Entries by Phil

Thursday Thrills as the Markets Try to Hold Our Bounce Lines

Wheeee, this is fun!  

We had a lot of fun in our Live Trading Webinar yesterday as we shorted the Russell (/TF) Futures at 1,550 after the release of the Fed Minutes led to an inexplicable rally and the Russell fell all the way back to 1,520 at the close for gains of $1,500 per contract in less than two hours – you're welcome!  

What we saw in the minutes was a Fed that is firmly on pace to raise rates 3-4 times in 2018 and, as I predicted in the Morning Report, these was nothing to get excited about and the silly morning rally completely unwound over the course of an hour's trading.  The S&P (/ES) Futures went over our 2,728 "strong bounce" line and topped out at 2,747 on a spike after the Minutes were rolled out (2pm) but then quickly fell back all the way to 2,701, good for gains of $1,350 per contract below our line and, after hours, it drifted even lower, all the way to 2,685 for another $1,300 per contract gain!  

This morning, in an effort to spin the reaction to the Minutes (as we predicted they would on Tuesday), the Fed's Bullard attempted to soften the blow, saying:

The neutral rate is "still pretty low" and the Fed shouldn't hike interest rates based on the conception from the last two decades of the twentieth century, Bullard added. It is "not the world we're living in today," he stated. In the policymaker's words, the Phillips curve effects are so weak that unemployment at 4%, compared to the natural sustainable rate of 5%, adds only seven basis points to inflation. "A lot" would need to happen for four quarter-point hikes in the benchmark rate this year instead of three, he concluded.

The key here is 3.  There WILL be three (3) rate hikes in 2018 – AT LEAST – and that's 1.5 more rate hikes than were anticipated when the market decided to get silly in November.  Yes there are tax cuts, but do tax cuts trump rate hikes?  The Fed MUST hike rates, they can't
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Which Way Wednesday – Fed Minutes Edition

So far, so predictable.

And that's the way we like our markets, right?  It was two weeks ago (2/6) that we prediced the market would bounce back from 2,550 to at least 2,650 (strong bounce) for the week and then, on 2/9, we broadened our lines and came up with the following predicted range for the S&P (/ES) Futures using our fabulous 5% Rule™:

Here's how those lines are holding up two weeks later:

We're testing the top of the bounce range but remember that range tops out still only 40% back to the 30% line, which doesn't even register on the chart anymore as the trading range has narrowed – as we predicted – at the lower levels.  As I said in yesterday's Morning Report, evidence suggests that 20% line may be the top of the range for rest of the year, not the bottom or even the middle and we will need to look down to the 10% line, at 2,420, for proper support after the next correction.  Hopefully, we'll consolidate around there for a proper move up later in the year (assuming things hold up in the economy).

This isn't about TA (I HATE TA), the 5% Rule is just a mathemetical representation of the Fundamental Value of the S&P 500 and we simply use the chart to illustrate it.  Stocks can go a very long time 10% overvalued and even grow into that valuation without a correction but 20% over-valued is strething it and, as we're seeing this earnings season, we set the high-flyers up for big punishments when they miss.  Here's the Big Picture on our other indexes from our Big Chart:

Those 50 and 200 dmas are the only TA I do pay attention to because those represent the average that a large sampling of investors have been willing to pay for a stock (or index) and, as you can see, we're still miles over the 200-day moving averages for our indexes so, the question is, what changed in the last 50 days to justify a 10% bump in the indexes?  I guess you can kind of say the taxes but,
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Tumblin’ Tuesday – Thursday and Friday’s Low-Volume Gains Erased at the Open

You can't say we didn't tell you so.  

In Friday's report I said: "We're now only 5% below the "obviously overbought" market top.  What changed in the past 7 days?…  The reason I'm skeptical of the rally is that we've bounced back on 1/3 the volume at which we sold off and forming a weak base is why we were shorting the market in the first place a few weaks ago.  Apparently, traders have learned nothing at all this month and we're right back to the madness of the Dow moving up 1,500 points on ridiculously low volume.  This is simply a lack of sellers at the moment and God help us all if they come back!"  Fortunately, we also followed through with our hedges and went into the weekend with a bearish tilt to our portfolios – locking in last week's silly gains.

Even better, of course, were the Futures Trade Ideas we featured in Friday morning's Report, in which I said:  "As I noted in yesterday's Report, we amped up our hedges into the weekend and, this morning, I put out a note to our Members saying":

/YM is 25,300, that's my favorite short and we have /ES 2,740, /NQ 6,845 and /TF1,545 and my stop-outs are if we get over 2,750, 6,850 or 1,550 but, otherwise, I want to accumulate /YM shorts.  

As you can see, we already had a nice $4,385 gain on the /YM shorts by 1:15 on Friday – not bad for 4 hours' work!  After that we were able to rely on our index hedges to protect us and, into the close, we addred the following trade idea for the Russell Ultra-Short (TZA):

I'd go TZA July $11 ($2)/15 (0.90) for $1.10 you get $5 in protection and it's almost $1 in the money to start.  

TZA closed Friday at $11.84 and is should still be a playable hedge this morning if you think your portfolio is too vunerable.  A $3.14 gain in TZA would be 26% and, since TZA is a 3x short for the Russell, that would mean a 9% dip in the Russell should correspond to…
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50 DMA Friday – S&P Struggles to Stay Technically Positive

Is overbought the right price now?  

Just a week ago, there were literally thousands of articles saying: "Well, of course we had a sell-off, the markets were so overbought it was bound to happen." Yet here we are, a week later and now they are saying what a great buying opportunity this is.  Seriously?  We're now only 5% below the "obviously overbought" market top.  What changed in the past 7 days?

The market has gone nuts since August, rising from S&P 2,400 to 2,872, which is a 20% run in 5 months.  Markets don't go up 20% a year, let alone in 5 months.  Hell, they hardly even go up 20% in two years and, of course, the logic is TAX CUTS – which seems to justify everything but let's consider that very few companies drop more than 20% to the bottom line (14.6% is the average) and that they are taxed on their profits, not their income so, even if the taxes were as much as the profits (they are about 20% of profits on average) and the taxes were eliminated ENTIRELY, then the companies would only make 14.6% more money.  

That is, of course, not the case and there is nothing in Q1's earnings or guidance to give any indication that the new tax law will have a serious effect on forward earnings – mainly because US Corporations never paid 20% taxes in the first place (about 13.5% on average).  So, if they actually paid the new 20% rate, it would be a tax INCREASE for those companies who routinely park their cash overseas or pay tens of millions of Dollars to accounting firms and Investment Banks to avoid paying Billions in taxes (Apple alone is bringing back over $200Bn they had stashed overseas).  

Trump is taking credit for repatriating funds from overseas but what he's really doing is giving companies a tax incentive (15%) for bringing back money they earned under the Obama Administration (because he was mean and would have taxed them) and for not paying their taxes under Obama's budgets.  In fact, Trump is REWARDING the corporations for hiding money from Democrats and letting future CEOs know that any time a Democrat tries to tax them – they are free to flaunt the law until a Republican is…
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Thrilling Thursday – Yesterday’s Russell Futures Up $2,500 Per Contract!

You're welcome!  

In yesterday's Morning Report, we decided the sell-off was overdone and went for the Russell (/TF) Futures longs at 1,480 and yesterday afternoon they blasted back to 1,520 for a $2,000 per contract gain on the day and this morning at 1,530 for another $500 per contract and NOW we are flipping short – but more on that later.  Remember, we are still playing the bounce lines from the charts we made for your last week – so none of this is a surprise and none of this, so far, including this morning's pop in the Futures, is indicating a true recovery yet.  

The S&P Futures (/ES) this morning are topping out at 2,720 and our 5% Rule™ Bounce Chart from last week (2/9) has, so far, predicted the moves perfectly:

All we are doing, so far, is topping out at the same place we bounced on 2/7 and that's being mirrored on the other indexes so the lines we need to be over now – in order to call today "bullish" are Dow 25,200, S&P 2,715, Nasdaq 6,700 and Russell 1,520 and, so far, the Russell and Nasdaq are a bit over but the Dow and S&P are below.  Don't forget, we topped out at 2,872 on Jan 26th so there's really nothing impressive about 2,720 - other than the fact that we came back from 2,600 but it's only a halfway recovery (not even) at this point and, if we fail to get over these lines, it's as likely we're consolidating for a move down after 2 weeks as it is we're moving back up.

Fundamentally, nothing has changed and you saw how quickly the market can still move down (and recover) yesterday.  Our 5% Rule™ takes into account that it's easy to manipulate a rally that recovers 20% and 40% of a drop if it's done quickly enough and we take into account the idiocy of dip buyers as well.  Not that all dip buyers are idiots – we had a field day adding stocks to our portfolios over the past two weeks – it's just that we added well-hedged positions and now it is time to improve our hedges, many of which we
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Markets Get No Loving on Valentine’s Day Inflation Massacre

Related imageHappy Valentine's Day!  

There's a massacre for the markets as we're down 300 points in a massive failure of the strong bounce lines which we predicted for you a week ago, which are:

  • Dow (/YM) 24,100 is weak and 24,700 is strong
  • S&P (/ES) 2,610 is weak and 2,670 is strong
  • Nasdaq (/NQ) 6,440 is weak and 6,580 is strong
  • Russell (/TF) 1,480 is weak and 1,510 is strong

We needed to see strong bounces on all 4 indexes taken AND HELD for at least a full day before we could safely say the correction is over (it's not).  

Strong inflation numbers are killing us this morning (CPI), keeping the Fed on the table for more tightening.  There had been no real news in the past week to change what were obviously overbought conditions 2 weeks ago so there was no logic in racing back to the overbought conditions – though we're still a good 5% below the highs.  If you almost had a heart attack last week, this is a good time to consider hedges and a great example can be found from the way we adjusted our Money Talk Portfolio (which we discussed on Feb 1st in our Morning Report) by adding a Nasdaq Ultra-Short (SQQQ) hedge that has gained $5,900 in two weeks, almost exactly offsetting half the damage to the portfolio – as intended.  That trade idea was:

SQQQ is the ultra-short Nasdaq ETF that's a 3x inverse of QQQ.  So, if the Nasdaq drops 10%, SQQQ goes up 30% (in theory, it's not perfect).  I'm going to add the following trade as a hedge and WE EXPECT TO LOSE MONEY ON THIS ONE – it's like life insurance, you pay for it but you hope that, each year, it's a waste of money!  

  • Buy

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Takeaway Tuesday – Trump Take $1.7Tn from the Poor to Give to the Rich

The new budget is here!  

As not at all promised by Trump when he was campaigning, Medicare will be slashed by $237Bn while $17Bn is being taken away from Food Stamps and yes, the Government will be getting in between you and your grocer as Trump is proposing no longer giving people food stamps, instead sending them boxes of food the Government selects for them (from campaign donors, of course).   

Trump's budget is an outright assault on small businesses and farmers with a 25% cut to the SBA  and a 15% cut to Agriculture with limited eligibility for crop insurance and caps on subsidies that will destroy those family farms, forcing them to sell out to big Corporations, who are still able to game the system to their advantage.  

Rural Economic Development Loans and Grants are being entirely eliminated – yet another way of making sure no one can compete with Trump's Corporate Donors, who will also benefit from the 25% budget cut to the EPA.  Overall, there's a 42.3% cut to all Non-Defense Discretionary spending.  In other words, Trump is cutting about half the stuff the Government does to actually help Americans while giving ALL of that money to the Top 10% – and mostly the Top 1%, of course.  

Despite coming off the most expensive disasters in history and with climate change getting worse, not better, 22% of the Army Corps of Engineers is being cut, which is a shame because, just this morning, new satellite data shows sea levels rising much faster than previously thought and the Army Corps of Engineers does things like building dams and levees to protect our cities from such things.

Image result for cost of disasters 2017But guess what happens when a city is flooded?  SALES!!!  Paint, hardware, carpets, furniture, Government clean-up contracts worth Billions of Dollars to Trump's donors.  Isn't that better than spending Millions to prevent the disaster from happening in the first place?  

And, just in case you thought Trump can't possibly be purposely trying to destroy the enviromnent to enrich his Donors – now they want to repeal Obama's restrictions on how much methane is released into the atmosphere by Corporate Donors who
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Monday Market Movement – Recovering or Just Bouncing?

We're up 300 more points! 

That would be exciting but it's only 1.25%, which is exactly what our 5% Rule™ predicted and, at this stage, is certainly no sign of market strength yet.  While we flipped bullish in Friday Morning's PSW Reprort, with a long at Dow (/YM) 24,000 that is now up $2,500 per contract (you're welcome).  Of course, first it was down $2,500 per contract (cue screams) but not if you followed our instructions, which were:

Well here's the test of 24,000 and we're failing that and 2,600 and 6,350 and 1,470 but those are now the lines we want to play long if we move back up but very ugly if we're failing that. 

Just before the market opened, in our Live Member Chat Room, I updated my prediction for our Members:

For now, we'll worry about the S&P lines – same as yesterday because, if we have to redraw them, then the Index is already failing (and forcing us to use lower levels).

And, of course, the lines don't change but the line we key off does.  Right now, we are looking at the 20% line on /ES and premising we consolidate there but, as I said yesterday, I think it's more likely we drift down to the 10% line (2.420) and that's where we should consolidate into Q2.  So, on the whole, I'm thinking 2,684 is going to fail today and we'll retest 2,640 next week and possibly blow it – hence the desire for more hedges!  

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Friday Free-Fall – Stop the Markets, We Want to Get Off!

Good golly, what a mess!  

The Dow gave up another 1,000 points yesterday and President Trump is now presiding over the worst week in stock market history.  Was it because he blew up the budget?  Was it because he got rid of Janet Yellen?  Was it because he's likely to be indicted and impeached?  Was it just because he was caught cheating on his wife with a porn star and then bribing her to cover it up using campaign donations?  Who can say – so many scandals, so little time.  

What is clear is that the US looks a little scary to investors, both foreign and domestic and it's not the kind of thing that can be fixed by having a huge military parade so money is coming out of funds and those funds are forced to sell their assets at whatever price and down we go.  

As noted during the week, we're in a bot-selling pullback and it's following the script of our 5% Rule to the letter but that's not good news as the S&P finished right at our 2,596 (weak retrace) line yesterday and is only just above it this morning.  We needed to go the other way, up to 2,728 and that's not likely to happen today but we are playing bullishly in our live Member Chat Room as follows:

Well here's the test of 24,000 and we're failing that and 2,600 and 6,350 and 1,470 but those are now the lines we want to play long if we move back up but very ugly if we're failing that. 

As long as 2,596 holds, we're willing to have a long on the S&P Futures (/ES) but it would be nice to have a confirmation from the others to let us know we're on track.  It's sad that I have to say this for the 4th time this week but yes, we still like Gasoline (/RB) long at $1.755, which is the 2.5% pullback line from $1.80, which we certainly expect to be back to into NEXT WEEK's holiday and that will…
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Flailing Thursday – Trouble at 2,700

Well, that about sums it up, right?

As I said in yesterday morning's Report: "On the whole, I'd rather if we consolidate here before even popping above 2,700 again as 2,850 was too high.  Hopefuly we can hang around 2,650 for a week or two and form a proper base before trying to move higher again – but traders are so impatient.…" 

Well, it's been a day and people are already freaking out because we haven't flown back to 2,850 and it's going to be a while before they realize 2,850 shouldn't have happened in the first place and it's more likely that this (2,700) is the top of the range, not the bottom – at least through Q2.  On our Big Chart, 2,640 is the 20% line on the S&P and, even being generous, THAT should be the middle of a range we move 5% up (2,772) and 5% down (2,508) in, so call it 2,500 to 2,800 with 2,650 the middle line.  That's where I think we'll settle once all the dust clears.

This morning, however, in our Live Member Chat Room, we are playing for a bounce using the following levels:

I also like /TF over 1,500 and /NQ over 6,600 and /NQ is lagging and likely to pop big if we get moving.  /YM 24,800 and /ES 2,675 will confirm and tight stops if 2 of the 3 fail to hold those lines!

Remember, 25 points (back to 2,700) on the S&P (/ES) is good for $1,250 per contract – nothing to sneeze at.  The Russell (/TF) hit 1,520 yesterday and that's up $1,000 per contract and the Nasdaq hit 6,700 and getting back there pays $2,000 per contract, so it's well worth playing for the bounce and the BOE gave a more hawkish statement this morning and that should keep the Dollar in check and allow our indexes a bit of breathing room today.  

In the Futures, we tested 2,550 on Tuesday and our 30% line is 2,860 and 2,640 is 20% so, ignoring the spike below, we have a 220-point drop and our 5% Rule™ tells us to expect a 20% weak bounce off that fall (44 points) back to 2,684 and then the strong bounce line
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