And we're back!
Another day, another 250-point rally on the Dow is now business as usual, if by usual we mean since Friday. Generally, it's considered UNusual for the Dow to go up 1,000 points (6.4%) in a month, let alone 3 days but we just did it in October – so why not again in February? In October we actually made a 2,000-point move – all the way to 18,000 and now it took us 1,000 just to get back to 16,500 but we went down on stupid sell-offs in Apple (AAPL) and Boeing (BA) that never should have happened in the first place (we're long on both).
As I noted back on 1/14, when we called 16,000 the fair bottom for the Dow (based on our valuation study of each individual component) and our 10% range for this year should be from there to 17,600 so we're not terribly impressed at 16,500 but at least it's progress. The spectacular gains we've had in our 4 Member Tracking Portfolios since then have been BECAUSE we stuck to our valuation guns and got more bullish while others were panicking.
Now we're a little nervous because this is like a date that's starting out really well and we're hoping we can go all the way but we don't want to blow it so a little bit of caution is advised here – at the point where we were harshly rejected last time. Last time we blew it at 16,500, it was right after the last Fed meeting and we thought the markets (thanks to Hilsenrath) were wrongly interpreting the statement and that caused us to be even more bullish on our second sell-off of the year.
Frankly, I'd be a lot more confident in this rally if we had taken the same two weeks to come back as we did to fall. Why? Because the volume of selling on the way down was about 1.5Bn on SPY on the way down (since 2/1) and 375M on the way up so, in the round-trip, we've had 4 times more sellers than buyers, essentially – it's kind of hard to make a base case on a foundation that weak, right?
Meanwhile, we're still getting a lot of disturbing macro data like Japan's 13% drop in January exports along with an 18% drop in imports is a strong indication the BOJ hasn't done nearly enough to stimulate that economy. Part of it is due to a rising Yen (lowering the exports measured in Yen) and part of it is Japan's move to manufacture more goods overseas but 13% in a year is pretty catastrophic.
We'd like to think we're doing better than that but today's Philly Fed Report came in at -2.8 in another month of contraction. Most disturbing is the future activity index fell from 24.1 to 19.1 – that's a 20% drop in a month of forward expectations. On the whole, this is all in-line with our expectations for the year. The only issue is that we bounced back way too fast this week and the market needs to take its time and settle in gently to the new trading range. That would be nice!
Oil is making a nice comeback today and that's going to give us a boost as that sector was in a complete panic. I was just interviewed by CNBC yesterday and gave them my $35-45 target into the summer and said "I don't see the panic move down below $30 happening again, that's just untenable." I don't know if I caused the oil rally with that comment but already this morning the April contracts are trading at $34 (we're long on oil, of course but taking profits by $35 as, like the Dow, it's too early).
We still need to see 1,040 on the Russell to confirm a rally and the Russell is our lagging index with the Dow at 16,500, S&P 1,930 and Nasdaq 4,215 and if they hold, then we can play the Russell Futures (/TF) bullish over 1,010 or, for the Futures-challenged, we can get a nice effect from the Russell Ultra-Long ETF (TNA) at $43.64 with the following options play:
Buy 10 TNA March $41 calls for $3 ($3,000)
Sell 10 TNA March $44 calls for $1 ($1,000)
Sell 1 BA 2018 $80 put for $7 ($700)
That obligates you to buy 100 shares of Boeing (BA) for $80 (now $116) in 2018 if it's below that price and, meanwhile, you have $3,000 worth of TNA spreads for net $1,300 with a potential $1,700 upside (130%) if TNA is above $44 in 30 days. That's a nice way to take advantage of a further rally and, of course, you can use any stock you REALLY want to own for a discount instead of BA – we just happen to really like that one!
If those levels break, of course, we're back to looking at hedges like the ones I highlighted back on the 5th – which paid off HUGE last week.
