I like this chart from Panamaorange at StockTwits:
I'm not a TA guy but I do know when things are overbought and oh boy are we overbought right now. Volume on the S&P ETF (SPY) was 57M yesterday as we busted up to new highs – that's about 1/2 "normal" volume of 100M, which is already down from 150M last year. Low volume means low conviction and we pair that with record ETF inflows (dumb money) of $56Bn and we know exactly what this rally is made of. Small Caps, Financials and Industrials captured most of the flows while, as noted yesterday, money is fleeing from Emerging Markets and Emerging Market Debt – we're simply the "safe haven" – for now…
And, of course, money is flowing out of bonds, which are a very bad thing to hang onto when interest rates are rising and December is on pace to blow November's numbers out of the water and, like Richard Gere, that bond money has nowhere else to go except into equities – regardless of how ridiculously priced they are.
And, of course, a person dumb enough to put their money into 30-year notes at 2% isn't going to think twice about running into equities that have a p/e of 30 – that's more like a 3.3% return, at least! That's also making dividend stocks extra expensive as the coupon clippers love dividend stocks and, as value investors, we're finding bargains very hard to find in that space but we're patient, we can wait for the correction.
Meanwhile, the Dow has climbed to the top of our target range already. Back on 11/25, we put up a hedge against our Russell Futures (/TF) shorts (was 1,350 then too!) that would cover us for an $11,250 profit if the indexes refused to back down – at the time I said:
In fact, the Russell 2,000 is just under 1,350 and that's up 200 points since early November (not counting their spike down) and that is just shy of 15% so the Dow is MILES behind if the move in the Russell is real (we have bet it is not but those bets are killing us!). The Nasdaq is up 4.3% and the S&P is up 5.5% and the NYSE, the broadest index, is up 4.8% so it's really the Russell that's a huge outlier – and that's why we're shorting it.
HOWEVER, we could be (and have been) very wrong about the Russell and, if so and it heads higher still, then it's the other indexes that should be catching up so we can hedge our hedges with long positions on the Dow, S&P and Nasdaq. For example, the Dow ETF (DIA) is at $190 so a 5% move in the Dow would be $199.50 and we can make the following play to gain leverage:
- Buy 30 DIA March $188 calls at $6.70 ($20,100)
- Sell 30 DIA March $193 calls at $3.75 ($11,250)
- Sell 5 AAPL 2019 $97.50 puts for $10 ($5,000)
This spread requires a net cash outlay of $3,850 and the spread pays $15,000 back if the Dow even squeaks higher into March expiration (17th) and you can use any stock for an offset but Apple (AAPL) is a major Dow component and makes a very desirable buy at $97.50 and the margin on 5 short puts is just $5,000 – so it's a very efficient trade that profits $11,150 (289%) if the Dow goes up 2.5% – good deal, right?
As you can see from the Russell Chart, our plan worked out perfectly and now we're reloading as we get back to 1,350. Meanwhile, there's been little change in the value of the DIA spread as the AAPL puts are still $10 (they are two years out, so don't change much) and the spread is now $3.30 vs $2.95 so a whopping gain of $1,050 so far but that is on track for our full $11,150 profit and the DIA is already catching up, as expected, at $192.49 – just 0.51 short of our goal so this one is still great for an upside hedge.
We have a Live Trading Webinar for our Members today at 1pm, EST and Consumer Credit comes out at 3pm and I expect that to be rising sharply as we can't reconcile the spending numbers with the income – and that's not a good thing! In last week's Webinar, we were less than impressed by the Beige Book readings and we called the top on the Dollar. This week, we'll be taking a look at this interesting chart, which shows how the consumers are getting squeezed paying for essentials (thanks StJ) – making it all the more silly to be buying Consumer Discretionary stocks at these sky-high prices.
Even as food costs have shrunk because of a global glut in farm products such as wheat, rice, soy and corn, the price of rapidly prepared food has risen as a result of managers passing on rising minimum wages to consumers, which in turn has pressured overall sales and traffic. As MarketWatch notes, the pressure was evident in third-quarter earnings, with companies bemoaning the shortage of growth drivers and fretting about weak consumer confidence and general unease about the state of the world. In November, Moody’s Investors Service weighed in by slashing its operating-profit-growth forecast for the restaurant sector and revising its outlook to stable from positive.
As noted by ZeroHedge: Underscoring the severity of the economic reality for most Americans, a recent NPD survey found 75% of respondents saying they have cut back on restaurant dining as they keep a closer tab on spending in most or all purchase categories, with many saying restaurant prices are too high.
Meanwhile, for the Fed which is now considering letting the economy "run hot" because there is not nearly enough inflation (except in rent, medical bills, college tuition and, of course, asset prices), the average restaurant bill has climbed 21% in the past decade, and the gap between eating in and eating out has consistently widened. In fact, from a nation of people "eating out", the NPD estimates that 82% of all meals are now consumed at home.
Maybe, those "improving economic indicators" are really nothing more than a mirage, meant to boost the confidence of some Americans, if not those 95 million who are no longer in the labor force.
