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Thursday, March 28, 2024

TGIF – Quad Witching Leads to Afternoon Market Sell-Off

Ooops, sorry, that headline is supposed to be at the end of the day. 

I guess we'll leave it and see how the day goes but I was just interviewed by Reuters and that's what we decided would happen today, though you'll have to wait for the official headline until the close.  At the moment, our Futures are down slightly after a nice rally into yesterday's close saved us from DOOM!  The S&P Futures (/ES) ran all the way up to 2,070 and that was up 10 points for a $500 per contract gain from my morning call along with similar gains on the other indexes.

Before we went up, we went down hard yesterday and, as I said in the morning post "Probably have to wait for the Dollar to be done rallying – it should stop before 95."  As you can see from this Dollar chart, we went a bit further than I thought and the Dollar topped out at 95.50 around 10:45 but the effect was as expected on the indexes once it ran out of steam:

If you're going to trade the Futures, or be any kind of day-trader, you HAVE to learn to understand the relationship between currency, commodity and equity pricing.  That's why I talk about all those other, boring things every day – our system is based on the philosophy that, if you give a man a fish – you feed him for a day but, if you teach a man to fish – you feed him for life!   We teach our Members HOW the market work so they understand how to make adjustments without having to rely on other people to tell them what to do.

Still, we do have our Live Member Chat room and we discuss the nuances during the trading day (and you can get an idea of how that works from this week's Live Trading Webinar) and, at 10:17, as things were bottoming, I said to our Members:

Dollar 95.41 – can't blame anything for being down at the moment.  /NKD 15,390 on a strong Dollar – that is such a wrong reaction but the Yen is also very strong and the BOJ just did nothing this morning – so I guess that's why at the moment.  

We had earlier been watching /NKD (Nikkei Futures) at the 15,500 line and, once it was done falling, it rallied all the way back to 15,800 overnight and has since settled back to 15,600.  15,500 is the point at which the BOJ has previously intervened and any time the Nikkei slips below 15,900, we lit to begin making bets on BOJ action.  Unfortunately, that support may not come this weekend as the Brexit still looms large on the Global Calendar and that decision comes next Thursday.

The campaign was put on hold after the shooting of British MP, Jo Cox, who was a Member of the Labour Party and had been campaining for the UK to remain in the EU, she was shot, stabbed and kicked by a man who shouted "Britain First!"  Britain First is the name of a right-wing anti-Islam group that Cox had spoken out against.  

On a brighter note, today is probably your last chance to join us on the Lumber Liquidator (LL) train before it leaves the station.  I have been banging my fist on the table on that one for a year and FINALLY, the U.S. Consumer Product Safety Commission ruled that a full recall of made-in-China laminate flooring sold by the company wasn’t necessary given none of the air-quality tests found formaldehyde levels above the remediation guideline.

Will Whitney Tilson finally be arrested for stock manipulation (allegedly) or is it "just one of those things" that poor LL investors had to suffer through an 80% drop in their stock based on what turned out to be completely unsubstantiated allegations by a short-seller?  As I said back on March 9th, when Tilson again attempted to take the company down:

Speaking of blatant market manipulation, Whitney Tilson was on CNBC bashing Lumber Liquidators (LL) again, using the same BS arguments he used last month, only acting like it was new information to spook investors (debunked by me on 2/22 here).  We saw it as a huge buying opportunity for those who missed our original call as the stock fell from $14 back to $11.77 so, if you want to give Whitney's shorts a tight squeeze (and who doesn't, he's such a cutie!), you can offer to buy all the LL stock he wants to short with the following trade:

  • Sell 5 LL 2018 $13 puts for $5.20 ($2,600) 
  • Buy 10 LL 2018 $13 calls for $5.20 ($5,200) 
  • Sell 10 LL 2018 $20 calls for $2.30 ($2,300) 

That nets you into the $7,000 spread for just $300 in cash and your worst case is you end up owning 500 share of LL at net $13.60.  If LL recovers and gets back over $20 by Jan 2018 expiration (19th), you make $6,700 in profits, which is a return of 2,233% of your cash invested and the ordinary margin on the short puts should be about $2,400 – so it's a very margin-efficient trade as well (248% gain on cash + margin).  

We're already long in our portfolios but might add more if we get a good entry.  If LL bounce back quickly, Tilson, who claims to have shorted 4% of the company on this "news" will be forced to quickly become a buyer of 4% of the company's stock to cover his failed attempt to manipulate the price and that would be about 1M shares, which would be half of an ordinary day's trading.  So watch that $14 line because, if we go back over it, Whitney is in the red and we could have quite a squeeze to drive us higher as he scrambles to cover!

In fact, in this Wednesday's live Webinar, I just happened to mention that LL was still one of my favorite long positions (we had purged so many others last week as we flipped short). In our Options Opportunity Portfolio, our LL trade will make $12,000 off our original net $360 cash investment for a net profit of $11,640 (3,233%) for our Members if LL gets back over our $18 target by January and there is NOTHING better than taking that money from Whitney.  Robin Hood strikes again!  

In our Long-Term Portfolio, we have a much bigger and much more bullish position but, sorry, that one is for Members only!  Suffice to say that, yes, we are long LL.  Still we are short on the overall market and we need a short-term hedge to take us through the Brexit next week and it's the Russell that has been outperforming the other indexes in the past 30 days, as well as the last 3 months so let's add a hedge using the Russell Ultra-Short (TZA) for our OOP and STP.

TZA is currently at $37.36 and it's a 3x ETF so a 5% drop on the Russell (to 1,080) would be a 15% pop on TZA to $43 so, as an aggressive hedge, we can do the following:

  • Buy 30 TZA July $40 calls for $1.85 ($5,500)
  • Sell 30 TZA July $45 calls for $1 ($3,000) 

That's net $2,500, which is the cost of our insurance for 30 days but we'll take it off with whatever loss if the crisis is avoided next week.  If not, and the markets do tank, then a $5 spread on 30 contracts will pay us back $15,000 for a $12,500 profit.  That's how we can spend $2,500 (2.5% of a $100,000 portfolio) to protect us against a 12.5% drop.  As I've noted though, we're already pretty bearish so this is more like a bet for us than a hedge but still, we'll add 50 to the STP for a $25,000 pay-off.

Now we can all relax over the weekend. 

Have a good one,

– Phil

 

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