7.4 C
New York
Monday, February 6, 2023


Tuesday – Testing our Reference Levels (as predicted!)

Wheeeee – this is fun!  

It's always fun when the market does what you predict it's going to do.  Last Wednesday I said we were going to see a pattern in the indexes that was going to look like the "M" in the McDonald's arches and Stock World Weekly did a nice job of illustrating it this weekend, which I put up in yesterday's post as well.  At no point did we change our mind but we did change direction as we bounced around within a fairly tight intra-day trading range but our macro picture remains intact and now those patterns are looking very obvious on the charts.

In last Thursday's post, I had mentioned: "those Ms are going to look dangerously sloppy (more bearish) if they can’t at least round out the top today" and that's where we are now, with sloppy M's that may not even hold our reference levels, which were our old breakout levels that we had hoped would support the broader rally.  

Of course we didn't have much adjusting to do (which is why we're just having fun with day trades) while we wait for the pattern to complete because it was the Wednesday before that, on May 4th, when I called the bottom on the Dollar and, therefore , a top on the market.

Right in the main post (which is Emailed to Report-level Members and above at 8:30 every weekday) I suggested the TZA June $37/42 bull call spread at $1.  This one is going very well as TZA is already at $36.65 and the spread is at $1.35, up 35% in 2 weeks – now THAT's a hedge!  Our offset to that was to sell  the weekly RUT $825 puts at $1.15 and they did, as expected, expire worthless that Friday which made the whole trade a free ride with a .15 credit and up 1,000% so far.  Notice how that's a great cover because if the RUT went up, for sure we keep the $1.15 and we have a free hedge but if it went down but held our levels (it did) we still get a free hedge and, if it went down and exceeded our expected range, then we have $5 coming to us from the spread to help pay for a roll.  

Other hedges we took that day in Member chat were GLD Aug $135 puts at $1.45, those are just $1.65 so far (up 14%) so still playable. It's too late for the SQQQ June $22/25 bull call spread, which we picked up at $1.15 but those are already 100% in the money at $1.80, up 56% but those were offset with WFR May $11 puts at .45 (now .30) or the PFE May $21 puts at .75 (now .20) to lower the basis.  SQQQ was also a straight play with the May $23 calls at .80 on the 6th, now $2.30 – up 187% in 11 days.  Hedging is easy, picking long-term upside winners is the tricky part!  

Our other go-to hedge is EDZ, as we felt the commodity sell-off would hit the overbought emerging markets. Just last Thursday, we were still adding EDZ hedges, with the July $16/20 bull call spread at $1.60, now $2.20 (up 25%) but offset with the sale of PCLN May $545 calls at $1.60, now .20, for a net spread of .20 that's up 1,100%.  On 5/6 our cover had been similar, with the June $17/20 bull call spread at $1.15, selling the PBR Jan $25 puts for .90, which are still .90 but the spread is $1.56, up 35% so far but EDZ is at $19.43 so it's $2.43 in the money and time is on our side.  

The question for today is whether or not time in on the side of global equities, which are generally failing their 50-day moving averages with the Hang Seng now joining Brazil's Bovespa, Mexico's Bolsa, India's Sensex (go EDZ!) and Japan's Nikkei as golbal indexes that have now failed their 200-day moving averages (chart by MacroMan).  

"You can't ignore the World," my Grandfather used to say, "It's right below your feet."  That was probably the best investment advice I ever got as my Grandpa Max would make me read the papers (more than one because you can't trust one to be right) with him every morning before we even looked at the financial pages.  

To this day it amazes me how little attention American investors pay to the Global Macros but God bless CNBC and the rest of the MSM that keeps herding the sheeple back and forth into poor investments shouting "USA, USA, USA" as a substitute for proper analysis.  It gives those of us in the thinking crowd a huge advantage! 

Of course what happens in the US matters a lot to us but it's a Big World out there and we ignore it at our peril.  Unfortunately, our own Fed and Congress seem to be ignoring as they debase the currency and act like fiscally irresponsible children, playing chicken with the debt ceiling.  Our biggest loser lately has been TBT, which keeps going down instead of up but, at some point, the Fed and Treasury's Ponzi scheme will end and it will end badly.  At the moment, the Fed is buying about 80% of the Treasury notes that are issued – do you really think they will stop in June and someone else will fill their place at these prices?  

At the moment, the betting is that the Fed won't/can't stop and that plus the relative strength of the Dollar is keeping rates ridiculously low.  TBT may end up being a dead bet – it sure was for people who thought Japan's rates would head higher at some point over the past two decades but, for now, we still like it.  This dip is a fine time to take advantage of short puts like the TBT Jan $32 puts, that can be sold for $2.50 and, on the long side, I like the 2013 $30/40 bull call spread at $4.50 for net $2 on the $10 spread.  That's a nice hedge against proper inflation.

I already made a call for Members this morning at 6:57 that I didn't think the pre-market rally would stick and now it's 8:40 and we're turning red.  We took a short on oil at $97.50 and it's already down to $96.60 so congrats to the futures players (again) as this has been, by far, our favorite slot machine!  The Dollar was 75.60 at the time, now 75.85 (up 0.2%) and that neatly erased the 0.25% pre-market pump but the Dollar will probably re-test 76 and breaking over that will not be good at all for our equity indices (or commodities).  

Boosting the Dollar today are concerns that Greece may, indeed, need to be restructured.  You may be thinking "duh" because you read us every day but this is taking most investors totally by surprise and the Euro has fallen 1% since yesterday as has the Pound – only the relative strength of the Yen (which EU investors also panic to) is keeping the Dollar from breaking over that 76 line.  Bill Gross flat out called Greece, not only insolvent, but at the end of the road with no more room left to kick the can further along.    

China is certainly no escape route as JP Morgan now says "Chinese economic data suggests that the risk of a “hard landing” in the world’s second-largest economy is rising."  Keep in mind that in 2007 and 2008 we were constantly being told that we were going to have a "soft landing" and we know how that worked out so the fact that JPM is already calling it a hard landing should really give you pause if you have money inside the China Bubble.

Gold isn't going to help you according to George Soros, who dumped his holdings of GLD last quarter, getting rid of 4.7M shares of GLD while the MSM herded the sheeple the other way and Soros is now reported to have dumped all 5M shares held by his fund.  Dennis Gartman says the "smartest people" are getting out of commodities – I don't know if being a bit early with that call makes us smarter or dumber but it sure is fun for us to have our cash on the sidelines and able to short the commodities while all the slower "smart people" are scrambling to get out (see our "Roach Motel Theory" to explain how commodity players get trapped in their positions).  

Even typical safety plays are not working as insurance companies just coming off the devastating Japan quake are now being hit with $6Bn worth of tornado losses in the South from last month and are looking at much more than that in flood damage as the mighty Mississippi overflows this week.  Not to start a controversy but this is the cost of NOT dealing with global warming but it's the insurance companies that are idiots because they should be out there supporting the green side of the argument, rather than letting the polluters control all the lobbyists while the environment spins out of control.  Oh well, with any luck the Earth will end as scheduled on Saturday and then the Koch brothers will get to say "I told you so." 

We're still operating under the premise that Judgment Day will not be on Saturday or, if it is, that it won't have any major bearing on our current virtual portfolios.  If the World does end on Saturday, it will be a nice break for HPQ, who warned yesterday that their managers should "brace yourselves for "another tough quarter."  The word "another" in the leaked memo forced HPQ to move earnings up to this morning and, as inferred, earnings were not so good and HPQ is down over 5% in pre-market trading. 

Two other things not worth investing in, from yesterday's news, are A) A college education – with a Pew survey finding 57% say the U.S. higher education system fails to provide students with good value for the money, and an even larger majority (75%) says college is too expensive for most Americans to afford and B) New Homes – which James Altucher blasts in: "Why I would rather shoot myself in the head than own a home," saying, for starters: "Leveraging up 400% in an illiquid investment with no diversification is a scary concept to me and should be to any rational person."  That is some solid investment advice.   Also read my article on the subject: "Interest Scams and How to Avoid Them – Mortgage Madness" which, if you MUST buy a home, at least shows you how to knock $100,000 off your mortgage payments.  

Hopefully we do hold our reference levels on the dips.  Obviously the NYSE and the RUT will be first to test but, if they break below those lines, the others are likely to follow.  There's certainly no improvement in the data and we did not expect good data this week as a lot of it relates to housing which, to use the proper economic term – SUCKS!  

  •  U.K. inflation jumps to 4.5%, up from 4% in March and above the 4.2% consensus. 
  • Germany's ZEW expectations index falls to 3.1 in May, vs. 7.6 in April and the historical average of 26.5. 
  • State Bank of India after the country's largest lender reports a 99% fall in Q4 profit. 
  • ICSC Retail Store Sales: -2% W/W, vs. flat last week.
  • Redbook Chain Store Sales: -2.3% Y/Y vs. +4.7% last week. 
  • April Housing Starts: -10% to 523K vs. 585K last month (revised from 549K). Permits -4% to 551K vs. 574K (revised from 594K) last month. 
  •  April Industrial Production: 0% vs. +0.7% (revised from +0.8%) in March. Capacity utilization 76.9% vs. 77% (revised from 77.4%) in March. 
  • China faces maybe its worst-ever power shortages as drought conditions hurt hydropower generation at the same time booming coal prices threaten power plant supply. Unable to raise prices to meet higher costs, power plants are trying to cut losses by operating at a lower capacity level. 
  • Apple (AAPL) continues to face serious iPad production problems, FBR's Craig Berger writes, likely rendering the company's internal goal of producing 40-45M iPads this year "out of reach."  

We're very well positioned for this dip so let's just sit back and relax and see what sticks. Bad news aside, our plan was to complete our M pattern, consolidate into expirations on Friday and then hopefully move back up but, as I said above, the sloppy M's are a concern and if we can't hold those bases – there's another 5% down before we test any serious support!  



Notify of
Inline Feedbacks
View all comments

Phil Thanks for coming back to me. You right I reread the instructions Here is the trad as I entered it the day it was published sold 15 x RUT JUn 910 c for 1.41 and bought Jun 900 c for 2.41 now the long is .62 and the short is .37 down 1,125.00

in addition to 5 guys, there are also contracts that USO holds.
I have no idea how it affects the game??

Phil, didn’t get a chance to post this weekend on your large income portfolio but I had stored on Evernote (a real great tool for keeping stuff BTW) a link to SA related to dividend paying stocks including a list of the S&P dividend aristocrats that have raised dividend for the last 25 years. That would be a good list to get started, no?
Some of them are already in the portfolio, others like JNJ are damaged, but there are some good boring ones there!

NFLX / Phil – I don’t have any figures, but I imagine that the available Internet bandwidth increases every year and probably even faster than NFLX subscriber base! Compare what we have today to what we had 10 years ago. I would not worry too much just yet… In any case, that’s what CSCO, JNPR and others are counting on to make money!

 So Hatzius thinks that with 9% slack in the labor market, we are far enough from increases in labor costs to keep the stock market rising on increasing profits.   Stock market historian Russell Napier believes that developed economies are starting down the barrel of Deflation, and that equities are only rising because they are being driven by the Fed creating a sort of artificial inflation through its credit creation.  This has forced EM countries to do the real dirty work of money printing to maintain their forex rates in parity with the U.S. dollar  [the U.S. money supply has not actually risen]  thus igniting inflation in EM countries.
Napier says that this EM inflation will force revaluation of EM currencies to contain the social pressures created domestically by this internal inflation, and that this will force U.S. yields up, essentially to defend dollar levels, which will precipitate a stock market decline to …….400.  Napier helpfully recommends buying U.S. equities at that level.
Both Hatzius and Napier are in agreement that dollar levels are the prime mover in respect of equities.  Hatzius apparently sees no current risk of the dollar plunging to levels that would force the Fed to raise rates.  Napier thinks that EM inflation will either end, or move, the "dollar pegs" of China and other EM countries, allowing their currencies to rise [and imports presumably fall] to contain domestic inflationary pressures.  This would shove the dollar down in relative terms, forcing the U.S. Fed to raise rates to prevent U.S. stagflation [the U.S. already has the "stag"], but tanking the stock market in the process.
I would guess that Phil would be more sympathetic to Napier’s view, because of Phil’s enthusiasm for TBT.  Which, fortunately for all of us stuck with a portfolio of equities, continues to fall.  What bothers me is the fact that TLT fell from @ 105 in September 2010 to 88 in March 2011 while the S&P went straight up.  It is now back up to 96, and the market is still rising. Equity markets have so far shown only the slightest of correlation with the equity markets.
The implication of this might be that Hatzius is right: as long as there is no upward pressure on U.S. wages, markets are up, up and away, and all this interest-rate fretting is quite overwrought, since average U.S. 20 year bond yields have probably averaged between 7-8 %.  I have no independent opinion.  I just think Chicken Little may be having a panic attack.  Although having to pay a 7% yield on today’s extraordinary U.S. deficit might be somewhat disconcerting to equity markets, admittedly.  But then, a revaluing of EM currencies is just as likely to precipitate an orgy of U.S. asset buying which would support the dollar.  Such assets as Rockefeller Center, or Pebble Beach again…or U.S. equities.  The matter is, as they say, is not free from doubt.  

25K if we have pop tomorrow morning, is it worth to uncover XRT?

 Correction: "…equity markets have shown only  the slightest of correlation with BOND markets."

 Goober – you said "Some combination of events related to this and the QEs could well be the next black swan or a portion of several black swans(think Japan) coalescing/morphing into one large black swan?"
I can’t help but give that concept a name – how does "Swanzilla" grab you?

Phil Thank you for the advice on RUT Just have set it up and the long roll to Sep 970 c has a margin of 3000 and if I would go along with the short caller from 910 to 885 would be a total margin of 20,000. on PM But I think I will just roll the long and let the short caller expire and see what the market brings.

Protest in Spain…..and the Euro is moving up?  Oh, this is not going to end pretty.

zero – I would say that since that ‘bottom’ on TLT…..@ 88, that TLT has outperformed the market and will continue to do so over the coming months.

Monthly Charts/Phil – do you review/use monthly charts of stocks when evaluating? if so, anything you look for in particular?

STJ:  Re: Belarus ‘dictatorship’.
Don’t believe everything you read.  Lukashenko did not let the banksters in that is why there is a constant propaganda against him.  In reality Belarus is not a rich country like Russia, there is very little natural resources.  They survive on agriculture, which they sell throughout Europe and heavy machinery.  Pensions and salaries although are higher than in Russia.  Do understand that Moscow is very different from the rest of Russia, all the wealth is concentrated there.  So the money stolen by the banksters during perestroika sort of trickles in into local economy.  RE prices are very high as supply/demand is very out of whack.  Belarus has free education (including universities, free health care, decent welfare system.  Lukashenko is the peoples president and is very loved by the people,same way Stalin was.  Banksters constantly foam at the mouth as they would like nothing more than to come in and rob the people the same way they did in Russia and Ukraine.  So all the ‘opposition’ is nothing more than another KGB/CIA payroll monkey.  Keep jailing them or better just shooting them Batka (Lukashenkos niockname, means father).  Every once in a while the banksters announce that they seized his accounts somewhere.  He just keeps on laughing at it.  When there is no accounts and no money, whats there to seize?  Those scumbags medvedev and putin however are multibillionares.  Lukashenko is running the same game as Arabs, but does not have the oil to share great wealth, but he takes care of people best he can.

Elliott – Swanzilla seems very appropriate, we shall see how that plays out. Give yourself a gold star !
Phil – not sure what your comment about dollar meant ? I was making the point of how hypersensitive it is now to commodities and equities and correlated in sink. I have no doubt there are other machinations as well like the balance of QE until June. But it will be interesting and likely profitable to ascertain the "NEW" machinations going forward. Personally I think a lot of the new machinations will be hidden and called something else or simply accounting slight of hand and word games plus USD up or down as is necessary, daily. As you said it is only monopoly money and do TPTB really care ? Seems to me the numbers are so absurd now they simply push buttons and get the results they want and think everything is just fine with little regard for any final outcome. At least during their tenure/election cycle. So is anybody really steering the ship or all asleep or drunk in wheel house?  Politics in the mix is a main driving force at this point in time as well and that is not a good thing.

Futures up USD down , messing with my overnite NKD short.

Everything is pointing to bounce so perfectly, that there is feeling of trap.
Or is this paranoia?

Oil – BTW inventories go lower (http://ransquawk.com/headlines/139409)

How are you trading oil after hours?  Are you using TOS?

doesn’t anybody sleep anymore?
boring night.

The futures Gasoline price has dropped by a dollar in the last two weeks.  Do you watch that price to determine where to short oil?

Good morning Phil,
Do you sleep occasionally?
I have just updated my predictive charts. It looks like the SPY/VIX options players bought the dip. The indicators are on bullish levels they were at the end of April again. However since it’s expiration week the indicators tend to be rather volatile.

Good morning Phil Question on BAC Jan 12 17.5 c long pd 3.70 now .09,  20 c short rec 2.60 now .04, 12.5 p short rec 2.73 now 1.50 what ajustment would you make thks

Phil Our NLY play have been called on the Jan 13 12.5 calls  shall we wait and see before bying some back ?

Boring isn’t that the definition of sleep – or sleep might be the definition of boring actually. 😉
Anyway you picked a great profession. Maybe really the only one where you can work 24h a day…

I have no doubt will reach your "Kipplinger-traget". About the job: you certainly have a number of true points, that I share. I live in Europe so it’s even easier to cover the European and US markets – just skip your evening social life.. 😉
However I still think it is important to not get sucked into it too much. I can see in my own performace that I usually trade better if I had a day or two off.

re: paranoia
Is it my imagination or is GMCR ‘pinned’ precisely between the 67.5 and 72.5 OpEx on Friday?  For almost two weeks now.

1 3 4 5

Stay Connected


Latest Articles

Would love your thoughts, please comment.x