Phil's Newsletter

Which Way Wednesday? Markets Drift Higher on Low Volume

SPY 5 MINUTEUp 1.25% is very impressive.  

Unless, of course, you look at the volume, which is what we usually get on a holiday.  This is why, for the most part, we are sitting on the sidelines with plenty of CASH!!! – as these low-volume market moves do not make us very confident that the "rally" will hold once activity picks up.  As noted by Dave Fry last night:

As markets were weak the previous two weeks it was the perfect time for a short squeeze and we’ve seen this numerous times over the past many months. There were also some supposed bullish comments from the IMF and (yes, them again) Greece as the Germans caved for another rescue.

But, another true thing is there was little volume in trade Tuesday, and this means little participation which to me is a negative.

We knew this going into the close, of course and I said to our Members last night (6:56 pm): 

As long as the Dollar is over 94, the Nikkei can hold up but 16,900 is our shorting line on /NKD (you are on your own in /NIY). On the others, /NQ is a great short at 4,398 because 4,400 should be tough to cross – so a good stop.  Matches with 2,080 on /ES (another good short) and 17,850 on /YM and 1,125 on/TF so those are the confirming lines.  

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Twisty Tuesday – Markets Gyrate Wildly While VIX Stays Low

What a ridiculous market.  

We're right back where we were on April 29th (2,060 on the S&P), which is still 2% below the 2,100 line while 3% (2,040) seems to be holding up well so we're consolidating at – you guessed it – the 2.5% line (2,050).  This is right where our 5% Rule™ expects us to be and we haven't broken down yet – but that doesn't mean we're not going to, so we're still loving our hedges, which are keeping our portfolios fairly neutral in all this chop

Similarly, the DAX fell from 10,500 to 9,800, which is -6.66% (thanks Lloyd!) and, as we know from the 5% Rule™, that's an overshoot and we expect a 20% (150 points) weak bounce  to 10,650 or a 40% (300 points) strong bounce to 10,100 and we're not going to be impressed by the "recovery" until the 10,100 line is held for more than a day and a rejection at 10,100 would be a bad sign:

See, isn't that easy?  The Must Hold line on the Dax is 11,000 (same as the NYSE) so 10,450 is the true 5% drop so we're really not impressed, in the bigger picture, until the DAX is over 10,500 so 10,100 should be EASY to pop back over if they are really on the way back to 10,500 and, if the DAX can't get back to it's -5% line, why would we be bullish on the S&P where 5% off the top (2,100) is 1,995 when it's already over that?

TA should follow your bullish investing premise, in the very least.  The bullish story is that the US is recovering (it is, slowly) and Europe is recovering and Asia will muddle through but if Europe's top index is 5% below it's Must Hold line (2,050 is 11% over the S&P's Must Hold at 1,850), how is the S&P going to justify being 20% higher than our German cousins?  Don't we all pretty much sell our goods and services on the same planet?

Amazingly, for all these wild market swings, volatility is very low – almost half of where it was in February, when the S&P tested our Must Hold line at
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Meaningless Monday Market Movement

Why do we work 5 days?  

Market trading on a Monday is like going to a kids softball game when only 4 or 5 kids show up for each team yet they insist on playing anyway and the parents sit on a metal bench for 2 hours watching kids chase balls around.  There's a human tendency to follow a plan – even if the plan already looks like a disaster.  This just happened to my daughter's game on Saturday and I KNOW everyone would have rather gone out for pizza instead but it was on the schedule and would count in the league standings so we went through the motions – but no one, not even the kids, considered it a real game.  

The markets are like that on Monday.  Half the traders are still in the Hamptons and the ones that show up aren't into it and volume is usually 2/3 or less than that of a regular day and even the news isn't awake yet and very little data is scheduled (how often do you promise to have a report ready Monday morning?).  Still, we go through the motions but I'm not going to pretend it matters – let's just try to enjoy a nice sunny day.

Europe is happy this morning as the Greeks have agreed to yet another round of Draconian austerity measures.  Well, everyone but Italy is happy, because they are next on the EU chopping block.  Though thousands of protesters rallied outside Parliament yesterday, the Greek lawmakers bowed to Germany's demands (over IMF objections) and slashed $6.2Bn (3% of GDP) worth of spending, mostly coming from pension cuts while, at the same time, increasing the amount workers must contribute into the dwindling pensions.  

I have long warned that Greece is simply a petri dish in which the powers that be test just how much crap the people will take before they revolt – so far, it's an amazing amount of crap!  What has "worked" for Greece (ie. allowed them to pay usurous creditors 20% interest on bonds) is now being pushed on Italy who, like Greece tried to do, are pushing back by electing a union leader to represent them at the EU.  Most likely, he will fail as…
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Option Opportunity Portfolio May Review – Up 19.3% In 30 Days!

What a great month it's been!  

Like the Fed, we've made very few adjustments to our portfolio but the ones we have made have been very effective and, more importantly, we added a lot of hedges that locked in our gains at very near our highest levels (45%) and we were relatively unaffected by this week's weak action.  We started the portfolio on August 8th as an experiment with the people at Seeking Alpha to see if we could create a fully documented portfolio that makes a steady 5% monthly return.  We failed to do that.  

Though we are up just about 45% in our 9th month, the returns have been far from steady.  As it turns out, our Butterfly Portfolio (one of the 4 virtual portfolios we use over at PSW) is still the champ and, to that end, we are incorporating more of those long, boring plays into the OOP from now on – as the goal was to have a low-risk $100,000 portfolio.  The mistake we made was trying to make 5% in our first month, which we did but we were over-exposed when the market dove – bad timing as our first month coincided with a huge market drop that lasted through September.

Nonetheless, we got back on our horse and followed our "Be the House – NOT the Gambler" strategy and made a lot of smart bets and got ourselves back on track.  Actually, this is a good time for a strategy note.  Over at Philstockworld, we have an Education and Strategy section where we discuss our methods of scaling in and out of positions (something I also teach in our Live Trading Webinars) and it would be very educational for you to review our Options Opportunity Portfolio – 2016 Preview, which details each of our positions at the time and how much money we expected to make from each one.  Although the BALANCE of the portfolio was just $101,571 at the time, the key quote was this:

Notice first that we have $98,672 worth of cash on hand.  We started

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Non-Farm Friday – Is America Working?

It's Non-Farm Payroll Day!  

Much more exciting than Cinco de Mayo, which we properly celebrated with quesadillas and sangria last night.  We celebrate Non-Farm Payroll Day by checking our Futures levels (we're short per our morning Alert to Members) and having some coffee – not as much fun but it can be more profitable.  This is one of those days when it's great to have a Futures account as the markets don't open for a whole hour after this major market-moving report is released.  

As you can see from the chart above, after fixing the disaster of the Bush collapse, Obama's job-creation record has been amazing – the best since Clinton (still the champ with 20M jobs created) and the monthly gyrations up and down are really not a big deal in the grand scheme of having now 6 years where we're averaging 200,000 jobs added per month (14.4M jobs).  

UNFORTUNATELY, we still haven't done enough to reverse the downtrend in total compensation – a number which takes into account hours worked, salaries paid, etc.  Total Annual Compensation has dropped by 15% of our GDP ($3Tn) since 1970 and workers of the World have failed to unite to reverse this trend in any meaningful way (raising minimum wages to $15 over 5 years is a small start).  

As members of the investing class, we can take comfort in knowing that screwing over the workers is VERY profitable for the Corporate Masters who pushed this disparity into overdrive since 9/11, increasing Corporate Profits by 120% in the past 15 years.  So hurray for us, I guess – unless of course you have someone you care about who has to work for a living – then it really sucks for them…

Of course, it's not all good news when you don't pay your workers enough to live on.  For one thing, they can't afford to buy homes and home sales are a very important driver of our economy.  Of course, as investors, we simply shift our money away from home builders and into REITs who own a lot of apartments and out of
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Thursday Fun – Weak Bounces Boost Bullish Bets

Let's talk about the 5% Rule™.

For details, you can read this post, but today we're going to focus on the very simple concept of bounce lines.  Under our 5% Rule™, we expect moves of 1.25%, 2.5% or 5% on major indexes to have 20% (of the move) corrections along the way, with a greater chance of a correction more likely as we cross each line of resistance.

It's the 5% Rule™ that led us to make a long call in yesterday's Live Trading Webinar, as we tested the -2.5% lines on our indexes EXACTLY WHERE WE PREDICTED THEY WOULD BE IN OUR MORNING POST (should be 2,047.50, not 1,947.50).

That's right, using our 5% Rule in the morning, I was able to say in our morning post at 8:33 am:

We have a PMI report at 9:45 and ISM Services at 10 along with Factory Orders and, at this point, expectations are low all around so we'll be looking for a bounce at Dow (/YM) 17,550, S&P (/ES) 2,040, Nasdaq 4,300 (/NQ) and Russell (/TF) 1,110 along with /NKD 15,900 but if any 2 are below (including whatever you are playing) – GET OUT! 

SPY 5 MINUTEThe S&P bottomed for the day at 2,039 at 2:05 pm and is already back to 2,055 for a $750 per contract gain in the /ES Futures.  In our Live Trading Webinar, we played the Nasdaq Futures (/NQ) over the 4,300 line and made a very quick $168.50 in 5 minutes and then we chose to play Gasoline Futures (/RB) and made a just as quick $580 after another 5 minutes of hard labor at our keyboards.  Making $748.50 in 10 minutes is good money so we took it and ran and went on with our Webinar at that point but the lines, like the song, remains the same – ready to be played any time we get a good test. 

This post isn't about showing you how to make money trading the Futures – we do that all the time in our Member Webinars (replays available here) and, of course, every day in our Live Member Chat Room.  This…
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Trump Victory Scares Global Markets

President Trump!  

Just think about what that will mean for America.  Then keep on thinking about it because we are only one Hillary scandal away from a Trump Presidency now that Ted Cruz has quit the race, leaving the GOP no choice but to rally behind The Donald at their conventon on July 18th.  Then it's just 4 months until the November 8th election when we can look forward to Trumps agenda, which includes (out of 76 campaign promises so far):

  • 1. Build a wall along the southern border that's taller than the arenas where Trump holds his rallies, taller than any ladder and one foot taller than the Great Wall of China. This "artistically beautiful" wall will be constructed out of hardened concrete, rebar and steel, and it will be "the greatest wall that you've ever seen" — so great that the nation will likely one day name it "The Trump Wall."
  • 4. Get rid of Common Core because it's "a disaster" and a "very bad thing." Trump says he wants to give local school districts more control and might even eliminate the Department of Education.
  • 6. Get rid of Obamacare and replace it with something "terrific" that is "so much better, so much better, so much better."
  • 10. Defund Planned Parenthood.
  • 18. Prosecute Hillary Clinton for her use of a private e-mail server while serving as secretary of state.
  • 23. Strengthen the military so that it's "so big and so strong and so great" that "nobody's going to mess with us."
  • 27. Target and kill the relatives of terrorists.
  • 46. Put billionaire hedge fund manager Carl Icahn in charge of trade negotiations with China and Japan, and pick an ambassador to Japan who is "a killer," unlike the current ambassador, Caroline Kennedy.
  • 54. Simplify the U.S. tax code and reduce the number of tax brackets from seven to four. The highest earners would pay a 25-percent tax. The corporate tax rate would fall to 15 percent. Eliminate the "marriage penalty" for taxpayers and get rid of the alternate minimum tax.54. Simplify the U.S. tax code and reduce the number of tax brackets from seven to four. The highest earners would pay a 25-percent tax. The corporate tax rate would fall to 15 percent.

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Turnaround Tuesday – Yesterday’s Gains Gone Before the Open

What a silly market!  

I warned our Members in the afternoon to be wary of the low-volume rally and, of course, we stayed the course on our bearish hedges (see last week's posts), which kept us from enjoying yesterday's move up but will serve us well this morning as we're right back to Friday's lows.  Today's excuse for the sell-off is more bad data from China (what other kind is there) with yet another negative (below 50) PMI reading.  

Even worse, China's financial regulator is clamping down on shadow banking.  China’s banking regulator is cracking down on financial engineering that Chinese banks have used to disguise Trillions of dollars in risky loans as investment products.  The clampdown, which will force banks to make provisions they previously avoided by disguising loans as investments, is designed to deflate one of the fastest-growing areas of the vast shadow banking apparatus, where bad debts are increasing.


Of course, let he who is without debt cast the first bond – the US has run up 160% of our GDP in debt since 2000, while China has 200% of their GDP into debt.  At least they got 7% GDP growth for 17 years (119%) out of all that spending while our GDP has grown less than 50% over the same period.  Still, since the GDP is growing then every year China is adding on even more stunning amounts of it as they continue to spend, spend, spend to paper over a weak economy (and again, so are we).  

What worries me most of all is the acceptance of the idea that China only has $1Tn worth of bad loans, which would be 3% of $35Tn.  Anyone paying attention to the China property bubble or Chinese earnings can see the number is easily 3-5x that amount and, in China's smaller economy ($8Tn) – that's a lot of money!  

It's certainly not a good idea to rely on Chinese analysts to tell you what's going on – over the course of the past year, their targets for the Shanghai and Hang Seng markets have
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Monday Market Movement – Yen Still Climbing vs Dollar

One again the BOJ does nothing over the weekend.  

That's put many, many traders on the wrong side of the strong Dollar/weak Yen bet and it's also pushed the Nikkei back to our long line at 16,000, which is where we expect support from the BOJ – whether overt or covert.  As I said in a Bloomberg interview last week:

I think 105 is a line that will be defended by the BOJ in whatever way they can, for as long as they can and the 16,000 line is also being defended at the moment so it's great fun to play in the Futures but as soon as we get to around 18,000 or 116 on the Yen, we flip to shorting the Nikkei and long on the Yen (short USD/JPY) because both those levels are unrealistic, no matter how hard the BOJ tries to push us over those lines. 

The BOJ's problem is they can't fight the constant flow of money coming into Japan from Asian investors looking for safe-havens to park their cash.  What are the alternatives?  As bad as Japan is, it's less scary than their home countries so investors tend to buy Euros (Francs, etc.), Dollars and Yen but, as a reserve currency, the Yen is just 2.5% of the Global Float (Dollar 63%, Euro 24%) yes, when people are allocating cash – they tend to put a disproportionately high percentage into Yen (vis a vis allocating by reserve status) and that is what causes the Yen to be too strong, no matter how much the BOJ tries to weaken it.  

Now Japan has been placed on on official US Government watch list for currency manipulation and that's forcing the BOJ to tread cautiously before making any additional currency moves and, as I said in another interview last week (hasn't aired yet), we're not expecting any real action from the BOJ until after the upcoming G7 meeting.

Without specific action to…
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TGIF – Stop the Week Before Things Turn Ugly!

SPY 5 MINUTEWow, what a day!  

Now aren't you glad we added those hedges on Tuesday?  Keep in mind that I can only tell you what the market is going to do and how to profit from it – the rest is up to you…  Our trade idea from Tuesday morning's post was:

  • Buy 40 June SQQQ $17 calls for $2 ($8,000) 
  • Sell 40 June SQQQ $21 calls for 0.85 ($3,400) 
  • Sell 5 AAPL 2018 $85 puts for $7 ($3,500) 

The idea is we REALLY want to own 500 shares of AAPL at $85, so the $3,500 we collected for selling the puts is free money and AAPL only fell to $95 anyway, so we're feeling very good about our 2018 obligation.  Meanwhile, the Nasdaq Ultra-Short (SQQQ) June $17 calls are already $3.10 ($12,400) while the short June $21 calls are $1.15 ($4,600) so we could close that spread now for $7,800 off our $700 cash outlay on Monday and that's a gain of $7,100 (1,014%) in 4 days – you are very welcome indeed and THAT is how we hedge!  

That then leaves us with just the obligation to buy 500 shares of AAPL at $85 in Jan, 2018 if it is below $85.  The current ordinary margin on 5 short puts is $4,225 according to Think or Swim or we could buy them back for $9.80 ($4,900) and then we'd be cleanly out of the entire trade with a $2,200 gain (314%) in 5 days.  

Our portfolios, on the whole, took very little damage on the dip (so far), and keep in mind the upside on the SQQQ spread is $16,000 – so still good protection in case things don't improve…
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Phil's Favorites

The Third Way: Share-the-Gains Capitalism


The Third Way: Share-the-Gains Capitalism

Courtesy of Robert Reich

Marissa Mayer tells us a lot about why Americans are so angry, and why anti-establishment fury has become the biggest single force in American politics today.

Mayer is CEO of Yahoo. Yahoo’s stock lost about a third of its value last year, as the company went from making $7.5 billion in 2014 to losing $4.4 billion in 2015. Yet Mayer raked in ...

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Zero Hedge

Nobody is ready, willing, or able to ask and/or answer questions of substance.

Courtesy of ZeroHedge. View original post here.

Submitted by hedgeless_horseman.

I wouldn't go to war again as I have done to protect some lousy investment of the bankers. There are only two things we should fight for. One is the defense of our homes and the other is the Bill of Rights. War for any other reason is simply a racket.

-Major General Smedley Butler, USMC, Two-Time Congressional Medal of Honor Winner

In observing politicians, the media, and American citizens, one thing is clear to me about the presidential, congressional, and local campaigns. ...

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Chart School

World Markets Weekend Update: Another Modest Improvement

Courtesy of Doug Short's Advisor Perspectives.

Five of the eight indexes on our world watch list posted gains over the past week, the same as the week before, although the average of the eight at 0.34% was a modest improvement over the -0.17% average the previous week. Japan's Nikkei was the top performer for the second week, up 1.97%, a tad higher than its 1.90% gain the previous week. India's SENSEX suffered the biggest drop, down 0.74%.

A Closer Look at the Last Four Weeks

The tables below provide a concise overview of performance comparisons over the past four weeks for these eight major indexes. We've also included the average for each week so that we can evaluate the performance of a specific index relative to the overall mean and better understand weekly vo...

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Market News

News You Can Use From Phil's Stock World


Financial Markets and Economy

Global Stocks Broadly Higher, Reversing Early Losses (Wall Street Journal)

Global stocks climbed Tuesday, while the dollar strengthened against the euro and yen.

Shares, dollar climb as markets play Fed waiting game (Reuters)

European shares were heading for their best day in over a month on Tuesday as the waiting game to see whether the U.S. raises interest rates again next month sent the euro to its lowest since March.

Asian shares had stumbled to near 2-1/2-month lows ove...

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Swing trading portfolio - week of May 23rd, 2016

Reminder: OpTrader is available to chat with Members, comments are found below each post.


This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...

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Kimble Charting Solutions

Gold- Two-thirds odds prices fall on a support break

Courtesy of Chris Kimble.


Since the peak in 2011, Gold remains in a downtrend, creating a series of lower high and lower lows.

Gold’s rally in 2016 is attempting to break this 5-year falling trend, as it is attempting to break a series of lower highs.

Over the past 6-months, Gold could be creating a rising wedge pattern. This pattern two-thirds of the time, suggests lower prices are ahead.


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Bayer Offers to Purchase Monsanto for $62 Billion

By Jacob Wolinsky. Originally published at ValueWalk.

On Monday, German conglomerate Bayer AG finalized its $62 billion takeover offer for American agrochemical company Monsanto (MON). The acquisition would create the largest agrochemical company in the world. Here is what the sell-side is saying.

Monsanto- Bayer – deals, deals, deals


At $122/share for Monsanto and no disposals the deal would require BASF to issue equity (Bayer issuing ~25% of the deal value) and would imply a deal ROIC in FY5 of 8.5%, 40bps below their WACC of 8.9% and below the buyback equivalent ROIC of 8.8%. The deal, however, would imply €4.55/share in FCF accretion in FY5 enabling BASF to delever to 0.5x net debt/EBITDA in the same time frame. If they levered back to 1.5x in FY15, we estimate EPS would reach €10.20/share.


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Digital Currencies

The Biggest Bitcoin Arbitrage Ever?

Courtesy of Chris at CapitalistExploits

Do you remember when you were growing up and all your friends were allowed Atari game consoles but you weren’t?

Well, I do and the things seemed as foreign to me as Venus. Mostly because the little time I managed to spend on the gaming consoles when my friends weren’t hogging them I found it all a bit silly. I never “got” computer games, and to this day still have poor comprehension of things like Angry Birds.

I suspect that many people around the world view Bitcoin in the same way as I view Angry Birds: with mild amusement and a general lack of understanding as to what the hell all the fuss is about.

I was thinking of this since a buddy of mine recently started ...

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All About Trends

Mid-Day Update

Reminder: Harlan is available to chat with Members, comments are found below each post.

Click here for the full report.

To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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This Is Why Biotech Stocks May Explode Again

Reminder: Pharmboy and Ilene are available to chat with Members.

Here's an interesting article from Investor's Business Daily arguing that biotech stocks are beginning to recover from their recent declines, notwithstanding current weakness.

This Is Why Biotech Stocks May Explode Again



After a three-year bull run that more than quadrupled its value by its peak last July, IBD’s Medical-Biomed/Biotech Industry Group plunged 50% by early February, hurt by backlashes against high drug prices and mergers that seek to lower corporate taxes.


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Mapping The Market

About that debate last night

Although we try to stay focused on finding and managing promising trade ideas, the comments in the comment section sometimes take a political turn (for access, try PSW — click here!). So today, Jean Luc writes,

The GOP debate last night was just unreal – are these people running to be president of the US or to lead a college fraternity! Comparing tool size? The only guy that looks semi-sane is Kasich. The other guys are just like 3 jackals right now. 

And something else – if Trump is the candidate, that little Romney speech yesterday is probably already being made into a commercial. And all these little snippets from the debate will also make some nice ads! If you are a conservative, you have to be scared now. 

Phil writes back,

I was expecting them to start throwing poop at each other &n...

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PSW is more than just stock talk!


We know you love coming here for our Stocks & Options education, strategy and trade ideas, and for Phil's daily commentary which you can't live without, but there's more! features the most important and most interesting news items from around the web, all day, every day!

News: If you missed it, you can probably find it in our Market News section. We sift through piles of news so you don't have to.   

If you are looking for non-mainstream, provocatively-narrated news and opinion pieces which promise to make you think -- we feature Zero Hedge, ...

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Help One Of Our Own PSW Members

"Hello PSW Members –

This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible.  Feel free to contact me directly at with any questions.

Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts.  After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.)  Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.

Thank you for you time!

FeedTheBull - Top Stock market and Finance Sites

About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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