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Which Way Wednesday – S&P 2,940 or Bust (again)!

Will the 2nd time be a charm?

The S&P 500 will make another attempt at getting over the 2,940 line, which is 33.6% higher than our old "Must Hold" line at 2,200.  33.6% is not particularly significant, the real significant line is the 20% line at 2,640 and we haven't seen that since April and now we're over the 30% line (2,860) and it's probably time to move the goal posts as those lines were for the end of 2017 and the tax cuts have been a game-changer for the S&P 500 and anyone else who measures their earnings in Billions.  

Companies aren't making more money – they are just paying less taxes but same difference to investors – as long as more goes to the bottom line.  I'm not saying that 2,860 is likely to hold in the long run but, taking into account buybacks and repatriation of capital (ie tax avoidance) and lower tax rates – 2,640 is a reasonably good "Must Hold" level for the S&P going forward as the Must Hold Line represents a bearish break if it fails and 20% above (3,168) and 20% below (2,112) is the expected range the market should stay in.

Getting close to 3,000, it's hard to imagine 2,112 ever happening but I suppose we said that in 2000 and again in 2007, when the S&P was up at 1,550 and both times it fell 50% within the next two years.  This time is different though – we're 50% higher now so, even if we fall 50%, we still end up back at the previous highs – that's progress! 

Image result for s&p 500 pe ratio 2019

That's right, we're getting very close to that magical 3,000 level which, appropriately, would price the S&P 500 at 30 times it's trailing earnings but, if we assume forward earnings will go up and up forever and nothing will ever, ever, ever go wrong – then it's only 27 times earnings and that seems like a bargain these days, right?

Image result for stock market bubble chartAs you can see from the chart above, 30 on the CAPE index has popped every bubble since 1903 except the bubble, which blasted the index all the way to 45 times earnings before collapsing so never underestimate the stupidity of your fellow traders – you really can fool some of the people all of the time and all of the people some of the time and that's a hell of a lot of suckers to hold the bags on the way up.

The chart on the left, however, indicates the price we are now paying for $1 of sales and THAT has never been higher than it is now.  As I mentioned above, the low tax rates have impacted the bottom line earnings and mergers and buybacks have decreased the share counts by which those earnings are divided but that doesn't create actual sales – those have been lagging while the market has skyrocketed – so let's hope nothing happens to disrupt either the sales or the profits or this house of cards could collapse REALLY fast!

Meanwhile, we just lie back and enjoy the ride.  Last Wednesday, in our Live Trading Webinar (and there's another one today at 1pm, EST), we went over 10 trade ideas (summarized in our Top Trade Idea of that day) that could make up to $100,000 by Christmas in anticipation of a flattening market.  Granted it was only a week but let's see how they are working out:

1) Sell 20 BBBY Jan $20 calls for $1.50 ($3,000)

  • Those are now 0.18 ($360) so up $2,640 

2)       Sell 10 CAKE 2021 $45 puts for $5.30 ($5,300) 

Buy 25 CAKE 2021 $45 ($13.80)/$60 ($7) bull call spreads for $6.80 ($17,000)

Sell 15 CAKE Jan $55 calls for $2.85 ($4,275)

  • Was net $7,425, now net $7,550 (up $125) so still good for a new trade on the $37,500 spread.  

3) Sell 20 CMG Jan $460 calls for $37.30 ($74,600) and buy 20 CMG 2020 $460/580 bull call spreads for $44.75 ($89,500) for net $14,900

  • That spread is now net $26,000 so up $11,100 

4)       Sell 30 GCI April $10 puts for $1 ($3,000) 

Buy 50 GCI April $10 (0.95)/12.50 (0.20) bull call spreads for 0.75 ($3,750)

Sell 30 GCI Jan $10 calls for 0.75 ($2,250) 

  • Was net a net $1,500 credit, now net $1,450 credit so up $50 and still good for a new trade on the $12,500 spread.  

5)        Sell 15 of the GILD 2021 $67.50 puts for $8 ($12,000).

Buy 25 2021 $65 ($18.50)/80 ($11.50) bull call spreads for $7 ($17,500)

Sell 15 Jan $77.50 calls for $3.30 ($4,950)

  • Was net $550 and now $1,450 so up $900 but still good for a new trade as it's a $37,500 spread so $36,600 upside potential remains!  

6)        Sell 20 GPRO 2020 $8 puts for $2 ($4,000) 

Buy 40 of the 2021 $5 ($3)/10 ($1.10) bull call spreads at $1.90 ($7,600)

Sell 20 Jan $8 calls for 0.45 ($900) 

  • Was net $2,700 now $1,800 so down $900 and great for a new trade as it's a $20,000 spread.  

7)        Sell 10 M 2021 $30 puts for $5.25 ($5,250)

Buy 15 M 2021 $30 ($9)/$40 ($5) bull call spreads for net $4 ($6,000) 

Sell 10 M Jan $35 calls for $2.70 ($2,700)

  • Was a net $1,950 credit, now a net $1,715 credit is up $235 and still good for a new trade on the $15,000 spread.

8) Sell 5 PSA 2021 $200 puts for $24

  • Still $24 and good for a new trade 

9)        Sell 10 TGT Jan $85 calls for $6.20 ($6,200) 

Buy 10 TGT 2021 $80 ($17)/95 ($10) bull call spreads for $7 ($7,000)

  • Was net $800, now net $1,750 so up $950 

10)       Sell 10 THC Jan $28 calls for $3 ($3,000) 

Sell THC 10 2021 $23 puts for $5.50 ($5,500) 

Buy THC 15 2021 $27 ($10.50)/37 ($6.50) bull call spreads for $4 ($6,000)

  • Was a net $3,500 credit and now a net $1,350 credit so up $2,150 

Image result for money machine animated gifSo, in one week, our 10 trade ideas are up $17,250 already ($84,625 more is expected by Jan expirations) and all we are doing is applying our basic "Be the House – NOT the Gambler" strategy by selling more premium than we're buying on stocks we believe will be flat to down from here into the new year.

Our long-term positions have lower net deltas, so they lose less money on the way down and they have lower thetas – so they lose less money over time. Our criteria for selecting these 10 was that they were internally volatile stocks (so they offered good front-month premiums) but they had a long-term overall value that would allow us to stick with and adjust a position – even if they fell more than we expected.  

Just because we don't like or trust the market, doesn't mean we can't make money while we wait.  These trade ideas utilized very little cash and tapped into our sideline margin to pay us significantly more money than we would have made if we just left our cash sitting around while we wait for the correction that never comes.  

We're still shorting the S&P (/ES) at 2,940 with tight stops above the line and the Dow (/YM) at 26,900 – also with tight stops above and we're shorting Oil (/CL) Futures at $75.50 – but very dangerous into inventories at 10:30 and, other than that – it's another "watch and wait" sort of day while we wait to see if the S&P can break over 2,940 and make a serious run at 3,000 because – why not?


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  1. The Russell is broken!

  2. As a reminder, only little people pay taxes! Who knew it was so hard to make a billion starting with only $400M. Once you know the true story behind Trump's fortune (and misfortunes), the book from Woodward makes more sense – his advisors have to constantly remind Trump that the US government is not a business where you can take chances and if that fails, you declare bankruptcy… and get bailed out by daddy. 

  3. Price to sales ratio / Phil – In a fundamental book I read (I know – who does that), the author argued that price to sales was actually a better indicator than P/E for the simple reason that sales are harder to manipulate. As you mention, earnings can be impacted by many things that don't reflect on the health of the company – either way of course! 

  4. Good morning,
    CMG/Phil- is the trade still good new? there's 2021 now though

  5. Morning, All!

    Join us for the live weekly webinar, today at 1pm!

  6. Good Morning!

  7. Good morning!

    Not much going on at the moment, just drifting 100 points higher at the open because that's what this market does….

    RUT needs to take back weak retrace at 1,670 and not fail strong retrace at 1,640 and /ES needs to get over 2,940 and /YM 26,700 and /NQ 7,700 before things are bullish again.

    Even Europe is getting strange with DAX down 0.5% and Euro Stoxx up 1% this morning

    We'll see where they close at 11:30.  Fed speak up the ass today:

    Wednesday's economic calendar

    CEO pay/StJ – Truly stunning how much salaries have grown.   

    Sales/StJ – That's true but there's the underlying assumption that true earnings are a function of but the impact of the tax changes has certainly changed the scale on the bottom line.  Once we figure out a proper sales/new earnings ratio – then we can go back to analysis based on sales to smooth things over.

    As I've noted before, there's so many "one-time" tax changes in the past year and this year that no one's earnings can be relied upon for the long-term – especially when you see massive tax credits suddenly popping up.  Like XOM:

    Income from Continuing Operations
    Total Other Income/Expenses Net 3,375,000 6,035,000 7,531,000 17,548,000
    Earnings Before Interest and Taxes 15,299,000 1,934,000 14,435,000 34,082,000
    Interest Expense -601,000 -453,000 -311,000 -286,000
    Income Before Tax 18,674,000 7,969,000 21,966,000 51,630,000
    Income Tax Expense -1,174,000 -406,000 5,415,000 18,015,000
    Minority Interest 6,812,000 6,505,000 5,999,000 6,665,000
    Net Income From Continuing Ops 19,848,000 8,375,000 16,551,000 33,615,000

    In 2015 they paid $5.5Bn in taxes on $22Bn in profits but last year they got a $1.2Bn CREDIT on $18.7Bn in profits.  Even if you assume they would just pay 20% on $18.7Bn, that's still $3.7Bn, not a $1.2Bn credit so the swing in their bottom line would be $4.9Bn and XOM has an 18x p/e so that's $88.2Bn in market cap (25%) – one way or the other.  It's silly to even guess which way a company like this will go but I sure wouldn't bet on higher if they are counting on tax credits going forward.

    CMG/Dave – Well sure, I'd rather have the 2021 spread to cover than 2020 but we already had the 2020s and didn't change them officially.  

  8. Nice dip in /CL – $75 is stop now but hopefully we see $74.50.

  9. CMG/Phil- so the spread changes to 2021 same strike but short calls, I am guessing to remain at 2020?

  10. CMG/Dave – No, the whole point was to sell the Jans against the spread and then use part of that money (assuming gains) to widen the spread and then sell calls next Q and wash, rinse, repeat for 8 Qs.  It's not that we believe in the 2021 target – it's just a buffer in case CMG blasts higher and puts the short calls in the money (and it reduces margin in a PM account, which you'd better have if you are trading this expensive stuff).  

    Strong ISM report made me get out of oil (reluctantly).  ADP strong too:

    ISM Non-Manufacturing Index

    U.S. Economy added 230K jobs in September

  11. Government Debt per Employed Person

  12. Not So Fast for World Growth

  13. /CL Bummer.  I unloaded 4 of 5 /CL shorts right I held for 2 days before the report for a small loss.  Out of the last one at $74.40.  I feel your pain Phil but wasn't prepared to take the risk. Bouncing back now maybe reshort at $75??

  14. /CL WOW huge build and crude bouncing back hard

  15. Everything is rising like its 2099?

  16. Aapl- up ANOTHER $4..yesterday I was shorting at $ out with my stop loss

    Today, shorting the $232.50 level while stock at $233.20- for $2.15…of that, $1.40 is premium.

  17. Maya1  I hear you.  It's been very difficult to make money on the short side. I am in /ES at 2943. This thing has to pull back at some point!

  18. Button/new highs

    I am long, but very leerily …..tight stops, scalping shorts and ready to pull trigger around election time

  19. ES2940…

    Phil may be right. We will see

  20. Shouldn't CHK be popping a little bit more with this /NG rally – which seems to be sticking? Added a small amount more today.

  21. Exports for the week were down 6 million barrels from the previous week which explains the build.

  22. cl appears to be defying logic and gravity is anyone aware of other news besides reported build

  23. Wow, what a crazy move oil made!  Huge build got shaken off for some reason – I'm waiting but looking to re-short.

    EIA Petroleum Inventories

    • EIA Petroleum Inventories: Crude +8.0M barrels vs. +2.0M consensus, +1.9M last week.
    • Gasoline -0.5M barrels vs. +1.3M consensus, +1.5M last week.
    • Distillates -1.8M barrels vs. -1.3M consensus, -2.2M last week.
    • Futures -0.41% to $74.92.

    /CL/Button – I don't know what's going on but I still like the shorts now at $75.66.  I'm back in 2 at the moment as an 8Mb build is huge – even with the offsetting /RB draw. 

    I think they are just trying to spike out the shorts before the real selling begins

    AAPL/Maya – They always use AAPL to top off a rally.  Never any harm in buying more AAPL if you're a fund looking to pop the Nas or Dow or even S&P.

    /ES/Maya – Was looking good for a moment but stopping out now after bounce from 2,937.50.  Lined up with 26,918, 7,677 and 1,665 so we'll see who's lagging if we fall back but I'm back short on /CL so I only want to stare at one thing in this crazy market.

    CHK/Ati – You would think but there are infrastructure bottlenecks (roads, pipelines, rails) in Marcellus and other shale areas that are putting constraints on future growth.   Still that should raise the prices as demand increases so I still like CHK but investors are very short-sighted.

    Exports/Den – Well that's super-odd, I wonder why.  Good mitigating factor but still, any build is not supportive of $75.50 IMHO.

  24. CHK: there's a lot of haters in this stock. It's emotional for some people for some reason (and maybe for good reason, the ex-CEO killed himself ramming his car into a bridge pylon).

    My favorite strategy here is long-term options with the "set and forget" switch turned on. E.g., Jan-20 7 calls are 0.45-0.50 and apparently I'm not alone in this position, 305k open interest!

  25. I may have missed the discussion but what the heck is going on with /NG and /KC?

  26. AAPL looks like a pot stock! 

    CHK/BDC – Lots of believers.  

    /NG/Japar – They've been undervalued for ages (which is why we kept going long) and finally something happened to make people realize it.  Those are the kinds of trades I love to keep dipping into.  In oil's case, it's overpriced now, so I keep shorting it while waiting for the big drop.

  27. Back in /ES shorts below 2,940 and 4 /CL shorts again at $75.59 avg.

    Almost Webinar time!

    Just tried Barilla Ready Pasta – 60 secs in the microwave for a quick lunch (plain noodles) – next time I'll have some leftover veggies ready and it's a proper meal! 

  28. I know this is 3 years old but it's worth watching again, or if you haven't see  it.

    It's actually more instructional than you might otherwise initially think.

  29. Just got my presidential alert. I already have a theory on what this might mean for the midterms.

  30. Thanks for the webinar Phil….

  31. Presidential alert/BDC – What a great way to scare the population.  

    You're welcome 1020, hope it was useful.  At least we make some cash:

  32. Phil – Your HMNY is up big today. 8-)

  33. So much for index gains – almost all gone now.

    HMNY/Albo – I know, 0.03!  Very psyched.  Someone actually gave them more money. 

    MoviePass parent company says it has raised $65 million in new funding

    Helios posted an operating loss of $127 million for the second quarter and burned through $219 million in the first half of the year. Board member Carl Schramm recently resigned, citing unanswered questions and concerns about the company’s corporate governance, and the board has proposed a second reverse stock splitto try to avoid getting delisted from NASDAQ.

    • Just a headline for now, but Bloomberg reports JPMorgan as downgrading China to Neutral from Overweight.
    • The move comes after a pretty brutal bear move for those markets, with the Shanghai Composite down more than 20% from the year's top hit in late January.
    • The rout in bonds continues, with the 10-year U.S. Treasury yield now higher by 9.5 basis points today to 3.16% – the highest level in more than seven years. The two-year yield is up to 2.86% – a level not seen in about 10 years.
    • The big moves are taking the steam out of stock gains, with the S&P 500 (NYSEARCA:SPY) retreating to about flat on the session.
    • Also under pressure from higher U.S. rates are emerging markets (EEM -0.8%).
    • Previously: Treasury yields break out to multi-year highs (Oct. 3)
    • With short rates on the rise and forecast to continue rising, what's not to like about these funds?
    • Among those seeing big inflows are the Goldman Sachs Access Treasury 0-1 Year ETF (NYSEARCA:GBIL) and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (NYSEARCA:BIL). GBIL saw a rush of $220M on Tuesday and $145M on Monday, bringing AUM above $2B for the first time ever.
    • It might be a "risk-off" move suggests Goldman's Michael Crinieri, with investors looking to build up some "dry powder" for a future downturn.
    • It's the equivalent of "putting your money under a mattress," says Bloomberg's Eric Balchunas.

    • Call it an attempt to help the Fed's interbank payment system catch up with our phone payment apps.
    • In an effort to update the clunky behind-the-scenes interbank settlement system, the Federal Reserve today is seeking comment on potential steps to support real-time gross settlement, Fed Governor Lael Brainard said in a speech at the Fed Payments Improvement Community Forum in Chicago.
    • "While we are seeing a growing demand for payments to be as instantaneous as the apps on our smartphones, in reality, under the hood, these payments currently rely on a patchwork of systems that can result in inefficiencies and delays, as well as uneven access," Brainard said.
    • The move toward real-time gross settlement aims to lower risk, increase safety, and accelerate payments compared with the deferred settlement system used under the current automated clearinghouse system.
    • "The capability to finalize interbank settlement before funds are made available to the recipient would avoid an undesirable buildup of risk in the system," he said.
    • Banks and technology providers of all sizes, Brainard says, may be able to develop new services or enhance existing services by capitalizing on the newer underlying interbank settlement infrastructure.
    • "This could ultimately benefit all consumers by lowering costs, increasing choice, and improving quality," he said.
    • Also the central bank is seeking comment on whether it should consider developing "a liquidity management tool that would operate 24/7 in support of services for real-time interbank settlement of faster payments."
    • Previously: Chicago Fed's Evans says he's `comfortable' with a December hike: Bloomberg(Oct. 3)
    • Fintech ETF: FINX
    • The National Retail Federation issues its forecast for 2018 holiday sales.
    • The NRF expects a 4.3% to 4.8% increase in retail sales to $717B to $721B during the crucial two-month period.
    • The expected pace is higher than the 3.9% average annual rise for the last five years, but below the 5.3% jump from a year ago.
    • NRF summary: "Thanks to a healthy economy and strong consumer confidence, we believe that this holiday season will continue to reflect the growth we’ve seen over the past year. While there is concern about the impacts of an escalating trade war, we are optimistic that the pace of economic activity will continue to increase through the end of the year."
    • The number of S&P 500 companies saying profits won't reach analyst estimates outnumbered those predicting they'll beat them by a ratio of 8-to-1 in Q3, the most since Bloomberg started compiling such data in 2010.
    • There are several explanations for the increase in earnings estimate pessimism:
    1. Analysts, after seeing their estimates trounced in the first half of the year, raised estimates to unrealistic levels.
    2. Companies are making room to make sure that they beat estimates by at least a penny.
    3. Rising costs and weaker overseas demand may slow earnings growth in the future.
    • For Q2, over 80% of S&P companies earned more than analysts expected, a record level. That pace of beating estimates isn't likely to continue, according to Ed Keon, chief investment strategist at QMA.
    • “You’re going to go to a slower trajectory,” said Keon. “You’ll see the second quarter will turn out to be the peak in terms of growth rates.”
    • Previously: AMAT -3.5% on Q3 report with downside guide, near-term customer spend warning(Aug. 16)
    • Italy's economy is expected to grow by 0.9% from the prior forecast of 1.1% and almost half the 1.6% the Rome executive has said it will put in its three-year budget plan.
    • Confindustria also cut its 2018 GDP forecast growth to 1.1% from the 1.3% it had estimated in June.
    • The group said its downward revision was linked to the changes in US trade policy and to turbulence in emerging economies such as Turkey and Argentina, as well as the end of the European Central Bank's quantitative easing and the rise in Italian bond yields.
    • Kandi Technologies (NASDAQ:KNDIraces 16% higher after the company discloses that the 2019 EX3 and K22 models qualify for up to $7.5K in U.S. federal tax credits.
    • Both models received the written acknowledgement of immediate eligibility for credit and the amount of the qualifying credit from Department of the Treasury of Internal Revenue Service for the New Qualified Plug-in Electric Drive Motor Vehicle Credit.
    • Kandi CEO update: "The pure electric vehicle market in the United States is full of potential. Following the approval of federal tax credit, Kandi’s EV products have become more competitive in both price and quality. I am confident that SC Autosports will successfully grow the EV business in addition to the powersports business."
    • TD Ameritrade  (NASDAQ:AMTD+2.2% after investing in ErisX, a regulated derivatives exchange and clearing organization that will include digital asset future and spot contracts on one platform.
    • Terms weren't disclosed.
    • “ErisX’s plan is to offer traders access to cryptocurrency spot contracts as well as futures contracts on a single exchange," says JB Mackenzie, managing director of Futures & Forex at TD Ameritrade.
    • Previously: CME ahead in bitcoin futures race (Aug. 21)
    • Harmony Gold (HMY -0.9%) says it signed a three-year wage agreement with South Africa's National Union of Mineworkers and two other unions.
    • HMY says the deal includes a R700/month pay hike in the first year for the lowest-paid underground workers, a ~9% increase and nearly double the inflation rate, with similar percentage gains following in the next two years.
    • The NUM union last month signed a three-year wage deal with AngloGold Ashanti that will provide a 12% pay hike for entry-level underground workers.
    • German services growth hit an eight-month high of 55.9 in September, in a further sign that strong domestic demand is helping to cushion the effects of a slowdown in manufacturing.
    • Composite PMI fell to 55.0 from 55.6 in August.
    • German services are benefiting from strong domestic demand thanks to record-high employment, rising real wages, increased job security and low borrowing costs.
    • While the U.S. economy thrives and consumer confidence strengthens, many lower-end malls struggle as vacancy rates rise, pushing down rents, the Wall Street Journal reports.
    • Q3 vacancy rates increased to 9.1%--the highest since Q3 2011--from 8.6% in Q2, according to real-estate research firm Reis.
    • “The retail sector is still correcting,” said Barbara Denham, senior economist with Reis.
    • Department-store closings from Bon-Ton Stores and Sears Holdings (NASDAQ:SHLD) accounted for theQ3  vacancy rate rise.
    • To be sure, not all malls are faring poorly. Malls in more affluent regions with less competition still attract tenants. And higher-end malls are diversifying by adding restaurants, theaters, and other entertainment businesses.
    • Previously: Retail gems amid mall gloom? (April 2)
    • UK service sector slowed slightly to 53.9 compared to forecasts for a reading of 54.0, following 54.3 in the prior month.
    • The report indicated that higher levels of business activity were attributed to a solid increase in new work and competitive pricing strategies, but the report also noted that Brexit concerns and heightened economic uncertainty remained the main constraints on growth.
    • “The steady economic expansion and intensification of cost pressures will add to views that the next move in interest rates will be another hike. However, with Brexit uncertainty intensifying in recent weeks, any rise seems unlikely prior to the scheduled March 29th exit from the EU,” Williamson concluded.

  34. The Art of the Elevator Pitch