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Technical Tuesday – Are We Moving Up to a New Range?

Over 2,850 on the S&P 500 (/ES).

2,873, in fact, as of yesterday's close and I really liked this chart by Andrew Lais at Stockcharts on the SPY showing the huge turnaround in buying activity that has fueled what is now a 12.9% rally off the January lows.  Clearly, sentiment could not be better and that may be the problem as we head into an earnings season that is almost certain to disappoint the bulls.  On the other hand, if they are willing to consider Q1 a bump in the road, we may truly be off to the races if 2,850 firms up as a new bottom for the senior index.

We have a light round of earnings this week but, just this morning, Walgreens (WBA) gave a disappointing report and promptly dropped 8% pre-market after reporting earnings of $1.64 vs $1.72 that was expected and also cutting guidance for 2019 to flat to last year's $6/share in earnings, which makes $60 quite a bargain to me (we're long) and our 2021 target was only $62.50 anyway – so we don't mind a little pullback.

In a trend that will challenge the sector, declining reimbursements for prescription drugs cut into the company's profit margins.  While Walgreens is filling more prescriptions at the pharmacy counter, it’s making less money on them – a worrisome sign for a key part of the business. Prescription sales in its U.S. stores rose 9.8 percent in the second quarter, but gross profit at the pharmacies fell 3.2%.  “The market challenges and macro trends we have been discussing for some time accelerated, resulting in the most difficult quarter we have had since the formation of Walgreens Boots Alliance,” Chief Executive Officer Stefano Pessina said in a statement about the quarter.

While those problems may be unique to WAG, poor Q1 earnings will not be unique at all and, if investors are going to chop 8% off the price of a company for matching last year's earnings – then don't expect 2,850 to hold up on the S&P 500 as more and more earnings reports are revealed.  

It's not just earnings that are a problem, we just got the Durable Goods Report and it wasn't good at all with a 1.6% dive in February while last month is revised down from 0.4% to 0.1% and this doesn't even begin to reflect the disaster that March will be as Boeing was forced to halt shipping on their flagship 737 Max planes after two crashes – a problem that is still not resolved.  

Yesterday I pointed out that the gains in our portfolios have gotten downright silly and that makes me uncomfortable as there's no way they can keep printing money at the rate they've been printing it during Q1.  As noted in the chart above, some of that money flowed into the market but a lot if it flowed into the bond market, driving the long-term yield curves below the short-term rates – which is usually interpreted as a sign impending recession.  

Whether or not we have a recession, clearly the market is priced for no such thing ever happening so it should be no more surprising to see the whole S&P drop 10-15%, as it did in December, as it is to see it rise 12.9%, as it did in Q1.  As I said to our Members yesterday, the best thing we can do, absent of cashing out, is to put about 25% of our unrealized gains into hedges and, fortunately, hedges are very very cheap right now. 

Short Call 2019 21-JUN 17.00 CALL [SQQQ @ $9.78 $0.00] -80 11/20/2018 (80) $-28,000 $3.50 $-3.35 $-14.32     $0.15 $0.00 $26,800 95.7% $-1,200
Long Call 2020 17-JAN 10.00 CALL [SQQQ @ $9.78 $0.00] 200 2/15/2019 (290) $60,000 $3.00 $-1.18     $1.83 $0.00 $-23,500 -39.2% $36,500
Short Call 2021 15-JAN 25.00 CALL [SQQQ @ $9.78 $0.00] -100 2/15/2019 (654) $-22,000 $2.20 $-0.83     $1.38 $0.00 $8,250 37.5% $-13,750
Short Put 2020 17-JAN 10.00 PUT [TZA @ $9.54 $0.00] -40 8/29/2018 (290) $-13,000 $3.25 $-1.09 $-55.81     $2.16 $0.00 $4,360 33.5% $-8,640
Long Call 2021 15-JAN 7.00 CALL [TZA @ $9.54 $0.00] 200 3/4/2019 (654) $65,000 $3.25 $0.13     $3.38 $0.00 $2,500 3.8% $67,50

SQQQ and TZA are the primary hedges in our Short-Term Portfolio, whose primary purpose is to protect our Long-Term Portfolio in our paired portfolio strategy.  At the moment, our hedges are fairly profitable and both are pretty much at the money but, with the SQQQs having gotten so much cheaper, it's going to be a good time to press that hedge.

Since SQQQ is a 3x Ultra-Short ETF, if the Nasdaq drops 10%, SQQQ should rise 30% to about $13 and 20% down on QQQ should give us about $16 on SQQQ and that would make our 200 shares worth over $120,000 vs their current price of $36,500.  There are two ways we can pump up this bet – we can double down, spending $36,500 more to buy $120,000 more protection (net $83,500) or we could roll the $10 calls down to the $5 calls for about $3 ($60,000), putting us $100,000 deeper in the money and effectively buying $100,000 for $60,000 rather than speculating with $36,500 to maybe make $83,500.

While buying an actual asset (the lower calls) does appeal to me, this hedge is INSURANCE and we're rather get more protection for less money and take our lumps if the market goes higher, which means we'd expect to make additional gains in our LTP positions to offset the STP losses.  So, officially, for the Short-Term Portfolio, let's double down on the SQQQ Jan $10 calls at $1.80 ($36,000) and buy back the short June calls to clear a slot for another sale if we get a nice pop.  

It's a lot easier to hedge your portfolios correctly if you know how much money they will win or lose in various market conditions.  If you go back to our Feb, 2018 review of the Money Talk Portfolio, we anticipated making $76,638 to add to our, at the time, $88,932 portfolio and, as of yesterday's Report, we were at $135,153 – very much on track for our two-year goal.  

We have added a few positions but it's such a low-touch portfolio (once per quarter) that 5 of the 8 positions are still there (ABX is now GOLD) so you can go back to that review and see exactly how the trades performed vs our expectations last year.  KNOWING what you are expecting to make and KNOWING what you expect to lose helps you make better hedging decisions and BALANCE is the key to being consistently successful in the market.


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  1. I think that we must now admit it – that Trump team is made up of geniuses. The US economy has never, ever been that strong. Dow 36,000 is close.

  2. Phil re WBA. I wasn't surprised about their earnings as they had a robust system for earnings credits with purchases that could be used to buy other merchandise from them. Since they are like a mini-mart it was convenient to use the credits for printer ink, paper products, RX etc. They capped out their credits to only 3 bucks on any purchase last quarter and I knew that would cause repercussions. Also the opiates can only be prescribed once with no refills for pain. What I've heard is that the Doc's are giving larger amounts for severe injuries since they are precluded from refills. I would think this is going to impact future earnings for all the super drugstores.

  3. And Brexit looking more and more gloomy right now… These guys need a master negotiator but we are not sharing!

  4. Good Morning!

  5. Bitcoin up 16% !   

    GBTC also up 16%.

  6. Phil/WBA,

    we have a big store in our locality and it is always empty. only maybe 10% occupied. on the other hand CVS is always busy. I find everything in WBA pricy as compared to other stores. I just use them to print board prints or other prints as those are discounted.

    could be just our local area….


  7. Phil—is the hedge fund generating the same returns as the LTP?

  8. Good morning!

    Please note, in the post above, we are adding more hedges to the STP:

     So, officially, for the Short-Term Portfolio, let's double down on the SQQQ Jan $10 calls at $1.80 ($36,000) and buy back the short June calls to clear a slot for another sale if we get a nice pop.  

    For the OOP, let's also double down on our SQQQ Jan $10 calls (now $1.85) 

    Nothing too drastic as long as 2,800 is holding on /ES and we're miles above that at the moment.

  9. Phil – SQQQ hedge – would you cover the 10's with anything if it was a brand new hedge or would you choose different strikes?

  10. Morning Phil. So, as a brand new hedge (not adjustment), do you recommend just buying SQQQ Jan $10 calls?

  11. Trump/StJ – His name will certainly go down in history….

    WBA/Pirate, Pat – They actually sold more prescriptions – just not making money on them.  I think the rules changed and they see that so they are going to adjust but I'm not walking away from $6/share when I can buy it below $60.  Just another silly market sale for the long-term investor.  

    In the OOP we're good because we were sensibly conservative in our spread:

    Short Put 2021 15-JAN 55.00 PUT [WBA @ $55.33 $-8.17] -10 12/26/2018 (654) $-5,150 $5.15 $3.03 $-2.85     $8.18 - $-3,025 -58.7% $-8,175
    Long Call 2021 15-JAN 50.00 CALL [WBA @ $55.33 $-8.17] 20 3/8/2019 (654) $29,500 $14.75 $-4.13     $10.63 - $-8,250 -28.0% $21,250
    Short Call 2021 15-JAN 62.50 CALL [WBA @ $55.33 $-8.17] -10 3/8/2019 (654) $-8,500 $8.50 $-3.30     $5.20 $-5.50 $3,300 38.8% $-5,200

    I'd like to roll the calls lower if we can but that's about it for that one.

    In the LTP, however, we took a bullish chance with them and got killed:

    Long Call 2021 15-JAN 70.00 CALL [WBA @ $55.33 $-8.17] 40 10/22/2018 (654) $59,400 $14.85 $-11.60 $5.63     $3.25 $-3.25 $-46,400 -78.1% $13,000
    Short Put 2021 15-JAN 65.00 PUT [WBA @ $55.33 $-8.17] -10 3/25/2019 (654) $-11,000 $11.00 $3.10     $14.10 $4.15 $-3,100 -28.2% $-14,100

    I'm not worried about the short put target but the long $70s are hopeless so, in the LTP, let's roll our 40 WBA 2021 $70 calls at $3.50 ($14,000) to 80 of the 2021 $50 calls at $10.90 ($87,200) and we'll sell 40 of the 2021 $65s for $4.75 ($19,000) so we're essentially doubling down by adding net $54,200 to our $48,400 trade though it's not really that bad as we've already pocketed $40,000 in gains on WBA so this is just a set-back and now we have $120,000+ worth of longs (only 1/2 covered) with a chance to produce a nice income if/when they bounce back. 

    Brexit/StJ – EU starting to get pissed off with all the nonsense.

    Hedge Fund/Jabob – A bit behind as it's more hedged but up over 20% for the year so far.  

    SQQQ/Fel , Alter- As a new spread, I'd go for:

    • Buy 40 SQQQ Jan $10 calls for $1.80 ($7,200) 
    • Sell 40 SQQQ Jan $17 calls for 0.85 ($3,400) 
    • Sell 5 WBA 2012 $55 puts for $8 ($4,000) 

    That's a net $200 credit on the $28,000 spread so very good protection against a 20% drop in SPX and margin on the short puts is about $6,000 so not too much of a burden but make sure you REALLY want to own $27,500 worth of WBA at about $55 (the current price) as it will probably be messy to ride out.

  12. Thanks, Phil. Have done the hedge with ALK puts instead as already exposed to WBA…

  13. Phil just a small correction on the SQQQ play the WBA 55 put should be 2021 and not 2012 just a short cut of fingers!

  14. Phil,

    are you in /KC? What is your plan?

  15. ALK/Alter – That's perfectly valid.  The offsets should be any stock you REALLY would like to own at the net put price.  

    2012/Yodi – Well those expire faster…  cheeky

    /KC/Japar – I just got back in on .KCN19 – couldn't resist at $94 but just one contract as it's been so crazy.  My plan is the same as usual, wait for it to go higher and take a $500-$1,000 profit or, if it goes lower, DD once or twice and then go back to plan A.

    Oil testing $62.50 but hard to get a read on it,  /RB $1.915 is a better short at $1.92 but all risky with inventories tomorrow. In both cases we've been higher:

    /NG back in the buy zone.  /NGV19 is $2.814 and $2.80 would be a fantastic entry.  High Dollar makes this a very good time to get in.

  16. Yay Bitcoin! I was losing my shirt doubling down and down on QUIK and last week I couldn't take it any more so I dumped it all and put the money in GBTC at 4.50 instead, which is working out pretty well so far.

  17. I have to leave for a meeting at 2pm, will be gone for the day.  

    Auto sales generally sucking:

    Ford on Tuesday publicly unveiled details of the latest version of its Escape SUV, heavily emphasizing comfort features including a moving rear seat to provide more leg room to passengers, plus consumer-friendly features such as an 8 inch (20.3cm) touchscreen and Wi-Fi connection for up to 10 devices within 50 feet (15.2m) of the vehicle.

    GM posted a 7 percent drop in first-quarter sales, with declines across all brands. Sales of the automaker’s Silverado pickup trucks fell nearly 16 percent and the high-margin Chevy Suburban large SUV dropped 25 percent.


    GM does not report monthly sales.

    FCA reported a 7 percent fall in U.S. sales in March and a 3 percent drop for the first quarter. All of FCA’s brands dropped in March, except for Ram, which saw a 15 percent increase in pickup truck sales.

    “The industry had a tough first quarter but with spring finally starting to show its face and continued strong economic indicators… we are confident that new vehicle sales demand will strengthen going forward,” FCA’s U.S. head of sales Reid Bigland said in a statement.

    Toyota Motor Corp reported a 3.5 percent fall in U.S. sales in March and 5 percent for the first quarter, hurt by declining demand for its Corolla sedans and Camry vehicles.

    “While some of our competitors are abandoning sedans, we remain optimistic about the future of the segment,” Toyota said in a statement.


    Nissan Motor Co Ltd posted a 5.3 percent drop in sales in March and its first-quarter sales were down 11.6 percent.

    Industry consultants J.D. Power and LMC Automotive have predicted a 2.1 percent drop in U.S. auto sales in March, partly due to bad weather, mixed economic data and lower tax refunds.

    Auto sales and housing generally signal the start of a recession and both are slowing in Q1.  I don't know what it will take for this market to snap lower but something's gotta give…

    Good timing Mr. M! 

    • BGCI Bloomberg Galaxy Crypto Index: +58.6% off the Dec lows
    • Bitcoin is +51.7% off Dec lows
    • Bitcoin Cash is +139.2% off Dec lows
    • Dash is +111.1% off Dec lows
    • EOS is +165.6% off Dec lows
    • Ethereum is +86.4% off Dec lows
    • Litecoin is +201.0% off Dec lows – Nomura

    Just keep in mind what nonsense it all is.

  18. VKTX - anyone have an opinion?  I sold some of my ARRY at 25 yesterday and used the money to establish a small position in this, based on the chart and some recent news, but I'm not a bio guy so informed opinions welcomed.

  19. Cryptos / Phil – nonsense indeed, but just like with NAK, we need a few Hail Mary plays from time to time to add spice. I started a GBTC position in my IRA at 7 and have doubled down with every $1 drop, expecting a binary result in 20 years – it's either worth nothing or I can buy a boat!

  20. TEVA near the 52 week low.

  21. Not sure why, but SPWR up close to 15% recently. Covered my position as $7 has been resistance.

  22. VKTX/Mr M – I know they had some good study results and, though they are burning $20M/yr at the moment, they have over $200M on hand so, as far as biotech gambles go – this looks like a good one. 

    Cryptos/Mr M – Also a fun gamble, just reminding you to keep a clear head if you are determined to ride the roller coaster.   Speaking of NAK – all cheap again at 0.59 if anyone likes to gamble.

    In the OOP, we have 10,000 shares and we sold 50 $2 puts for 0.95 so more like we have 15,000 shares at about $1.25.  The EPA Chief, Wheeler, recused himself from NAK decisions because his law firm had lobbied for them and that was taken as a negative but it's the same old, same old as they navigate the permitting process.  I'm not too keen on spending $9,000 to DD in the OOP just because it makes a very speculative stock a big allocation but I have no problem adding 20,000 shares of NAK at 0.59 to the LTP as a new play.  

     TEVA/Jabob – I don't like them as much as I used to. 

    SPWR/StJ – Technically toppy but still so cheap at $7.  In the OOP, we have the $3/7 spread so all good there.  In the LTP, we have 50 naked long $5 calls we bought for $2.70 back in Oct, so just getting even now and I'm not inclined to cover yet.

    Well, gotta go.  Later all! 

  23. Donald Trump is now saying 22 things a day that aren’t true