Global Market Comments
June 19, 2020
Fiat Lux
Featured Trade:
(JUNE 17 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (AAPL), (FXE), (FXA), (BA), (UAL), (AAPL), (MSFT), (BIIB), (PFE), (OXY), (SPCE), (WMT), (CSCO), (TGT)
Tag Archive for: (SPY)
Below please find subscribers’ Q&A for the June 17 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What is the best way to buy long term LEAPS for unlimited profits?
A: There is no such thing as unlimited profits on LEAPS; they are specifically limited to about 500% or 1,000%. Most people will take that. The answer is to wait for crash day. That’s when you dive into LEAPS, or during very prolonged sell-offs like we had in February or March. That’s where you get the bang per buck. On a capitulation day, you can pick up these things for pennies.
Q: How do you explain that all the cities and states that had major COVID-19 outbreaks and deaths are controlled by Democrats?
A: That’s like asking why you don’t get foot and mouth disease in New York City. The majority of US cities are Democratic, while the rural areas tend towards Republicans and the suburbs that flip back and forth. So, you will always get these big hotspots in cities where the population density is highest and there is a lot of crowding because that’s where the people are. Covid-19 is a disease that relies on within six-foot transmission. You are not going to get these big outbreaks in rural places because there are few people. Horse, cow, and pig diseases are another story. That is one reason the disease has become so politicized by the president.
Q: What is the time horizon for your picks?
A: It’s really a price function rather than a time horizon. Sometimes, a trade works in a day, other times it’s a month. I try to send out a large number of trade alerts because we have new subscribers coming in every day and the first thing they want is a trade alert. Occasionally, I’ll make 10% in a day and I take that immediately.
Q: I’m a new investor; trading in a pandemic is one thing, but what about other risks like volcanic eruptions, major solar flares, or global war? How do I prepare for one of three of these things in the next 25 years?
A: I’m actually worried about all three of those happening this year. If you lived through 1968, everything bad tends to happen in one year, and bad things tend to happen in threes. This is a year where we’re kind of making it up as we go along because there is no precedent. The playbook has been thrown out. Those who always relied on trading stocks and securities predictable ranges got wiped out.
Q: Beijing has quarantined its population again and canceled flights; is this going to cause the Chinese government to ramp up the blame game with the US?
A: Absolutely, the US is the number one Corona incubator in the world by far. We have 120,000 deaths—China had 4,000 deaths with four times the population. Many countries are blaming us for keeping this pandemic alive and spreading it further. But I don’t think foreign relations are a high priority right now with our current government. That said, it is easier for a dictatorship to control an epidemic than a democracy. In China, they were welding people’s doors shut who had the disease.
Q: Do you think taking away the $600 or $1200 stipend for the unemployed is going to crush the chances for many trying to get back to work?
A: It will. A lot of the stimulus measures only delay collapse by a couple of months. The PPP money was only for 2 months; I know a lot of companies are counting on that to stay in business. Some state unemployment benefits run out soon. Either you’re going to have to start forking up $3 trillion every other month, or you’re going to get another sharp downturn in the economy. Cities are bracing themselves for the worst eviction onslaught ever. Mass starvation among the poor is a possibility.
Q: Where do you place stops on vertical spreads?
A: Since vertical spreads don’t lend themselves to technical analysis, you have to draw a line in the sand—for me, it’s 2%. If I lose 2% of my total capital, or 20% on the total position, then I get the heck out of there and go look for another trade. That’s easy for me to do because I know that 90% of the time my next trade is a winner.
Q: Why did you sell your S&P 500 (SPY) July $330/$320 put spread at absolutely the worst moment?
A: The market broke my lower strike price, which is always a benchmark for getting out of a losing trade. When you go out-of-the-money on these spreads, the leverage works against you dramatically. This market isn’t lending itself to any kind of conventional historic analysis. The market went higher than it ever should have based on any kind of indicator you’re using. When the market delivers once in 100 year moves like we had off the March 23 bottom, you are going to be wrong. However, we immediately made the money back by putting on a (SPY) July $335/$340 put spread with a shorter maturity, and a (SPY) July $260-$$270 call spread. If you’re in this business, you’re going to take losses and be made to look like a perfect idiot, like I did twice last week.
Q: Who is getting involved down 10%?
A: I would say you’re getting both institutions and individuals involved down 10%. You keep hearing about $5 trillion in cash on the sidelines, and that’s how it’s coming to work. Plus, we have 13 million new day traders gambling away their stimulus checks.
Q: Why have you not put on a currency trade this year?
A: With the incredible volatility of the stock market, there were always better fish to fry. Currencies haven’t moved that much, and you want stocks that are dropping by 80% in two months and gapping up 200% the next two months. So, in terms of trading opportunities, currencies are number three on that list. Would you rather buy Apple (AAPL) for a 75% move, or the Euro (FXE) for a 6% move? My favorite has been the Aussie (FXA) and it has only gone up 20%.
Q: Do you issue trade alerts on LEAPS?
A: I don’t; most trade alerts are short term trades in the next month or two because we have to generate a large number of them. However, in February, March, and April, we started sending out lists of LEAPS. We sent out about 25 LEAPS recommendations. We did ten for Global Trading Dispatch (BA), (UAL), (DAL), ten for the Mad Hedge Technology Letter (AAPL), (MSFT), and five for the Mad Hedge Biotech & Health Care Letter (BIIB), (PFE). Even if you got just one or two of these, you got a massive impact on your performance because they did go up 500% to 1,000% in 2 months, which is normally the kind of return you see in two years. So, getting people to buy all those LEAPS was probably the greatest call in the 13-year history of this letter. I know subscribers who made many millions of dollars.
Q: I am new to trading; other than placing a trade, what do you recommend I get a handle on in the learning process?
A: We do have two services for sale. We have “Options for the Beginner,” and that I would highly recommend, and I’ll make sure that’s posted in the store. You can’t read or study enough. If you really want to go back to basics, read the 1948 edition of Graham and Dodd, where Warren Buffet got his education actually working for Benjamin Graham in the ’40s.
Q: Will Occidental Petroleum (OXY) go bankrupt?
A: No, they have the strongest balance sheet of any of the oil majors, so I would bet they would hang around for some time. They also have no offshore oil, which is the highest cost source of oil. But it’s going to be a volatile time for a while.
Q: Usually the selling is telling me to go away. With this market, the amount of money on the sidelines, is it going to be a stock picker’s market?
A: Yes, like I said the playbook is out the window. Normally, you get a month’s worth of trading in a month, now you get a month's worth in a day or two. So, we’re on fast forward, Corona is the principal driver of the market and no one knows what it’s going to do. The teens were a great index play. The coming Roaring Twenties will be a stock picker’s market because half of the companies will go out of business, while many will rise tenfold. You want to be in the latter, not the former. And index gets you the wheat AND the chaff.
Q: Will there be another opportunity to buy LEAPS?
A: Yes, especially if we get a second corona wave and it slaps the market down to new lows again. There’s a 50/50 chance of that happening. The rate of Corona cases is now increasing exponentially. We had 4,000 new cases in California yesterday.
Q: How do you see Main Street two years from now? Will the battered middle class ever recover?
They will if they move online. I think main street will be empty in two years. Only the largest companies are surviving because they have the cash reserve to do so. And they seem to be able to get government bailout money far better than the local nail salon or dry cleaner. Again, this was a trend that had been in place for decades but was greatly accelerated by the pandemic. I was in Napa, CA yesterday and half of the storefront shops had gone out of business.
Q: What are your thoughts on the spacecraft company Virgin Galactic (SPCE)?
A: Great for day traders, great for newbies, but not real investment material here. I don’t think the company will ever make money. It was just part of the temporary space had. Better to read about it in the papers and have a laugh than risk your own hard-earned money. Elon Musk’s Space X though is a completely different story.
Q: Which is the better buy now: Walmart (WMT), Costco (CSCO), or Target (TGT)?
A: I’d probably go for Target because they have been the fastest to move to the new online order and curb pickup universe. But Costco is also a great play.
Q: When should I buy Tesla?
A: On the next meltdown or down 30% from here, if and whenever we get that. It’s going to $2,500, then $5,000.
Q: With QE infinity, it doesn’t sound like we’ll get to LEAPS country. Do you agree?
A: No, I wouldn’t agree because at some point, the government might run out of money, the bond market won’t let them borrow anymore, and the money that gets approved doesn’t actually get spent because the works are so gummed up. Plus, Corona is in the driver's seat now. What if we’re wrong and we don’t get 250,000 cases by August, but 500,000 cases? 20 million? There are 100 things that could go wrong and get us back down to lows and only one that can go right and that is a Covid-19 vaccine. We’ve essentially been on nonstop QEs for the last 10 years already and the market has managed many 20% selloffs during that time. If we pursue a Japanese monetary policy, we will get a Japanese result, near-zero growth for 30 years.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mount Everest in 1976
Global Market Comments
June 15, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WAITING FOR MY SUGAR CUBE),
(SPY), (INDU), (UUP), (GLD), (TLT), (HTZ), (TSLA)
I was born in the middle of a pandemic.
It was polio, and in the early 1950s, it was claiming 150,000 kids a year just in the US. You know polio. You’ve seen the pictures of the kids with withered legs or living in iron lungs, the ventilators of their day.
My mom contracted polio in the 1930s and spent a year in quarantine. They didn’t understand then that the virus was in the drinking water.
She lost the use of her legs for a time. My grandfather’s cure was to take her hiking in the High Sierras every weekend to rebuild her muscles. During WWII, he had to buy gas coupons on the black market to make the round trip from LA to Yosemite.
It worked well enough for mom to earn a scholarship to USC where she met my dad, a varsity football player. By the time I came along, Jonas Salk discovered a vaccine, which was infused into a sugar cube and given to me at the Santa Anita Racetrack along with tens of thousands of others. It was one of the big events of American history.
Some 70 years later, I am maintaining the family tradition, forcing my kids out on backpacks a couple of times a week, they're moaning and complaining all the way.
It looks like the first wave of the Corona pandemic isn’t even over yet. That’s why the Dow Average managed to puke out some 10% in days.
So, here is the conundrum: How much can we take the market down in the face of the greatest monetary and fiscal stimulus in history. Some $9 trillion has already been spent and there is at least another $5 trillion behind it.
My bet is a few more thousand points down to 24,000 but not much more than that. If this turns into a rout and a retest of the lows, the Fed will simply turn on the presses and print more money. After all, the marching orders from the top are to keep stocks high into the election, whatever the cost.
One of the reasons we are seeing such wild swings in the market is that the market itself doesn’t know what it’s worth. That’s because this is the most artificially manipulated market in history, thanks to the government stimulus, 20 times what we saw in 2008-2009.
Stocks can’t figure out if they are worthless, or worth infinity, and we are wildly whipsawing back and forth between two extremes.
Take that stimulus away and the Dow Average would be worth 14,000 or less. Stimulus will go away someday, and when it goes away, there will be a big hit to the market. It’s anyone’s guess as to timing. Ask the Covid-19 virus.
We have seen countless market gurus being wrong about this market, many of whom are old friends of mine. That’s because they, like I, see the long-term damage being wrought to the economy. Recovering 80% of what we lost will be easy. The last 20% will be a struggle.
That alone amounts to one of the worst recessions we have ever seen. This is going to be a loooong recovery. Some forecasters don’t expect US GDP to recover to the 2019 level of $21.43 trillion until 2025.
In the meantime, the national debt is soaring, now at $26 trillion, and will soon become a major drag on the economy. The budget deficit alone this year is now pegged at an eye-popping $3 trillion, the largest in history.
The S&P 500 turned positive on the year for a whole day. It’s been an amazing move, the largest in history in the shortest time, some 47% in ten weeks. NASDAQ hit my year-end target of $10,000, then immediately gave back 10%.
The problem now is that stocks are still the most overbought in history and risk is the highest since January. Much trading is now dominated by newly minted day traders chasing bankrupt stocks like Hertz (HTZ) with their $1,200 stimulus check. Far and away, the better trade is to sell short bonds. After that, buy gold (GLD) and sell short the US Dollar (UUP).
Stocks then dove 7.4% on second wave fears as US cases top 2 million and deaths exceeded 114,000. Jay Powell says he won’t raise interest rates until 2023 at the earliest. The “reopening” stocks of airlines, hotels, and cruise lines are leading the downturn from crazy overbought levels.
Houston may have to close down again, in the wake of soaring Corona cases after a too early reopening. Other cities will follow. Cases in Arizona are also hitting new highs. It’s not what the market wanted to hear.
Weekly Jobless Claims hit 1.54 million, at a falling rate, but still at horrendous absolute levels. That’s better than last week’s 1.9 million. Some 20.9 million are still receiving state unemployment benefits, or 13.1% or the total workforce. These numbers certainly don’t justify a stock market near an all-time high.
The Fed expects Unemployment to remain stubbornly high, not falling to 9.3% by yearend. I think that’s highly optimistic. Some 20% of the 43 million lost jobs are never coming back, giving you an embedded U-6 rate of over 10%. It is easier and faster to fire people than to hire them back.
Election Poll numbers are starting to affect the market. Polls showing Trump 10%-14% points behind Joe Biden in the November presidential election opened stocks down 400 points on Monday. The betting polls in London are confirming these numbers.
The Republican leadership is jumping ship. A Biden win will bring higher corporate taxes, balanced budgets, less liquidity for the stock market, fewer Tweets, and clipped wings for the top 1%. Is this a trigger for the next market correction? We’ll find out in five months. When will stocks notice that?
Bond King Jeffrey Gundlach absolutely hates stocks, predicting we could take out the March lows. He believes the monster rally in big tech is unsustainable. The better trades are to sell short the US dollar (UUP) and to buy gold (GLD). I agree with much of this, but Geoff’s calls can take 6-12 months to come true, so don’t hold your breath, or bet the ranch.
Tesla hit a new all-time high, as I expected, ticking at $1,220. An 11% price cut is boosting sales and market share, while (GM) and (F) are dying. The Model Y, which looks like the love child of a Model X and Tesla 3, is expected to be their biggest seller ever. This is one bubble stock that IS worth chasing. Buy (TSLA) dips up to $2,500. No kidding!
New Zealand became the first Corona-free country, with zero cases, so it can be done. An island country with all international flights grounded, aggressive social distancing restrictions, and an ambitious contract tracing, the land of kiwis had everything going for it. Most importantly, they had the right leadership that listened to scientists, which the worst-hit countries of Sweden, Brazil, and the US are sadly lacking.
The Mad Hedge June 4 Traders & Investors Summit recording is up. For those who missed it, I have posted all 9:15 hours of recordings of every speaker. This is a collection of some of the best traders and investors I have stumbled across over the past five decades. To find it please click here.
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil at a cheap $34 a barrel, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance took it on the nose last week. I got stopped out of my shorts at the market top, then took a hit on my bonds shorts. My 11-year performance stands at 360.61%.
That takes my 2020 YTD return up to a more modest +4.70%. This compares to a loss for the Dow Average of -12.2%, up from -37%. My trailing one-year return retreated to 44.88%. My eleven-year average annualized profit backed off to +34.34%.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, June 15 at 12:00 PM EST, the June New York State Manufacturing Index is out.
On Tuesday, June 16 at 12:30 PM EST, US Retail Sales for May are released.
On Wednesday, June 17 at 8:15 AM EST, Housing Starts for May are announced.
At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are published.
On Thursday, June 18 at 8:30 AM EST, Weekly Jobless Claims are announced.
On Friday, June 19 at 2:00 PM EST, the Baker Hughes Rig Count is out.
As for me, I am waiting for my sugar cube.
In the meantime, I will spend the weekend carefully researching the recreational vehicle market. If everything goes perfectly, a Covid-19 vaccine will be not available to the general public for at least two years.
Until then, my travel will be limited to the distance I can drive. Travel while social distancing with my own three-man “quaranteam” will be the only safe way to go.
When the New York Times highlights it, as they did this weekend, it’s got to be a major new thing.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Yosemite in 1942
Global Market Comments
June 12, 2020
Fiat Lux
Featured Trade:
(WHEN THE BILL COMES DUE)
(SPY), (TLT), (GD), (USO), (HTZ), (JCP)
This was a top you could see coming a mile off. Now, the correction for the greatest rally in stock market history has begun. Will it be the greatest correction in history?
It could be.
It was the awful news that the Coronavirus is starting to run away again that started the panic. New cases in Texas and Arizona are growing so fast that the local hospital systems are getting overwhelmed once again. The Armageddon scenario is back on the table once again.
You knew we were in trouble when the stocks of bankrupt companies, like Hertz (HTZ) and JC Penny (JCP) started doubling in a day, even though they have no equity value whatsoever. They were bid up simply because they had low single-digit prices, as bankrupt companies always do.
They were bid up by greater fools and the market just ran out of them.
It wasn’t just equities that got slammed. Oil (USO) suffered a horrific day, down 8.2%. because of burgeoning inventories leftover from a dead-in-the water economy. Bonds rocketed three points and are up an eye-popping 11 points from last week. Even gold (GLD) failed to move, held back by widespread margin calls.
It seems we have returned to the terrors of February-March, the down 2,000 points a day kind. There was barely a rally all day. It basically went straight down. How much more is there to go? Let’s look at the obvious targets in the S&P 500 (SPY) and the distance from the Monday top.
$299 – Down 7.7% from the top – the 200-day moving average and top of the April - May double top
$288.74 – Down 10.9% - The 50-day moving average
$272 – Down 15% - bottom of the April - May double bottom
$262 – Dow 19.4% - Top of the initial rally off the March 23 bottom and the level where a new bear market is declared. Two bear markets in two quarters?
$219 – Down 32.6% - the March 23 low gets retested.
There is quite a lot to chew on here. In the end, it will depend on how much the first Corona wave ramps up after a far too early re-opening. Even if there are no further shutdowns of the economy, a world where consumers are too afraid to leave their homes doesn’t generate a lot of growth or earnings.
When the president says things are great, but you see 5% of normal traffic in the local shopping mall, you want to run a mile.
Forget about the second wave, we haven’t even gotten out of the first wave yet. Corona deaths topped 114,000 today. We could hit 250,000 by August, not a great mall traffic generator.
If the selloff continues, and it probably will until the Q2 earnings are published starting in mid-July, then this is the dip you want to buy. For if the lows hold, we will be at the beginning of a 400% move in the main indexes over the next decade.
To get the depth of the argument why this will happen, please read about the coming Roaring Twenties and the next American Golden Age by clicking here.
Here is what you want to do on this move down:
*Stocks - buy big dips
*Bonds – sell rallies aggressively
*Commodities - buy dips
*Currencies - sell US dollar rallies
*Precious Metals – buy dips
*Energy – stand aside
*Volatility - sell short over $50
*Real Estate – buy dips
And buy LEAPS (Long Term Equity Anticipation Securities), lots of LEAPS. This is where traders have been picking up 500%-1,000% returns this year.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
June 8, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HISTORY IS REPEATING),
(SPY), (INDU), (TLT), (TBT) (TSLA), (DAL), (BA)
When I was 13 years old in 1965, the week-long Watts Riots broke out in impoverished South Los Angles, killing 34. It was sparked by a police arrest for reckless driving.
While the ruins were still smoking, my dad drove me downtown to view the wreckage. Prudently, he kept his loaded Marine 1911 Browning .45 caliber automatic under a newspaper on the front seat. It looked like a war zone, with some 256 buildings burned to the ground and another 200 looted.
I have been running towards the sound of guns ever since.
Some 55 years later, we are seeing history repeat itself. However, instead of seeing the riots occur in major cities one at a time, as they did in the 1960s, we saw demonstrations and riots in 356 US cities all at the same time!
The impact on the economy, and eventually the stock market, will be immense.
As a long term follower of the structure of the US economy, what is going on now is utterly fascinating. A million connections within the economy have been severed forever and a million new ones created, which few understand.
The end result will be a far more efficient and profitable form of American capitalism. Companies are rebuilding time-tested business models in weeks. Those who can discern these new connections early will make fortunes. Those who don’t will dry up and blow away like so much dust into the ashcan of history.
Of course, the defining announcement of the week came on Friday morning with the Headline Unemployment Rate, which delivered a blockbuster FALL, from 14.7% to 13.3%, sending stock up 1,000 points. It’s proof that the stimulus is largely going into the stock market.
Economist forecasts were off by a whopping 10 million jobs, delivering the biggest miss in history. Leisure and Hospitality accounted for 1.2 million job gains, half the total.
Something doesn’t smell right here. How do you miss 10 million jobs? The streets and traffic levels tell me the real jobless rate is more like 20%. I can’t even get into my bank to deposit a check.
I believe the streets.
Look for big downward revisions, which may pose another threat to the market, and possibly a secondary crash, but not for another month.
A client told me last week that he wishes there were major market crashes more often where he could load the boat with deep out-of-the-money LEAPS which then double or triple in weeks.
He may get his wish. The faster we rise now, the greater the risk of a secondary crash which could wipe out half the recent gains.
I managed to catch the bottom of the biggest stock market rally of all time with dozens of LEAPS like with (TSLA), (DAL), (UAL), (BRKB), and (BA). I took profits all the way up and went into last week modestly “Risk On.” But the 1,000-point rally on Friday caught me totally by surprise, as it did everyone else.
I’m sorry, but I guess I’m lousy at trading those once in hundred-year events.
My saving grace has been the most aggressive, in-your-face short positions in the bond market (TLT), (TBT) in the 13-year history of this letter at the same time. It’s still a great trade. Selling short US Treasury bonds now with a 0.90% yield is the same as buying the Dow Average at 20,000….again.
Pending Home Sales collapsed 21.8% in April and off 33.8% YOY on a signed contract basis. These are the worst numbers since the data series started. The West was hardest hit, down 50%. No wonder I’ve seen so many real estate agents at the beach. We already know that a sharp rebound is underway as Millennials move to the burbs and flee Corona-infested cities. Home prices will be up this year.
Mortgage Demand is soaring as ultra-low rates spur demand. Housing will lead the recovery of the bricks and mortar economy. It will take another year before jumbo loan rates start to decline as banks avoid risk like the plague. Buy (LEN) and (KHB) on dips.
Stocks are the most overbought in 20 years since the top of the Dotcom bubble. Risk is extreme for new longs. Almost all S&P 500 stocks are trading above 50 day moving average. The technical indicators are screaming “SELL”.
Consumer Confidence is recovering as even the slightest bit of reopening looks like a lot coming off of zero. The Conference Board’s consumer confidence index rose to 86.6 this month from 85.7 in April, well up from an expected 82. Call it “green shoots”.
Used Car Prices have crashed with Hertz going bankrupt and defaults on new car loans reaching record levels. Surviving rental companies have cancelled all new car orders. Vacation travel has vaporized. Wells Fargo has ceased lending to car dealers. Time to upgrade that second car?
The greatest 50-day rally in the S&P 500 is now over, up 40% since March 23. Buyers are getting nervous and exhausted and are overdue for a pullback. But the historical six-month gain after a move like this is another 10.2% up, followed by a one-year gain of 17.3%. Over $14 Trillion in Fed and fiscal stimulus can go a long way.
US Factory Orders collapsed further, down 13% in May after a 14% crash in April. Don’t expect these numbers to decline any time soon. The stock market will never notice.
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil at a cheap $34 a barrel, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance was up modestly on the week, my downside hedges costing me money in a steadily rising but wildly overbought market. We stand at an eleven-year performance all-time high of 366.68%.
My huge short bond positions, which I have been adding to all the way down, are still delivering big profits. That’s because time decay is really starting to kick in with nine trading days left until the June expiration.
That takes my 2020 YTD return up to a lofty +10.77%. This compares to a loss for the Dow Average of -4.9%, up from -37%. My trailing one-year return exploded to a near-record 52.27%. My eleven-year average annualized profit ballooned to +34.92%.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, June 8 at 8:00 AM EST, Consumer Inflation Expectations for May are announced.
On Tuesday, June 9 at 10:30 AM EST, we learn the NFIB Small Business Optimism Index for May.
On Wednesday, June 10 at 8:15 AM EST, the US Core Inflation Rate for May is printed. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are published.
On Thursday, June 11 at 8:30 AM EST, Weekly Jobless Claims are announced.
On Friday, June 5, at 10:00 AM EST, the University of Michigan Consumer Sentiment figures are out. The Baker Hughes Rig Count follows at 2:00 PM EST.
As for me, I traveled to the local shopping mall to see how real this 2.5 million gain in jobs really exists. More than 50% of the shops were closed, several had already gone bankrupt and traffic was easily below 10% of pre-pandemic levels. Restaurants had maybe 5% of peak traffic sitting at outside tables. Mall police were there to enforce facemask rules.
Nope, not seeing any recovery here. Caveat Emptor.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Hill 27 on Guadalcanal
Global Market Comments
May 21, 2020
Fiat Lux
Featured Trade:
(MAY 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(GLD), (SDS), (TSLA), (VIX), (ROM), (SPY),
(TLT), (TBT), (DRI), (CCI), (BOTZ)
(TESTIMONIAL)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 20 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Do you believe chairman Powell when he says no negative rates?
A: I do believe that he does not want negative rates—that would be hugely detrimental to the economy. Europe and Japan have been trying them for the last ten years and they absolutely do not work. When it costs something to deposit money in the bank, people take it out of the financial system and hide it under their mattresses or buy gold (GLD). Although Powell doesn’t want negative rates, he may not have a choice; the market’s already taking them there in the futures market one year out. If we do get a big second wave of corona in the fall, and we do go to new lows in the stock market, and unemployment goes to new highs, negative rates will happen on their own whether Powell wants them or not.
Q: What is your best metric for determining when this bounce is over?
A: We passed those metrics on when a normal bounce is over weeks and weeks ago, and it just keeps going up. If you’ll notice, I have no stocks right now. I have some balanced long and short stock indexes but that’s it. My big trade is short bonds. When an asset class is no longer attractive, avoid it like Covid-19.
Q: What range should I wait for to buy the Proshares Ultra Short S&P 500 ETF (SDS)?
A: I’m really only using (SDS) as a hedge to limit the risk on much bigger long positions that I may have. (SDS) doesn’t lend itself to normal technical analysis because it is an artificial construct.
Q: What price to get into Tesla (TSLA)?
A: If you look at the Tesla chart, it's almost exactly the same as all of the other FANGS, as it’s essentially becoming the next FANG. So, they will trade with the FANGS for that reason, at least in the short term. Don’t buy it here, wait for the next major selloff to $600 or so. We actually had a bunch of concierge customers to buy long term leaps under $500 dollars in March, and they got 500% returns in 3 weeks.
Q: Why didn’t we just buy the ProShares Ultra Technology ETF (ROM) and go to sleep for five years?
A: If you recall, I was actually recommending just that in March when (ROM) was trading in the $80s, and we actually had a (ROM) position that we got stopped out of. The (ROM) is the 2x long technology ETF that's gone from $80 to $160 since the market bottomed almost 2 months ago.
Q: Why do you keep using deep in the money put spreads and call spreads?
A: You use them when volatility is very high like it is now—right now the Volatility Index (VIX) is at $28. The normal price is at $14 or $15, and we’ve just come down from $80. Even in the high $20s, you still get huge payoffs (like 10% a month) per call and put spread. As long as (VIX) is that high, we’ll keep doing them. They are also the perfect trade to have in range trading markets like we’ve had for the past month. They give you a nice extra kicker on your P&L.
Q: What is the worst-case scenario?
A: We get a second wave of the virus, another couple hundred thousand Americans die, the stock market goes to new lows, and we have a presidential election. How’s that for a worst-case scenario? Other than that, how is your day going?
Q: Do you trade pre and post market?
A: No; I used to when I ran my hedge fund, but I don’t do anything now if it’s beyond the capability of most individuals. I only want to put out trade alerts that people can get done. So, I'm only trading US hours. The reason you trade overseas is that you always get the highest highs and lowest lows in the Asian markets. During the late 1990s, I was the number one or two volume trader in the Singapore futures market.
Q: Do you think the 200-day moving average will be substantial resistance to the market?
A: I think absolutely yes, and I also believe that the only downside trigger for a major breakdown in the market is a second corona wave.
Q: If we get negative interest rates, would (SDS) fall?
A: No, (SDS) is a 2X bear (SPY) ETF that would go through the roof because negative rates would only happen if the stock market was collapsing. You might get a double on (SDS) on a second corona wave and negative interest rates. That’s why I’m keeping my position.
Q: Could the market just keep going up with no major pullbacks if the Fed keeps stimulating the economy?
A: Yes, and that’s what has been happening. Jerome Powell has said that the Fed’s ability to borrow is unlimited, therefore the amount of stimulus they can keep throwing is also unlimited, and if that’s what happens, all of that money will go into financial assets, even if the real economy is in utter freefall (which it has been). You can’t rule out anything these days. You always have to trade with the belief that anything can happen at any time.
Q: I need help setting up Long term Equity Participation Securities (LEAPS). Is there a video on that?
A: You can take all the educational videos we have on call spreads and put spreads, and everything applies exactly the same, except that instead of doing a one-month maturity, you do a two-year maturity. If you play around with the maturity tab on your platform, you can find the longest dated maturity on each option series. Sometimes, it’s only a year, sometimes all the way up to 2.5 years.
Q: Are there any other options besides the United States Treasury Bond Fund (TLT) to short the bond market?
A: Yes, there’s the ProShares Ultra Short 20 Year Treasury ETF (TBT); that’s a 2x short bond market ETF. But you don’t get anywhere near the leverage that we have in the (TLT) put options spreads.
Q: Do you expect a return in inflation with all the stimulus going on?
A: Absolutely yes; food prices have already increased 20%—that will be a big inflationary push. Another $14 trillion in government QE and spending hitting the economy is also highly inflationary. And a lot of the price cuts which fueled deflation are ending as global supply chains are cut and the US food distribution system breaks down.
Q: Is the Great Depression on the table?
A: We are in a Great Depression now that is already far worse than the last one, except that this one will be shorter than the decade seen in the 1930s.
Q: How long will it take for unemployment to recover to the December 2019 3.5% unemployment lows?
A: We will never get back to those lows. A lot of that was over employment (artificial employment), with a lot of temporary marginal workers being picked up. And the net effect of the epidemic will be to make businesses forcibly more efficient; that means getting a lot more done with a lot fewer workers. So, I don't think we’ll ever see that 3.5% rate again. Economists are predicting that the next new low in unemployment may be 5% or 6%, and even that could take 2 or 3 years to get there.
Q: Will the market soar on vaccine news?
A: Well probably not; I would bet that two-thirds of any real vaccines are already in the price. We are getting vaccine announcements every day and the market is immediately discounting it, so when we actually do get the real thing, we may get a rally of only a few days and that’s it. We also won’t know for many months if it is real and is moved to mass production.
Q: If you would buy one restaurant, what would it be?
A: None; I would not touch the restaurants here with a 10-foot pole. None of the restaurant chains have any prospect of making a profit, except for maybe the ones that already had takeout models like Subway or Chipotle Mexican Grill (CMG). Some hedge funds are buying Darden (DRI), but with their money, not mine.
Q: Should I double my short position in volatility (VIX)?
A: No, not down here, especially after a huge run in the stock market like we had—a 40% rise off the bottom. If we do get above $50 though, I will be shorting volatility then.
Q: I bought the (BOTZ) AI and robotics ETF, on your recommendation—it’s now almost double off the lows. What should I do with it now?
A: Short term, take profits, long term keep it. I think the (BOTZ) doubles again from these levels, and I know some of you out there bought LEAPS on the (BOTZ) at the lows and you’re up 1,000% on those. If you have a 1,000% profit take it, you probably won’t get another one in your lifetime.
Q: Time to refi the house?
A: No, I think refi rates are artificially high now (and totally out of line with the bond market) because the default rate is so high—8%. Once that default rate starts to drop, the interest rate on mortgages should also fall, and I think you could see 2.5% on the 30-year fixed rate mortgage. Europe has had 0% rates for almost 10 years, and their home mortgages are at 2%, so that’s ultimately how low we could go.
Q: Are you worried about the debt related to Crown Castle International (CCI)?
A: No because they’re putting all the debt to good use and they can always refi at lower rates. There is no question that the demand for cell phone towers is going to be enormous—epidemic or not, because of the roll-out of 5G phones.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
