The Lord Giveth… (QQQ,DIA,VOX,HYG,CBOE,KKR,FB)
It’s hard to find anything negative to say about a market that has been on an even-keeled, upward trajectory for the last eight years.
You can mock what underpins its strength, you can deride the foolishness of those who’ve made millions just buying and sitting put, and you can wail like a newborn over the fundamental and technical excesses that are sure (eventually) to rock the very foundations of the financial edifice and send the global economy off the edge of the planet.
And eventually, we admit, you’ll be right. The fun will come to an end.
But it’s far more likely to be a jagged up-and-down affair than the simple cliff-dive that most imagine. We’re of the school that contends that a wild volatility will seize the market before the final top is in, sending it hithering and thithering in a manner that breaks every man Jack who has more than a few bucks invested in the equity amusement park of the next few years.
And a quick look at the charts of the major world indexes reveals that we might now be approaching our first fitful turn in that process.
But before we get there, the New Year’s rally has offered us an opportunity to close out a number of trades, and it’s our intention to tend to those first.
We start with our VOX trade that we’ve been rolling out since it was first initiated back on the 21st of February in a letter called Run for your Life! INFLATION!.
Last bout saw us selling four VOX January 19th 93 PUTS for $3.30 each. Today, they go for $5.00. Buy them back and sell five (5) VOX July 20th 94 PUTs for $4.40 each. In so doing, you add another $2.00 to the credit side.
Our trade of June 20th asked you to consider buying the HYG May 89 CALL for $0.88, and selling the HYG January 19th 88 CALL for $0.90. Total credit on the effort was $0.02.
And today, things are brighter. The May CALL goes for $0.15 and the January 88 for $0.04. Sell the former and buy back the latter and you net $0.13 on nothing expended. Good on ya if you went in big.
Our third trade under the scope was sent out in our July 25th letter, Sell the Market. There, we urged you to sell the CBOE January 19th 95 CALL for $3.60 and buy the CBOE January 19th 100 CALL for $2.05, then use the proceeds to purchase the CBOE December 15th 85 PUT for $1.35. Total credit on the trade was $0.20.
And today? Both the long and short CALLs are in the money, so this Friday, we face a $4.80 loss on the trade. Our advice? Close down anything still open just before the close on Friday and we’ll take redemptive action next week.
Big Win on KKR!
On October 24th we penned a letter called Investor Want a KracKeR?, in which we suggested you buy the KKR June 15th 21 CALL for $1.25 and sell the KKR June 15th 21 PUT for $1.90. Total credit on the trade was $0.65.
Today, the long CALL is worth $2.55 and the short PUT just $0.80. Dispense with them! Sell the former and buy back the latter and you net $2.40 on zilch spent. That gives you a wooly 1500% in less than three months.
Finally, we turn to our December 5th Facebook bet. The letter was called All Hail the Dipstick Trade – and there we recommended buying the FB January 19th 160 PUT for $1.72 and selling the FB January 19th 185 CALL for $1.85.
At this point we’re recommending amorphous action.
That is, as of last Friday, FB was on a steep downward arc, having given up 4.5% in the week’s closing session. Keep an eye on it, and close out the long PUT as soon as you can realize a meaningful gain. And remember, it expires this Friday.
This Week’s Knock Down
We opened with the possibility of the broad market taking a spill very shortly. Why do we think so?
Have a look now at the Dow and NASDAQ for the last six months.
The Dow is overbought for the second time in just three months (in green) as price has accelerated noticeably higher since the New Year.
“But,” you say, “it [the Dow] was overbought back in October, and nothing happened then…”
“Yes,” we reply, “but back in October, the NASDAQ was still cruising higher on a more sustainable trajectory. There was no overbought condition registered then, so buyers were able to rotate out of the Dow’s high fliers and reallocate into more palatable tech names.
“Today, however, the NASDAQ is also closing fast on an overbought daily read (see below), meaning we have reason to suspect – at the very least – that a period of uncertainty lies dead ahead.”
Take a peek –
The square green box above shows the NASDAQ on the verge of going overbought. It may not happen, granted, but we’ve little reason to believe that at some point in the coming days or weeks the NASDAQ won’t strike above RSI 80 and trigger some technical selling.
Indeed, if it occurs, it will be only the second time since the bull market began some nine years ago. Back in February of 2017 the NASDAQ’s RSI went 80+ for a few days, and a week later the Dow followed suit. The result was a two month sideways slide for the NASDAQ and a three month wander for the Dow.
Our trade today is predicated on a repetition of that scenario.
Look for NASDAQ outperformance over the next several months.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider selling the DIA September 21st 270 CALL for $4.30 and buying the QQQ September 21st 175 CALL for $4.23. Total credit on the trade is $0.07.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew