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Weakening Wednesday – Markets Turn Down Ahead of the Fed

Wheeeee, isn't this fun? 

It sure is when you are prepared.  We added a bunch of hedges on Friday to our Short-Term Portfolio and the two short Russell Futures (/RTY) contracts we picked up in yesterday morning's PSW Report are already up $5,000 and that's plenty for us to make a non-greedy exit at the 2,300 line as that's bound to be a little bouncy in the very least.  Congratulations to all who played along at home!  

Remember, I can only tell you what is likely to happen and how to profit from it – the rest is up to you.

When you make $2,500 per contract you need to protect your gains.  As we neared 2,300 yesterday, it was a 50-point fall so the weak bounce would be 10 points higher (20% of the fall), according to our fabulous 5% Rule™ and a strong bounce would be 10 more points to 2,320 so that became our stop and we didn't spend more than 5 minutes above that line so the stops didn't trigger but now that we're hitting goal at 2,300 – there's no reason to be greedy and we look for a "fresh horse" to bet on – an index that hasn't fallen like the others – yet.

   

As you can see, the Dow has fallen less than the other indexes in this sequence so now we pick lines and, in this case we have, of course, 2,300 on /RTY, 13,000 is a great line on the Nasdaq (/NQ) and we'll use 3,940 on /ES and, if two out of 3 of those fail, we can short the Dow (/YM) as our lagging indicator and that would then be confirmed by our 3rd cross lower and then, if ANY of our indexes poke back over their lines – we get out quick as our premise is only IF all the indexes keep falling we take the fresh horse out for a ride.  

/YM is trading at 32,750 at the moment and 32,800 is a good enough shorting line that I'd give it a toss if at least one of our other indexes is below their line but, otherwise, we'll just see if we get strong or weak bounces – using the same calculations across the board.  

Of course, we don't do this in a vacuum.  Our plan since last week was to short into the Fed Meeting (announcement today at 2pm with Powell speaking at 2:30 – all covered during our Live Trading Webinar) as we can't imagine what more the Fed can say to keep this fantasy market believing that 35 times earnings is the new normal for the S&P 500.  Very simply, that's a 2.8% annual return and do you know what else pays a 2.8% annual return?  30-year notes at 2.425% and those are risk free (in theory – I wouldn't touch them with a 10-year pole).  

Still this is where classical economic theory comes into play and money will gravitate to the safer path over time and it was all fun and games when the 30-year was paying 1.5% in December and investors literally had no choice other than to put their savings in the 2.8% market but now that the 30-year is paying 2.425% – how do you justify moving money instead into outrageously overpriced stocks?  

Let's play a game to illustrate this point.  In 1982, we had another insane Republican in power who decided that deficits didn't matter and taxes were only for poor people.  Reagan had only been in office for two years but the 30-year note had shot up from 13% (which was double where we were when Nixon took us off the Gold Standard) to 18% before Volker finally stepped in and began attacking the monster.  Fortunately our National Debt at the time was only just crossing $1Tn so 18% interest was "only" $180Bn a year but, by the time Reagan left office, he had almost tripled it to $2.8Tn – which would have been the end of our Nation had the Fed not stomped down rates by 1989. 

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Clinton slowed down the deficit growth by 2000 but then the country switched horses and we went back to giving tax breaks to the wealthy and, guess what?  By 2005 we hit $8Bn (up over 50% in 4 years) and by 2009, after 8 years of Bush we were up 50% again at $12Tn – over 100% under that administration.  Obama took over during the 2nd Bush Financial Meltdown and he too almost doubled the deficit to $20.2Tn in 2017 and, since then, Trump has added 50% and Biden is not slowing the trend in his first year. 

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Does this seem dangerously out of control and unsustainable to you or am I just an old fogey who doesn't understand Modern Monetary Theory?  That's how I feel these days and I guess I'm being a stick in the mud when people just want to sit back and enjoy the rally but I say BEWARE and, since it is the Ides of March – I think you should take that advice…

We'll see what kind of rabbit Powell and the Fed can pull out of their hats this afternoon but we've got our $1.9Tn and rates are already as low as the Fed can get them so attempting to do more would only highlight the fact that the Fed can no longer control rates in an infaltionary environment so they have now switched to a policy of calling inflation "transitory" so they can pretend they don't need to do anything about it rather than try to do something about it and have people see how powerless they now are.

So what else do we have, Infrastructure?  Only over McConnell's dead body, apparently.  Infrastructure helps ordinary people and unless we can find a way to funnel that spending into the pockets of the top 0.01% – the GOP is going to stand firmly against it.  This economy, such as it is, has been built on constant stimulus.  Take that stimulus away and what do we have?  

Sadly, we're going to find out…

 


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  1. Good morning everyone. Happy St. Patrick's Day. Here is the link to today's webinar

    https://attendee.gotowebinar.com/register/6779778226543087373


  2. Here’s what NFTs are — and what they could do for the music industry, artists and fans



  3. German economist panel cuts 2021 growth outlook to 3.1%






  4. Futures / Phil – Are the shorting points in today's post for the Futures contract expiring in March or June?


  5. Good morning!

    Futures/Jij – I just trade the front contracts as they are more active, currently it's the Junes.  Whatever ToS defaults to on any given day.  

    Oil with a small net build:

    • EIA Petroleum Inventories: Crude +2.4M barrels vs. +3.0M consensus, +13.8M last week.
    • EIA Gasoline +0.5M vs. -3.0M consensus, -11.9M last week.
    • EIA Distillates +0.3M vs. -3.4M consensus, -5.5M last week.
    • Futures (CL1:COM -0.7%)??

    ?IEA seems to agree with me now:

    • European Union car registrations reported lowest February on record since 2013 of -19.3% to 771,486 units, followed by 24% decline in January, as COVID containment measures and uncertainty continue to weigh heavily on demand.
    • Registrations in Italy -12.3%, Germany -19.0%, France -20.9% and Spain -38.4%.
    • European Union February registration -17.4% for Volkswagen (OTCPK:VWAGY), -21.7% for Stellantis (NYSE:STLA), -27.9% for Renault (OTC:RNSDF). -18.7% for Hyundai (OTCPK:HYMLF), -9.1% for BMW (OTCPK:BMWYY), -19.3% for Daimler (OTCPK:DMLRY), -19.5% for Ford (NYSE:F), -11.4% for Toyota (NYSE:TM), -43% for Honda (NYSE:HMC), -2.6 for Volvo (OTCPK:VOLAF), -36.5% for Nissan (OTCPK:NSANY)  and -22.4% for Mazda (OTCPK:MZDAY).

    SPACs have raised $83.4B so far this year, already surpassing all of 2020

    • SPAC IPOs have already raised some $83.4 billion during 2021’s first 2-1/2 months – more money than the industry garnered in all of 2020, which was itself a huge record year, new research shows.
    • Industry tracker SPAC Research found that a $200M initial public offering from Build Acquisition Corp. pushed 2021’s total volume of SPAC IPOs above 2020’s total, as per Reuters.
    • SPAC Research added that 2020’s total was already six times higher than the industry’s previous record.
    • Other special purpose acquisition companies that closed IPOs in the past 24 hours include Athena Technology Acquisition Corp. (ATHN.U), Golden Arrow Merger Corp. (GAMC.U), Kadem Sustainable Impact Corp. (KSIC.U) and KKR Acquisition Holdings I Corp. (KAHC.U).
    • Value stocks have been building up high levels of momentum as rising yields have been leading investors away from growth-related names.
    • The Nasdaq 100 is down 6.29% from its past month all-time high and the U.S. 10-Year Treasury yield is at its highest mark since February 6th, 2020 at 1.66%
    • March 23rd, 2021 will mark the one-year anniversary of the MSCI AC World Value Index’s eight-year low in accordance to Bloomberg. Additionally, since November 6th, 2020, the global value stock instrument has risen 22% showing signs of strong momentum.
    • The MSCI ACWI Value Index captures large and mid-cap securities displaying overall value style features across 23 developed markets countries and 27 emerging markets countries.
    • Momentum into value has been a theme of late but the recent Biden victory and his calling for additional stimulus had investors shift their attention towards value-related names and away from high growth.
    • Additionally, now that the $1.9t stimulus plan has hit the markets it has made investors roll over even harder into value-related names. 
    • Investors that are interested in learning more about value-based exposure may want to examine a few exchange traded funds that offer value. Some ETFs are as follows: iShares S&P 500 Value ETF (NYSEARCA:IVE), Vanguard Value ETF (NYSEARCA:VTV), and Invesco S&P 500 Pure Value ETF (NYSEARCA:RPV).
    • Below is a chart of how these value ETFs faired against the S&P 500 over the past 6 months.

    • Within the next two weeks, it is likely the SAFE (Safe and Fair Enforcement) Banking Act will be reintroduced in the House of Representatives, a piece of legislation that can benefit multi-state operators (MSOs), BTIG says in a note.
    • Based on discussions with contacts in Washington, the firm says that reintroducing the legislation prior to April 1 means it will likely bypass committee hearings, speeding up a vote on the measure.
    • Because it has bipartisan support, BTIG believes the SAFE Banking Act can potentially pass both chambers of Congress by late summer.
    • The legislation potentially benefits MSOs in several ways, according to BTIG: the ability to deposit cash in U.S. banks; the ability to transact in credit cards instead of just cash which can translate to higher spending; increased public safety; and increased public health it would reduce the exchange of dirty cash.
    • "Separately, the MORE [Marijuana Opportunity Reinvestment and Expungement] Act could also get reintroduced by April 1st, but would likely have a much more difficult path to passing in the Senate," according to the note.
    • U.S. multi-state operators this morning: MedMen Enterprises (OTCQB:MMNFF) -4.7%; Curaleaf Holdings (OTCPK:CURLF) -0.9%; Acreage Holdings (OTCQX:ACRHF) unchanged; Harvest Health & Recreation (OTCQX:HRVSF) +1.2%; Cresco Labs (OTCQX:CRLBF) -0.6%; Green Thumb Industries (OTCQX:GTBIF) -1%.
    • American Resources (NASDAQ:AREC) is moving forward with the commercialization of its rare earth element technology process chain with the building of a 2kW rare earth processing electrolysis facility. AREC +32% premarket to $5.62/share.
    • It will utilize the previously announced acquired technology and patents from Ohio University in addition to its partnership with sponsored research programs and Dr. Gerardine Botte.
    • The design of the initial facility has a total capex of less than $1M and is in the form of a mobile application that can be transported from internal and external sites to process and evaluate the specific fly ash and coal-based feedstocks at each location.
    • The facility will enable American Resources to determine the specific economics of each feedstock site and the revenues that will be generated from the critical and rare earth elements, the fly ash-to-concrete market, and the recovered carbon and the hydrogen generated during the process.
    • Last month, President Biden signed an executive order mandating a 100-day review of critical product supply chains in the U.S., focused on semiconductors, active pharmaceutical ingredients, advanced batteries and key minerals and materials.
    • February Housing Starts-10.3% M/M to 1.421M vs. 1.570M expected and 1.584M prior (revised from 1.580M).
    • On a Y/Y basis, housing starts are down 9.3%.
    • Single-family housing starts, at a rate of 1.040M, falls 8.5% from the revised January rate of 1.136M.
    • Building permits: -10.8% to 1.682M vs. 1.750M expected and 1.886M prior (revised from 1.881M).
    • Still, that's up 17.0% from February 2020's rate of 1.438M.
    • Single-family authorizations were at a rate of 1.143M, 10.0% below the  revised January rate of 1.270M.
    • Privately owned housing completions in February were at a seasonally adjusted annual rate of 1.362M, 2.9% above the revised January estimate of 1.324M and 5.0% above the February 2020 rate of 1.297M.
    • Single-family housing completions, at a rate of 1.042M, is up 2.8% from the revised January rate of 1.014M.

  6. Armchair trade PNW buy stk at 80.10 sell Oct 21 strangle 80/75 for 9.20 Combined monthly return 1.9%. Stk yield is 4.13% and has a PE of 16.

    52 month range 60 to 92


  7. FB is not too bad for a tech stock at $278, which is $795Bn.  They made $30Bn last year and project $40Bn in 2022 and to some extent, of course, the pandemic is making them look better with everyone stuck at home but FB does a lot of stuff (that makes regulators nervous) that I think paints a path to a bright future.  

    With options, we don't have to regret not buying them for $200, we can still buy them in the LTP for $200 by selling 3 2023 $230 puts for $28.50 ($8,550) and that puts nice money in our pocket and I want to buy 5 2023 $260 ($65)/300 ($47) bull call spreads at $18 ($8,000) and sell 2 June $310 calls for $9 ($1,800) so the whole thing is a net $2,350 credit on the $20,000 spread and our worst case is owning 300 shares at net $225.30 ($67,590), which is a 20% discount to the current price.

    Ideally, we'll sell more short calls during the 674 days we have to play and we can't really get burned to the upside as we're perfectly happy to buy more longs if FB moves higher since that would also mean we could put stops on the profitable puts and we'd be using only a small fraction of an allocation block to maintain a FB move over $300.  

    Margin on the puts is just $4,132 so it's an efficient trade but, of course, that would go higher if FB goes lower – keep that in mind.

    It will, on the whole be disappointing if all we make on this trade is $22,350.



  8. Producer Price Indexes Latest Numbers


  9. Let's sell 10 NRG 2023 $28 puts for $4.50 ($4,500) in the LTP per Brendan.  


  10. Holy shit. Look at the dollar drop!


  11. Powell not speaking til 11:45 tomorrow 


  12. Nice upswing in gold and miners after the fed comments. 


  13. Dollar drop/Dave – Great market lifter.  That's Powell doing his job – QE Forever! 

    That's why we take our profits off the table (and the same goes for our portfolios!).

    Gold/Rick – Same deal, debasing the currency is great for all the alternatives.