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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Thursday Market Folly – You Need an AAPL a Day to Maintain Dow 22,000

So far, so good.

After a quick rejection, the Dow is drifiting along under the 22,000 line and it LOOKS bullish but let's remember that it took big moves by Caterpillar ($10), Goldman Sachs ($10), JP Morgan ($8), Boeing ($30) and Apple ($7) on earnings to give the Dow it's last 500 points.  That's a tough act to follow for sure.

And it's been a sort of a feedback loop because each earnings win pops the index, which raises all the Dow components and then the next one hits and reinforces the gains from the last win and then the index makes a new high and more money pours into the ETFs, etc.  All very nice if you are bullish but the rally, on the whole, has come on fairly low volume and, now that earnings are over, we'll have to wonder what catalysts is going to take us over 22,000 (our shorting target), let alone hold us up here.

Over in Europe, they have earnings too and the Europeans were not as impressed with earnings as the US investors were.  In fact, Germany's DAX is down 5% from their June highs along with the Euro Stoxx Index, which fell from 3,650 to 3,450 while the S&P added 50 points (2%).  

Major Global Indexes don't usually diverge from each other that much and the Nikkei has been trending down as well so someone is delusional and it's probably the country that elected a reality show host to be their President – I'm just saying…

The Dow is up 600 points since it's June high and that's 2.8% but, more importantly, since the election, the Dow is up from 18,000 so 4,000 points is 22% and I have to ask you – has Trump made things 22% better in 9 months?  And we're not taking about a 22% rebound after a sell-off, the Dow had already gained 50% since 2012 (4 years) from 12,000 to 18,000 so this 22% is just a cherry on top of all that fudge and whipped cream that was already piled on the QE sundae that had already taken us from 6,000 to 12,000 in the 4 years before that. 

Granted we were at
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Whipsaw Wednesday – The View from Dow 22,000

Wheeeeeee – This is fun!  

Dow 22,000 is our shorting spot (predicted last week) and we hit that that yesterday after Apple (AAPL) announced their earnings and popped $10 after hours, adding 85 points to the Dow.  This gave institutional sellers the perfect cover to dump everything else and the index is back below 21,950, despite Apple's help.  50 points on the Dow (/YM) Futures is $250 (you're welcome) but we can do much better than that and we will be taking advantage of today's pop to add to our hedges (while it's cheap) and that's for Members Only but, for you, the cheapskate reader, we can give you a new hedging idea using the Dow Ultra-Short (DXD), which is a 2x inverse ETF:

  • Buy 100 DXD Oct $11 calls for 0.45 ($4,500)
  • Sell 100 DXD Oct $13 calls for 0.12 ($1,200) 
  • Sell 5 AAPL 2019 $120 puts for $4 ($2,000) 

DXD is at $11.24 so in the money and $13 is $1.66 away or 15% so a 7.5% drop in the Dow will pay you back $2 x 10,000 options (100 per contract) or $20,000 and the net cost of the spread is $1,300.  That's a profit of $18,700 (1,438%) if the Dow drops 7.5%, and stays down, into the October expirations.  You are obligating yourself to buy 500 shares of AAPL at $120 ($60,000) so make sure you REALLY want to own AAPL if it drops 20% but, chances are your will be safe with that bet if the Dow stays up and, if the Dow falls and puts AAPL in the money, then you have an extra $20,000 to buy the shares with!  

Meanwhile, we could not be more pleased with the AAPL options we do have.  AAPL is the largest holding in our Options Opportunity Portfolio and we had already gained $15,800 on our net $5,600 credit position so up $21,400 but that's nothing as our profit potential for AAPL is $185,600 so we're merely "on track" to our goal of $170.  No wonder the Options Opportunity Portfolio is up 200% in two years!  

We will have to roll out the short callers but,
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Toppy Tuesday – Back to our Shorting Line on the S&P 500

2,480! 

That's where we called the short on S&P (/ES) Futures last week and we fell back to 2,460 ($1,000 per contract gained!) and now we're back at 2,480 so what do you think we're doing?  I already put a note out to our Members this morning in our Live Chat Room, saying:

Markets blasting up yet again for no particular reason.  Now I like /YM short at 21,950 with tight stops but then again at 22,000, /NQ 5,900 is good as well and you know 2,480 was my target short on /ES and that's lined up with 1,430 on /TF – definitely a short the laggard day.  

We're also shorting Oil (/CL) at $50 but long on Natural Gas (/NGZ7) at $3.07 and long on the Dollar (/DX) at $92.75 – all fun trades for a Tuesday morning.

 

IN PROGRESS

 

Monday Market Maintenance – Dressing the Windows for One More Day

Image result for market contrarianRecord highs! 

That's what the Banksters want to print in their monthly reports to get their customers to pull their CASH!!! off the sidelines and put them into something that generates fees for the bank.  They don't give a crap whether you win or lose – as long as they get their fees.  

Morgan Stanley says "this time will be different" and that we shouldn't worry about Central Bank de-leveraging or China's Credit Collapse because (and these are their points, not me just making it sound absurd), although "global growth will moderate somewhat, and will remain above trend."  That would be great but the "trend" has been around 2% and global stocks are not priced for "above 2% growth" they are priced for 4% growth or 6% growth and we are miles away from that!

Goldman's Chief Equity Strategist, David Kostin says the company's HNW clients are "confused" by the lack of inflation (as that's what we expect in a great economy) and he ponts back to the disparity of measurement that we touched on last week.  

Like me, Kostin is recommending inflation hedges, urging his clients to ignore what the Fed is saying and pay attention to the evidence that's right in front of their eyes.  Zero Hedge does a very good job pointing out what's wrong with inflation measures as they note that: "A leading driver of disinflation has been the Video, Audio, and Computer category where prices dropped by 5% in 2015, by 10% in 2016, are declining at an average pace of 7% YTD."  This is one of the stupidest things the Government does when measuring inflation.  Basically, if you bought an IPhone last year for $1,000 and it had 64Gb or Ram and this year you spend $1,200 but it has 128Gb of ram, the Government says you are getting more for your money so that phone is counted as 40% CHEAPER than the one you bought last year.  

Of course it's a bit more complicated than that but processor speed per Dollar goes up too so yes, electronics are almost always a drag on inflation, as are appliances.  So take this chart with a Lot's wife-sized
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$2,000 Friday – Big Win on Nasdaq Shorts offset Oil Losses

It was a mixed bag.  

In yesterday's PSW Report, we called for shorting the Dow (/YM) below the the 21,650 line and we never really got there but the Russell Futures (/TF) crossed below our 1,445 target and plunged another 20 points to 1,425, yeilding a nice $1,000 per contract win on the day.  That was enough to offset our loss (so far) of $600 per contract on oil shorts at $48.50 (for those who did not use the tight stops suggested, of course).  

Oil is $49.10 this morning and we still think the short story will play out during August but it's likely to be a rough ride along the way.  The Nasdaq was good for a 100-point drop, yeilding gains of $2,000 per contract from our Wednesday morning call and the S&P (/ES) was rejected at our 2,480 line, dropping to 2,460 and that was also good for gains of $1,000 per contract in just two days.

In Wednesday morning's PSW Report, we also discussed our Wheaton Precious Metals (WPM) spread, which was net $3,825 at the time and is now net $4,180 so up $355 (9.2%) in two days – I told you it was good for a new trade.  Chipotle (CMG) was also a great spread, going from net $16,900 to $23,050 for a very quick $6,150 (36%) gain but sadly, for Seeking Alpha readers, the report we submitted on Wednesday was rejected by the editors because they didn't feel the trades were "new enough" – since they were both derived from older trade ideas.  Pinheads!  

If you want to read our Morning Report BEFORE the market opens every day – you can sign up HERE – I've lost my patience with Seeking Alpha and will no longer submit content there – other than the occasional blog post and, for now, my Options Opportunity obilgations.

Speaking of politics:  32 Million thank yous to Republican Senators Lisa Mukowski, Susan Collins and yes, even John McCain for saving health care for 32M Americans (for now).  They voted against the Obamacare repeal last night and there were gasps on the Senate floor when John McCain, who Trump just called a real hero for voting to allow debate…
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Thrilling Thursday – The View from the Top

Image result for stock market roller coasterHere we are again.

Once again the Fed failed to raise rates and the Dollar dropped, sending the indexes and commodities higher.  Boeing (BA) was the entire story for the Dow (DIA), as their $20 gain was good for 170 of the 97 points the Dow gained.  That's right, without BA, the rest of the Dow components lost 73 points and the S&P ended up red (slightly) despite Boeing's boost.  

We had a live Webinar yesterday and we talked about the internal market weakeness and decided to stick with our index shorts from Tuesday morning's Report, notably the Dow below the 21,650 line and the Russell below 1,445 – with tight stops over the line.  

We're also still shorting Oil (/CL) Futures below the $48.50 line as that too, seems overdone after it's 15% run since Mid-June rom $42 to $48.50.  Considering how much effort has been made to talk oil up – $48.50 is pretty pathetic, a strong indicator of general weakness.  Also, we're getting into that time of year when there's already a tremendous overhang of fake, Fake, FAKE open contracts at the NYMEX from traders who have no intention of taking delivery.  December already holds open orders for 342M barrels – that's 20 times the amount that will actually be delivered!  

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Wishful Wednesday – Fed Edition

Image result for draghi whatever it takesHappy anniversary!  

It's been 5 years today since ECB President and Goldman Sachs (GS) stooge, Mario Draghi said: "The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."  At the time, the EuroStoxx index was at 2,000 and now we're at 3,500, a 75% gain in 5 years and Germany's DAX is up over 100%, from 6,000 to 12,281 as of yesterday's close.  That's an average gain of 20% a year for 5 consecutive years – happy anniversary indeed!

The Euro has fallen 20% over that time period, making the gains somewhat less impressive but not too much and "only" down 20% is very surprising as the Yen is down 30% over the same period and the ECB's money supply is up 30% as well.  Actually, the EU money supply is up closer to 100% since 2008, Draghi's "whatever" was just icing on that already well-iced cake.  

None of that comes close to the flood of Dollars that have been printed since 2009 with $3Tn new Dollars in circulation which QUADRUPLED the supply of US Dollars in the World.  Keep in mind those are hard Dollars which the banks then turn around and lend out 10 times each, which is $30Tn more Dollars or 1.5 times our entire GDP so, when you hear our GDP is growing at 2%, you should say "WTF?" as our money supply has been growing at an average of 30% per year for a decade…  

Image result for money supply dollars 2016

That money, in turn, gets pumped into the stock market, which also levers up the cash by about 10:1 on inflows and PRESTO! – it's a "recovery".  Steely Dan said "You Can't Buy a Thrill" but you can certainly buy an economy if you are a motivated Central Bank and no one was more motivated than the former Managing Director of Goldman Sachs, Mario Draghi, whose "former" firm is up 120% since he did "whatever it takes" for them.  

It's kind of cute the way people think there will be no consequences to 300% increases in the money supply.  The way gold, silver and uother commodities are trading – you…
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