Nasdaq 6,000?
Why not, we hit 5,000 in early 2015 and it's been two whole years so why not add 20% to the index – 50% from the lows of last year but let's not pick nits, right? In fact, the Nasdaq Composite ($COMPQ) is up 20% since the election, gaining $1.7 TRILLION in market cap to hit $8.5Tn for the first time this morning.
I know I didn't put $1.7Tn into the Nasdaq, did you? No, no one put $1.7Tn into the Nasdaq. In fact, there were only approximately $200Bn worth of net inflows into the Nasdaq since the election and the rest is LEVERAGE. That's because the price of all the shares that haven't been trades instantly adjust to the price of the shares that are actually trading and, in a low-volume rally like the one we're having, those distortions can get pretty drastic.
Another problem with the Nasdaq, which we've discussed before, is that the top 10 stocks make up almost 1/2 of the index, more than half if you don't count GOOGL twice. It's all about what the Top 10 are doing and, other than GILD (who I just featured as a great bargain on Nasdaq Live yesterday morning) all of these stocks have been performing very well and soon we'll see if the earnings justify the massive gains.
Back when the Nasdaq was first challenging 5,000 on Dec 7th (Pearl Harbor Day) we were concerned that the market may fly higher – like it did in 1999 before the crash. At the time we used a bullish $3,850 Dow ETF (DIA) trade that has already returned the projected $15,000 (289% profit) but there's still the obligation to buy 500 shares of AAPL at $97.50, on the short puts we sold for $10 (now $3) so, if we were to close those out for $1,500, the final profit on the upside hedge would be $9,650 (250%) but who doesn't want to own AAPL for $97.50? So why would we pay $1,500 to get out of those contracts?
As I mentioned yesterday, we have PLENTY of upside trades in our Long-Term Portfolio and in our Options Opportunity Portfolio and yesterday the LTP gained 2.5% ($12,500) while our hedges in the Short-Term Portfolio lost $5,000 but the key is that the hedges lock in the net gains – a reversal in the markets won't take it away. It's worth sacrificing some of your upside for peace of mind (30% as a rule of thumb).
Another key to this strategy is knowing when to cash out at the top (we just cashed Chipotle (CMG) ahead of earnings). That way, you keep all the gains AND make money on the hedges when the correction finally comes. We'll let you know how that turns out as the market hasn't corrected much in the past 3 years and the Dow is up another 150 this morning because – well, we don't need a reason, do we? In fact, fear has not been less in the market since early 2007:
In early 2007, the Nasdaq was just testing 2,500 and it ran up to 2,860 by November but then down 50% to 1,400 a painful year later. Timing those entries and exits is hard, that's why we like to play both sides because, if we make a mistake – neutral is pretty much the worst thing that happens to us. Now we're up 3,500 points (140%) from those 2007 highs and we need to consider whether or not the companies we're paying up for are actually making 140% more money than they did then – or if, like 1999, the multiples have just gotten out of control.
At this point, I have no idea whether or not this rally is legitimate. The main reason we are flying higher today is yet another pledge from the White House to cut Corporate Tax Rates from 35% to 15% because, you know, that's going to really help out the middle class, right?
It is going to help out shareholders as it's a $240Bn/yr tax cuts for those Corporation who weren't able to hide all of their profits in offshore accounts. It will add $2.4Tn to our National Debt over 10 years, rocketing us past the $20Tn mark where interest on the Debt, at 3%, will be $600Bn a year. But wait, there's more! Trump also want to cut the rate to 15% on "pass-through expenses", which will cost us another $160Bn a year.
Oh sorry, by us I mean those of you who don't have hundreds of thousands or millions or Billions invested in the market – we'll be fine, thanks! In fact, we'll take all that money we save on paying taxes and buy ourselves some shiny new robots so we can fire your ass and toss you into the social safety net we're dismantling right before your eyes. And still you think Trump is working for your benefit!
Seems like madness to me but we are, fortunately, in the investing class and we're happy to go along for the ride and happier still knowing we have our hedges – just in case this crazy train goes off the rail at some point – and, happiest of all knowing that, if our worst fears are realized and Trump drives this country completely down the tubes – that we can afford to leave.
The Gilead (GILD) trade idea I had yesterday for the Nasdaq crowd is a great way to play an extended Nasdaq rally and a great stock to play as a value, even if the market tanks. The trade idea I shared (with updated prices) was:
- Buy 10 GILD 2019 $60 calls for $11.70 ($11,700)
- Sell 10 GILD 2019 $70 calls for $7 ($7,000)
That's net $4,700 on a $10,000 spread so the upside potential at $70 is a net $5,300 profit (112%) and this trade requires no margin at all, just $4,700 in cash. If you want to save the cash and don't mind a bit of margin, you can also sell 5 GILD 2019 $60 puts for $7 ($3,500) and that drops the net on the spread to just $1,200 and increases the upside potential to $8,800 (733%) in exchange for $3,366 in ordinary margin.
I had intended to talk about Taser (AAXN) and a couple of other great stocks that are on our Watch List so I urge our Members to go over there and check those 21 stocks for remaining bargains before they all turn out like Whole Foods (WFM), where our trade idea (2/17) was:
WFM (2/17) – Nowhere near as cheap as SVU but WFM made $500M last year and is selling for $10Bn so p/e 20 but I like the fact that they are pushing into Europe and I like the rollout of their less-expensive 365 stores – though they are cannibalizing sales and eating into the bottom line for now. Since it's a slow roll, I would just plant a stake by selling the 2019 $30 puts for $4.50 and see how things go with a break-even at $25.50.
See, SVU, still pretty cheap!
We will go over the Watch List tomorrow in our Live Trading Webinar (1pm, EST) and we'll see if 6,000 holds on the Nasdaq today but most likely we'll invest some of those long-term gains into improving our hedges – just in case gravity is real.
