of Salesforce Tower are just coming into view across San Francisco Bay.
A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my MacBook Pro, iPad, and iPhone, pick up my various adapters, and pack up.
We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten-mile night hike up Grizzly Peak tonight and still get home in time to watch the ball drop in New York’s Times Square on TV.
I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.
I’ll shoot you a Trade Alert whenever I see a window open at a sweet spot on any of the dozens of trades described above, which should be soon.
It is always the sign of a great hedge fund manager when he makes money while he is wrong.
I have seen this throughout my life, trading with clients and friends like George Soros, Julian Robertson, Paul Tudor Jones, and David Tepper.
And wrong I certainly was in 2024.
I thought Trump would lose the election.
Then, I thought that markets would rocket no matter who won. Only the sector leadership would change.
How about one out of two?
The big question is: “Is a stock market crash now in front of us?” The answer is absolutely yes. It’s only a question of how soon.
At this point, we only know what Trump said. And as we all know, what Trump says and does, or can do are totally different things. It all adds a new and constant source of unknowns for the market.
Of course, it helps to have a half-century of trading experience, too. I like to tell my beginning subscribers, “Don’t worry, after the first 50 years, this gets easy.”
Except easy it is not, going into the next several couple of years.
In a few months, it will be Ground Hog Day, and Punxsutawney Phil will call the weather for the next six weeks from his hilltop in Gobbler’s Knob, Pennsylvania.
For the financial markets, it could mean six more MONTHS of winter.
Nobody wants to sell because they believe in a longer-term bull case going into yearend.
In the meantime, they are buying deregulation plays (JPM), (GS), (BLK), and Tesla (TSLA) as a hedge against the next Tweet.
We could see a repeat of the first half of 2017 when markets rocketed and then died.
This is what a Volatility Index (VIX), (VXX) is screaming right in your face, kissing the $13 handle.
The never-ending tweets are eroding the bull case by the day.
So, we’re at war with Canada now? Wait! I thought it was Mexico? No, it’s France. If it’s Tuesday, this must be Belgium.
And our new ally? Russia!
Even the Federal Reserve is hinting in yesterday’s statement that it is going into “RISK OFF” mode, possibly postponing a December interest rate cut indefinitely.
Unfortunately, that completely sucks the life out of our short Treasury bond trade (TLT), (TBT) for the time being, a big earner for us earlier this year.
Flat to rising interest rates also demolish small caps and other big borrowers (homebuilders, real estate, REITs, cruise lines).
The market is priced for perfection, and if perfection doesn’t show, we have a BIG problem.
All of this leads up to the good news that followers of the Mad Hedge Fund Trader enjoyed almost a perfect month in November.
Trade Alert Service in November
(DHI) 11/$135-$145 call spread
(GLD) 12/$435-$340 call spread
(TSLA) 12/$3.90-$400 put spread
(JPM) 11/$195-$205 call spread
(CCJ) 12/$41-44 call spread
(JPM) 12/$210-$220 call spread
(NVDA) 12/$117-$120 call spread
(TSLA) 12/$230-$240 call spread
(TSLA) 12/$250-$260 call spread
(TSLA) 12/$270-$275 call spread
(MS) 12/$110-$115 call spread
(C) 12/$60-$65 calls spread
(BAC) 12/$41-$44 call spreads
(VST) 12/$115-$120 call spread
(BLK) 12/$950-$960 call spread
The net of all of this is that 2024 is looking like a gangbuster year for the Mad Hedge Fund Trader, up 18.96% in November and 72.00% YTD, compared to only 26.62% for the S&P 500.
It seems that the harder I work, the luckier I get.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/05/John-Thomas-David-Tepper.jpg303387april@madhedgefundtrader.comhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngapril@madhedgefundtrader.com2024-12-03 09:04:182024-12-03 11:36:37It's Groundhog Day
At today’s Mad Hedge Biweekly Strategy Webinar, I received an excellent question: Why is the Vertical Call Debit Spread my favorite trading vehicle?
So let me ask you this: How would you like to play blackjack now that the dealer would bust 90% of the time? What if you played roulette with the assurance that the ball would land on black 90% of the time?
I bet you would be interested….very interested.
I only trade with Vertical Call Debit Spreads in my own personal account. While your broker may be recommend outright options trades to you because that’s where the volume and the commissions are, if he is smart enough, he is almost certainly executing Vertical Call Debit Spreads for his own account.
And let me tell you why.
1) A Vertical Call Debit Spread offers the most favorable risk/reward ratio of any financial instrument among the plethora out there.
2) A Vertical Call Debit Spread allows you to precisely define your risk. You can’t lose any more money that you put up. With naked short puts, for example, which most other newsletters often recommend all day long, your potential losses are unlimited
3) Vertical Call Debit Spreads allow a vast increase in profits compared to outright stocks, potentially 10X-100X. You can get a claim on $1 million worth of stock for literally only $10,000, not bad when you know the direction. Customers of mine who are nailing 1,000%-2,000% returns in a year, and I get a few every year, are executing very deep out-of-the-money Vertical Call Debit Spread LEAPS.
4) The liquidity for Vertical Call Debit Spreads is enormous for the most popular stocks, like Nvidia (NVDA) and Tesla (TSLA), with exercise values of the options more than the underlying stocks.
5) Vertical Call Debit Spreads allow you to specifically target a share price trading range (very deep in-the-money) that has the highest probability of taking place.
6) The day-to-day volatility of Vertical Call Debit Spread is very low, usually 8% or 9%. That’s because you are long on one option and short on another. This prevents traders from selling bottoms and buying tops, always fatal mistakes. When people ask me what I do for a living, I tell them I stop people from selling market bottoms and buying market tops.
7) When you have a seasoned war horse like me with 55 years of trading experience making your stock picks, Vertical Call Debit Spreads become a total no-brainer. This is why my Trade Alert service is up 68% this year, almost triple the S&P 500 (SPY).
8) Vertical Call Debit Spreads hit their maximum profit whether markets go up, sideways, or down small. It’s only the surprise out of the blue, down moves are large, triggered by black swans, that lose us money and those we stop out of immediately.
9) A Vertical Call Debit Spread benefits enormously from time decay. That is how they hit maximum profits when the underlying stock is unchanged. It gives you a cushion against mistakes and bad stock calls. That’s why I focus on the front-month expirations where time decay is accelerated.
10) Vertical Call Debit Spreads have a built-in short volatility element. If you buy a Vertical Call Debit Spread with a Volatility Index at $24, and it then drops to $14, you make a lot of money. Over the years, I have found that it is almost impossible to lose money with Vertical Call Debit Spreads when the Volatility Index is over $30.
11) OK, I thought of one more reason. Vertical Call Debit Spreads are much cheaper than outright options. That’s because you are buying one option and then receive the proceeds from selling short another option, which cuts the price by two-thirds. That lets you triple your size compared to an outright option. Triple the size, and you triple the profits.
Given all this, I think it’s time for all of you to undergo a refresher course on how to most efficiently play the market with Vertical Call Debit Spreads.
Most investors make the mistake of investing in positions that have only a 50/50 chance of success or less. They’d do better with a coin toss.
The most experienced hedge fund traders find positions that have a 90% chance of success and then leverage up on those trades. Stop out of the losers quickly, and you have an approach that will make you well into double digits, year in and year out, whether markets go up, down, or sideways.
For those readers looking to improve their trading results and create the unfair advantage they deserve, I have posted a training video on How to Execute a Vertical Bull Call Spread.
This is a matched pair of positions in the options market that will be profitable when the underlying security goes up, sideways, or down small in price over a limited period of time.
It is the perfect position to have on board during markets that have declining or low volatility, much like we have experienced in for most of the last several years and will almost certainly see again.
I have strapped on quite a few of these babies across many asset classes, and they are a major reason why I am up so much this year.
To understand this trade, I will use the example of Apple trade, which most people own and know well.
On October 8, 2018, I sent out a Trade Alert by text messages and email that said the following:
BUY the Apple (AAPL) November 2018 $180-$190 in-the-money vertical BULL CALL debit spread at $8.80 or best
At the time, Apple shares were trading at $216.17. To accomplish this, they had to execute the following trades:
Buy 11 November 2018 (AAPL) $180 calls at….…….…$38.00
Sell short 11 November 2018 (AAPL) $190 calls at…..$29.20
Net Cost:…………………….……….....……...........…….….....$8.80
A screenshot of my own trading platform is below:
This gets traders into the position at $8.80, which costs them $9,680 ($8.80 per option X 100 shares per option X 11 contracts).
The vertical part of the description of this trade refers to the fact that both options have the same underlying security (AAPL), the same expiration date (November 16, 2018), and only different strike prices ($180 and $190, or a “spread”).
“Bull” (as opposed to “Bear”) means you receive the maximum profit in a rising market as opposed to a falling one.
“Debit” refers to the fact that you have to pay money to obtain this position rather than receive a credit.
The maximum potential profit can be calculated as follows:
+$190.00 Upper strike price -$180.00 Lower strike price
+$10.00 Maximum Potential Profit at expiration
Another way of explaining this is that the call spread you bought for $8.80 is worth $10.00 at expiration on November 16, giving you a total return of 13.63% in 27 trading days. Not bad!
The great thing about these positions is that your risk is defined. You can’t lose any more than the $9,680 you put up.
If Apple goes bankrupt, we get a flash crash, or suffer another 9/11 type event, you will never get a margin call from your broker in the middle of the night asking for more money. This is why hedge funds like vertical bull call spreads so much.
As long as Apple traded at or above $190 on the November 16 expiration date, you will make a profit on this trade.
As it turns out, my take on Apple shares proved dead on, and the shares rose to $222.22, or a healthy $32 above my upper strike.
The total profit on the trade came to:
($10.00 expiration - $8.80 cost) = $1.20
($1.20 profit X 100 shares per contract X 11 contracts) = $1,320.
To summarize all of this, you buy low and sell high. Everyone talks about it, but very few actually do it.
Occasionally, Vertical Bull Call debit Spreads don’t work, and the wheels fall off. As hard as it may be to believe, I am not infallible.
So if I’m wrong and I tell you to buy a vertical bull call spread, and the shares fall not a little, but a LOT, you will lose money. On those rare cases when that happens (about 10% of the time), I’ll shoot out a Trade Alert to you with STOP-LOSS instructions before the damage gets out of control.
I start looking at a stop loss when the deficit hit 10% of the size of the position or 1% of the total capital in my trading account. It’s easier to dig yourself out of a small hole than a big one.
And why do I execute Vertical Call Debit Spreads rather than Vertical Call Debit Spreads like most professionals do? Because Vertical Call Debit Spreads are easier for beginners to understand.
To watch the video edition of How to Execute a Vertical Bull Call Spread, complete with more detailed instructions on how to execute the position with your own online platform, please click here.
Good luck and good trading.
Vertical Bull Call Spreads Are the Way to Go in a flat to Rising Market
(MARKET OUTLOOK FOR THE WEEK AHEAD or OUT WITH THE NEW, IN WITH THE OLD) Plus REPORT FROM THE QUEEN MARY II),
(TLT), (TSLA), (DHI), (LEN), (KBH), (LMT), (RTX), (GD), (GLD), (SLV), (GOLD), (WPM), (JPM), (NVDA), (BAC), (C), (CCJ), (MS), (SPY)
“Take things as they are and profit off the folly of the world.”
That is one of my favorite quotes from Anselm Rothschild, founder of the Rothschild banking dynasty, which ruled the financing of Europe for centuries. I lived next door to his great X 10 grandson in London for ten years, the late Jacob Rothschild, and boy, did I learn a few nuggets from him.
It's really just another way of saying that you have to trade the market you have, not the one you want. By the way, Anselm’s other famous quote? In 1815, the year the British defeated Napoleon at the Battle of Waterloo, he said, "I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls the British money supply controls the British Empire, and I control the British money supply."
And that shall be my strategy in the coming years. The good news? There is a ton of folly out there and, therefore, tons of great new trades.
Let’s start with the market themes. Out with the new, in with the old. Falling interest rates plays are out. Rates will stay higher for longer. Artificial Intelligence will take an extended vacation. Saving the environment is history. Take a look at the woeful underperformance of NASDAQ. That will allow earnings to catch up with share prices, which are already at nosebleed levels.
Money managers will sell these areas, which in many cases have seen enormous appreciation, to finance the purchase of the new themes. These include deregulation, the end of antitrust, the Bitcoin ecosystem, and Tesla (TSLA).
It helps a lot that the outgoing themes are incredibly expensive, with price-earnings multiple of 30X-100X, while the new ones are dirt cheap, with multiples of 15X down to single digits.
Buy cheap, sell expensive….I like it!
If you think I’m just an aging old hippy from Berkeley spouting his iconoclastic, out-of-touch-with-reality views, then check with Mr. Market, who agrees with me on every point and is never wrong.
Notice the collapse of the bond market (TLT) since September. Fed funds futures have already backed out 100 basis points of easing, from 250 basis points to only 150, and we have already seen the first 75. If inflation makes a rapid comeback (prices started rising on November 6), we are likely to only see a couple more 25 basis point cuts from the Fed in this cycle, and that’s it.
The 30-year fixed rate mortgage has rocketed from 6.0% to 7.13%, sticking a dagger through the heart of the real estate market and homebuilders (DHI) (LEN), KBH).
Defense? Who needs weapons when we are withdrawing from the international community? We will just have to depend on our existing 50-year-old defense systems. And while you’re at it, end “cost plus” contracts, which have inflated defense spending since 1940.
This is what fried the shares of Lockheed Martin (LMT), builder of the Blackhawk helicopter, Raytheon (RTX), maker of Javelin antitank missiles, and General Dynamics (GD), manufacturer of the Abrams tank after the past month. What happens to these stocks when the Ukraine War ends?
I have received a lot of questions about whether it is time to go into pharmaceutical and biotech stocks. The answer is no, a thousand times no. The appointment of anti-vaxxer Robert F. Kennedy as the head of Health and Human Services puts the kibosh on that trade, who is likely to declare war on that department. That explains the wipeout of shares in that sector.
Precious metals? Forget it (GLD), (SLV), (GOLD), and (WPM). Witness their own recent hell they have entered. There is no doubt that the election ended the gold trade, which has fallen by 8.3% since November 5. That’s because investors pulled $600 million out of gold-backed ETFs just in the week ending November 8, according to the World Gold Council. It just had its worst week in three years. “Interest rates higher for longer” absolutely does not fit anywhere in the precious metals trade.
Another contributing factor has been the strength of Bitcoin, which raced to a new all-time high of $93,000 on the back of the Trump win. The industry had been a major contributor to the Trump campaign. What better way to fund Bitcoin purchases than to sell your gold, which in any case is up 40% in a year? Money has been pouring into Tesla shares for the same reason.
At some point, gold will fall to a level where Chinese saving alone supports the price. There is no way of knowing where that is, so I’ll wait for the market to tell me. Central bank buying will continue unabated, which has totaled 694 metric tonnes ($5.3 billion) so far in 2024.
I believe that gold will still hit $3,000 an ounce over the long term. But for now, the shine is clearly off those American Eagles. The last time gold took a rest, from 2011 to 2019, it was for eight years.
The bottom line is that there are plenty of new fish to fry out there and plenty of fire with which to cook them. Does anyone have any matches?
In November, we have gained a breathtaking +8.19%, amazing adding to our gains while the market dropped 2.3%. My 2024 year-to-date performance is at an amazing +61.33%.The S&P 500 (SPY) is up +25.79%so far in 2024. My trailing one-year return reached a nosebleed +62.15%. That brings my 16-year total return to +737.86%.My average annualized return has recovered to +53.02%.
I maintained a 100% long-invested portfolio, betting that the market doesn’t drop below pre-election levels. That includes (JPM), (NVDA), (BAC), (C), (CCJ), (MS), and a triple long in (TSLA). My November position in (JPM) expired at max profit. We should make 46 basis points a day until the December 20 option expiration in 24 trading days, thanks to time decay and falling volatility.
Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 73 of 93 trades have been profitable so far in 2024, and several of those losses were really break-even. That is a success rate of +78.49%.
Try beating that anywhere.
My Ten-Year View – A Reassessment
We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties, is now looking at a headwind. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
My Dow 240,000 target has been pushed back to 2035.
On Monday, November 18 at 8:30 AM EST, the NAHB Housing Market Index is out. On Tuesday, November 19 at 8:30 AM, the US Building Permits take place. Nvidia (NVDA) announces earnings after the close.
On Wednesday, November 20 at 8:30 AM, the MBA Mortgages Rates are announced.
On Thursday, November 21 at 8:30 AM, Existing Home sales are printed. We also get Weekly Jobless Claims.
On Friday, November 22 at 8:30 AM, the S&P Global Flash PMI is announced. At 2:00 PM the Baker Hughes Rig Count is printed.
Location: 48 degrees, 02.12 minutes North, 043 degrees, 42.08 minutes West, or 1,421 nautical miles ENE of New York.
As for me, The Queen Mary 2 is currently plowing its way through a massive fog bank a thousand miles thick, sounding the foghorn every two minutes. Visibility is less than 100 yards, and the waves are a rough 12 feet high. The captain has closed the outside decks for fear of losing a passenger overboard. The weather has disrupted our satellite link, and our Internet is down. So here I write. Leave me alone with a laptop for an hour, and I can conquer the world.
One hour out of New York, and a passenger suffered a heart attack. So the captain turned the ship around and headed back to the harbor, where the New Jersey Search and Rescue sent out a launch to pick up the unfortunate man and his distraught spouse. Every passenger leaned over the port railing to watch.
That meant we could pass under the Verrazano Bridge three times, on each occasion deftly clearing the span by a mere ten feet. Talk about inauspicious beginnings. Visions of Leonardo di Caprio going down with the ship danced across my mind.
The ship is truly gigantic. You must allow 20 minutes to get anywhere, 5 minutes to walk there, and 15 minutes to get lost. When launched two decades ago, it was the largest cruise ship ever built at 148,900 tons, nearly double the size of the now decommissioned Queen Elizabeth II. It whisks up to 3,000 passengers and 1,325 crew across the seas in the utmost luxury at a steady 21.5 knots. You could water ski behind this leviathan of a vessel if only the crew permitted it.
As a 50-year guest of Cunard and the highest paying customer on the ship, I managed to bag the Sandringham Suite, possibly the most luxurious publicly available oceangoing accommodation ever created. The 2,200 square foot, two-floor, two-bedroom, three-bathroom, Q1 class apartment on decks nine and ten included a formal dining room, kitchen, his and her closets, a small gym, and 1,000 square feet of rear-facing teak deck.
All of this was a bargain for $56,000, or about the same as renting the presidential suite at the San Francisco Ritz for a week at $10,000 a night, except at the end, you wake up in England five pounds heavier. Not that I noticed, though. By the afternoon, the two complimentary bottles of Dom Perignon Champagne were already headed for the recycling bin.
The suite came staffed with two full-time butlers, Peter and Henry, who were an endless font of fascinating information about the ship. During one unfortunate cruise, eight senior citizens passed away. The onboard morgue held only six, so the extra two were stashed in the meat locker for the duration of the voyage. There was no reported change in the flavor of the Beef Wellington.
I asked if Cunard had ever performed burials at sea in these circumstances. They said they used to. But a few years back, an elderly billionaire, “Mr. Smith,” checked into a deluxe Q1 cabin with a hot young “Mrs. Smith” and then promptly expired. The grieving widow requested he be buried mid-Atlantic with the traditional yard of sail and a cannonball. When the ship docked at Southampton, a much older, real “Mrs. Smith” appeared to claim the body and sued the company when informed of his current disposition. So, no more burials at sea.
Yes, the ship did hit a whale once, which stuck to the bulbous bow. When it landed in Portugal, Cunard was fined for commercial fishing without a license. The unlucky cetacean’s skeleton is now in a Lisbon maritime museum. Apparently, this company gets sued a lot.
Of course, the memory of the sinking of the Titanic is ever present. There is a history display down on deck 2, and you can even have your photo taken in front of a backdrop of the grand staircase of the ill-fated ship. When we passed 10,000 feet over the wreck at 48 degrees, 38.50 minutes North, 50 degrees, 00.11 minutes West one day out of New York, the Queen Mary 2 let out three long blasts of its horn in memory of the lost. Cunard took over the Titanic’s White Star Line during the Great Depression and is, therefore, the inheritor of this legacy.
When I visited the computer center, I was stunned to learn that they were offering three-hour long classes on Apple products and programs every hour, all day long. They covered iMacs, iPads, iPhones, and all of the associated software and gizmos. I promptly signed up for five classes. Watch for my next webinar. It will be a real humdinger, with all the bells and whistles.
You would think that with 280 pounds of luggage, I could remember to bring a pair ofblack socks. It was not to be. So I headed out to the ballroom with my black tux and navy blue socks to tango, rhumba, and foxtrot with the best of them. The problem is that just as you twirl, the ship rolls, swiping the dance floor right out from under you. With several Octogenarian couples within range and my size, the consequences could have been fatal. Still, those oldsters really knew their steps. I really hope those pictures come out, especially the one of me on the dance floor, flat on my back.
Looking at the vast expanse of the sea outside my cabin window, I am reminded of the opening scenes of the 1950’s WWII documentary Victory at Sea. An endless, dark, tempestuous ocean churns and boils relentlessly. I am now even more awed by my early ancestors, who took three months to cross from Falmouth to Boston in a 50-foot-long wooden ship called the Pied Cow in 1630. They did this without navigation to speak of rotten food and a dreaded fear of sea monsters. What courage or religious ferocity must have driven them?
Four days of hearing foghorns is starting to get tiring. Captain Wells has been ducking many of his social responsibilities, feeling more secure in the bridge close to the radar. After a few days of intermittent access, the Internet is now gone for good, the satellite connection having given up the ghost. People are blaming everything from a lightning strike on the Virginia ground station to late-night watching of porn by the crew.
Instead of surfing the net, I am devoting more time to exercise in anticipation of my upcoming Swiss mountain climbing adventures. I have developed a careful routine where I fast walk three times around deck 7 in a brisk wind, take the elevator down to deck 1, walk up the stairs to deck 13, speed past the kennels, the practice golf range, two swimming pools, and a bar.
I can accomplish all of this three times in an hour and do it with 40 pounds of books stashed in my backpack. My butler, Peter, tells me there is always a certifiable nut case on every cruise, and I have been designated by the crew as “THE ONE”.
The 2,600 passengers are quite a mixed batch. We have 1,200 British, 750 Americans, 350 Germans, 80 Canadians, 4 dogs, three cats, and an assortment of other nationalities, and exactly one Japanese couple who didn’t speak a word of English.
I took pity on them and spent an evening translating and catching up on the world at large with them. He was a retired dance instructor, which explains why he and his wife owned the dance floor on most nights. They were grateful for the conversation, for during their entire 30-day cruise from New York to Southampton, then the Baltic Sea and the Norwegian fiords, then back to New York, they had no one to speak to. Still, that was better than last year, when they completed a 105-day round-the-world cruise with no one to talk to. Before they left, they gave me an exquisite, handmade, traditional Japanese purse as a gift.
Queen Mary II Passing Under the Verrazano Bridge
Your Intrepid Reporter
Breakfast on the High Seas
Check Out My New Digs
The Hard Life at Sea
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2024/11/John-thomas-cruise.png636478april@madhedgefundtrader.comhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngapril@madhedgefundtrader.com2024-11-18 09:02:342024-11-18 11:29:42The Market Outlook for the Week Ahead, or Out with the New, In with the Old
There’s nothing like a swift kick in the shins, a slap in the face, and a good boxing of the ears to give you a healthy dose of humility.
That’s holders of the ProShares Ultra VIX Short-Term Futures ETF (UVXY) right about now. This is the popular ETF that rises when the S&P 500 (SPY) falls.
“Markets can remain irrational longer than you can remain liquid,” as my late mentor, the legendary economist and early hedge fund trader John Maynard Keynes, used to say.
I know this because it is inscribed on a post-it note taped to my screen.
This was only made possible by the Volatility Index falling to $14 in the past week, a multi-month low.
To see this happening with stocks at an all-time high is nothing less than amazing. The ($VIX) seems to be telling us that stocks are going sideways to up for the rest of the year.
The reason this fund can only fall over the long term is because of the contango that permanently haunts it.
While the front-month Volatility Index (VIX) was trading at a lowly $14, three-month volatility was at a lofty $19.9.
The (UVXY) buys three-month volatility and runs it into expiration. It then exacerbates this negative impact with 2X leverage. The guaranteed loss on this trade is, therefore, $2.80/$14 X 2, or 40%.
It is a perfect money-destruction machine.
Do this every month, and eventually, you use up all your capital. You see this most clearly on the long-term split-adjusted (UVXY) chart below, which has it going from $30,000 to $10.88 in only three years, a loss of 99.9%.
This is why you should only hold the position for a few days or weeks at the most and, even then, to hedge long positions in other stock or indexes.
The bulk of the trading in this instrument is, in fact, carried out by day traders.
You only want to own (UVXY) and the (VIUX) during the brief, frenzied volatility spikes that occur, as we did with the last trade.
You might want to ask the question, “Why aren’t we shorting this thing?”
The ($VIX) is prone to sudden, extreme moves to the upside whenever an unforeseen geopolitical or economic event takes place, such as a terrorist attack or a bad monthly nonfarm payroll number.
It can double in days as traditional long-side investors who are unable to sell short stocks or futures rush to buy some downside protection.
It has done this a few times in the past year. During the 2009 crash, the ($VIX) ratcheted all the way up to $90 and $65 during the pandemic.
Often, you get large moves of 20% or more right at the opening, as professional traders who are almost always short volatility, rush to cover short positions all at the same time.
As a result, many of the people who try this strategy often go bust.
On top of this, your broker is unlikely to extend the margin you need to put on a decent-sized position, especially to beginners.
The concern is that when the customer wipes himself out, they will take a piece of the broker’s capital with it. Customers who lose money in this way often end up suing their broker, another turn-off.
The people who do make money at this tend to be large teams of very experienced traders with massive computer and programming support executing complex, state-of-the-art risk control algorithms.
It costs millions of dollars to put all this together.
Needless to say, you should not try this at home.
Maybe the market is trying to tell me something. Like, quit looking for a seat after the music stops playing. Don’t trade if there is nothing there.
Nobody pays you to hold cash.
It looks like it is going to be a long winter. A long cruise is looking better by the minute.
https://www.madhedgefundtrader.com/wp-content/uploads/2022/03/john-thomas-in-red-shirt-e1648184714884.png578400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2024-11-15 09:02:592024-11-15 11:39:36Contango in the (UVXY) Explained One More Time
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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.
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