Flip Flop Friday – Bank Earnings Boost Confidence

Don't be fooled by weak bounces.

The Dow may be up 370 points at the open and that seems like a lot but we closed near 25,000 and, as noted in yesterday's PSW Report, we were expecting a bounce off 25,175 back to 25,450 just to complete a WEAK bounce off the 5% correction (which we also predicted) and yesterday's failure at the bounce line does not make a second attempt today more impressive.  As we discussed in Wednesday's Live Trading Webinar, it's not just making the bounce lines that matter but making them in the same time period that we fell.

It took rwo days to hit 25,175 and yes, we did bounce back in one day yesterday but that failed and got worse and now it's day 2 and all we're doing this morning is making another run at 25,450 and that is not going to be enough to flip us bullish – now we need to see the strong bounce level at 25,700 taken and held – along with the levels we set for our other indexes as well.  We called this in yesterday's report, of course and I'll repeat it again because we're looking for the same factors in play:

Nothing has happened to support the markets so far but here are some of the things that can turn things around – at least to create a dip-buying rally but whether or not that's enough to crack the strong bounce lines remains to be seen:

  • Trump could stop calling the Fed "crazy" (not likely, he needs someone to blame for the market sell-off since he's been using the market rally to measure his success)
  • The Fed could capitulate to Trump and say they won't raise rates anymore (not likely as yesterday's 10-year auction was not pretty – even at 3.25%. 

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$5,000 Thursday – Cashing in Our Shorts and Looking for the Bounce Lines


I love a good correction, especially when we call it.  Yesterday, in the Morning Report (which you could have in your hands every day, pre-market for just $3/day), when the Futures were UP, I said:

We also have a potential 1,000-point drop in the Dow (/YM) to look forward to if it fails at 26,250 so yes to Futures shorts below that line if it fails, with tight stops above.  If the S&P is below 2,860 and the NYSE is still below 13,000 and the Nasdaq fails 7,275 and the Russell is below 1,620 – that's going to confirm a bearish market and we'll get more aggressive on our shorts but, so far, we're pretty well-balanced in our 5 Member Portfolios and we will review them today in our Live Trading Webinar.

The Dow (/YM) Futures did indeed bottom out this morning at 25,174, past our 1,000-point goal and this morning, in our Live Member Chat Room (which you can also subscribe to) I sent out a Trading Alert to our Members at 7:49 saying:

I think 2,750 on /ES is the best long line with tight stops below and 6,780 on /NQ should be fun if dip buyers come in with a stop below 6,775 (Nasdaq loves those 25-point lines) and then we'll watch the rest of our bounce lines to see if we're going to add more hedges or take profits on the ones we have.  

Things are already off to a good start with the S&P flying back up to test the 2,800 line and S&P (/ES) Futures contracts pay $50 per point so a 50-point move would be good for gains of $2,500 per contract on the bounce but, now that we're testing 2,785, we need to keep a stop at 2,780 and settle for a $1,500 per contract gain if the market is simply weakly bouncing pre-market.

I don't usually do this but I put a lot of work into the morning Alert for our Members and there's nothing more important this morning than discussing the bounce lines so I'm going to…
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Will We Hold it Wednesday – DAX 11,800 Edition

Usually, we don't care so much about Europe.

However, Germany's DAX index is critically testing the 11,800 line, which would be it's lowest point since early 2017 and, in 2015, DAX had a 20% correction after failing at this mark – all the way to 9,000 so failing here would be extremely significant and the Euro Stoxx Index faces a similar test at 3,200 – but it's still 100 points above that line – a larger percentage (3%) than the DAX (1%) has to fall.  

Brexit, of course, remains the big story over in Europe but Italy is also falling apart and, just this morning, the Parlimentary Budget Office said the Government's forecast of 1.5% growth next year was exaggerated, indicating deficits will be larger than projected and far afoul of EU regulations.  Italy's debt is already 130% of GDP and that's considered a crisis – said the writer in a country who's debt is 110% of their GDP and also has BS inflated Government projections for economic growth.

Image result for italy deficitEU authorities are expected to declare Italy in violation of the bloc’s rules on fiscal discipline unless Rome changes course. Leaders of the League and 5 Star have defiantly denounced EU officials, raising the specter of a monthslong confrontation.  Last Friday, the EU’s executive arm criticized Italy’s budget plans, saying they represent a “significant deviation” from recommended fiscal policies.  Skeptical investors have dumped Italian bonds and stocks, especially banking-sector shares. The yield on Italy’s benchmark 10-year bonds touched a four-year high of 3.7% on Tuesday.  

3.7% is off the chart and that chart is up over 100% since May!  By comparison, Germany is still borrowing money at 0.55%.  Italian Finance Minister Giovanni Tria said the government is worried by the “unacceptable” bond yield spread, which on Tuesday was near the widest in more than five years.  "If the spread reaches 500?” Tria said in response to a hypothetical question. “The government will do what it does in an unexpected crisis, because we aren’t expecting that.”  That's not actually reassuring since Italy in the 70s and 80s massively devalued their currency and engaged in hyperinflation to pay off debts (ie. pay debts with worthless currency to pretend they aren't…
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Tumblin’ Tuesday – Dollar Up, TBills Down, Markets Look for a Bottom

Image result for monks roller coasterWheeeee!

Sell-offs are so much fun when you are ready for them.  We added Delta (DAL) yesterday as a Top Trade Alert since we like the sale price ($52) and were able to construct a nice income-producting trade while we wait for earnings on Thursday.  We can afford to do that because we always hedge our portfolios and keep plenty of cash available for bargain-hunting while others are panicking.  Times like these are when we like to do our shopping!  

Futures are down again this morning as the IMF cuts it's forecast for Global Growth due to the escalating trade wars to which we say – DUH!  To this day what surprises me most about traders (and my fellow analysts) is how oblivious they can be to macro changes until someone of authority points it out for them.  Who could have possibly believed trade wars would be good for the Global GDP?  Only someone listening to Trump and his team of Economorons with no logic filter could possibly think what they are doing is pro-growth.  

Global Groth is still 3.7%, which is not bad but it's worse than the 3.9% forecast they had just 3 months ago and, since trade tensions are getting worse and since Trump is still threatening to ratched tarriffs up from the current $110Bn to $500Bn – we can expect the IMF to downgrade the growth forecasts another couple of times down the road.  Will this also shock and surprise traders?  

Oddly enough, the US and China's forecast is steady, though Trump will be disappointed to miss his 3% promise.  Europe and the Emerging markets are suffering so far but the IMF indicates escalating Trade Wars could knock another 0.8% off the global total – which would be a disaster.  The IMF has already cut the US forecast to 2.5% next year so the trend is down – even at the current trade levels.  

Meanwhile, things in Europe are getting even more stressful as French President Emmanuel Macron, who just won last year with 66% of the vote, now has his support at just 34% followiing a recent poll after a series of scandals and a government shake-up.  While
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Monday Market Misgivings – China, Italy, Bonds, Brazil & Brexit

Problems, we've got problems

They're not new problems and trade issues and bond issues are self-inflicted problems but, as was made obvious by the Kavanaugh confirmation this weekend – these self-inflicted problems aren't going to go away soon.  If America is indeed on the wrong path – the wheels are being locked in with lifetime appointments that insure these policies will last long after Trump has gone to pasture.  

As you can see from the chart on the right, other than Israel, Kenya and, of course, Mother Russia, other contries' view of America has been deteriorating rapidly since Trump took office – worse even than Trump's poll numbers at home.  People in other countries consider the United States, not Russia or China or Iran – to be the single biggest threat to World Peace.

Meanwhile, Trump's rollback of Obama's Climate Policies and withdrawal from the Paris Climate Accords has, according to the new report from the United Nations, set us on a path for Global Catastrophe as soon as 2040 which, in case you are not good at math, is only 21.5 years away.  

The report, issued on Monday by the Intergovernmental Panel on Climate Change, a group of scientists convened by the United Nations to guide world leaders, describes a world of worsening food shortages and wildfires, and a mass die-off of coral reefs as soon as 2040 — a period well within the lifetime of much of the global population.

The report “is quite a shock, and quite concerning,” said Bill Hare, an author of previous I.P.C.C. reports and a physicist with Climate Analytics, a nonprofit organization. “We were not aware of this just a few years ago.” The report was the first to be commissioned by World leaders under the Paris agreement, the 2015 pact by nations to fight global warming.

Image result for us rogue nation climateLook, I know you don't want to hear this stuff on a Monday morning but we are talking about a major global crisis and WE ARE MAKING IT WORSE, not better, not even the same, because we have "leaders" who are not only ignoring the problem but ACTIVELY working
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Faltering Friday – Rally Retraces from the Top

It's not much in the grand scheme of things.

As we noted and predicted on Tuesday, the Russell Index is undergoing a long-overdue correction to the 1,640 line from 1,705 and, as noted on Tuesday – it's not really bearish unless we fail to hold 1,640.  So far, the other indexes have not really followed suit – yesterday's 200-point drop in the Dow was nothing – not even 1% of it's 26,825 start to the day.  BUT (and it's a big but), if the Russell does fall into a proper correction and fails to hold the 1,640 line – then we can look for all the indexes to begin correction and THEN things can get very interesting.

We calculated the retrace zones for the other indexes in yesterday's Live Member Chat Room and they are:

Still looking for 1,678 (weak bounce) on /RTY going back to Tuesday's notes and below 1,670 is more likely that we're legging down to 1,640 (strong retrace from 1,700) and then we can expect the other indexes to AT LEAST weak retrace from their highs.

That's off the year runs so, for the Dow, we're looking at 25,000 to 27,000 which is 2,000 points so 400-point retraces are 26,600 (weak) and 26,200 (strong):

/ES is essentially the same /10 so 2,700 to 2,900 means 2,860 and 2,820 and, since /ES is still at 2,923, it makes a great short below the 2,920 line with tight stops above.

/NQ 6,400 to 7,600 is 1,200 so 240-point retraces and Nas loves 25s so call it 250 to 7,350 and 7,100.

We hit 26,600 on /YM yesterday and our /ES shorts paid $1,650 per contract at 2,890 but that's still not a proper correction on the S&P and we can re-short it on a move back below 2,900 with very tight stops over
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Thousand Dollar Thursday – Our Webinar Trades Make Quick Profits

Do you want $1,000? 

How about $1,237.50?  That's what we made during our Live Trading Webinar yesterday in the S&P Futures alone.  And that was at 2,925 – this morning, our two remaining Futures contracts stopped out at 2,915 after testing 2,912 and that was good for an additional $500 per contract gain – another $1,000 to start your day!  

Futures trading is not hard and it is not scary or complicated – that's one of the things we try to teach our Members in our weekly live trading Webinars.  In fact, in yesterday morning's PSW Report, we made an entire case for shorting the S&P Futures (/ES) at 2,640 so all we did at the 1pm Webinar was follow our own advice.  A 15-point drop on the /ES Futures is good for $750 for each contract and each contract requires $6,600 in margin and changes $50 for each point the S&P moves.  

So, the way we like to enter a trade in the Futures is to find a good line of support or resistance – in this case S&P 2,640 – and then we use that for a stop, say at 2,645, so we're limiting our loss to $250 but, ideally, we prefer to catch a move on the way under the line – so momentum is on our side and then we keep very tight stops over the line. 

Usually we win or lose $250 but, once in a while, we win a lot more on a nice move in our favor.  If we can keep our small wins and losses about even then those big wins become our profits.  Our other calls from yesterday's morning Report were:

We're still shorting the S&P (/ES) at 2,940 with tight stops above the line and the Dow (/YM) at 26,900 – also with tight stops above and we're shorting Oil (/CL) Futures at $75.50 – but very dangerous into inventories at 10:30 and, other than that – it's another "watch and wait" sort of day while we wait to see if the S&P can break over 2,940 and make a serious run at 3,000

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Which Way Wednesday – S&P 2,940 or Bust (again)!

Will the 2nd time be a charm?

The S&P 500 will make another attempt at getting over the 2,940 line, which is 33.6% higher than our old "Must Hold" line at 2,200.  33.6% is not particularly significant, the real significant line is the 20% line at 2,640 and we haven't seen that since April and now we're over the 30% line (2,860) and it's probably time to move the goal posts as those lines were for the end of 2017 and the tax cuts have been a game-changer for the S&P 500 and anyone else who measures their earnings in Billions.  

Companies aren't making more money – they are just paying less taxes but same difference to investors – as long as more goes to the bottom line.  I'm not saying that 2,860 is likely to hold in the long run but, taking into account buybacks and repatriation of capital (ie tax avoidance) and lower tax rates – 2,640 is a reasonably good "Must Hold" level for the S&P going forward as the Must Hold Line represents a bearish break if it fails and 20% above (3,168) and 20% below (2,112) is the expected range the market should stay in.

Getting close to 3,000, it's hard to imagine 2,112 ever happening but I suppose we said that in 2000 and again in 2007, when the S&P was up at 1,550 and both times it fell 50% within the next two years.  This time is different though – we're 50% higher now so, even if we fall 50%, we still end up back at the previous highs – that's progress! 

Image result for s&p 500 pe ratio 2019

That's right, we're getting very close to that magical 3,000 level which, appropriately, would price the S&P 500 at 30 times it's trailing earnings but, if we assume forward earnings will go up and up forever and nothing will ever, ever, ever go wrong – then it's only 27 times earnings and that seems like a bargain these days, right?

Image result for stock market bubble chartAs you can see from the chart above, 30 on the CAPE index has popped every bubble since 1903 except
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Tuesday – Trouble at 1,700 for the Russell

What's wrong with small caps?

All the other indexes seemed pretty happy yesterday but the Russell 2000 fell 1.5% and are down even more this morning in a non-stop UGLY day of trading where almost every candle formed on the hourly chart was a down one (and the up ones were pathetic).  Volume was also almost all red and much stronger than Friday's up volume, which was completely reversed by noon.  

So far, this is just a natural rejection of the Russell's 10% run for the year, which began at the 1,550 line on Jan 2nd so 10% from there is 1,705 and that's why we have been shorting the Russell below the 1,700 line, looking for that rejection.  According to our 5% Rule and rounding off to the more significant 1,700 mark, a 150-point run expects a 30-point (20% of the run) rejection so 1,670 should be a weak retrace and that's all this is so far.  Another 30 points would be a strong retract (1,640) and still not really bearish unless we fail it.  As noted in Friday morning's PSW Report:

Notice on our Big Chart that the Russell has failed its 50-day moving average at 1,700.  There's nothing bullish about the market until it takes that back and watch out below if any of the others fail to confirm a new downtrend but, as I said, not today – today we have to make the quarter look pretty so we can bring some fresh retail suckers in to hold the bags next quarter

Remember, I can only tell you what is likely to happen and how to make money trading it.  A 30-point drop in the Russell is good for gains of $1,500 per contract and, since we expect a bounce off the weak retrace at 1,670 – we already know where we're likely to stop out.  Now that we have that range, we look at the 40-point drop from 1,710 (because we can't round off in the short-term picture) to 1,670 (but we do use the goal line – even if it doesn't actually hit) and now we look for a weak bounce – which is 20% of the 40-point drop – to 1,678 and a strong bounce to 1,686, which we have to clear before looking bullish…
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Faltering Friday – Tesla Tumbles, Takes Nasdaq With It

Image result for emperor musk has no clothesWell, that's a big "I told you so!"

Way back in our August 8th PSW Report (and in our Live Member Chat Room the day before) our reaction to the Elon Musk tweet that Tesla (TLSA) was considering going private at $420 with "funding secured" was to call BS and short the stock.  The title of that particular report was:  "Wednesday’s Whopper – Musk Claims Some Idiot Offered Him $420/share for Tesla!" in which I said:

$420 per share?!?

That's $72Bn for a car company that had to run production lines in tents to push out 5,000 cars in the last week of July and, aside from the high level of defects reported in the cars that have been delivered, word is that it's taking weeks to get even basic repairs done and MONTHS for replacement body parts to arrive.  Not only that but the Model 3s that are being delivered are averaging $64,000, not $35,000 as promised and TSLA is going to run out of $7,500 EV credits this year – as well as cash

The company lost $1.9Bn in 2017 on $11.7Bn in sales and, in Q1 and Q2 of 2018, they have lost $1.4Bn on $7.4Bn in sales so 58% more sales 47% more losses – I guess that COULD be called improvement, right?  Liabilities have "improved" from $21.9Bn to $22.6Bn but what's another $700M between friends, right?  TSLA also "needs" to build a $2Bn factory in China and maybe put a roof on their new production lines in Freemont so that's what, about $100Bn to take over TSLA for the joy of losing another $1.5Bn for the rest of 2018?

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