The Futures are flying!
What couldn't be accomplished in 3 weeks of trying is almost accomplished while the markets were closed this morning as the Dow gains over 150 points in pre-market, low-volume trading. Asia was up on positive Chinese data while Europe had some good PMI numbers and oil is up 2.5%, at $55, as OPEC officially began their production cuts on Sunday and so far, so good.
Fundamentally, nothing has changed. Last I heard, high oil prices were bad for consumers and impacted profits in the Transports but no one actually cares about the Fundamentals – least of all the TradeBots that run the markets these days.
Anyway, I resolved to be more Republican in 2017 so we're going to accentuate the positives in the markets and ignore the negatives so we can BUYBUYBUY without all that needless worrying that comes with being a Liberal. Earnings season kicks off next week and we'll be able to see if our Corporate Masters are able to justify a 10% rise in their stock prices. Certainly the energy sector should be improving.
We did have a 3.2% improvement in Q3 earnings over the prior year but that was the first time we had a positive quarter since Q1 '15 so 1 out of 6 is not a trend yet. Of course the comps are easy to beat so we should get SOMETHING out of Q4 but keep in mind we're already up 10% from 2015 – on, so far, less than 2% more earnings.
Half the Q3 earnings came from the Financials and Financials should do well in the age of Trump but, like the broader market, they have already jumped close to 20% since the election in anticipation of a lot more than the 8% gains they've posted so far.
If you think the Financials have gotten ahead of themselves, I like the Ultra-Short Financial ETF (SKF) which has been slammed down 33% since the Summer but seems to be holding up at $30 as the Financial ETF (XLF) runs out of gas at $24. A pullback on XLF to $21 would be 10% down and that should give SKF a 20% pop to $36. If we assume that happens after January earnings, we can play like this:
- Buy 20 SKF Feb $30 calls for $1.80 ($3,600)
- Sell 20 SKF Feb $33 calls for 0.75 ($1,500)
- Sell 5 WFC 2019 $45 puts for $4.50 ($2,250)
This trade has a net credit of $150 and you get anohter $6,000 back in Feb if SKF is up 10% (if XLF is down 5%) for a $6,150 gain (4,100%) on cash. You carry an obligation to buy 500 shares of Well Fargo (WFC) for $45, but that's 20% below the current price and, of course, the idea is that it's unlikely WFC is doing poorly if the Financials are doing well – so hard to lose on both sides.
In the Futures market, I do like shorting oil (/CL) below the $55 line. It's up today because the OPEC production cuts kicked in on Sunday but now we're into the usual winter slump in demand and those cuts won't be felt in the US for another couple of months (takes 3 weeks for the tankers to make a trip) so where's the immediate catalyst?
Gasoline (/RB) is also silly at $1.70 so that's another good shorting line and silver (/SI) is back where we like it long at $16 so plenty of fun trades to make already in 2017 but we're mostly watching and waiting this week and, likely, into Trump's inauguration on the 20th as we're looking for FACTS, not speculation, as to what new regulations to expect that will move industy in the coming year.
For instance, just this morning Trump tweeted out "General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A. or pay big border tax!" That knocked GM down 1% pre-market already. Possibly the most profitable trade of 2017 is simply waiting for Donald to tweet what you should go long or short on!
2017 is off to an interesting start already and I look forward to navigating all the twists and turns with you iin the year to come. I'll be on FaceBook Live at the Nasdaq this morning – giving my thoughts on the year ahead but alreay I see 1,375 failing on the Russell Futures (/TF) so I like that short as well – with tight stops above.
