Wheeeee, isn't this fun?
It sure is when you are prepared. We added a bunch of hedges on Friday to our Short-Term Portfolio and the two short Russell Futures (/RTY) contracts we picked up in yesterday morning's PSW Report are already up $5,000 and that's plenty for us to make a non-greedy exit at the 2,300 line as that's bound to be a little bouncy in the very least. Congratulations to all who played along at home!
Remember, I can only tell you what is likely to happen and how to profit from it – the rest is up to you.
When you make $2,500 per contract you need to protect your gains. As we neared 2,300 yesterday, it was a 50-point fall so the weak bounce would be 10 points higher (20% of the fall), according to our fabulous 5% Rule™ and a strong bounce would be 10 more points to 2,320 so that became our stop and we didn't spend more than 5 minutes above that line so the stops didn't trigger but now that we're hitting goal at 2,300 – there's no reason to be greedy and we look for a "fresh horse" to bet on – an index that hasn't fallen like the others – yet.
   
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As you can see, the Dow has fallen less than the other indexes in this sequence so now we pick lines and, in this case we have, of course, 2,300 on /RTY, 13,000 is a great line on the Nasdaq (/NQ) and we'll use 3,940 on /ES and, if two out of 3 of those fail, we can short the Dow (/YM) as our lagging indicator and that would then be confirmed by our 3rd cross lower and then, if ANY of our indexes poke back over their lines – we get out quick as our premise is only IF all the indexes keep falling we take the fresh horse out for a ride.
/YM is trading at 32,750 at the moment and 32,800 is a good enough shorting line that I'd give it a toss if at least one of our other indexes is below their line but, otherwise, we'll just see if we get strong or weak bounces – using the same calculations across the board.
Of course, we don't do this in a vacuum. Our plan since last week was to short into the Fed Meeting (announcement today at 2pm with Powell speaking at 2:30 – all covered during our Live Trading Webinar) as we can't imagine what more the Fed can say to keep this fantasy market believing that 35 times earnings is the new normal for the S&P 500. Very simply, that's a 2.8% annual return and do you know what else pays a 2.8% annual return? 30-year notes at 2.425% and those are risk free (in theory – I wouldn't touch them with a 10-year pole).
Still this is where classical economic theory comes into play and money will gravitate to the safer path over time and it was all fun and games when the 30-year was paying 1.5% in December and investors literally had no choice other than to put their savings in the 2.8% market but now that the 30-year is paying 2.425% – how do you justify moving money instead into outrageously overpriced stocks?
Let's play a game to illustrate this point. In 1982, we had another insane Republican in power who decided that deficits didn't matter and taxes were only for poor people. Reagan had only been in office for two years but the 30-year note had shot up from 13% (which was double where we were when Nixon took us off the Gold Standard) to 18% before Volker finally stepped in and began attacking the monster. Fortunately our National Debt at the time was only just crossing $1Tn so 18% interest was "only" $180Bn a year but, by the time Reagan left office, he had almost tripled it to $2.8Tn – which would have been the end of our Nation had the Fed not stomped down rates by 1989.
Clinton slowed down the deficit growth by 2000 but then the country switched horses and we went back to giving tax breaks to the wealthy and, guess what? By 2005 we hit $8Bn (up over 50% in 4 years) and by 2009, after 8 years of Bush we were up 50% again at $12Tn – over 100% under that administration. Obama took over during the 2nd Bush Financial Meltdown and he too almost doubled the deficit to $20.2Tn in 2017 and, since then, Trump has added 50% and Biden is not slowing the trend in his first year.
Does this seem dangerously out of control and unsustainable to you or am I just an old fogey who doesn't understand Modern Monetary Theory? That's how I feel these days and I guess I'm being a stick in the mud when people just want to sit back and enjoy the rally but I say BEWARE and, since it is the Ides of March – I think you should take that advice…
We'll see what kind of rabbit Powell and the Fed can pull out of their hats this afternoon but we've got our $1.9Tn and rates are already as low as the Fed can get them so attempting to do more would only highlight the fact that the Fed can no longer control rates in an infaltionary environment so they have now switched to a policy of calling inflation "transitory" so they can pretend they don't need to do anything about it rather than try to do something about it and have people see how powerless they now are.
So what else do we have, Infrastructure? Only over McConnell's dead body, apparently. Infrastructure helps ordinary people and unless we can find a way to funnel that spending into the pockets of the top 0.01% – the GOP is going to stand firmly against it. This economy, such as it is, has been built on constant stimulus. Take that stimulus away and what do we have?
Sadly, we're going to find out…
