Phil's Newsletter

Failing Friday – Hedging the Dow for a 3,000-point Drop

Was it all just a dream?  

How much of the rally of the past two years will be erased on this correction?  The Dow has already fallen 3,000 points from it's height but it's not done.  Strong earnings from AAPL will help it today but it can't hold up the whole, overpriced index now that the value police have woken from their long slumber.  

It has literally been two years since valuations have mattered as 0% interest rates meant companies could borrow money for free to cover up mistakes and even to buy their own stock – if no one else wanted it.  Decreasing share counts made equities rarer (and made earnings seem larger) so, like BitCoin, demand outpaced supply – especially with fresh money coming in from the side as everyone wanted to play the stock market.  On top of that, there was stimulus money – TRILLIONS of Dollars in stimulus in a World where, the Economic Stimulus Act of 2008 (under Bush) was "just" $152Bn.

The amount of stimulus from our Government (and don't forget the Fed) over the past two years has been roughly $11Tn – $6Tn added to our National Debt and $5Tn added to the Fed's balance sheet.  Our GDP is only $20Tn so 1/4 of our GDP over the past two years has been stimulus.  Where are we going to be without it?  And, at the same time as the stimulus is removed, the Fed is cutting back the money supply.  They have to – they are now overcompensating for the overeasing they just did (maybe $11Tn was too much), which has now led to massive inflation.

a. When to Go to Walt Disney World - yourfirstvisit.netIn fact, yesterday's very impressive-sounding GDP growth of 6.9% (over last year's crap numbers) isn't so impressive when you consider that 7% of that comes from inflation.  This is not economic growth – this is price growth.  Yes you are getting a bigger salary but good luck filling up a 20-gallon tank for less than $75 and, if we still went to movies, how about those $15 tickets and $10 for a popcorn and coke?  Everyone is raising prices and rents are rising too – it's not a raise when all you are…
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Thursday Flip Flop – Futures Fake New Lows and Find a Bottom?

It's been a rough couple of weeks.  

The Nasdaq once again hit the 13,500 line last night, after hearing a hawkish Fed conference from Chairman Powell, which is exactly what we predicted would happen on Monday, when I said:

We were at 15,200 on the Nasdaq Thursday morning and our long-predicted correction target of 15,000 was a certainty but now we're "living on a prayer" that 600 points below 15,000 (14,400) is an overshoot of the rapid correction and not the first leg of the run to 13,500 – where we began Q2 of last year.  

13,200 is actually the 20% correction from 16,500 but the key line for the Nasdaq is 15,000 and 16,500 was 10% up from there and 13,500 is 10% down – that's what the above chart is measuring,  We will, on the whole, be LUCKY if the Nasdaq settles into a range around 15,000 but, in truth, it's likely we overshot the proper range by a mile and 13,500 may be the top of a proper range that centers around 12,000 – which would be a reasonable valuation for the index.  

When you are in a slide like this, you need to consider what is going to change the sentiment and, this week, we have a Fed Meeting on Wednesday but what is the Fed going to say that will help?  They have already said they were looking to tighten so reversing would be a sign of weakness and they already said not until March, so doing nothing won't help either.  I imagine they'll say they will take market conditions into account along with Labor and Inflation and that might calm things down a little, but will it reverse the slide? 

We have, in fact, tested the 13,700 line on Monday and, as of last night,…
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Wednesday Weakovery – Markets Bounce Ahead of the Fed

This is what we call a weak bounce:

The S&P 500 fell 500 points in 2022 (so far) and now it's bouncing 20% of that drop, which is 100 points.  According to our 5% Rule™, we look for 20% pullbacks from a rally or sell-off at each significant increment of 1.25%, 2.5%, 5%, 10%, 20% and 50%.  It's not very different from a Fibonacci Retracement but we adjusted to take into account computer trading – since Fibonacci Retracements govern natural growth cycles, not coded ones… 

And, as Asimov said:

Since emotions are few and reasons many, the behavior or a crowd can be

more easily predicted than the behavior of one person can. And that, in turn, means that if laws are to be developed that enable the current of history to be predicted, then one must deal with large populations, the larger the better. "

That's why our 5% Rule™ applies so well to indexes and actively traded large caps and commodities – but not so well to individual stocks – we need a better sample size to make more accurate predicitions.  That is another major flow in Technical Analysis – it does not take volume into account.  

14,700 is where the Nasdaq needs to be to get out of the Bear Set on our bounce charts and it's well below that at 14,400 – despite this morning's 250-point gain.  If the Nasdaq does clear 14,700, we will flip a bit more bullish but, for today, most likely we are still just watching and waiting – especially ahead of the Fed's firrst announcement of 2022…
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Testy Tuesday – Russell 2,000 Edition

The madness continues.

I don't have much that's new to say as I've said it all since Thanksgiving, when I warned that Omicron, Labor Unrest and Inflation were brewing a toxic combination, saying:

We're watching the Russell 2,000 closely this week as that index is down 10% from the highs and back to where it's been flat-lining all year.  2,200 is the line to watch and below that, there is not much support all the way back to 1,500, which would be a 33% correction from here – very unpleasant.  

So, if the Russell breaks, look for the other indexes, which are only about 2.5% off their highs, to begin catching up and that could get very ugly, very fast and that means we need to be very sensitive to signs of worsening news as a warning to add more hedges.  We went over the levels to watch on each of the indexes in yesterday's Live Member Chat Room.  

As you can see, the Russell has fallen 16.8% since November but that was not the high, the high for the Russell was 2,460 on November 8th and yesterday's low was 1,925, 21.7% off the high.  This morning we are testing the 2,000 line from below and, as before, which side of the line the Russell is on is likely to determine the direction of the markets going forward but, if I was right in late November, the real bottom could be a lot lower than this.

GE lost $3.8Bn this morning and RTX missed expectations but 3M (MMM), who make the masks, are up 1.4% pre-market with better-than-expected earnings.  The VIX is as high as it was during the December dip, when the Russell fell 15%, to 2,150 and 15% below that would be 1,827.50 – only 100 points below yesterday's low.  

If we keep getting these anemic earnings reports, investors are going to start questioning the valuations that are being asked – even…
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Monday Market Meltdown – Halftime Show

As I said on Thurdsday – we were halfway there.  

We were at 15,200 on the Nasdaq Thursday morning and our long-predicted correction target of 15,000 was a certainty but now we're "living on a prayer" that 600 points below 15,000 (14,400) is an overshoot of the rapid correction and not the first leg of the run to 13,500 – where we began Q2 of last year.  

13,200 is actually the 20% correction from 16,500 but the key line for the Nasdaq is 15,000 and 16,500 was 10% up from there and 13,500 is 10% down – that's what the above chart is measuring,  We will, on the whole, be LUCKY if the Nasdaq settles into a range around 15,000 but, in truth, it's likely we overshot the proper range by a mile and 13,500 may be the top of a proper range that centers around 12,000 – which would be a reasonable valuation for the index.  

When you are in a slide like this, you need to consider what is going to change the sentiment and, this week, we have a Fed Meeting on Wednesday but what is the Fed going to say that will help?  They have already said they were looking to tighten so reversing would be a sign of weakness and they already said not until March, so doing nothing won't help either.  I imagine they'll say they will take market conditions into account along with Labor and Inflation and that might calm things down a little, but will it reverse the slide?  

Clearly Congress and the President are not going to break their streak of doing nothing and that leaves us with Earnings Reports, which have not been helping and Economic News – which gets worse and worse as we begin to score the Omicron period.  No, this does not look good at all and, as I said, if we get a swell of sellers hitting the market – there are clearly not enough buyers to support any price level until we do make AT LEAST a 20% correction.   

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PhilStockWorld January Portfolio Review – Part 2

What is hedging? | Advanced trading strategies & risk management | FidelityThank God for hedges!  

As of Tuesday morning's review, we had $800,000 worth of hedges in our Short-Term Portfolio and suddenly, on Friday morning – we're already wondering if that's enough, right?  This is why we ALWAYS hedge – especially in a toppy market and, as Fundamental Investors – we know when a market is toppy.  We also have RULES about hedging, like putting 25-33% of our unrealized gains into our hedges.  That's how our hedges rise proportionally with our portfolios – so we don't let ourselves get complacent in a rally.

Our Short-Term Portfolio (STP) is paired with our Long-Term Portfolio (LTP) and acts as the primary hedge there but it also has enough to spare to cover our other portfolios against a 20% correction.  Above that and we're in trouble but, of course, we simply add more hedges when 10% fails and again when 20% fails.  At the moment, 10% seems ready to fail.

  • Dow  36,000 to 34,200 has bounce lines of 34,560 (weak) and 34,920 (strong) 
  • S&P 4,700 to 4,465 has bounce lines of 4,512 (weak) and 4,559 (strong) 
  • Nasdaq 16,500 to 15,000 has bounce lines of 15,300 (weak) and 15,600 (strong) 


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Thursday Thoughts – Correction Complete or Halfway There?

"We've got to hold on to what we've got
It doesn't make a difference if we make it or not
Woah, we're half way there
Woah, livin' on a prayer" – Bon Jovi
We're at a critical inflection point in the market.
The S&P 500, as you can see, has fallen back from 4,800 to 4.560 (a bit lower now) but that's only a 5% correction while the Nasdaq has fallen closer to our predicted 10% (15,000 was our goal) and the Russell has fallen from 2.400 back to 2,065 and that's 14% and no one cares what the Dow does as it's a ridiculous, price-weighted index whose movements are meaningless (yet followed closely by most of the World).
As for the Dow, it is down from 36,500 to 35,000, which is 4% so I'm fairly certain we'll be seeing the rest of that 5% drop before we're through and, more likely, a full 10% drop is ahead of us – all the way back to 32,850, which is where we were in March of last year.  The Russell is 200 points BELOW where we were last March – so perhaps it's the canary in the coal mine for all of the indexes.


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PhilStockWorld January Portfolio Review – Part 1

Image result for one million dollars animated gifImage result for one million dollars animated gif$2,518,702!  

That's up $309,256 since our last review for our paired Long-Term (LTP) and Short-Term (STP) Portfolios since our December 16th review, where we only made a few small changes.  That's because, at the time, we were down $64,619 from our Nov 18th review and we knew we'd bounce back but this month made up for it in spades and we're now up $1,918,702 (319%) from our $600,000 start back on Oct 1st, 2019.

A flat to down market is just what we've been playing for this fall and, now that we hit our 15,000 goal on the Nasdaq right on schedule (January expirations) we will now have to play a lot more balanced into earnings so we can gather more data.  

We reviewed our Short-Term Portfolio (STP) in yesterday morning's PSW Report and we have $800,000 worth of hedges against a 20% drop.  HOWEVER, we don't expect a 20% drop as we're already down 10% so call it $400,000 worth of protection against a 10% drop but, fortunately, our Long-Term Portfolio (LTP) is sitting on $1,848,403 (78%) in CASH!!! – and that itself is a nice hedge against a drop.  So I THINK we are properly balanced at the moment but we're still going to take a very skeptical view of our current positions – looking to cash out anything we're not HAPPY to double down on if the market does drop another 20%.

After a busy late November, early December adding 19 bullish positions while things were on sale, we added just one new long (MRNA) to the LTP since our last Review.  With 40 long spreads and 22 short puts – we have more than enough to manage at the moment and, like I said, we'll be looking to cut more than add for now.  

Short Puts – This is how we usually initiate a trade in the LTP.  MRNA, in fact, started with the short puts and we just got more aggressive on them last week.  We have collected $208,390 selling short puts – essentially promises to buy stock if it falls below a certain price and, usually, we aim for at least a 20% discount to the
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Tumbling Tuesday – Low Start to the Weak

"The percentage you're paying is too high priced

While you're living beyond all your means

And the man in the suit has just bought a new car

From the profit he's made on your dreams"

 - Steve Winwood

Welcome back. 

Possibly to reality, as it is now, officially, earnings season and there's no hiding from the truth of Q4 now that traders are back from even the most extended of vacations.  The Fed have fired their happy talk guns and their first meeting of 2022 is next Wednesday so the Fed has to go quiet this week and they've already indicated no rate hike – so no upside catalyst from that corner and Biden can't pass a parking ticket – so no stimulus is coming either.  That means the market has to impress us all by itself – yikes! 

"If you had just a minute to breathe

And they granted you one final wish

Would you ask for something like another chance


Or something sim'lar as this"

We're back to averaging 2,000 people a day who have just a minute to breathe in the US with 156,505 people per day newly hospitalized and 800,000 newly infected yet you would think this thing is over from the news in the MSM.  I know things are bad because I live in Florida and I went to the grocery store and people were wearing their masks!  I have NEVER seen so many people wearing masks as I have this week – I guess at this point pretty much everyone has multiple friends and family members with Covid – so the message is finally sinking in.  

Notice the "slowdown" over the holiday is due to lack of reporting more so than an actual drop in cases.  And, of course, with the milder form of Covid…
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Friday Already? Ending the Week Weakly

SATURDAY AT THE FAT MAN'S | Fat Harold's Ocean Drive NMBI thought it was Saturday!  

Don't ask how, that's the most senile thing I've ever done and I'll be 59 in March – in case you are keeping track.  I had a nice, relaxing morning, woke up at 6 and did some reading and then caught up on some late-night talk shows (I just watch the monologs) and, in my defense, Seth Meyer's said he'd be back in the studio on Monday and I didn't realize he doesn't do Friday shows so I think that's where I got the impression it was Saturday.  

Anyway, I got some washing done and then I went out for breakfast and, on the TV, the stock tickers were going by and we were down about as much as yesterday so I thought it was just showing yesterday's finish but then I saw the Nas below 15,500 and I realized something was wrong and I raced back home.  First time I've ever done that.

So, it's 10:10 now and the indexes are down a bit more this morning but nothing tragic.  Looking at our bounce chart, which we've had since Dec 21st, the only change since Wednesday's rally is the Weak Bounce line on the Russell, which has turned black (too close to call) – also, we have a new bottom for the Nasdaq, better reflecting our expectations:

  • Dow  36,000 to 34,200 has bounce lines of 34,560 (weak) and 34,920 (strong) 
  • S&P 4,700 to 4,465 has bounce lines of 4,512 (weak) and 4,559 (strong) 
  • Nasdaq 16,500 to 15,000 has bounce lines of 15,300 (weak) and 


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Kimble Charting Solutions

Lumber Price Peak Would Raise Concerns For Equities!

Courtesy of Chris Kimble

The supply chain has dealt with several issues over the past couple of years, as consumers and businesses have been forced to navigate a tricky “COVID” landscape.

Commodity prices (in general) have risen, while enduring some big swings.

Today we look at a commodity that plays an intricate role for consumers, and perhaps the equities market as well. Lumber. When lumber prices are high, new homes and buildings cost quite a bit more.

Above is a “weekly” chart of lumber prices. As you can see, there have been times when a lumber peak/bottom have be...



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ValueWalk

How To Buy Gold

By Eric Gozenput. Originally published at ValueWalk.

If you’re looking for an asset that protects against inflation, buy gold!  Take a look at our helpful guide below for some tips on purchasing this precious metal.

Q4 2021 hedge fund letters, conferences and more

Wondering How to Buy Physical Gold? Consider The Different Types: Gold Bars and Rounds

Gold bars are one of the most popular gold buying options for investors. B...



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Zero Hedge

Canadian 'Freedom Convoy' Receives First GoFundMe Payment After Temporary Halt

Courtesy of ZeroHedge View original post here.

Update (Friday 0711ET): Organizers of the "Freedom Convoy" have "received confirmation that GoFundMe has released our first batch of funds" following reports Thursday, the c...



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Phil's Favorites

Is the omicron variant Mother Nature's way of vaccinating the masses and curbing the pandemic?

 

Is the omicron variant Mother Nature’s way of vaccinating the masses and curbing the pandemic?

Preliminary research suggests that the omicron variant may potentially induce a robust immune response. Olga Siletskaya/Moment via Getty Images

Courtesy of Prakash Nagarkatti, University of South Carolina and Mitzi Nagarkatti, University of South Carolina

In the short time since...



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Biotech/COVID-19

Is the omicron variant Mother Nature's way of vaccinating the masses and curbing the pandemic?

 

Is the omicron variant Mother Nature’s way of vaccinating the masses and curbing the pandemic?

Preliminary research suggests that the omicron variant may potentially induce a robust immune response. Olga Siletskaya/Moment via Getty Images

Courtesy of Prakash Nagarkatti, University of South Carolina and Mitzi Nagarkatti, University of South Carolina

In the short time since...



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Digital Currencies

Why do you need a Bitcoin ETF when they already made you one?

 

Why do you need a Bitcoin ETF when they already made you one?

Courtesy of 

Chart via Piper Sandler’s new note on Coinbase. They don’t think it’s trading as a proxy for Bitcoin but I know it is. Here’s their take:

COIN shares have performed in-line with bitcoin since reaching an all-time closing high on 11/9/21. COIN shares and the price of bitcoin (which we use as a proxy for broader cryptocurrency pric...



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Politics

5 things to know about why Russia might invade Ukraine - and why the US is involved

 

5 things to know about why Russia might invade Ukraine – and why the US is involved

Courtesy of Tatsiana Kulakevich, University of South Florida

U.S. President Joe Biden said on Jan. 19, 2022, that he thinks Russia will invade Ukraine, and cautioned Russian president Vladimir Putin that he “will regret having done it,” following months of building tension.

Russia has amassed an estimated 100,000 troops along its border with Ukraine over the past several months.

In mid-January, Russia began moving ...



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Chart School

Bitcoin Swings Down to Support

Courtesy of Read the Ticker

Come on! Seriously do you think a 400% rally for Bitcoin was going to be given to the public easily. Without any pain! Come on muppets!



The uniformed (public) buy when price is rising or breaking new highs, the informed buy when price is falling or breaking lows.



The informed have to do it this way as they are large volume players and the only way they can buy large volume is to create chaos. The chaos brings to the market the weak holders and a forced sell. Price is moved to where the volume can be accumulated, in a bull trend that is down to critical support.



Of course if price is in a true bull market the 'chaos' created should not break critical long term trend signals, ...



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Promotions

Phil's Interview on Options Trading with TD Bank

TD Bank's host Bryan Rogers interviewed Phil on June 10 as part of TD's Options Education Month. If you missed the program, be sure to watch the video below. It should be required viewing for anyone trading or thinking about trading using options. 

Watch here:

TD's webinar with Phil (link) or right here at PSW

Screenshots of TD's slides illustrating Phil's examples:

 

 

&n...



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Mapping The Market

Suez Canal: Critical Waterway Comes to a Halt

 

Suez Canal: Critical Waterway Comes to a Halt

Courtesy of Marcus Lu, Visual Capitalist

The Suez Canal: A Critical Waterway Comes to a Halt

On March 23, 2021, a massive ship named Ever Given became lodged in the Suez Canal, completely blocking traffic in both directions. According to the Suez Canal Authority, the 1,312 foot long (400 m) container ship ran aground during a sandstorm that caused low visibility, impacting the ship’s navigation. The vessel is owned by Taiwanese shipping firm, Evergreen Marine.

With over 2...



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The Technical Traders

Adaptive Fibonacci Price Modeling System Suggests Market Peak May Be Near

Courtesy of Technical Traders

Our Adaptive Fibonacci Price Modeling system is suggesting a moderate price peak may be already setting up in the NASDAQ while the Dow Jones, S&P500, and Transportation Index continue to rally beyond the projected Fibonacci Price Expansion Levels.  This indicates that capital may be shifting away from the already lofty Technology sector and into Basic Materials, Financials, Energy, Consumer Staples, Utilities, as well as other sectors.

This type of a structural market shift indicates a move away from speculation and towards Blue Chip returns. It suggests traders and investors are expecting the US consumer to come back strong (or at least hold up the market at...



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Lee's Free Thinking

Texas, Florida, Arizona, Georgia - The Branch COVIDIANS Are Still Burning Down the House

 

Texas, Florida, Arizona, Georgia – The Branch COVIDIANS Are Still Burning Down the House

Courtesy of Lee Adler, WallStreetExaminer 

The numbers of new cases in some of the hardest hit COVID19 states have started to plateau, or even decline, over the past few days. A few pundits have noted it and concluded that it was a hopeful sign. 

Is it real or is something else going on? Like a restriction in the numbers of tests, or simply the inability to test enough, or are some people simply giving up on getting tested? Because as we all know from our dear leader, the less testing, the less...



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Insider Scoop

Economic Data Scheduled For Friday

Courtesy of Benzinga

  • Data on nonfarm payrolls and unemployment rate for March will be released at 8:30 a.m. ET.
  • US Services Purchasing Managers' Index for March is scheduled for release at 9:45 a.m. ET.
  • The ISM's non-manufacturing index for March will be released at 10:00 a.m. ET.
  • The Baker Hughes North American rig count report for the latest week is scheduled for release at 1:00 p.m. ET.
...

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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Ilene is editor and affiliate program coordinator for PSW. Contact Ilene to learn about our affiliate and content sharing programs.