Up and up the markets go, where they stop….
Stop? Markets don't stop going up, do they? Certainly not when the Fed can toss $2.7Bn onto the bonfire to keep things warm for another day and, at $65Bn a month, that's just an "average" day's work.
The worse the economic news is, the more likely the Fed will keep giving us FREE MONEY and the more the markets can go up.
That's the standard theory but, as we discussed in our Member Chat early this morning, that theory has a gaping hole in it:
Taper/ZZ – To me, it's not about whether or not they taper. 1,850 on the S&P was the result of $85Bn a month. Now it's $65Bn a month so subtract 20 S&P points. Just keeping it going doesn't get us higher – higher we already hit and now there is LESS FREE MONEY than we needed to get to 1,850. Remember my car-lot model – you have to have constant inflows of new cash into the market or you simply run out of people who can afford the pumped-up prices at which point ANY selling pressure ends up finding no buyers.
Every day, 600,000 shares of PCLN are bought AND SOLD for $1,300. That's $780M per day – just to maintain $1,300. When there's an influx of new money (10% is a rule of thumb) the stock can rise about 1%, so it's not that hard to pop the price but, once you do – you then need 1% more money every day to sustain it.
This is twice as much as we needed last year already and, despite the fact that there are mutual funds and ETFs and even hedge funds that are forced to buy it because it's in an index or group they track – you still need $780M a day to keep those plates spinning.
Now, consider the cost of keeping the whole market 30% higher than it was last year. To some extent, money was re-allocated from other investment classes (gold, TBills, wages) and, of course, some money is printed (lots, in fact) but still, every day, the market needs 30% more than last year to keep up appearances. So, where does this money come from every day? Corporations are a big source of it because they are buying back their own stocks and buying out competitors and decreasing the total supply of shares available – that's a big help. The top 1% have much, MUCH more money (the Forbes 400's net worth climbed from $1.7Tn in 2012 to over $2Tn in 2013 – up $300Bn or an average gain of $750M per Billionaire – yet no lynch mobs will be formed) so we can assume much of that goes back into the market but it's peanuts compared to the Fed's now $65Bn per day pump job.
Then we have stimulus from the BOJ (now more than the Fed at $75Bn/day) and the PBOC and the ECB – all helping to keep those plates spinning each day but where does NEW money come from? Wages aren't up, people aren't saving and there's no inflation so money isn't flowing from the Banks and multiplying. This is all how the supply of money "suddenly" dries up and we end up in a crisis, that no one could see coming….
As you can see from Dave Fry's S&P charts, we're back to the tippy-top in a low-volume rally – laughingly low this week, in fact. So, as I said earlier in the week, we're taking this move back to the top with a Lot's wife-sized grain of salt and we're going to take a stab at shorting the market below the 1,850 line (and pulling those shorts if we get over!).
Please check out our various trade reviews – we are still BULLISH long-term (and we ARE cashing in our short-term long positions!) – we're just expecting a short-term retest of 1,750 in March and, if that holds – I'll be thrilled to go bullish for the next run, where we hopefully do break out to new highs. BUT, if not – here's a few ways to profit from a 5%+ pullback:
- TZA is always our favorite ultra-hedge and it's way down at $16.52 with the Russell at 1,160. 5% down is 1,100(ish) and that's 15% up on TZA, to $19(ish). The April $16/19 bull call spread is 0.80 and we can offset that with the sale of the $15 puts at .62 to net .18 on the $3 spread. That means you are starting out .52 in the money and that means you gain .34 (188%) if TSA just holds $16.52. If TZA does rise to $19, you collect $3 for your net 0.18 in cash for a 1,566% gain.
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Maybe we should just do that one trade and leave it at that! So, what are we hedging? We have our Income Portfolio, which is up 4% so far this year ($20,000) and we'd like to have that not reverse and lose $20,000 on a dip. So let's work that backwards and go for a $9,000 pay-off, which is 30 contracts in our Short-Term Porfolio. Our worst-case scenario is we get assigned 3,000 shares of TZA at net $15.18 ($45,540) but we'll pull the trade before it gets that bad (stop at Russell 1,185 or S&P 1,855) and, of course, if we have a loss on the hedge, it's because the markets are going up and we should make it up with our Long-Term gains.
We already have 20 TZA July $17/25 bull call spreads ($1.05) as long-term protection, these are ADDITIONAL protection, in case we get the dip we expect into early March.
The Nasdaq has been on a huge tear and we are long on AAPL, which essentially is the Nasdaq but there are also a lot of over-priced momentum stocks we'd love to short, but we're too scared. AAPL took a dip to $530 and SQQQ (3x ultra-short on the Nasdaq) is down to $52.34 so:
We can sell 1 AAPL 2016 $450 put for $42.50 ($4,250) and buy SQQQ 15 June $50/59 bull call spreads at $3 ($4,500) and that's a net of $250 in cash out of pocket for $13,500 (5,300% on cash) worth of protection and our worst case is owning 100 shares of AAPL for net $452.50 ($45,250).
Keep in mind, of course, that – if you don't really, Really, REALLY want to own 100 shares of AAPL at net $452.50 (15% off the current price) – you shouldn't be selling ANY short AAPL puts. You can substitute short puts from any stock you REALLY want to own for net 15-20% off (assuming a bigger market correction does happen) or you can JUST take the bull call spread for $3, which pays $9 if we get a dip and, as with TZA, we're starting our $2.34 in the money, so your only risk (other than .64 of premium) is that the Nasdaq goes higher and your longs get more valuable.
In our Member Chat Room this morning, we shorted Natural Gas Futures (/NGH4) at $6.25 and Oil Futures (/CLJ4) at $102.50 but those are day hedges. We also shorted UNG (Natural Gas ETF) in Tuesday's Live Futures Trading Workshop, so those are great hedges for day-trading and short-term covers.
I'll be adding a few more 500% plays in our Member Chat Room today and I'll send out an Alert to our Members as I do. Remember, if we break higher, we take our small losses on these hedges and enjoy the ride up – we're only covering ourselves JUST IN CASE a week of low-volume moves up doesn't justify the indexes breaking out to new all-time highs. Just in case….
Have a great weekend,
– Phil
