Global Market Comments
February 11, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or DON’T STAND NEXT TO THE DUMMY),
(AAPL), (MSFT), (TSLA), (VIX), (TLT), (TBT), (FXI)
Posts
When I was a war correspondent (Cambodia, Laos, Iraq, Kuwait, Indonesia), my seniors gave me a sage piece of advice that saved my life many times.
“Don’t stand next to the dummy.”
Don’t go near the guy wearing the Hawaiian shirt, NY Yankees baseball cap, and aviator sunglasses. You want to be dressed in the same color as the troops and blend in as much as possible. Otherwise, the enemy will aim at the dummy and hit you.
As much as I tried, at 6’4” I was never going to blend in anywhere in Asia. So, I went into the stock market instead.
Now 50 years later, I am facing another dummy problem. Except that the next hit I may take will be of the financial kind rather than the metallic one.
The reaction to the Trump tax cuts is going to be far worse than any benefits the privileged class was able to reap from the cuts in the first place. Listening to the proposals aired, I shudder: A maximum 70% tax rate, the end of special estate tax treatment, a millionaire’s surtax, and the banning of corporate share buybacks.
It’s that last one that that will be particularly damaging for the US economy. Often, a company’s best possible investment is in its own shares where returns are frequently higher than possible through investing in their own business. Just think of all those shares Apple (AAPL) bought at $25, now at $170, and Microsoft (MSFT) picked up at $10.
This is one of the only occasions were management and shareholder interests are one and the same. The event is tax-free as long as you don’t sell your shares. And companies don’t have to pay dividends on stock they have retired, boosting profits even further.
The media loves pandering to the most extreme views out there. I know because I used to do it myself. Cooler heads will almost certainly prevail when the tax code is completely rewritten again in two years. Still, one has to worry.
The week had plenty for we analysts and strategists to chew on.
Is the Fed pausing because of political pressure or an economy that is falling apart? Neither answer is good for equity holders. Start cutting back risk while you can. There are lots of bids on the way up, but none on the way down as December showed.
There has lately been a rising tide of weak data to confirm the negative view.
Factory orders nosedived 0.6% in November, the worst in a year. Funny how nobody wants to make stuff ahead of a recession. ISM Non-Manufacturing Index Cratered to 56.7. Should we be worried? Hell, yes! Why are we getting so many negative data points and stocks keep rising?
Farm sector bankruptcies are soaring, hitting a decade high. Apparently, the trade wars and global warming aren’t working for them. Ironically, ag prices are about to take off to the upside when a Chinese trade deal gets done. Buy the ags for a trade.
Tesla (TSLA) cut prices again in a blatant bid for market share and global domination. The low-end Tesla 3 price drops to $42,900. Next stop $35,000. Too bad they laid off my customer support personnel to cut costs. I can’t find my AM radio.
China trade talks (FXI) hit the skids, taking the stock market down with it as an administration official concedes they are “nowhere close to a deal” with the deadline 3 weeks off. Trump desperately needs a deal while the Chinese don’t, who think they can do better under the next president. If you disagree with this view in China, your organs get harvested and sold on the open market.
The European economy is also going down the drain with the EC’s forecast of economic growth cut from 1.9% to 1.3%. The US-China trade war is cited as a major factor. The global synchronizes slowdown accelerates. Looks like they’ll have more time to drink cheap wine and smoke Gauloises.
The Volatility Index (VIX) hit $15 and that seems to be the bottom for the time being. The market was more overbought than at any time since July. Is the “fear gauge” signaling that happy days are here again? I doubt it. Don’t whistle past the graveyard.
The Mad Hedge Market Timing Index is entering danger territory with a reading of 67 for the first time in five months. Better start taking profits on those aggressive leveraged longs you bought in early January. Your best performers are about to take a big hit. The market has since sold off 500 points, proving its value.
There wasn’t much to do in the market this week, given that I am trying to wind my portfolio down to 100% cash as the market peaks.
I stopped out of my short portion in Apple when my stop loss was triggered by pennies. The second I was out, it began a $6 selloff. Welcome to show business.
I used a major 3 ½ point rally in the bond market to put on a new double short position there. The yield on the ten-year US Treasury bond has to plunge to 2.40% in a month, a three-year low, for me to lose money on this position. It’s a bet that I am happy to make.
My 2019 year to date return leveled out at +10.03%, boosting my trailing one-year return back up to +35.75%.
My nine-year return maintained +310.17%, a new high. The average annualized return stabilized at +33.83%.
I am now 70% in cash and triple short the bond market.
Government data is finally starting to trickle out now that the government shutdown is over.
On Monday, February 11 there is nothing of note to report. Everything important is delayed.
On Tuesday, February 12, 10:00 AM EST, we get the January NFIB Small Business Index. Earnings for Activision Blizzard (ATVI) are out and should be a complete disaster, along with Twilio (TWLO).
On Wednesday, February 13 at 8:30 AM EST, the all-important January Consumer Price Index is published. Barrick Gold (GOLD) reports.
Thursday, February 14 at 8:30 AM EST, we get Weekly Jobless Claims. We also get December Retail Sales which should be good.
On Friday, February 15, at 8:30 AM EST, the February Empire State Index is out. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I will be battling my way through the raging snowstorms of the High Sierras trying to get over Donner Pass to my Lake Tahoe estate. Unless I clear the six feet of snow off the roof soon, or the house will get crushed from the weight as it did three years ago.
Where are all those illegal immigrants hanging out in front of 7-Eleven now that I need them?
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 8, 2019
Fiat Lux
Featured Trade:
(FEBRUARY 6 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (FXA), (NVDA), (SPY), (IEUR),
(VIX), (UUP), (FXE), (AMD), (MU), (SOYB)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 6 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Why are you so convinced bonds (TLT) are going to drop in 2019?
A: I think the Fed will regain the confidence to start raising rates again in the second half. Wage inflation is starting to appear, especially at the minimum wage level in several states. That will crater the bond market as well as the stock market, just as we saw in the second half of 2018. We’re in unknown territory in the bond market; we’re issuing astronomical WWII levels of debt and it’s only a matter of time before the Federal government crowds out private sector borrowers. Even if the bond market sidelines during this time, we will still make the maximum profit in the kind of option bear put spreads I have been putting on.
Q: Why did the Aussie (FXA) go down when they suddenly flipped from rising to cutting interest rates?
A: Interest rate differentials are the principal driver of all foreign exchange rates. They always have been and always will be. Rising rates almost always lead to a stronger currency. And with the US Fed on pause for the foreseeable future, we think the Aussie will be stronger going into 2019.
Q: Do you see the 10-year US Treasury yield going back up to 3.25% this year?
A: Yes, it’ll probably happen in the second half of the year—once the Fed gets its mojo back and decides that high employment and inflation are the bigger threats to the economy.
Q: Has NVIDIA (NVDA) bottomed here?
A: Probably, but you don’t want to touch the semiconductor chip companies until the summer. That’s when all the industry insiders expect the industry to turn and start discounting rocketing earnings after the next recession.
Q: Are stocks expensive here (SPY)?
A: On a trailing basis no, on a forward basis definitely yes. The current price/earnings multiple for the market is 17 now against a 14-20 range in 2018. So, we are dead in the middle of that range now. That’s OK when earnings are rapidly rising as they did last year. But they are falling now and at an increasingly increasing pace.
Q: Do you think the administration used the shutdown to bring forth a recession? To kickstart the pro-economic platform for reelection in 2020?
A: The administration’s view is that the economy is the strongest it’s ever been with no chance of future recession and that they will win the election as a slam dunk. If you believe that, buy stocks; if you don’t, sell them.
Q: How bad do you think Europe (IEUR) will get and does that mean the dollar (UUP) could see parity with the Euro (FXE) soon?
A: Europe is bad but they’re not going to raise interest rates anymore. However, they’re not going to cut them either because they’re already at zero. You need rising rates to see a stronger currency and the fact that the U.S. stopped raising rates is an argument for the Euro to go higher.
Q: Are we about to settle into a fading Volatility Index (VIX) environment for the rest of the year?
A: No, we are not; the (VIX) has been fading for 6 weeks. We’re approaching a bottom with the (VIX) here at $15, and the next big move in will probably be to the upside. The market has gotten WAY too complacent.
Q: Which are the most worrisome signals you see in the U.S. economy right now?
A: Weak earnings and sales guidance from all U.S. companies going forward and the immense jump in jobless claims last week as well as the ever-exploding amounts of government debt. Did I mention the trade war with China and the next government shutdown? Traders have a lot on their plate right now.
Q: How far will Lam Research (LRCX) go?
A: We’ve just had a massive 46% move up, so I wouldn’t chase it up here. However, long term there is still an easy double in this stock. They’re tied in with the semiconductor companies; NVIDIA, Advanced Micron Devices (AMD) and Micron Technology (MU) all trade in a group and may take one more run at the lows. Short term it’s overbought, long term it’s a screaming buy.
Q: Will the ag crisis feed into the main economy?
A: It could. All ag storage in the country is full, so farmers are putting the new harvest under tarps where it is rotting away and then claiming on their insurance. If you add another harvest on top of that it will be a disaster of epic proportions. China is America’s largest ag customer. It took decades of investment to develop them a client, and they are never coming back in their previous size. The trust is gone. Bankruptcies are at a ten-year high and that could eventually take down some regional banks which in turn hurt the big banks. However, ag is only 2% of the US economy, so it won’t cause the next recession. It’s really more of a story of local suffering.
Q: If you give out stop and not filled at stop price, when and how do you adjust to exit?
A: I would quickly enter it and if you’re not done quickly move it down five cents. If you don’t get done, do it again. There is no way to know where the real market is in until you put in a real order. There are 11 different option exchanges online and they are changing prices every millisecond. Furthermore, spread trades can get one leg done on one exchange and the second leg done on another, so prices can be all over the place.
Q: What data goes into the Mad Hedge Market Timing Index and how do you use it to time the markets?
A: It uses a basket of 30 different indicators which constantly changes according to what generates the highest return in a 30 year backtest. It includes a lot of conventional data points, like moving averages and RSIs, along with some of our own internal proprietary ones. When we are getting a reading below 20, we are looking to buy. Any reading over 65 and we are looking to sell, and over 80 we will only go short. It works like a charm. It paid for my new Tesla! I hope this helps.
Global Market Comments
January 24, 2019
Fiat Lux
Featured Trade:
(FROM THE FRONT LINES OF THE TRADE WAR),
(AAPL), (AVGO), (QCOM), (TLT),
(HOW THE MAD HEDGE MARKET TIMING ALGORITHM TRIPLED MY PERFORMANCE),
Global Market Comments
January 23, 2018
Fiat Lux
Featured Trade:
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)
(WHY TECHNICAL ANALYSIS DOESN’T WORK)
(FB), (AAPL), (AMZN), (GOOG), (MSFT), (VIX)
Global Market Comments
January 11, 2019
Fiat Lux
Featured Trade:
(WHY THE MARKET CRASHED IN DECEMBER),
(SPY), ($INDU), (VIX)
(THE GOVERNMENT’S WAR ON MONEY),
(TESTIMONIAL)
Were you horrified by the market action in December? The next one could get much worse.
We are all used to market corrections. Live long enough and you will endure hundreds of them.
But December? That was a real first class crash, a four times a century event. And to see this occur in the face of solid economic data made it totally unexpected by all. The only analysts predicting a collapse like this one are the ones who have been expecting it daily for the past decade.
To see a 20% decline in NASDAQ and a 50% plunge in market leaders in the face of a 3.2% GDP growth rate and a 3.9% unemployment rate is a first. It makes no sense.
This wasn’t a correction. This was an instance where the market ceased to function and was effectively closed. In fact, it took a conspiracy of several independent forces to get the meltdown we got.
The bottom line here is that this is not your father’s stock market.
The low hanging fruit here is to blame in the high-frequency algorithms. But that is the cheap shot. Algos don’t care which way markets go. They take volatility up sharply, but they take it down as well, as any long-suffering vol player will tell you.
Over time, their market impact is neutral. And algo traders go home 100% in cash every night. That doesn’t explain opening meltdowns of 500 points a day or more. No, there was something much more structural at work.
Human emotions are easy to predict. Take the humans out of the equation and markets can only be read by mainframe computers, at least on a short-term basis. That’s why so many of these market traditions, like “Sell in May and go away,” and the “Santa Claus rally” have quit working.
Only about 10% of today’s daily traders are the breathing kind. The rest are all made of silicon. Even I have come to rely heavily on my own personal algorithms in the Mad Hedge Market Timing Index. It has been worth its weight in gold and saved my bacon many times.
There is no doubt that pure quant strategies have blood on their hands. These funds strictly adhere to rules that have identified the long-term relationships between different asset classes and act accordingly.
For example, when bonds go up, you sell them and buy more stock, but sell more foreign currencies as well, and perhaps pick up some copper as well. All of this is adjusted for risk and volatility. There is thought to be about $1.5 trillion committed to this kind of strategy.
Among these, you can include “risk parity traders” of the kind pioneered by my friend Ray Dalio in the 1990s. (Ray will tell you how he did it in his fascinating book, Principals, out last year). Ray, by the way, is one of the top performing money managers over the last 30 years.
Trend followers pour more gasoline on the fire. If you sell, they will sell more, creating these massive 100 handle days in the S&P 500 (SPY).
Heightening fears was a never-ending torrent of bad news out of Washington. Two out of three key cabinet positions were emptied by presidential firings and remain unoccupied. Trade talks with China came to an impasse. It was not what investors wanted to hear.
All of this set up the perfect storm for December.
Equity mutual fund redemptions hit a record $53 billion in early December. Market liquidity dramatically shrank as players took off for the holidays, as seen on the chart below. Liquidity during the second half of December was thinner than the worst days of the 2008 financial crisis.
A two-decade-long flight of capital from the floor of the New York Stock Exchange was also a factor. The inevitable result was for the Volatility Index (VIX) to take a run at its highs for the year.
If you wanted to sell anything in size, it could only take place at throwaway prices. It all culminated in the notorious Christmas Eve Massacre which saw a 1,000-point range day in the Dow Average in a holiday-shortened trading day. If it had been a full day it might have been down 2,000 points.
Don’t expect any respite from these strategies any time soon. In fact, we could see worse moves ahead. The current administration believes in a free market, non-interventionist approach to securities markets. That means no new regulation.
The same thing happened in the run-up to the 2008 crash when Christopher Cox (brother of my old boss at Morgan Stanley, Archie Cox) was basically told to go play golf instead of regulate.
Welcome to the new age of investing. The bottom line for all of us traders and investors is that we are going to have to pedal a lot harder to earn our crust of bread….or become a computer.
Did you Say “Buy” or “Sell”
Global Market Comments
November 30, 2018
Fiat Lux
Featured Trade:
(NOVEMBER 28 BIWEEKLY STRATEGY WEBINAR Q&A),
(VXX), (VIX), (GE), (ROKU), (AAPL),
(MSFT), (SQ), (XLK), (SPLS), (EWZ), (EEM)
Global Market Comments
November 29, 2018
Fiat Lux
Featured Trade:
(SHORT SELLING SCHOOL 101),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)