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Will We Hold It Wednesday – Record Highs Edition

Image result for nasdaq 1999 chartUp and up she goes! 

As I noted in yesterday's report, we're very likely in the late stages of a bubble rally but you could have said that at any point in 1999, when the Nasdaq rose from 1,750 to 3,750 and you would have been right in early 2000, when it kept going all the way to 4,816 because it went far below that over the next two years but you also would have missed a hell of an opportunity on the way up – as long as you knew when to take a profit…  

I misseed a lot of the rally in 1999 as I thought a double at 3,000 was a bit much and I sat there with my arms crossed, cluck-clucking at all the fools who rushed in for the next 1,800 points but a lot of those guys got very, very rich chasing those crazy stocks and some of them got out ahead of the crash but my takeaway from that was to just be patient, make a bit of money on the way up but I find I'm far more comfortable using that money at the bottom to pick up value stocks for the long-term.

On the whole, I'd rather own a stock at a great price for 10 years and make constant streams of money than jump in on a momentum stock and try to time my exit.  It's a difference in style and it's important to know what kind of trader you are – especially in a rapidly moving market like this one.  While you can make some very nice money buying AMZN for $1,932 and selling it for $2,000 we STILL have a lot of the trade ideas that we played since the 2009 crash like:

AIG at .40, BAC at $4, CY at $5, F at $1.68, FAS at $4.76, GE at $8, GOOG at $350, HCBK at $9.50, HOV at .80, IP at $5.62, IWM at $37, JPM at $16.80, UNH at $20, VNO at $30, WFC at $12, X at $10 and dozens of others that were detailed in that week's wrap-up 

THOSE are the kind of trades I get excited about.  I happened to be on TV on Friday, March 6th, as the market was collapsing and I called out 13 trade ideas that returned 469% on cash just 6 months later (and went on to make much, much more) but opportunities like that only come along if you have cash on the sidelines.  If the market collapses and all you are doing is scrambling to avoid margin calls – then you are doing it wrong or, more accurately, you WERE doing it wrong – which is pretty obvious in retrospect but far too late to fix.

Despite my experiences in 1999, I found there were far too many people who lost their shirts in 2008 and I felt, at the time, that I should have done a better job warning them because, while I was bearish and I did call for cash – I started doing so in 2007 and by mid-2008 I felt like a broken record (and I'm sure I sounded like one) and I was tired of being wrong so I went back to cluck-clucking from the sidelines when I could have been more active warning people of the dangers of chasing a bubble.  

So, this time is different and I am determined to keep reminding you how foolish it is to over-commit, no matter how exciting the market looks.  As I said yesterday on CNBC Japan – there simply isn't enough money in the World to support a $100Tn Global Stock Market rising more than 4% in year – because that's the $4Tn growth in Global GDP (also about $100Tn) so, if every panny of that flowed into the market – THEN there would truly be a $4Tn (4%) gain in VALUE in the markets – as it is, all we have are gains in PRICE and, as we saw in 2000 and 2008, prices can collapse very, very quickly!  

Keep in mind that the market is PRICED like an auction only the price of the one item being bid on (a single share of stock) leads to a re-pricing of EVERY OTHER SHARE OF THAT COMPANY.  When you think about it, that's kind of insane because if, at the close of the day, on the last trade, I buy a single share of Apple (AAPL) stock from you for $500, then AAPL will close at $500 and have a $2.5Tn market cap, gaining $1.5Tn thanks to may $500 transaction.  

Image result for rise in etfs 2018Of course it will likely reverse over time but this is how people manipulate the markets, to make stocks look better or worse than they really are by simply bidding them up or down into the close.  Pick the right stocks, and you can manipulate the indexes and, if you manipulate the indexes, you manipulate the money that flows in from ETFs and that's how easy it is to manipulate the entire market – especially when the recent explosion in ETFs and Index Funds have made them the market's most significant (and easy to control) players these days.  

The problem with ETF's, as we learned in 2008, when they were 85% smaller in size, is that they don't only buy mindlessly in bulk, they also sell mindlessly in bulk so, when and if assets begin to be withdrawn from these funds, they will relentlessly dump their holding and manginfy market losses at a very alraming rate.  The fact that they are generally managed by robots these days does not make it better – it makes it much, much more terrifying!  

Image result for hedging strategiesTo that end, we pressed the hedges in our Short-Term Portfolio this week and that helps protect us from a sudden sell-off but we press our hedges so that we can BUY more longs.  As a rule of thumb, we take 25-35% of the money we make on the long side and use it to lock in our gains with hedges and THEN we can put more money to work on the long side, knowing that there will be a floor to our foolishness – THAT is what I figured out in 1999 and that's what protected us during the last market downturn, which is why we had CASH!!! ready to buy Google at $350 while others were bailing and JPM at $16.80, etc.  If you are not prepared, then not only do you lose much of your gains in the downturn but the opportunity to make real money over the long-term passes you by – that's just a risk I'm never willng to take!  

The hedging adjustments we made to the Short-Term Portfolio should pay us roughly $200,000 if the indexes fall 20% and a 20% fall in the indexes will, presumably, wipe out all of the gains made in our Long-Term Portfolio, which is up 40% of $500,000 or —-  $200,000.  If the market keeps going up, we'll probably lose $70,000 on our hedges but our LTP will likely gain another $200,000 by the end of next year so we're giving up roughly 1/3 of our gains to hedge our positions.  

Only there's another trick as we also hedge our hedges and, to that end, we haven't lost any money in the STP this year so it's worked out extra-well – so far.  Notheless, we will remain vigilant – even as we do look for more opportunities to go long from time to time.  

Today is the day we've been looking forward to all month as it's time to short oil into the holiday weekend!   This has been a very reliable way to make money and we already added a new, aggressive Ultra-Short Oil (SCO) spread in the STP on Tuesday afternoon but oil is back over $69 again – so you didn't miss anything if you are late to the party.  

Of course we like the Futures (/CLV8) short as well and we already went in and out of Gasoline (/RBU8) shorts at $2.10 and that line is still good but, in both cases, tight stops above and our next attempt would be $70 on oil but $2 on /RBV8 (October), as the Sept contracts are too close to expirations (2 days).  We only want to play just below the lines with tight stops above as we have the overhang of Iran news still able to pop things higher.  

The API report showed very little change in oil and gasoline inventories and a 1Mb build in Distillates and we had hoped for a big draw in /RB to drive it higher and also to assure us that we're less likely to have a draw AFTER the holiday (on the assumption that Gas stations topped off their tanks before).  Since that's not the case, we'll wait and see how the EIA report looks and what kind of reaction we get and I'll call an audible in Live Chat this morning as well as, of course, going over the situation in this afternoon's Live Trading Webinar (1pm, EST).

Real GDP Percent ChangeWe got our first revision to Q2s GDP and it's still showing a 4.2% gain, up form 2.2% in Q1 so averaging 3.2% for the year so far and Corporate Profits are up 2.4% for the Quarter and that's up 6.7% for the year but a huge disappointment considering the tax breaks kicked in this year.  So corporate profits are up 6.7% and the Market is up 20% – that seems about right, doesn't it?

Rest of the World Corporate profits, where they don't have a $1Tn Government Tax (or lack of) giveaway boosting the bottom line DECREASED by $8Bn – not much as a percentage but their markets are also rallying to follow ours because – ETFs and Index Funds…  

Be careful out there!

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  1. Good morning, All!

    Join us for the Wednesday webinar today at 1pm!

  2. I just like to copy my early morning comments for you late risers to read.

    August 29th, 2018 at 4:07 am | Permalink | Tweet thisIgnore this user    

    Winston and others.
    I see my AAPL question to Phil has set up quite a discussion. I did mention in my discussion, that during the time I have traded AAPL I could set aside just about 500K.
    The Jan 19 170 caller was a rest substance of previous trades liquidated. I fully agree with you, that especially for new comers even approach a trade with high stock prices, I mean over 70$ or so in that range, should be taken with extreme great precaution.
    You have criticize the selling of leap puts or for that matter even shorter term puts.
    However I like to add one comment to my trade position given to Phil, in my given positions I actually failed to sell more puts. Selling more puts would have balanced the runaway 170 caller to a certain extend.
    The 170 Jan20 long call is just not a match for the half number of 170 Jan 19 caller. I did even have 15 more than 50%
    Obviously in any new play I would have sold a caller in the range of at least over the present stock price. My BCS originated end Nov. 17 and no callers were sold for this position. I did this, as I still did have the old 170 callers.
    Would I have sold a good amount of puts at the time of the purchase of the BCS the decrees of the putter would have fairly balanced the increase of the 170 caller.
    So from that point of view, selling puts would have been the right thing. (Monday Morning ect)
    You obviously, when selling puts, have to make sure that you happy to receive the stock at this price and you have the cash to cover.
    In a heave falling Market the danger in the runaway put is worse than a California forest fire!!! So I agree.
    However again by setting up a leap BCS with selling at the same or better half the amount of puts, I feel is still well positioned. Again selling the appropriate short term half cherry call.
    I noticed in Phil’s play suggestions he always sells only half the amount of putters, in case he might have to double. Mostly in these plays I sell positions in lots of 4 or max 6x option leaps, so I can sell 2 or 3 cherry calls.
    In a flat market the cherry call goes worthless.
    In a rising market the short leap put and the long leap call are the main parts which work for you, at the same time the short cherry and the short leap call run against you. So here it is important to have your proportions right.
    In a down going market, the leap short caller and the cherry caller will run with you, on the other hand you will lose on the long call as well on the put, they will run against you. So here again balance is the secret to have right at a given time.
    I hope this discussion will be a good lesson especially for new comers, still wetting their tows.
    You can take only higher type of risk, if you do have a good cash build up behind the relevant position.
    August 29th, 2018 at 4:25 am | Permalink | Tweet thisIgnore this user    

    Yodi – very valid points.
    August 29th, 2018 at 4:34 am | Permalink | Tweet thisIgnore this user    

    PS my new trade will be in the direction of
    Jun20 BCS 25x 180/240 sell 5x Jun 20 185 puts I still hold some 7 off so it is a total of 12 puts, committing 12x 185= 222K!!!! Sell Jan 19 225 call @ 9.65. x 10. So you see less than half, which you can roll and important is over the Jun 20 180 call. The cost after Phil's discussion will be in the range of 10K and we have a spread of 60 x 100 600K with a cash outlay of 10K after closing my present positions.

    So if AAPL will reach 240 plus by Jun20 I would be looking for some 540K not taking in to consideration any rolls which might have to be done on the Jan 19 225 caller.

    Any questions or further comments welcome.

    August 29th, 2018 at 7:23 am | Permalink | Tweet thisIgnore this user    

    Winston I guess we all have its horror stories of puts. They always nice on a up market, but hell can break lose on a down market. One thing I seldom do is doubling up on puts. I rather roll the same amount in a better position and or pay the piper. I know than I can swim that far but no further. That said might be the wrong approach, but I feel more secure. The doubling up might be looking good on paper, but I trust most of us have learn the other way. ABX yes I still do hold put in moderation. CLF I did cut my losses, LB and TEVA I never touched. Always told everyone that bra will never hold water. Possible one day it will float.
    Mostly I look at the overall picture of my ports. 66% win 34% lose. So that can take care of the suckers. Obviously you always have to trade in accordance to the cash in your portfolio.
    If you have a 25K port you should hold 12K in cash to play it safe. Mainly trade with smaller stocks.
    I feel for me the armchair trade is still the more comfortable.
    August 29th, 2018 at 7:28 am | Permalink | Tweet thisIgnore this user    

    Winston I know Phil start a play with higher numbers. Possible he should start with 2, 4. or 6. You can always go for more. This aswell would give the newcomer a better start.

    But obviously the final decission is always on yourself.
    August 29th, 2018 at 7:33 am | Permalink | Tweet thisIgnore this user    

    The only numbers he stinged on was the latest TSLA trade. I even sold more callers. If they reach 420 than Musk will be selling a flying car at this point.

  3. I am afraid that if you Google Trump News again this morning, it's still bad news!

  4. Markets don't seem to care about the news:

    We haven’t had economic extremes during this recovery. The progress has been gradual so anyone predicting a rocketship to the moon or a terrifying crash has been wrong. Gradual good news doesn’t play well in the headlines but it’s been there nonetheless.

    Things are far from perfect but the markets don’t care about good or bad; they care about better or worse. And things continue to get better as a whole with the economy.

    Eventually excesses will build and we’ll have a sustained downturn. But you won’t hear about it ahead of time in the news.

  5. What bond rates could signal:

    By subtracting out an estimate of the term premium, they obtain an “expectations only” spread between short- and longer-dated securities. By separating the two drivers, they find that inversion signals high recession risk whether it stems from a low term premium or low short-rate expectations holding down long-term rates.

  6. From Bloomberg this morning:  Trump's Mexico Deal Looks Like a Lemon

    It shouldn’t be all that surprising that this deal is more limited than it first appears. Mexico is scarcely going to agree to devastate its domestic industry to please President Trump.

    Indeed, its modest nature should be considered a virtue, and global equity markets are quite right to be rallying in relief that this element of uncertainty has been lifted. If Washington can sell tweaks to existing treaties as historic victories that merit a ratcheting-down of global tensions, that’s good news for the other seemingly intractable trade disputes rumbling around the world.

  7. Good Morning!


  9. Good morning!  

    Had to give up on /NQ shorts as we popped 7,600 – too ridiculous and now MS is raising targets to push things even higher so we have to wait for the dust to settle.  

    • Morgan Stanley becomes Alphabet’s (GOOGGOOGL) biggest bull and raises its price target by 14% to $1,515 from $1,325, a new Street high. 
    • Analyst Brian Nowak says Alphabet is in the early stages of monetizing its seven platforms that have over 1B users. The analyst also thinks the self-driving unit Waymo could spur further share gains. 
    • Nowak models Waymo at a $60/share valuation, or $45B, which he sees as 25% of its $175B potential. 
    • GOOGL shares are up 0.8% premarket to $1,255.34. 
    • Morgan Stanley selects CarMax (NYSE:KMX) as its favorite name in the auto retail sector.
    • The investment firm thinks CarMax has evolved to become a "best in class" operator and has significant market share opportunity above its current 2.5% to 3.0% level. The analyst team also points to some easier same-store sales comparisons in upcoming quarters for the company.
    • CarMax is rated by MS at Overweight and assigned a price target of $89.
    • Shares of CarMax are up 0.87% in premarket trading to $77.79 vs. a 52-week trading range of $57.05 to $81.67.
    • JPMorgan assumes a slate of Chinese internet stocks: Bitauto Holdings (NYSE:BITA) at Overweight with a $38 target, Phoenix New Media (NYSE:FENG) at Overweight and $10; Sina (NASDAQ:SINA) at Overweight and $150, Weibo (NASDAQ:WB) at Overweight and $118, Autohome (NYSE:ATHM) at Neutral and $80, and Fang Holdings (NYSE:SFUN) at Neutral and $3.60.
    • The WSJ reports that biotech analysts are receiving lucrative pay packages as a result of the boom in biotech investment banking activity, including IPOs, equity offerings and M&A. Top analysts are getting remuneration in the $3M – 4M range because of their value in backing banking deals (a major source of conflicted interest in the dot-com crash in 2000).
    • Examples include former RBC analyst Michael Yee who received $4M/year to join Jefferies. Other moves include Andrew Berens who left Morgan Stanley for Leerink and Alethia Young, now at Cantor Fitzgerald from Credit Suisse. Still others, Matthew Harrison at Morgan Stanley and Yigal Nochomovitz at Citigroup, for instance, received big raises to stay put.
    • In 2003, 10 large securities firms agreed to pay $1.4B to settle charges of tainted research, a deal engineered by then-NY AG Eliot Spitzer. The link between research and banking was severed at that time, but now appears to be moving closer.

    Driving the sheep in for the slaughter!  

    • Short positions against the FAANG stocks have increased 42% in the past year to about $37B worth, according to Bloomberg and S3 Partners data.
    • Amazon (AMZN +1.4%) has the most short interest with almost $10B.  The other FAANG stocks are Facebook (FB -0.2%), Apple (AAPL +0.4%), Netflix (NFLX -1.2%), and Alphabet (GOOG+1%)(GOOGL +1%). 
    • Tech companies overall make up half of the 10 largest short positions in the world with Alibaba (BABA -0.5%) topping at $19B due to the US-China trade tensions and the company’s food delivery bet.  

    Thanks Yodi, good discussion.

    News/StJ – Anything other than "Election Invalidated" is bad news at this point.  Even Trump out of office isn't enough to reverse the damage.

    Mexico/Den – He's actually managed to make a worse deal for the US than NAFTA and still can't get Canada on board until they get even more concessions from him.  It is good news just to have something back in force though.

    PZZA/Soma – We timed that right! 

    Submitted on 2018/08/16 at 10:54 am

    PZZA/Yodi – We picked some up for the hedge fund, mostly short puts – I think they've suffered enough.

    For the LTP, I like:

    • Sell 15 2020 $42.50 puts for $7.90 ($11,850)
    • Buy 20 2020 $35 calls for $15 ($30,000)
    • Sell 20 2020 $50 calls for $6 ($12,000) 

    That's net $6,150 on the $30,000 trade that's $17,000 in the money to start!  Upside potential at $50 (not ambitious) is $23,850 (387%) which will pay for a nice cruise next summer!  

    Like I was saying above, the best way to play is to wait PATIENTLY for opportunities to buy good stocks cheap for the long-term.  A trade like this will just chug along and pay us 20% a month for 16 months but we can only get into these if we don't have our money tied up in stocks that are already priced to perfection.

  10. DKS threw UA under the bus saying significant declines in UA sales led to their bad Q but it's really because UA went with wider distribution, lowering DKS's share of their sales, so maybe an opportunity on the over-reaction to UA?

    Nom asked me about HIBB earlier in the week and I said:

    HIBB/Nomi – I'm surprised they have 1,000 stores but I guess that's because I think if DKS for size and they only have 728 stores but do $8.5Bn with $325M in profit vs HIBB not even $1Bn and not even $50M in profit.  DKS is trading at 10x HIBB ($3.7Bn) but the tie-breaker for me is that DKS only has 5x more employees and more sales per employee is a thing that matters. 

    I'd wait for HIBB to prove a bottom before jumping in and DKS can give you exposure to the sector if you want that, selling perhaps their 2020 $30 puts for $3.60 as that's net $26.40 is 30% off the current price.

    DKS actually RAISED guidance, didn't lower it.  I stand by the 2020 $30 puts as being a very fair bottom and now they are $4.50 so let's sell 15 of those in the LTP for $6,750.

    UA, even though cheaper, still seems expensive to me at $8.5Bn ($18.30) and not a prayer of earning $400M in the foreseeable future:

    Year End 31st Dec 2012 2013 2014 2015 2016 2017 TTM 2018E 2019E CAGR / Avg
    Revenue $m 1,835 2,332 3,084 3,963 4,825 4,977 5,131 5,176 5,483 +22.1%
    Operating Profit $m 208.7 265.1 354 408.5 417.5 27.8 -108.4     -33.2%
    Net Profit $m 128.8 162.3 208 232.6 257 -48.3 -159.5 76.4 144.8  
    EPS Reported $ 0.61 0.75 0.95 1.05 0.45 -0.021 -0.17      
    EPS Normalised $ 0.61 0.75 0.95 1.05 0.45 0.16 0.12 0.17 0.33 -23.2%
    EPS Growth % +28.7 +24.2 +26.2 +11.0 -57.7 -63.7 -75.6 +2.61 +97.8  
    PE Ratio x           119.5 157.1 116.4 58.9  
    PEG x           45.8 60.3 1.19 1.18

    People are out of their friggin' minds with what they are paying for things!  

  11. Oil down 2.5Mb!   That's popping /CL, /RB down 1.6M, Distillates down 800K – way, way better than the API report.  

    Crude futures rise further post inventory data

    • EIA Petroleum Inventories: Crude -2.6M barrels vs. -0.7M consensus, -5.8M last week.
    • Gasoline -1.6M barrels vs. +0.4M consensus, +1.2M last week.
    • Distillates -0.8M barrels vs. +1.6M consensus, +1.8M last week.
    • Futures +0.80% to $69.08.

    No immediate play but we do like /RBV8 short at $2 with tight stops above ($1.99 now).  /CL hopefully we can short at $70 ($69.50 now).

  12. It looks like /NQ is headed for 7668….

  13. The Dirty Banks Down Under

  14. As Tesla deals with internal woes, rivals make their move

  15. Legal marijuana industry tries to shake ‘stoner’ stereotypes

  16. 7,6660 on /NQ – wow!  

    Close enough on /RBV8 at $1.995, hopefully we won't have to work hard for that one.

    I'm down $25K on /NQ so my revenge trade is going to be 50 SQQQ Nov $10 ($1.55)/$13 (0.60) bull call spreads at 0.95 ($4,750) which pays $15,000 at $13 so 1/2 my money back if I win that one is a good start and not much worse off if I don't (and a more attractive /NQ re-entry at about 7,750)

    We don't see this set very often. Record SPX high, still-negative market internals on our measures, "Who's who of awful times to invest" syndrome of extreme overvalued, overbought, overbullish conditions, and T-bill yield > SPX dividend yield. Not a forecast, strictly FYI.

    Screen Shot 2018-08-29 at 7.47.17 AM

    Mortgage Prisoners Totally Screwed in Australia as Refinance Rejections Soar One million mortgage prisoners are on the edge. The total number of monthly rejections went from 2,031 in December 2017 to 30,986 in July 2018, a mere 1426% increase.

    1) Teacher has heart attack and goes to ER. 2) Hospital bills him $109K above insurance. 3) Guy balks and bill gets sent to collections. 4) Story goes on & . 5) Hospital decides it “only” needs $782.29.

    The U.S. decreased federal funding for sexually transmitted diseases by 40 percent in the last four years, during which time STD rates have skyrocketed to record highs.


    Webinar time!  

  17. CRON was a huge win. +50% in 2 weeks

  18. NQ/Phil- ouch and I have been poking in and out of NQ with tight stops too… the market just seem to keep rallying..  I going to try at 7660 again, today I short at 7600 and got out tight stops… I have alot of tech positions so I think its a good hedge..

  19. Well, things are still up at new highs.

    Got my $2 entry on 2 /RBV8 shorts during webinar.  Went from 1 to 2 to 3 and back to 2 so far.  I wouldn't be surprised if /RB goes higher but I don't want to not have any if it doesn't.

    Not much else seems to be happening.

    /NQ/Dave – See my webinar notes on 1999 behavior – very tough to short anything when your downside is not limited in this environment.

  20. AMZN – Up 62 points !  Approaching 2000.

    Add another 5 billion to Bezos' net worth.

    Probably more than the Donald's net worth just today.

  21. Bezos / Albo – That alone probably gets Trump all riled up! 

  22. The average target price for AMZN is now about $2100! We could be there Friday?

  23. Definitely, no love lost between those two.

  24. Phil:  What are you thoughts these days on DBA?   I have Jan 2019 18 short puts (sold for .66) and 2019 19 short puts (sold for .75), as well as 2020 short 21 puts.  These were all sold as an offset to hedges that long-ago expired worthless.  The extrinsic value on the Jan 2019 19s is nearly gone, and part of my position was put to me today.  I have been trying to even roll the 2019 18 and 19 puts to the 2020 17 and 18 puts to no avail since DBA has relentlessly gone down.  I now can roll the 2019 19s for a .20 credit to the 2020 19s, or I can take my losses and move on.  I also need to decide if I should keep the shares that were put to me at 19, or take the loss and move on.  Do you think that we will see an uptick in DBA, or, in any case, do you think it that is just too hard to fight the decay?  Any thoughts that you have on this would be appreciated.  Thanks.

  25. AMZN/Albo, StJ – Madness!  And it's running the Nas up and up.  

    As I noted in the Webinar, just Nowak's 2 upgrades on AMZN and GOOGL "added" $500Bn to the projected market cap of the S&P – about 1.5% and more on the Nasdaq.  That's just created out of thin air based on 2 paragraphs of complete BS.

    That's what happened in 2006/7 when there was a circle jerk of analyst upgrades that went on and one for ages, driving things up to ridiculous prices (which we're well-past now).

  26. Hi Phil.  Thx for your help yesterday.  Pls advise on AAPL position:

    20 Jan130 calls (basis 23.60); 5 Jan140 calls (27.20); 5 Jan175 short calls (10); 15 Jan180 short calls (11.42)

    10 Jan2020  150(37)/200(14.50) BCS 

    10 Jan2020   130 short puts (10)

  27. taihuichi,

    Why do you not be clearer on matters? 20 x Jan ???? long short ??? 130 calls 5x Jan ????140 calls long short etc.  Please see how questions are general set up so one can understand them.

  28. AAPL/Taihu – Yes, it would be clearer if you stuck to the format.  I'm going to guess:

    • 20 Jan $130 calls at $94
    • 5 Jan $140 calls at $84
    • 5 short Jan $175 calls at $50.30
    • 15 short Jan $180 calls at $45.75
    • 10 2020 $150 ($80)/200 ($44) bull call spreads @ $36
    • 10 2020 $130 short puts at $2

    So messy!  Why?  Clearly I would cash the 20 Jan $130s ($188,000) and the 5 Jan $140s ($42,000) and buy back the short $130 puts ($2,000) as they are pointless.  That leaves you with 10 2020 spreads covering 20 short calls and $228,000 in cash, so let's see what we have to adjust now.  

    The short calls don't have enough premium, so you're done with those ($25,150 + $68,625 = $93,775) so now you just have $134,225 and the 10 long spreads but waiting 17 months to make 33% isn't very good so they have to go too for another $36,000 so now it's just $170,225 in cash and what's a good, new APPL position and I'd go for:

    • Buy 30 AAPL June 2020 $180 ($57.25)/240 ($24) bull call spreads at $33.25 ($99,750) 
    • Sell 10 AAPL Jan $220 calls for $14 ($14,000) 

    I would not sell puts unless they pull back, the June $280 puts are $9.20 and the $200 puts are $15 so $15+ you could sell 10 for $15,000 which would be enough to roll your $180 calls down to the $170 calls (now $65) – certainly after a $20 drop.  As it stands, you have net $85,750 in the $180,000 spread and $84,475 on the sidelines to adjust.

    If all goes well, you keep $10,000 in premium and you have 660 days to sell and Jan was 142 days so figure 3 more sales will knock $30,000 more off the price.  

    I believe that's less risk with a much larger potential return, manageable shorts (1/3 cover), no puts and cash in pocket.  That's a good adjustment!  

  29. Comments from anyone – per above Hussman quote: "still-negative market internals"

    I have followed his screeds for the past few years and he make a major point on market internals but does not define the metric. Whatever it is, he sees negative while just within the past few days I believe Bespoke published their point on market internals via a chart (advance / decline line) and concludes market internals are strong? Now, Bespoke does quality work and I believe Hussman is no Dr Doom and will eventually be proven correct given playing out his beloved "full cycle".

    So, same market, opposite assessment. Who's got it right?

  30. Trump’s Tariffs on Canadian Newsprint Are Overturned

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  32. Excerpts from Hussman’s Aug 2018 commentary:

    The upshot is this. Measured from their highs of early-2018, we presently estimate that the completion of the current cycle will result in market losses on the order of -64% for the S&P 500 Index, -57% for the Nasdaq 100 Index, -68% for the Russell 2000 Index, and nearly -69% for the Dow Jones Industrial Average.

    These estimates undoubtedly seem preposterous, as was my March 2000 projection of an -83% plunge in technology stocks (the tech-heavy Nasdaq 100 lost an implausibly precise -83% in the subsequent 2000-2002 collapse), as was my projection in 2000 that the S&P 500 would likely suffer negative total returns over the following decade (it did), as was my April 2007 estimate that the S&P 500 could lose -40%, not to become deeply undervalued, but simply to reach valuations that were “standard, normal, commonplace” (the S&P 500 went on to lose -55% in the subsequent 2007-2009 collapse, though I emphasized in late-2008 – after the S&P 500 had indeed collapsed by more than -40% – that “The best way to begin this comment is to reiterate that U.S. stocks are now undervalued”).

    Presently, our own measures are not signaling an imminent recession, but we also disagree with those who completely rule out a recession until 2019 or 2020. Rather, we would continue to monitor the full set of measures that we find – in combination – to be well-correlated with oncoming economic weakness.

    Together these conditions offer a useful “gestalt” of recession risks – typically long before the consensus even recognizes a recession in progress. In prior economic cycles, our Recession Warning Composite has been very effective on its own, though in recent years we had a couple of false signals due to employment weakness that was subsequently revised away. While it’s preferable for the evidence to be as broad and robust as possible, we’d still consider our Recession Warning Composite to be a notable indication of oncoming economic trouble: 1) S&P 500 below 6-months prior, 2) yield curve flatter than 2.5%, 3) credit spreads wider than 6-months earlier, and 4) ISM below 50, or below 54 with either unemployment up 0.4% from its low or year-over-year payroll employment growth below 1.3%. If there’s a recession on the horizon, this set of measures should offer a reasonably early warning. Again though, more evidence and confirmation is always preferable.

     Just as the primary driver of market returns in recent years has been a cyclical move from depressed valuations to the most extreme valuation multiples in history, much of the growth in the U.S. economy since the global financial crisis has been driven by the largest cyclical increase in history in the ratio of civilian employment to the civilian labor force. That’s another way of saying that the growth has been largely driven by a decline in the unemployment rate from 10% to just 3.8%. With both valuations and unemployment at cyclical extremes, the likelihood is that the tailwinds that have driven the market returns and economic growth of recent years will turn into headwinds. As that happens, extrapolating growth, as if it is some sort of entitlement, will be a profound mistake.

  33. Phil – This information above is alarming, not that you haven't been beating the table on how ridiculous the markets are acting, even the PSW morning post highlights this and the advantage of being properly hedged.  And, I keep reading analyst reports on the various news outlets that I follow, of which, I am slowly learning some is more chatter than anything.  The fact that I am 'wet' behind the ears and haven't experienced 1999, 2008, etc, is adding to my anxiety about a significant correction as Hussman communicates in his August article.  I know that we can't time the markets, and nobody really knows how, nor when the 'house of cards' will come crashing down, but he seems to have a historical accuracy of knowing how far down the markets will potentially go and that alarms me the most.  I have many 2020 calls/puts in the market, and a couple hedges that are mostly covered, so I feel my upside on a correction is limited and I don’t know enough (yet) to know if I can handle a 50% plus collapse.    

    The more I am following and learn about investing, The more you guys have enabled me to evaluate and question some of the positions within my portfolio, such as, those ‘dogs with fleas’ positions – will they get worse?   Will the income off the hedges be enough to facilitate rolling the positions that require it?   It is not a question of if, but when the market declines, will the portfolio/positions be mature enough and will it generate the cash necessary to manage the positions it supports.  Well, my math skills (for Options) suck and hope isn’t a valid investing strategy, but I have to assume if the indexes drop 50%, I'll be faced with rolling and DDing to effectively manage those positions.  I am asking the PSW members or you to kindly share your 99/08 experiences and/or how these strategies (BCS funded by puts) responded in a market crisis?

    I have lots to learn, should be paper trading, but that wouldn't keep my attention and I don't want to give up learning this stuff, as I feel it is something I can do for a lifetime.  So, any help is always appreciated.  

  34. Wish there was an edit button…   

    anyhow, I would like to add, these are questions/thoughts frequently running through my head and learning from others experiences on this blog is helping me shape my own financial trading style.  It is important to note that I am reducing my exposure to alleviate these concerns. I have taken the position that I don’t mind sitting on the sidelines for 6-18 months until the bubble bursts…. these portfolios are not needed for my lifestyle, they are being created to help others.  However, I have a small bankroll comparatively speaking to most of you guys.  Hell, the recent Top Trade idea was more than my entire portfolio. 

    So having some other perspectives on a major market correction/crash and/or strategies (short-list) to take advantage of it will be instrumental in surviving it. I don't like the feeling that my cash will be low after such an event and I doubt that I’ll have extra cash to load up on new exciting positions, rather I might be hitting the Pepto-Bismol bottle.  So, I am downsizing a bit, but wanted some feedback about how Options respond in a high volatility market, how stocks already in the crapper are impacted, and whether you have time to put on the 'short' list when the bottom is falling out.  Or, anything else you feel is of value.  Thank you kindly!

  35. Phil on the guess AAPL suggestion you mean Jun20 180 put NOT 280!!!

  36. GrassHopper67  / Hussman – having been a long time reader of Hussman, I came to the conclusion that he is running neck and neck with the Jehovah;s Witnesses on forecast accuracy: 1878, 1881, 1914, 1918 and 1925 and more recently 1975  (dates for the second coming)..

    Best check out his fund performance – catastrophically dreadful. Search for his mea culpa on sitting out a large part of the latest bull market. He may be intellectually correct, but practically irrelevant. Limited  actionable ideas after all his analysis. 

    However, he is a good practical example of what cashy and cautious has meant over the recent past since the financial crisis. To give him credit, he did stick to his investing strategy – unfortunately it was the wrong strategy.

  37. Grass hopper,
    Long list of concerns. And your questions are very valid. A while back I down seized my portfolios. However slowly more trades and ideas have filled up the open holes again.
    You need to differ between options and stock. As you see in my armchair trades I always buy stocks with a higher div. and more reputable records. However that does not mean these stocks are not out of danger in a case of a crash.
    Holding the stock I see however a light at the end of the tunnel. The stock might go down 40% but you only lose if you sell. The call side of the armchair will be only to your advantage in a drop, as they run worthless.
    In the passed the greatest danger is always a sold put. This sucker increases margin requirement like an avalanche. I have cleaned out at my recent clean up a lot of puts (sold puts). You must make sure you still like the stock, even if it is say more than 35% assigned to you above market value at a market drop.
    This is always easier said than done. You should have notice in our last day’s discussion, see Winston, that in establishing a position the sale of a put will help to reduce the cost of the trade.
    Safer actually would be doing without that sale of the put.
    Now coming to options in case of a crash, there remains only one winner, and that is the sold caller.
    The rest will be a loss and on top of it is, opposite to the stock holding the option always has a limited life time!
    This is the reality of option trades. There is only one good advice which Phil always gives BE IN CASH.
    Obviously this does not bring any extra income, but you find you feel very good during a crash.
    You need to look at you portfolio and ask yourself can I live still with 50% less, if the answer is yes, you are OK.
    This is my two cents of opinion not even advice, than many times I do not even follow my own advice.

  38. One of my bigger lessons I did learn, when a friend of mine recommended to channel some trades to a broker friend of his.
    We both traded with that broker. However I only traded stocks with that broker, in respect my friend trade stock and options.
    The Security and exchange commission found out the broker did mangle customers fund with his own and froze for over one year ALL accounts. You could not tough them. During that year we did have one of these crashes. Stocks and options went down like wild fire. I could only watch my savings melting away.
    After the crash was over and the investigation was completed, we could collect out left over accounts. However even that my stocks were heavily bruised, most of them recovered nicely, I think some of them I hold still today.
    My friend however lost heavily on his options as a lot of them ran out of time to trade.
    So there you are you can learn every day. Look out what broker you have!!!

  39. Winston – Hussman feedback (Jehovah Witness forcast accuracy) was my stress reliever comment of the day.  I'll do a bit more digging outside his website, as, I spent hours today reading through his posts and my blood pressure was certainly higher as the result.  At this stage in learning this stuff… it doesn't take much to lead me down a few useless rabbit holes. So, I appreciate anyone letting me use them as a sounding board. 

    Yodi, Indeed, It was your guys discussion that prompted me to add up my risk regarding the puts on the books.  When I did — "BAM" - my brain went into overdrive. I have too many puts and not nearly enough Calls.  I mean, as you point out.. those Calls will be our friend on the way down. The lightbulb went off today when I was looking over my portfolio and thinking if the market does crash, do I REALLY want this stock. Still a very young grasshopper here…. and keep reminding myself to be patient, thank you guys. 

    I always appreciate your two cents worth! To me, hearing others opinions help me sort through my own thought process and validate my own way of thinking.  I understand these choices are mine and mine alone, but.. no reason to step on the same pile of shit as someone else.  Without you guys, I would be stepping in loads of dung.  =)  Thanks for all the commentary too… it is your strangle discussion that interested me in the armchair trades, my first few expired a couple weeks back and the next round expire in about 22 days.  Much easier than playing Futures!  

    Again, thank you both! 

  40. Good morning! 

    Small dip in the Futures but nothing exciting.

    /CL hitting $70 but we're only shorting BELOW the line!  

    Hussman/Grass – He's "historically" accurate the way a broken clock is right twice a day.  If you often call for a correction, sometimes you will be right and then you can sell your "indicators" for the next decade.  I really should have just gone into the business of peddling the 5% Rule as the ultimate indicator – could have published once in a while like Hussman and taken the rest of my time off…

    And what Winston said! 

    Don't forget that hedges are INSURANCE and they are meant to MITIGATE the damage, not prevent it entirely (as I noted in yesterday's webinar).  If you manage your portfolio properly, you should know how much money you will make in a flat or up market and then if you take 1/3 of that money (25% if you are really bullish) and put it into hedges that pay 2:1 on a 20% correction what do you have? 

    • 100 makes 20 and you hedge for 5 
    • Market goes up another 20, you make another 20 and lose the 5 = 135
    • Market stays flat and you have 120-5 = 115
    • Market goes down 10% and you have 105 (115 – 10) 
    • Market goes down 20% and you have 115 – 20 + 15 (the hedge pays off) = 110

    So by hedging correctly you have assured that in ANY market condition (outside a 40% drop) you will have at least 105 left and having 105 or 110 left when the market is at 90 or 80 means you are in a great positions to go bargain hunting.  That's a lot better than having 120 and hoping for 140 and ending up with 80, right?  

    Options are way more fun when the volatility is high because we get more premium to sell.  If you want to know how the market goes and how we play various conditions, click the Phil tab on top and go back to whatever date range you like and read the posts and comments of the time – you'll see we adapt with the conditions – it's just that the conditions haven't changed much in the last 10 years!  

    AAPL/Yodi – Yes, the $180 puts, thanks.

    Good portfolio points, Yodi.