Thrilling Thursday – The View From the Top

Here we are again.

For the past year we've been topping out around 2,800 on the S&P 500 (/ES) and yesterday we closed over at 2,820 and, if we can hold it through the weekend, we may be looking at a real move above the line and the top of the range may become the new bottom BUT, I don't see the economic data to support that yet – so I remain a bit skeptical.

Fortunately, not too skeptical and our Long-Term Portfolio added $42,172 (8%)  since our 2/15 Review while our Short-Term Portfolio (where we keep our hedges) has remained fairly flat and that's exactly what we like to see in our paired portfolios.  

 

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Why Worry Wednesday – Market Continues to “Soar and Ignore”

No Brexit deal again.

Not that the markets seem to care but, at the moment, Britain is scheduled to leave the EU on March 29th and, as you can see from yesterday's vote, they are nowhere close to agreeing on a divorce settlement with the EU.  

Without a deal, the UK must depend on the EU to simply give them an extention and restart negotiations but, if the EU plays hardball – the UK could be cut adrift, with no trade agreements with ANY country.  Since all the EU nations have negotiated as a block for the last 30 years, the UK doesn't have any individual trade deals with any nation so, effectively, they can't trade.  

EU President, Donald Tusk, said that the 27 EU governments would consider a “reasoned request” from the U.K. for an extension, noting they would need to agree unanimously. The leaders, he said, “will expect a credible justification for a possible extension and its duration.”  Meanwhile, Jeremy Corbyn, leader of the main opposition Labour Party, said: “The government has been defeated again, they must accept that their deal…is clearly dead,” adding the U.K. should stay in a customs union with the EU.

 

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Testy Tuesday – Trouble at 2,800 – As Usual

Here we go again.

We made it back to our favorite shorting line yesterday as the S&P 500 (/ES) once again tested the 2,800 mark, failing to cross it into the very fake, Fake, FAKE close and already down 14 points this morning but still up 35 from the 2,750 open so we'll have to see how things go on the first real day's trading of the week.

Boeing (BA) came all the way back to $400 at the day's end, down "just" 5% after being down 12.5% at the open but we're not bottom-fishing BA as there remains an open question as to whether their primary plane is safe enough to fly and it probably is, but BA is no bargain at $400, which is $225Bn for a company making $10Bn a year so p/e about 22.5 and I'm certainly more than 10% less sure BA will be able to justify that multiple than I was last week.  Other investors seem to feel differently but there's no way I'd take that risk right now.

As noted, this is a political issue as much as a corporate one and we can't really trust the FAA under Trump to make an impartial decision so we can expect a lot of countries (who don't trust Trump either – see why we watch those polls?) to ground 737 Max planes until their own agencies can re-certify the aircraft.

To some extent, the behavior of BA stock is very similar to the behavior of the S&P 500 and the other major indexes.   We made it to all-time highs and, despite numerous new risk factors popping up – the indexes keep recovering back towards the highs – as if that's where they belong – despite all the problems we are now seeing in the Global Economy.  Apparently we've learned nothing at all since 2008.

Image result for 2008 crash vs todayCertainly investors haven't learned NOT to buy stocks on margin as Margin Debt is 25% higher than it was in 2007 – despite being drastically reduced over the past quarter.  First Margin Debt contracts and then the Indexes contract is pretty much the market norm – as people have to buy stocks with real money and begin demanding real performance and we'd better keep our eye on this chart because it seems to indicate we're pretty close to a significant correction.

 

 

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Monday Market Madness – Boeing’s 2nd Crash Since October Takes The Dow Down With It

Is China over-reacting or are we under-reacting?

Aviation safety is one of those things you would hope don't get politicized but that's what we're getting this morning as an Ethiopian Airlines 737 Max crashed on take-off, killing all 157 on board less than 6 months after Indonesia's Lion Air 737 Max crashed on take-off, killing all 189 on board that plane.   The FAA was supposed to be looking into the matter in January but, you know – the Government shut-down and the investigation was delayed.

It's POSSIBLE (nothing is proven) that the 737 Max has problems with it's software automation and that means China and Ethiopia are right to ground the fleet immediately but it's also possible that China and their trading partner are sticking it to Trump and BA, using America's largest exporter as a negotiating chip – exactly the same way Trump has been using Huawei to put pressure on China.  

That's how dysfunctional and unstable the World has become – we have no way of knowing if Governments are acting in the people's best interest or if they are simply playing Cold War-style Economic Brinksmanship.  

Image result for boeing crashIn the Lion Air crash, investigators have indicated the pilots fought the MCAS system as it strongly and repeatedly pushed down the plane’s nose, but didn’t follow an existing procedure to deactivate it.  On MAX 8 models, under certain conditions, pilots may be unable to pull the plane out of a dive unless they react quickly and proceed to the most relevant portion of their emergency checklist. Outside safety experts have questioned how the FAA gave the green light for such a design lacking redundant software or hardware safeguards.

One malfunctioning sensor or a single stream of faulty signals—called a “single point failure” in engineering lingo—can lead to a catastrophic dive, if pilots react improperly, so China may have a very good point and maybe it's the US who is politicizing the issue by NOT grounding the 737 Max's pending a full investigation – who the F knows anymore???

There's a lot at stake here as Boeing is a large part of US Exports and, while only…
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TGIF – Stocks Slide into the Weekend – What’s Next?

Wheeeee!  

I love a good sell-off – especially when we called it and we're well-prepared.  We were skeptical of the market rally on Monday and, in our PSW Morning Report (which can be delivered to you pre-market for a small fee), I said:

"We'll see if the market is ablfe to get excited about more Trade Talks and we still haven't cracked 1,600 on the Russell (/RTY) but as long as the S&P (/ES) is over 2,800 – all is technically well in the markets…  7,200 on the Nasdaq (/NQ is a good shorting line for today as is 1,590 on /RTY, since that's the 200 dma – tight stops above!"  

30 points is a 1% pullback on the S&P Futures (/ES) and, at $50 per point per contract, it pays $1,500 – making it an excellent portfolio hedge (using $6,600 of margin per contract).  What makes Futures Trading such a valuable tool is that you don't have to wait for the market to open to make an adjustment.  Also, there's very little friction cost (the cost of entering or exiting the trade, including fees) so you can use it to very quickly adjust your portfolio at a moment's notice.  

Generally, at PSW, we don't like to enter a Futures trade unless there is a significant support or resistance line we can use as a stop because Futures contracts tend to move quickly and erratically EXCEPT when they run into significant support or resistance, where they slow down enough for you to catch your breath and see what's real.  Since we are not technical traders but Fundamental ones – having the time to check the news flow is critical in deciding when to get in and out of a Futures trade.  In fact, we took the quick $1,500 gain on Monday and we concentrated on the Russell (/RTY) shorts on Tuesday as I said in that Morning Report:

/RTY 1,568 should be support but, if not, could see 1,550.   Tight stops in any case but I'm happy with these gains!

As you can see, almost all the rejections sent us down 100-200 points so let's


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Flailing Thursday – Markets Look More Toppy With Each Passing Day

This is sad:

We've been going nowhere for a month and there's nothing wrong with healthy consolidation but, if you listen to the Financial Media, you would think you are missing out on some huge rally.  FOMO, or "Fear of Missing Out" is the new driver for market behavior though I can't imagine what it is people fear, when you consider the S&P 500 is up 1,000 points 55% in the last 3 years though we're actually lower now than we were a year ago.

That's why we've been "Cashy and Cautious" since we cashed our our 5 Member Portfolios in December of 2017, when I decided the risk of holding through the holidays wasn't worth it after a year of such spectacular gains.  I was a little early with that call but we got a great sell-off last January and we jumped in with our new Portfolios and now they have made ridiculous gains – especially our skeptical Short-Term Portfolio, which we use to hedge our Long-Term Portfolio.

I went over the STP and gave my thoughts on it in yesterday's Live Trading Webinar (replay available here) and we feel our current hedges adequately protect us from what we think will be a minor (2.5-5%) correction that shouldn't take us lower than 2,640 on the S&P (/ES), which is the 20% line on our Big Chart, which is still using the 5% Rule™ calculations we applied way back in 2015 so we're right on track but we also need to adjust those brackets 10% higher (Dow, Nas and S&P only) to account for the new, lower, Corporate Taxes and their effect on large-cap earnings.  

 

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Which Way Wednesday – Beige Book Edition

More Fed data.

That's what we're waiting for today as the Fed will release their Beige Book, which covers the end of the shutdown period and should give us a read on how damaging the shutdown has been to Q1 earnings.  As you can see from the chart, the Atlanta Fed's estimate of growth in Q1 is pretty close to zero while the "consensus" estimate of leading economorons is just under 2% – that's a pretty wide gap and it's going to matter A LOT which way that line begins to bend.

For the moment, the markets are hanging onto hope that the US and China have finally worked out their differences and that the Governement won't shut down again this year and Brexit won't be a total disaster and, of course, that all those warning signs that have been flashing in the economy are temporary (from our self-inflicted wounds) and we will get back to growth very quickly.  Despite my skepticism, that is how we've been playing the market as our Member Portfolios are generally bullish – with a few hedges – "just in case".

I would still be happier if the market made a nice 10-20% correction and stayed down long enough to consolidate for a proper move up but it doesn't look like the powers that be are willing to let that happen – and that includes China – who went to great lengths to prop up their own markets this week as well.

 

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Testy Tuesday – Trouble at 2,800 – Again!

You're welcome!  

In yesterday's PSW Morning Report (subscribe here) I said:

7,200 on the Nasdaq (/NQ is a good shorting line for today as is 1,590 on /RTY, since that's the 200 dma – tight stops above!

As you can see, the Nasdaq (/NQ) shorts were good for gains $2,000 for each Futures contract shorted while the Russell (/RTY) fell to 1,565 and that was good for gains of $1,500 per contract – not a bad way to start the week.  In case you are wondering – in our Live Member Chat Room, at 12:16, I also called the bottom, saying:

Hopefully that will be it, 2,780 though is a terrible fail of 2,800 and down 100 points on the Nas is a quick $2,000 and /RTY 1,568 should be support but, if not, could see 1,550.   Tight stops in any case but I'm happy with these gains! 

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Despacito – How to Make Money the Old-Fashioned Way – SLOWLY!

Are you ready to retire?  

For most people, the purpose of investing is to build up enough wealth to allow you to retire.  In general, that's usually enough money to reliably generate a year's worth of your average income, each year into your retirement so that that, plus you Social Security, should be enough to pay your bills without having to draw down on your principle.

Unfortunately, as the last decade has shown us, we can't count on bonds to pay us more than 3% and the average return from the stock market over the past 20 years has been erratic – to say the least – with 4 negative years (2000, 2001, 2002 and 2008) and 14 positives, though mostly in the 10% range on the positives.  A string of losses like we had from 2000-02 could easily wipe out a decades worth of gains.

Image result for stock market returns by decade 2018

Still, the stock market has been better over the last 10 (7%) and 20 years (6.7%) than any other investing vehicle and, if that keeps up, a stock market portfolio may give you the best chance of obtaining a functional retirement.  At 7% a year, if you want to generate a $70,000 annual income, you need to have $1M invested but it would be a tragedy if the market dropped 30% and then you had $700,000 and 7% of that is only $49,000 so you have less money coming in AND not enough to live on – keep that in mind when coming up with your "Comfort Number" and, by all means – speak to a Financial Professional who can help you plan by taking into account your own circumstances!  

While some investors shy away from stock options because of their reputation for being akin to gambling, we disagree. Stock options are an important tool for supplementing your stock investing. Options, when used correctly and strategically, allow you to “Be the House, NOT the Gambler”. While no one in the casino always wins, the odds favor the dealer. We’ll show you how to structure your investments to keep the odds in your favor, like the dealer in a casino.


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Monday Market Moves Up (again) on Trade Progress (again)

Yay, I guess.  

The crisis we created may be over!  The US and China may lift tariffs by March 27th – after President Xi finishes a trip to Italy and France, where China may buy both countries under the EU's new BOGO Program.  Meanwhile, to appease Presdent Trump, President Xi has agreed to buy $18Bn worth of Natural Gas (/NG) from, specifically, Cheniere Energy (LNG), the US's largest exporter of Liquefied Natural Gas.  

Of course, this kind of concession is completely meaningless as Natural Gas and Oil (/CL) is what they call a "fungible" commodity, meaning that it's essentially irrelevant WHERE China buys it's Oil and Nat Gas because they will simply replace another buyer here and the guy who used to buy it from us will buy it from someone else or, perhaps, forced Chinese buying of our Natural Gas will create a shortage and artificially raise prices for all Americans.  

Image result for fungible cartoon

Of course LNG has been spending big to boost exports ($15Bn, in fact) as if they KNEW this deal was coming or maybe it's because the deal already came and Trump is just acting like he did something (not surprising) as LNG already signed a deal with China National Petroleum in November, to buy 1.2M tonnes of LNG a year and a tonne of LNG is 48.7Bcf so 58.44Bcf of Natural Gas is 3.6% of the entire US supply of Natural Gas, which is already in the low end of the 5-year range.

Working Gas in Underground Storage Compared with Five-Year Range

 

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