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Will We Hold It Wednesday – Weak Bounce Edition

This is not pretty.

We're down in the Futures and pretty much back where we were at Monday's close – a bit higher but, more importantly, failing our weak bounce lines 2 days after the drop and that's generally a sign that we're consolidating for a move lower – not recovering.  

I mentioned last week that there's nothing the Russell could do to avoid a "death cross", where the 50-day moving average crosses below the 200-day moving average and that's a bearish sign and, as of this morning, the 50 dma is 1,562 and that's now below the 200 dma at 1,561 and that's 1 point away from a Death Cross! 

Since the 50 dma moves 4x faster than the 200 dma, all it will take is a single down day on the Russell to trigger this extremely bearish technical indicator and that will then trigger selling programs that will affect all the indexes so hedging with the Russell (which we do) is a pretty good idea at the moment – especially as it was down at 1,266 in December and that's 272 points (17.6%) down from here and that would pay $13,600 per contract on the /RTY Futures OR, you could play  the Ultra-Short Russell ETF (TZA) like we are in our Short-Term Portfolio with the following spread:

TZA Short Put 2020 17-JAN 10.00 PUT [TZA @ $9.66 $0.00] -40 8/29/2018 (247) $-13,000 $3.25 $-1.17 $-55.81     $2.09 $0.00 $4,660 35.8% $-8,340
TZA Long Call 2021 15-JAN 7.00 CALL [TZA @ $9.66 $0.00] 200 3/4/2019 (611) $65,000 $3.25 $0.10     $3.35 $0.00 $2,000 3.1% $67,000

Since TZA is a 3x ultra-short, if the Russell falls 17%, TZA will rise about 51% (they don't work perfectly) from $9.66 to $14.58 and that would make our 200 $7 calls (100 contracts per call) worth $151,600 from the current net of $58,660 so this spread is offering us net $92,940 worth of protection agains a 17% correction.  

That's just one of our hedges, of course, our SQQQ hedge is much bigger and we also have a fun spread on (TNA), which is the ultra-long Russell ETF – but we're shorting that with a put spread as TNA would lose 51% on the same 17% drop in the Russell.  That one looks like this:

TNA Long Put 2020 17-JAN 65.00 PUT [TNA @ $60.61 $0.00] 40 4/17/2019 (247) $43,000 $10.75 $1.75 $11.19     $12.50 $0.00 $7,000 16.3% $50,000
TNA Short Put 2020 17-JAN 35.00 PUT [TNA @ $60.61 $0.00] -40 2/15/2019 (247) $-8,800 $2.20 $0.13     $2.33 $0.00 $-520 -5.9% $-9,320

This spread pays up to $120,000 and has a curent net of $40,680 so $79,320 of protection on this hedge.  We're already making money ($6,660 and $6,480) on both positions but, on the whole, we'd rather lose the $100,000(ish) we invested and have our Long-Term Portfolio positions hold their gains for the year.  Hedges are like life insurance – you pay for it every month but you HOPE you don't get to cash it in…

Since the Russell is in DEEP TROUBLE, if we're going to add a hedge, it will be another TZA and it doesn't have to be complicated as it's either going to work or it won't so a short time-frame will suffice and I notice, with TZA at $9.66, that the July $8 calls are only $1.75 so just 0.09 in premium on those and we can offset them by selling some covers like the July $12s at 0.35 so we net into the spread at $1.40 and it pays $4 for a $2.60 (185%) gain if TZA is over 12 in 65 days (July 19th expiration).

Since we already have 200 uncovered TZA calls in our STP, however, we can be more clever than that and add 100 of the TZA July $8 calls for $17,500 and offset that cost by selling 50 of the TZA 2021 $13 calls for $2.10 ($10,500) so it reduces the net cost of the July $8's to $7,000 (0.70) and we can then take those off at $12 with $40,000 for a $33,000 (471%) quick profit and all we've done is capped the gains on 1/4 of our 2021 longs – a very good swap!  

That's one of the advantages to always having those long-term hedges working for you.  We ended up rolling out to 2021 because the market went relentlessly up so we kept moving the goal-posts on our hedges but, now that we have that back-stop, we can begin generating cash by leveraging our long position – using our insurance to recoup some of the money we've put into it.  Every good portfolio manager knows how to navigate these hedging strategies and you should want to learn to be a good manager of your own portfolio!  

I'd like to think a Trump tweet will save us but Trump is like the boy who cried "wolf" a few too many times and even the idiot dip-buyers are finally realizing the President is totally full of crap.  The next awkward realization will be that the Fed is kind of powerless now as rates are already insanely low and they already have a $4.5Tn balance sheet so they simply can't do the things they used to do to prop up the markets.  Without the Fed backstop – we are in DEEP TROUBLE! 

Retail Sales came in a bit disappointing this morning, down 0.2% vs up 0.2% expected by leading economorons and there was no way to spin it as it was weak across all 4 measurements (ex-auto, ex-gasoline, control group).  Usually they can find one of those sets to point to as "encouraging" but not in April – and that was BEFORE Trump raised tariffs that cause US Consumers to pay more money for the same items, which is a pure economic drain on their disposable income.

Trump is also threatening to put tariffs (he loves tariffs) on European cars as of Friday and that will send the EU markets into a tailspin and, of course, bring about retaliation against our own auto sector – so we have that to worry about over the weekend.  This morning, the IEA cut their Demand Outlook but tempered their view by saying the potential for supply disruption could quickly outweigh the decrease in demand.  We're still long on gasoline (/RB) and we'll see the EIA Inventory Report at 10:30 but API showed a massive 8.6Mb build in Oil (/CL) last night with Gasoline up 600,000 and Distillates up 2.2Mb – a very ugly report if EIA confirms it.

We will go over the oil report as well as our hedges in our 1pm (EST) Live Trading Webinar – so come join us there!  

Meanwhile, we're going to keep an eye on our bounce lines and see which way things go but, at the moment, it's not looking good as only the Dow is above the -5% line and, if the Dow fails 25,200 – we can expect ALL of the indexes to move towards a 10% correction by next week and that's another 1,260-point drop in the Dow – very, very ugly!  

  • Dow 25,200 is the 5% line and the bounce lines are 25,450 (weak) and 25,700 (strong)  
  • S&P 2,860 is the 5% line and the bounce lines are 2,875 (weak) and 2,890 (strong)
  • Nasdaq 7,475 is the 5% line and the bounce lines are 7,540 (weak) and 7,605 (strong) 
  • Russell 1,550 is the 5% line and the bounce lines are 1,565 (weak) and 1,580 (strong)


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  1. I guess Tuesday is now meaningless! Actually, it seems that everyday is meaningless with markets detached from reality. We have an ongoing trade war that the WH is not in a rush to strop because it helps with the deficit, we have provocation with Iran that could lead to another "real" war and the impact it would have on the world economy and we have increased political turmoil including in the US. These don't sound like bullish factors!

  2. Good morning all!

    It's webinar day! Join Phil at 1pm, here:

  3. Good morning. Phil, what would you recommend as a new hedge? TIA!

  4. Good Morning!

  5. Good morning!  

    More bad news:

    • April Industrial Production: -0.5% to 109.2 +0.0% consensus, +0.2% prior (revised).
    • Capacity Utilization 77.9% vs. 78.7% consensus, 78.5% prior (revised).

    That was very unexpected. 

    Volume on sell-off was pretty low.  While that's not a great sign (could be a lot more people who want to sell but can't find buyers), it means we can pop right back up on a little good news.  The trick is finding the good news – mostly it's earnings.  Companies are making money (see M) and, if F'ing Trump would just leave things alone – things would probably be great (again).  

    New Hedge/Robert – Well I'd go with the July TZA spread above and offset with short puts on something you don't mind buying if the market drops 20% like this:

    • Buy 50 TZA July $9 calls for $1.30 ($6,500) 
    • Sell 50 TZA July $11 calls for 0.65 ($3,250) 
    • Sell 10 M 2021 $20 puts for $4 ($4,000) 

    So that's a net $750 credit on the $10,000 spread so the upside potential is $10,750 if the Russell falls and the worst case scenario is you get $22,000 worth of M stock (currently) for net $19,250.

    If you want a bigger hedge, I'd suggest selling more than just one put so you're less likely to get burned by one company going lower than we thought.  Anything still in the LTP is a good candidate as we've already purged the things we aren't happy to ride out a downturn with.

    M/DC – What a gift that you still get to buy it cheap after those earnings!  

    Looking into 2019, Macy's said it sees same-store sales rising by 1% for the full year, with flat net revenues and diluted earnings per share in the region of $3.05 to $3.25, supported by about 25 cents per share in asset sale gains.

    "Macy's is off to a solid start this year, delivering our sixth consecutive quarter of comparable sales growth and making progress against the North Star Strategy. As an omnichannel retailer, we are focused on growing our customer base by providing a great experience across all channels and taking market share category by category," said CEO Jeff Gennette. "Our brick & mortar sales trend improved sequentially in the first quarter, supported by the Growth50 stores and Backstage. We had another quarter of double-digit growth in our digital business, and mobile continues to be our fastest-growing channel."


    "We are pleased with the progress we are making on our strategic initiatives as they continue to drive top-line growth, keeping us on track to reach our 2019 goals," Gennette added. "We believe these initiatives, coupled with productivity improvements, position our company well for long-term profit growth."

    Actually, in the STP, let's sell 25 of the M 2021 $20 puts for $4 ($10,000) and we'll use it to offset some hedge later if 25,200 doesn't hold.  

  6. GOP senators raise alarms, criticize Trump as U.S.-China trade war heats up

  7. Saudi Arabia says its oil pipeline was hit by drones

  8. UBER- 

    Uber underwriters worried about the IPO deployed unusual ‘naked short’ tactic to support the stock

    I don't care about UBER's IPO in particular but am curious about these stories surrounding the IPO regarding naked short selling to "'boost the price". Apparently this tactic is legal in these circumstances although generally banned since the big crash (2008-9). Do you know how this works? I get that selling shares one does not have could , under certain conditions, provide some price support but if successful would require the short seller to buy back at higher price , i.e., a losing trade. 

  9. Things turning up as Trump backs off EU Auto Tariff threat.  

    Dollar took a sharp turn down too – I assume on some Fed comment.

    That's why we wait for clear signals before spending more on hedges (though not on the hedge of the hedges (M), which was well-timed).  

    /CL $61.30 and /RB $1.98 ahead if EIA.  /RBN19 still under $1.96 and I still say it will make 0.09 or more by next week.

  10. Oil up 5.4Mb, Gasoline down 1.1Mb and Distillates up by 100,000 so much better than API, especially for /RB so I'm happy with our play. 

  11. See, easy money!   Still going, of course. 

    • EIA Petroleum Inventories: Crude +5.4M barrels vs. -0.8M consensus, -4.0M last week.
    • Gasoline -1.1M barrels vs. -0.3M consensus, +0.6M last week.
    • Distillates +0.1M barrels vs. -1.0M consensus, -0.2M last week.
    • Futures -0.66% to $61.37.

    • Automaker stocks perk up after CNBC reports the Trump administration plans to delay auto tariffs by up to six months as negotiations continue.
    • German automakers are seeing the biggest bounce off the development, with BMW (OTCPK:BMWYY), Volkswagen (OTCPK:VWAGY) and Daimler (OTCPK:DDAIF) all up roughly 3% on European exchanges.
    • Any de-escalation of tariff tension is also positive for Ferrari (RACE +1.2%), Toyota (TM +0.9%), Honda (HMC +0.5%), General Motors (GM +1.1%), Ford (F +1.1%), Tesla (TSLA -0.4%), Nissan (OTCPK:NSANY +0.3%), Hyundai (OTCPK:HYMLF) and Tata Motors (TTM -4.8%).

  12. Phil,

    Are you cashing out /RB or riding it into next week?

  13. He’s accused of war crimes and torture. Uber and Lyft approved him to drive.

  14. I cashed out RB at 1.99. Too much gain for me. 2000$ in one day. One pos.

  15. /RB/Japar – Next week as it's an unusually strong premise coming into holiday weekends and being low in the channel.  Unless we hit $2, of course – not going to turn that down – will be about $3K profit on two contracts.  

  16. /RB/Kgab, Japar – To be clear, I'm playing /RBN19, if I were playing /RB, I certainly would have taken that off the table.  In any case, it's a bit much to expect any instrument will continue to rise past it's 2nd pivot point (R2) in a single day without game-changing news and a small draw in inventory is not that – it just didn't change my holiday-driving premise in a negative way – so I'm sticking with my longs looking for $2.05 next week (but if I get $2 now – I'll be happy to lock in half my gains and start a new long over $2 with tight stops below).

  17. Yeah. I played RBN19 too as you. 

    thank you Phil, it was nice…

  18. What I like about /RBN19 is that, even if it fell to $1.90 – I'd be kind of happy to DD and have 2 at $1.93ish as I still firmly believe we'll see $2+ by July 4th, if not next week – so I'm willing to take a hit and keep going on this one.  

  19. Phil,

    Last week when you said, doom… I cashed out some of my big winner long leg of my spreads. And I set a stop price on the short calls. 
    My thought was, that it will work as a free hedge. 

    Only problem was the bigger violatily and that why the short calls became more expensive, but most of the cases the price went more faster down than the violatily up.
    Is it a good practice or not? 


  20. OK, now it's too much money on /RB so I'm looking for any excuse to stop out – only $100 away from goal would be dumb to blow.   And it's gone

    Colbert was so funny but it's so sad…

    Doom/Kgab – Well you went gung-ho bearish, I was talking about just cashing out.  Still, I would ignore the VIX effect and concentrate on whether or not the stocks you have short calls on have gone lower or not.  Make sure your losses are/would be under control if we pop back to our highs on a sudden trade deal.  It's an excellent practice for a seasoned trader who's able to watch things carefully and TAKES SOME OFF THE TABLE as things go forward.  In other words, if you have 10 winners – take 2 down by the close and tomorrow, if you have 8 winners – take another 2 off…  It's bonus money and you never know how long these things will last as it's all hinged on trade, which can reverse quickly (even though we don't think it will – it still CAN).  

    Damn, /RB going higher but I'll play again if /RBN19 crosses over $2 with tight stops below so, at worst, I'll miss 0.005 of the so far 0.07 rally where I already took 0.065 off the table.  

  21. Speaking of nice wins, /HG with a huge pop!  Happy with those gains too.

    Done with Soy now (still like the ETF)

    Now we can flip back to /NG long (/NGV19):

    Oh yay, /RB turned down – turned out to be a perfect exit – I love it when that happens! cheeky

  22. FAA seems to be saying BA fix is good and planes should be cleared by next week.

    In the LTP, I don't mind selling 10 BA 2021 $280 puts for $21.45 ($21,450).

  23. Tyson’s Alternative Meats Can Become `Billion-Dollar Brand’

  24. Trump Poised to Delay Auto Tariffs Amid EU, Japan Trade Talks

  25. World Economy Rebound Thrown Into Doubt by Escalating Trade War

  26. Wow, I forgot to do portfolio reviews – I thought expirations were next week!  Lots of homework for me!

    • Boeing (BA +1%) bounces higher even after receiving some rough treatment at a hearing of the aviation subcommittee of the House Transportation and Infrastructure Committee, whose chairman said the Federal Aviation Administration has a "credibility problem" with its safety certification of the 737 MAX aircraft.
    • Delegating the safety certification process to third parties is "not working as Congress intended," according to the panel chairman, Rep. Rick Larsen.
    • Committee members also voiced frustration at the progress of their oversight investigation into the company, the grounded 737 MAX aircraft and the FAA's approval of the airliner to enter service; the transportation committee chairman said the FAA has only begun to turn over documents and Boeing "has yet to provide a single document."
    • Acting FAA chief Dan Elwell said he expects Boeing to submit a software fix in the "next week or so" for the MAX and is concerned by the company's lengthy delay in disclosing a software anomaly.
    • Elwell said Boeing should not have waited 13 months to tell the FAA that it inadvertently made an alarm alerting pilots to a mismatch of flight data optional on the 737 MAX, instead of standard as on earlier 737s.
    • (OSTK -15.1%) falls sharply on more insider sales by CEO Patrick Byrne.
    • Byrne sold 500K shares this week split between a sale of 250K shares at $13.33 on May 13 and 250K shares at $12.84 on May 14.
    • Shares of OSTK dropped to a multi-year low of $10.65 earlier this afternoon.
    • SEC Form 4
      • Ford (F +1.3%) says it will recall almost 273K Ford Fusion and Ranger pickup trucks in North America due to an issue with a transmission shift cable that increases the risk of vehicles rolling away.
      • The company confirms that it is aware of three reports of property damage and one injury report potentially related to the issue.
    • Layoffs are under way across Disney (DIS +1%) and its Fox properties, Variety reports.
    • The job cuts have been widely expected after Disney wrapped its deal for Fox's media assets, creating heavy redundancies on the entertainment side. Some cuts began in mid-March and rose to the senior VP, executive VP and president level.
    • The Los Angeles Times reported that more than 3,000 cuts were likely to come from the combination.
    • Google is up more than 4% and Facebook more than 3%, helping the Nasdaq to a 1.25% advance less than two hours before the close.
    • The S&P 500 is up 0.8% and the Dow 0.65%.
    • Markets were goosed earlier this morning on a report the White House will delay implementation of auto tariffs against the EU.
    • The 10-year Treasury yield is off three basis points, helped along by a soft retail sales report for April.
    • General Electric (GE -0.5%) expects "very significant negative cash flow" from its core power plant business this year and does not anticipate large improvement in the unit's cash flow margins for at least three years, CFO Jamie Miller said today at a Goldman Sachs investor conference.
    • GE expects some power plant orders it booked in Q1 to be spread more throughout the year, Miller said, suggesting the relatively strong quarter did not signal a turnaround in the unit.
    • Some investors see signs of improvement in GE's ailing power business but others see problems; J.P. Morgan's Stephen Tusa says a tally of orders by GWs shows erosion in GE’s market share.
    • Miller also tempered expectations in his comments today, saying GE’s power business would take 2-3 years to work through lingering pension costs, unprofitable contracts and liabilities from the 2015 acquisition of Alstom.
    • General Electric (GE -0.3%) tips lower after noted bear Stephen Tusa at J.P. Morgan states the obvious that the company's power business is still struggling but says GE is sugar-coating this in communications with investors.
    • "We believe a full accounting of the situation with a closer look at the data, even a rudimentary review, supports our view that GE is indeed losing market share in a stable" heavy-duty gas turbine market, Tusa writes, and "we see nothing here to change our negative view on Power, more so evidence of a company that appears to manage to headlines rather than on-the-ground fundamentals."
    • Tusa says GE's 4.5 GWs in Q1 gas turbine orders was aggressively promoted by management but a closer look shows externally sold utility grade HDGT orders of ~1 GW were well below both Siemens and MHI (~2.5 GWs each) and far from a signal of a change in trend.
    • "Beyond this cut of the data, however, the dynamics here raise concern around communications from a company that continues to get material benefit of the doubt around credibility, though appears to us to be stopping short of telling the whole story," according to Tusa.

    • Despite polls indicating broad citizen support, New Jersey lawmakers have shelved a bill legalizing marijuana in the state due to the lack of votes for passage. Instead, they plan to ask voters in November 2020 to amend the state constitution to make weed legal.
    • In the meantime, they are advancing two related bills, one expanding the state's medical marijuana program and the other expunging records of residents with past convictions of possessing up to five pounds of pot.

  27. There's just no news justifying a 1.4% in the Nasdaq (7,525 on /NQ) so I shorted it but so far, so bad.  AAPL is up 1.3% but the other indexes are up less than 0.5% and getting rejected at their -5% lines on /ES and /RTY and the strong bounce line on /YM – so why should the Nas be so excited? 

  28. Trump Almost Always Folds

  29. Phil – CSCO earnings tonight, will you continue to hold short?

  30. LQMT/Phil – Still a fan? It's back to it's historical low, buy more or bail? They bled a lot of cash last year and have less revenue than most individuals on this board but they have tons of cash still in the bank.

  31. CSCO/Deano – I'm certainly not short on CSCO.  Not sure we have any position.  

    LQMT/MrM – I do like the tech but they haven't done much with it.  They are "bleeding" cash because they took on a big investor who gave them the money to ramp up production so I think we can give them another year (won't run out of money).  

    Nice downturn at the end saved my Nas shorts but disappointing.

  32. Phil – I was thinking of CSCO's affect on the market as a whole. Might be less of a bellwether than it used to be though.

  33. Fans of Star Trek, we are getting close to the the universal translator model:

    Speaking another language may be getting easier. Google is showing off Translatotron, a first-of-its-kind translation model that can directly convert speech from one language into another while maintaining a speaker's voice and cadence. 

  34. LQMT – Has the singular distinction of sporting a net profit margin of -700%.