TGIF – Market Ends Week on a Rough Note

Wheeee – this is fun!  

As you can see from JackDamn's index chart, the Russell Small Caps have now given up ALL of their gains for the year and, even a little bit lower and we won't be looking at a small correction anymore.  Generally, we like to "short the laggard" – or the index that has fallen the least but the Nasdaq is a strange animal and all of it's outperforming gains are due to Apple (AAPL) - and we think AAPL deserves to be at $160, so we don't see it as particularly overpriced compared to the Dow or S&P, though there are certain components in the Nasdaq (AMZN, NFLX, TSLA) that have ridiculous values and those may correct and drag the index down with them.  

As you are well aware, we've been discussing options hedges and futures shorts all month so I hope you enjoyed yesteray's dip as much as we did.  Our two key shorts in our portfolios are the Ultra-Short Russell ETF (TZA) and the Ultra-Short Nasdaq ETF (SQQQ) and the Nasdaq is 4.5% off the top and the Russell is 7% off.  By the way, we have the SQQQ hedges, not because we thought the Nasdaq would drop more but because our biggest long position is AAPL – so it gave us the best protection to lock in our gains.  

In fact, we just did a review of our Options Opportunity Portfolio, which is up an impressive 211% as of our two-year anniversary (8/8/15 was our start date with $100,000) and it is, by far, the best-performing portfolio in the Seeking Alpha Marketplace.  That portfolio has the following AAPL position that, if successful will, by itself, make us $180,000 by Jan 2019.  

Our net entry on the trade was a $5,600 credit, mostly in June and, though the short puts obligate us to buy 2,000 shares of AAPL for $130 ($260,000), which would use $130,000 of ordinary margin, AAPL is already far enough out of the money where the net margin requirement in the short puts is just $20,000 – so it's a non-issue in our now $311,000 portfolio.  


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Faltering Thursday – CEOs Quit Trump, Markets Start Noticing the Mess

Wow, that was a fun day!  

After bragging about how easy it would be to replace departing CEOs, Trump ended up disbanding what was left of his Business Council as we finally found a group of people in America with the backbone to stand up to the President.  From our point of view, we don't care what news brought the market down, as long as the market goes down and, once again, our index shorts were big winners.  In fact, we made almost $1,000 for our Members in just over an hour during our Live Trading Webinar alone (you're welcome!). 

Our 5:49am call to short the Futures was linked pre-market in yesterday morning's PSW Report and now would be a good time to review the calls after the fact, so we can get an idea of how our 5% Rule™ operates in the wild:

The Dow had a 400-point run (1.8%) to 22,050 so 80-points back is 21,970 and then all the way back to 21,890 but I'm only expecting a weak retrace for now.  

As you can see, we pretty much nailed 21,970 (weak retrace).  90-pont drop from 22,000 (our shorting line) was good for gains of $450 per contract.

/ES had a 30-point run to 2,470 and that's 6-points back to 2,463 and then 2,457 if it's so inclined to fill that gap.  

Again we have the weak retrace and a 10-point dop on the S&P Futures (/ES) is good for gains of $500/contract.  What we're looking for…
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White Power Wednesday – Trump Says Some Nationalists are “Very Fine People”

I can't believe the markets are up again.  

This country is running headlong into full-scale riots and the market could not be more complacent about it.  Once again we are jacked up in the Futures and I already put out a note to our Members with new shorting lines and I have to run to the Nasdaq this morning for an interview so I'm just going to post a link HERE.  

That's right, we're very busy in the mornings at PSW and that's because being a good investor is a JOB, not a hobby and it requires a surprising amount of work if you want to get it right.  Yesterday morning we also shorted the low-volume move up in the Futures and my call in the Morning Report was:

Meanwhile, talk of trade war is strengthening the Dollar, which may even break back over 94 today and that unintended consequence of sabre-rattling is not good for the markets so we took advantage this morning and put in those short orders on the Futures in our Live Member Chat Room at Dow (/YM) 22,000, S&P (/ES) 2,470, Nasdaq (/NQ) 5,925 and Russell (/TF) 1,400.  As usual, we wait for two of them to cross under than then short one of the laggards with VERY TIGHT STOPS – because this market be CRAZY!  

The Dollar hit 94.04 and is holding 93.90 at the moment, consolidating for a move higher (long /DX) and we got some nice drops on our indexs but, as we thought they were shallow:  Dow fell 50 points to gain $250 per contract, S&P fell 10 points to gain $500 per contract, Nasdaq fell 25 points to gain $500 per contract and Russell fell 20 points to gain $2,000 per contract, which is good because, as I said to our Members in the Live Chat Room at 9:37:

I've got 5 short /TF, always my favorite.  1,395.30 is my avg.  Other than that, just seeing how things shake out.  

Image result for boring investmentsSee, this is not complicated:
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Trade War Tuesday – Trump “Probes” China, A Welcome Distraction

Related image1, 2, 3, 4 – I declare a trade war!  

Those of you who are students of economic history know that nothing is more damaging to an economy than a trade war and those of you who don't know enough history to believe there are "alternate facts" aren't worth trying to convince, so I won't waste time here.  Our President, of course, is not one to let facts get in the way of a rash decision and Trump is proposing special taxes on Chinese imports, starting with aluminum but actually, this is a sneaky way to stop the flow of cheap solar cells into the US to boost Trump's beloved coal industry (and the Koch Brothers).  

It is not unusual for the U.S. to punish businesses it deems to be “cheating” on global trade rules, and one should not be too quick to judge any specific punitive measure taken. But the fear is that we are now on a slippery slope toward a trade war, as China is certain to respond by taxing U.S. sales of goods in China.

All of this trade talk ignores the basic fact that China is our factory floor, the way the midwestern cities once were in the mid-20th century.  They were dirty and polluted and the kind of jobs people had were not the kind of jobs people actually wanted, which is why the people in the Northeast were thrilled to export those jobs and the pollution out west.  As the US developed and as World Trade became more efficient, we exported the jobs and factories all the way to Asia and China became the new Japan (who were our factory in the 70s) and now China is pushing those jobs and factories to Africa because, in the end – NOBODY ACTUALLY WANTS THEM!

Image result for iphone assembly lineAssembling IPhones is not a dream job but those are on the high end of of what we have exported overseas.  I'm going to focus on the IPhone so I can explain to you what an idiot our President is, without making it too complex.  

 Though the IPhone is an American product, it's assembled in China and those
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Monday Morning Market Movement – More of the Same

If it's Monday, the Futures must be higher.

It's very easy to get the markets going in thin weekend trading and usually we peak out of Meaningless Mondays or Testy Tuesdays and then we resume our normal shorting activities.  Last Tuesday, we called for shorting the S&P Futures (/ES) at the 2,480 line and we caught a ride down to 2,435 for 45 points at $50 per point per contact – a profit of $2,250 per contract (you're welcome) and that was a very poor 2nd to our Russell Futures short (/TF), which fell from 1,430 all the way to 1,370, which was good for a profit of $6,000 per contract.

It's really not hard to follow these trades, we laid out the levels and the details in Tuesday Morning's PSW Report and delivered it to the inbox of our subscribers by 8:35 on Tuesday morning, an hour before the market opened and that day's $3 investment in our newletter was paid back 2,000 times on the Russell alone.  Subscribe here if you'd like to catch the next 2,000x winner!  

Rembember – I can only tell you what the market is likely to do and how to make money playing it, that is the extent of my powers – the rest is up to you…

We also put up an options spread on SPY for those who aren't able to trade the Futures (though it's really not hard, we teach Futures trading to our Members in our Live Weekly Webinars) and that trade was:

We've been talking about hedges and a good way to hedge the S&P, other than simply shorting /ESFutures with tight stops above, is a bear put spread on SPY options, which we can accomplish with the following:

  • Buy 20 SPY Sept $247 puts for $2.50 ($5,000) 


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Faltering Thursday – Terror at Dow 22,000

Image result for dow 22,000 crashWhere's our Apple?

Last week I told you it would take an AAPL (earnings) a day to keep the Dow over 22,000 and this week we've been faltering at that line and, while it's not yet time to panic, the Apple tree is looking a little picked over at this point.  With the Dow at 22,000, a 2.5% correction would send us down 550 point and we haven't had a WEEK like that since May (16th, just after earnings – lining up with next Wednesday) , when the Dow fall from 21,000 to 20,600 as earnings wound down

Traders are herd animals and easily spooked and the Dow hasn't given up a full 500 since last July and the two times before that we had big corrections were 2,500-point drops – in Aug of 2015 and again in July, both times falling from around 18,000 to 15,500.  But hey, this time is different, right?  Now we're at 22,000 and we haven't had a proper consolidation since November – it's the new normal, right?  Right???

Back on May 16th, the title of our morning report was "Toppy Tuesday – S&P 2,400 – Again" and I was skeptical, as I had been all month, that the market would hit such a milestone without at least a minor (2.5%) pullback – as dictated by our fabulous 5% Rule™.  We were shorting the indexes at the time because I felt that AAPL was boosting the markets too much and the rest were actually weakening, saying:

It seems like every Tuesday I have to point out that Mondays are meaningless and, so far, we've made good money shorting the S&P Futures (/ES) at 2,400 as well as Dow (/YM) 21,000 and Russell (/TF) 1,400 but the Nasdaq (/NQ), now 5,708 keeps going up and up, which is no surprise with Apple (AAPL) at $156 – up 10% since April 25th and AAPL is 15% of the Nasdaq by itself.

That adds 1.5% to the Nasdaq and the rest of the Nasdaq's 3% move came from the Dollar


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World War Wednesday – Trump’s “Fire and Fury” Spooks Markets

Well this is fun!

We went over our 2,480 line yesterday morning on news of tax cuts coming out of DC (conveniently timed for the market open) but then the tweeter-in-chief took time off the golf course to say that North Korea will be met with "fire and fury, the likes of which this World has never seen before."  Keep in mind that's a statement coming from the head of the only state that has ever actually used nuclear weapons on another country

That took the S&P right back to 2,460 for a gain of $1,000 per contract per our call in the PSW Morning Report, which you could have delivered to you every morning for just $3 a day.  That call paid for 3 years' worth of subscriptions so, you're welcome.

Our other shorting lines were good for $250 on Dow Futures (/YM), $1,400 on the Nasdaq Futures (/NQ) and a fat $1,500 per contract gain on the Russell Futures (/TF), which took a 30-point plunge from our 1,430 goal – not bad for a morning's work, right?

This morning, we're letting the indexes tell us what to do by watching our levels.  My not to our Members earlier this morning was:

/TF 1,400 is a good place to play for a long bounce if we get our usual pre-market run-up.  We're lined up right with /YM 22,000 (also a good long with tight stops below) and 2,460 on /ES and 5,880 on /NQ and if ANY of those lines fail then it's time to use them as bearish marks and short the laggard.

So we are waiting and seeing but European stocks are down more than 1% so it's looking like the advantage is going to the shorts, especially since the unrepentant Trump JUST re-tweeted the following:


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Trendless Tuesday – Stuck at the Market Top

2,480! 

That was our shorting line last Tuesday and here we are (still) again on the S&P and waiting for SOMETHING to happen.  Volume on the S&P ETF (SPY) was only 26.8M, the lowest Monday reading of the year and less than 1/2 of Friday's volume.  Where have all the traders gone?  

How are we going to punch up through 2,500 if we can't even hold 2,480?  The Dow is a joke of an index (22,050 on /YM), so we don't count that and the Nasdaq (/NQ) is having trouble at 5,950 in the Futures while the Russell (/TF) was also a short at 1,430 last week and today they are struggling to hold 1,411 – another bad sign.  On the SPY ETF, you can see the volume melting away as we struggle along the $248 line.

 We've been talking about hedges and a good way to hedge the S&P, other than simply shorting /ES Futures with tight stops above, is a bear put spread on SPY options, which we can accomplish with the following:

  • Buy 20 SPY Sept $247 puts for $2.50 ($5,000) 
  • Sell 20 SPY Sept $242 puts for $1.35 ($2,700) 
  • Sell 5 TEVA 2019 $20 puts for $4.40 ($2,200) 

That spread is net $100 and pays $5,000 (up 4,900%) if the S&P drops below 2,420 (2.5%) into Sept expirations.  You have an obligation to buy 500 shares of TEVA for $20 ($10,000), but that's a stock we really love at this price so, essentially, free money for promising to buy it.  Ordinary margin on the short puts is just $900, so it's a very margin-efficient way to raise cash but you can use any stock you REALLY want to own as an offset.  

That covers us through some August uncertainty without risking very much (other than owning TEVA) and it's one of the main ways we like to hedge for the short-term.  It's much less aggressive than our longer-term ultra-short ETF long spreads, those provide the bulwark of the protections for our long-term positions.

For those comfortable playing the futures, however, nothing beats a straight-up bet on the indexes as long as…
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Monday Market Movement – Topping or Popping?

It has not been a good year(s) for value investors.

Well, it's been a good year but not as great as it's been for trend followers betting on growth stocks.  I guess we're not true value investors, because we've had a pretty good year but certainly we could have done better holding our noses and buying more MoMo stocks.  Most of Q2 earnings are behind us and there aren't too many red flags – other than the great big one that shows value to be at an all-time low, and I don't mean value investing, but the VALUE of the stocks we're investing in.

Just because you buy and expensive stock and it gets more expensive, doesn't mean it was worth what you paid for it.  This is part of the "greater fool" theory that marks stock bubbles – you can always find someone to be a greater fool than you were – until you can't – then the bubble pops.

We don't know when these sky-high valuations will come to an end, which is why we rely on hedging, more so than shorting.  With hedging, we maintain our long positions but we use some of the long profits (about 25%) to lock in our gains without sacrificing any additional upside to come (or, at least not 75% of it).  

What's really annoying about this stage of the rally, however, is that stocks that look cheap relative to traditional fundamental metrics such as profit or cash flow have fallen so far out of favor that Goldman Sachs in June questioned whether the markets are witnessing the death of value investing. 

Since that call, the market has gained another 2.5% but, as you can see from the chart, we're back at levels we haven't seen since the 4th quarter of 2015 and the S&P topped out then at 2,116 but fell precipitously to 1,810 by Februray.  That's 306 points or just shy of 15% in 3 months but we're only just getting to the top – we may drift here for a while or, maybe this time is different and the people dumping value stocks (ie. stocks that are a good value) in favor of "growth" stocks (ie. stocks that don't actually have earnings to…
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Non-Farm Friday – Is America Working?

209,000 jobs.

That's pretty good, only 183,000 new jobs were expected and June was revised up by 9,000 more jobs (231,000) with unemployment now down to 4.3%.  More importantly, the Civilian Labor Force is growing, now about 160,500,000 (of which, about 7M are unemployed).  Average weekly earnings are up to $909.42 from $884.42 last July so up $25 (2.8%) but let's call it $100 per month and $1,200 per year more times 153.5M workers is $184Bn more Dollars in the economy this year but last year we only had 151.5M workers so 2M workers making 52x $909.42 ($47,290) is $94.6Bn new Dollars so, overall, let's say the working economy is up about $300Bn or 1.5% of our GDP.

That's not hard math, any economist can do it.  Any analyst can do it but, where you do need some kind of Quantum Mechanics is to try to explain how $300Bn of new salary money (most of which went to the top 10%) translates into the kind of buying power that would send the US markets $10Tn higher – that's 30:1 leverage!  

Of course, that makes sense as the market multiples on earnings have gone up considerably along with expectations but where I feel we're running ahead of reality is by looking forward and even assuming we add $600Bn of wages in the next 12 months – we're still miles behind what would be needed to support this bullish premise.  Also, consider that $600Bn more wages would be a 5.6% increase, which would then put cost pressure on businesses (until the robots are ready) and that would drag the economy.

So it's hard to paint a more enthusiastic picture than the one that's already been painted because, as noted by Calvin, "Alexander contemplated his victories and he wept, because there were no more Worlds to conquer."  What will we do for an encore when we only have 7M people left who are unemployed?  At this pace, in 3 years, they will all have jobs and we will have 0% unemployment.  What is the World the market expects down the road to justify a 20% improvement in 9 months?

The market is still benefitting from a benificent Fed and a lack of alternatives to invest
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