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Monday, March 18, 2024

Record High Wednesday – Will the Fed Pop Us or Drop Us?

We are so close – again.

Back on May 3rd, I explained how the market was confusing efficiency for a strong economy, noting that Corporations can make more money while the people starve.  At the time, I noted that materials sector performance looked too weak for a proper bull market and, for the quarter, we're still in very bad shape with Petrolum down 9%, Natural Gas down 19% and Copper down 7.5% – those are not signs of a strong recovery.

Speaking of Copper (/HGZ19), yesterdsay morning's long trade idea from our PSW Report (subscribe here if you don't want to miss our trade ideas) with contracts jumping from $2.64 to $2.70 for gains of $3,000 per contract before lunch!  Our options trade idea for Freeport-McMoRan (FCX) is slower-moving but that stock gained 1% yesterday and will really take off if there's progress with China.

Meanwhile, the indexes blasted higher as Trump tweeted out that he will be meeting with China's Xi at the G20 this weekend and, although that's kind of the point of the G20 – people are very excited about it.  Also, as noted in yesterday's Morning Report, Draghi fever spread across the markets and anticipation couldn't be higher that our Fed will also signal that it's ready to cut rates, buy bonds, buy assets – whatever it takes to keep the rally going becuase what on this Earth is more important than making rich people richer?  

Nonetheless, we are urging caution into the Fed Report and yesterday, in our Live Member Chat Room, we discussed a good 3-month hedge to take us, not just through today but through the summer:

Hedge/QC – Two factors in selecting a hedge is which index is ahead of the others (that's what the Big Chart is for) and which index is most likely to fail.  From the Big Chart, the Dow is now back to the May high S&P close and Nas lagging a bit and RUT lagging a lot so Dow or S&P and BA may come down more and drag the Dow and others if the trade talks blow up so I still like DXD, which is a 2x Ultra-Short for the Dow so a 10% drop in the Dow (back to June lows) would be up 20% on DXD which is $27 so $27 x 1.2 = $32.40 so that's our target and now we consider out time-frame and you'll be gone for July and the next DXDs are Oct after July so now we know what to play:

  • Sell 10 TAP 2021 $47.50 puts for $4.40 ($4,400) 
  • Buy 30 DXD Oct $25 calls for $2.75 ($8,250) 
  • Sell 30 DXD Oct $32 calls for 0.80 ($2,400) 

That's net $1,450 on the $21,000 spread so there's $19,550 (1,348%) upside potential against your cash outlay.  You are obligated to own 1,000 shares of TAP at $47.50 ($47,500) if it goes lower but it's nice to have a hedge that's $2 ($6,000) in the money to start and TAP at $54 has a 12% cushion before the puts kick in.  

We like Molson Coors (TAP) because of a partnership they have with Hexo (HEXO) to make THC-infused beer.  We think HEXO is too risky but TAP is a great bargain stock we wouldn't mind owning and selling the 2021 $47.50 puts pays us $4.40 now in exchange for a promise to buy TAP for net $43.10 between now and Jan, 2021.  The stock is at $54.11 now so that's $11 (20%) below the current price – that's our worst case.  

We like to use short puts to offset the cost of our hedges as we're getting paid to buy stocks we'd like to own at a discount (see "How to Buy a Stocks for a 15-20% Discount").  It's a very effective strategy because, if the market goes down enough for TAP to drop 20%, the hedge is likely to pay us $19,550 – covering 40% of the cost of the TAP stock we'd be assigned.  Of course, the money is to hedge our WHOLE porfolio, not just the one stock so it's important to pick strong stocks that are likely to recover as your offset.

Another hedge we have in our Short-Term Portfolio, whose job it is to protect our Long-Term Portfolio, is shorting the Ultra-Long Russell ETF (TNA), which is back at $60 but our hedge is still holding up well for the moment:

TNA Long Put 2020 17-JAN 65.00 PUT [TNA @ $60.88 $1.92] 40 4/17/2019 (212) $43,000 $10.75 $1.03 $11.19     $11.78 $4,100 9.5% $47,100
TNA Short Put 2020 17-JAN 35.00 PUT [TNA @ $60.88 $1.92] -40 2/15/2019 (212) $-8,800 $2.20 $-0.39     $1.82 $-0.09 $1,540 17.5% $-7,260

TNA is a 3x long ETF so, if the Russell were to fall 10%, back to 1,400, then TNA should drop 30%, to $42.62 and that would put our $65 puts $22.38 in the money and the net $34,200 spread we entered would be worth $89,520 for a gain of $55,320 (161%) and we're already up $5,640 (16.5%) but there's plenty of room to run so still good for a new hedge.  The Russell has been a lagging index in the recovery from the last 10% dip and is now resting right on the 50-day moving average so it's going to be a leading indicator today:

Not only is Fed easing now baked into the market but President Trump yesterday threatened to "demote" Fed Chair Powell if he doesn't like the rate decision.  Of course, demoting Fed Chairs is not a thing, but try telling that to people watching Fox news.  Bloomberg News reported Tuesday morning that the White House had looked into demoting Powell in February and Trump was asked if that's still his intention to which the President replied "Let's see what he does" and that Trump wants "a level playing field" with money-printing Europe.  

There would be nothing more ridiculous than squandering a rate cut when there is no crisis, employment is full and the markets are at all-time highs but Trump is still running far, far short of Obama's first-term performance in Market Gains, Job Creation, Housing Index, Consumer Confidence, GDP Growth, Wage Gains, Business Confidence, Deficit Reduction, Foreign Policy,  Aprroval Ratings…  – so he needs a win SOMEWHERE!  

Yesterday we had a bit of success shorting the Dow BELOW (not above) the 26,500 line and, if the Fed disappoints (2pm), that could be an exciting play for the day.  26,550 was the high on the /YM Futures so that's the next shorting line if 26,500 holds but I really can't imagine what the Fed could say that would justify yesterday's rally.  

Speaking of justifications, OPEC is acquiescing to Russia's demands to move their meeting to July 1-2 in Vienna and OPEC will do ANYTHING to get the Russians to join them in cutting production – just in time to screw American drivers over the July 4th Holiday.  If you believe in OPEC+, you can play the September Gasoline Futures (/RBU19) long off the $1.65 line ($1.62 has been the lows so I'd plan to DD there for a $1.635 avg and stop below $1.60) or you can play the Gasoling ETF (UGA) and I'd go with:

  • Sell 10 UGA July $28 puts for $1.40 ($1,400) 
  • Buy 20 UGA July $27 calls for $1.70 ($3,400)
  • Sell 20 UGA July $29 calls for 0.75 ($1,500) 

That's net $500 on the $4,000 spread so $3,500 (700%) profit potential in just 30 days and your worst-case scenario is ending up long 1,000 shares of UGA at net $28.50 (assuming your spread is wiped out).  Trump wants the Dollar weaker, which is also good for Oil and Gasoline prices and OPEC certainly wants Oil higher and Tesla (TSLA) may collapse soon as Q2 deliveries end up disappointing people after all – all possible positives for UGA.

Well, there's a few ways to make money while we wait for the Fed to disappoint us.  

Be careful out there…

 

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