I’m Having An Attack! (AAPL,SPY,USO,FXI)
Isn’t it always the case…?
The news is horrible. The threats are palpable. The rhetoric and bombast are as hot as ever. Suspicion and anger are ubiquitous; finger-pointing; mud-slinging; muck-raking; belly-aching…
For gawd’s sake, my meniscus has been twice herniated, my pylor valve is stuck, and I just burned the honey-garlic spaniel!
The kids are gonna kill me…
The Decibel Level Climbs
When the news is not reporting the Mueller/Trump duel, it’s all about rising oil, with 1) Iran and the potential loss of three and a half million barrels of daily oil supply, or 2) Yemen trying to take out Saudi oil infrastructure, or 3) Israel gearing up for a takedown of Iran in Syria and Lebanon, or 4) Venezuela, whose oil production is veering toward zero, as funds to pay for the extraction of that country’s vast reserves go squandered or missing or who knows where.
And now Warren!
This week it was reported that Señor Buffett had his first losing quarter since 2009, reporting over a billion bucks lost for Q1.
The damage is everywhere.
And here’s what’s worse.
From Wall Street we’re seeing growing concerns that the breadth of the market is thinning with every new rally. A report this week from Goldman Sachs indicates that
- The so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) now account for over 27% of the value of the NASDAQ Composite, twice their size just five years ago,
- They also account for a full 12% of the index’s overall rise in just the last year.
- Tech stocks in general (and particularly those names noted above) have contributed to nearly three quarters of the S&P 500’s margin expansion,
- One-third of the index’s earnings per share growth,
And a wild 43% of that index’s total return since the start of 2017.
In short, everyone is jumping into the big names, and the concentration of funds that are relying on such a small basket to provide their returns is spooking an increasing number of analysts and strategists.
To put a numerical value on it, roughly one quarter of all investors have exposure of some degree to just these handful of names, either by way of outright ownership, their pension funds, ETFs or mutual funds. And if those stocks decide to pull back as a group, the possibility of a disorderly unwind weighs heavily on the street. Getting out before the wave turns over is now foremost on everyone’s mind.
One Final Foreboding Figure
Goldman notes that only three times in the last half century has a single sector accounted for better than a fifth of the S&P’s overall index weight: “Energy in the early 1980s (26% weight), Tech in the late 1990s (35%), and the Financials in the mid-2000s (22%).”
And in no case did it end well.
Goldman reports that “those three episodes each culminated in an absolute price decline in excess of 50% for the high-flying sector and underperformance relative to the S&P 500 of roughly 30%.”
That being the case, the question must be asked, “Why in the world would anyone put their eggs in such a rickety basket?”
And the answer is a simple one.
The bull market lives.
And no one has any other choice.
Now, that may sound like some paltry reasoning to you, and in the normal course of events, we’d agree. But we are not recommending owning stock. On the contrary, we believe that our options based approach is far more prudent at this point than any other.
What’s more, we’re also convinced that the stormy atmosphere that permeates the news these days provides ample cover for the markets to rise without anyone noticing.
Sentiment levels also suck.
And that’s precisely why we’re recommending those most popular FAANG names at this juncture.
Take a look at the following chart of the NASDAQ 100, a more focused means of playing the big tech stocks than the Composite.
- First, MACD is just a day or two from confirming RSI’s rise above her midway waterline (in green), at which point technicians will likely turn strongly bullish on NDX ownership.
- Note, too, that we have what appears to be a breakout from a three month pennant pattern (in red), a wholly bullish development if we get some volume behind the move.
- And finally, price is moving convincingly above all her salient moving averages, all of which are unfurled and trending higher.
In short, the ‘DAQ’s got moxy!
And we’re going to offer you a trade on it right after we close down one open initiative.
Just Last Week!
It was opened last week in a letter called Y’wanna Buy the Petro-Yuan? There, we urged you to consider the purchase of the USO January 18th 11 CALL for $3.05 and the concurrent sale of the FXI January 18th 47 CALL for $3.00. Total debit on the trade was $0.05.
The USOs are going for $3.35 and the FXIs for $2.73. Sell off the former and buy back the latter and you net $0.57 on a nickel spent. Call it 1140%.
And call it sweeeeeeet!
Now to this week’s goods.
We’re going to play the upcoming tech rally as a long-short affair, because there are still a great number of risks in both the financial and geo-political spheres that could upend the FAANG apple-cart.
We’re choosing our tools carefully.
First, we’re betting with Warren on Apple Inc. (NASDAQ:AAPL). The Buffet-man owns close to $30 billion worth of the world’s biggest publicly-traded company, and the latest earnings and guidance info from the electromagnetic radiators shows he made a good bet.
As the chart below shows, we’ve just struck all-time highs, and while we could see a consolidation in the weeks ahead, the future looks downright bright.
Apple showed perfect resilience while the rest of the market still suffers from a late January panic attack.
Against AAPL, we’re playing the broad market S&P 500, whose current anxiety will translate into smaller gains than Apple should the advance continue.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you purchase the AAPL June 21st (2019) 200 CALL for $12.00 and sell the SPY June 21st (2019) 275 CALL for $13.79. Total credit on the trade is $1.79.
With kind regards,
Hugh L. O’Haynew