Options Trading: One of the Best Ways to Exploit Herd Mentality

Options Trade: One of the Best Ways to Exploit Herd Mentality   In 2005, 450 sheep jumped to their deaths.   One sheep dove.  Another followed.  All of a sudden, a flock of sheep began jumping off a cliff for no real reason. Shocked shepherds would watch as another 1,500 jumped.   Hundreds of sheep perished, as they got caught up in herd mentality.   Each followed and jumped simply because every other sheep was doing it.   And as uncommon as this may sound, it’s not.   In fact, this very same thing happens each and every day among traders and investors.   We buy because everyone else does.  We sell because every one else does.   But we never question what we’re really buying or selling, which can be quite costly.  Instead, we take the leap simply because every one else is doing it.   And if every one else is doing it, it must be right.  Right?  Well, not exactly…   In 2009, Kiplinger’s ran an article by Robert Frick, titled, “Don’t Trust the Crowd.”   It noted:   What’s scary about the herd mentality is how insidiously it gets you to see things differently. In fact,…

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Buyback Magic (DIA,QQQ)

Buyback Magic (DIA,QQQ)   There are two distinct and opposite forces currently operative in the domestic equity market, both of which have significant clout.   The first is bullish, and, as our partner in crime, Hugh L. O’Haynew, outlined earlier in the week, it’s accounted for exclusively by the corporate buyback tsunami that began shortly after Sir Trumpendonald’s tax relief regime was passed into law late last year.   The size and scope of those buybacks has been ginormous, and we’ll have more to say on the matter in a moment.   The second active force in the market is bearish and is accounted for by everyone else who plays the investment game, including fund managers, institutional investors and regular hacks like you and me.   The reasons for their selling are manifold and include, among others, weakness in emerging markets, European politics and debt, trade wars, rising interest rates and a general sense that stocks have just gotten too pricey over the last year and a half.   Indeed, a 39% rise for the Dow and a 56% percent climb on the NASDAQ since the Trumpendonald won the election is something that should get everyone squinting.   We’ll have more…

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How to Escape a Market Head-Lock (AMZN)

How to Escape a Market Head-Lock (AMZN)   There are folks in the investment world, many of whom get a lot of airtime, who’ve been down on the equity market for years.  Their claims that stocks are over-bought and wildly expensive according to every traditional historical marker are absolutely right, and in that regard no one can gainsay their research or their understanding of how the markets have worked for the last 60 or 70 years.   But sorry for them, something changed.   In the last two decades, governments the world over have begun to involve themselves in the market’s workings to a degree that’s not only unprecedented but alarming.   The bank of Japan, for instance, now owns at least 75% of all that country’s listed ETFs, making it a top-ten shareholder in 40% of the nation’s equities! It also holds a full 42% of the country’s bond market, a sum equivalent to Japan’s entire annual economic output. Staggering.   Japan has been in an economic funk for decades, and this, apparently, was their best thinking on how to break out of it.   Plainly, it hasn’t worked. But that didn’t stop other nations from following the same…

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Get A Haircut! (FXI,QQQ,DIA,USO,IYT)

Get A Haircut! (FXI,QQQ,DIA,USO,IYT)   Earlier this week, freewheeling Hugh L. O’Haynew over at our Wall Street Elite desk decided to push the toothless FAANG narrative.  He was keen on portraying them as no match for the traditionally more defensive sectors going forward.   Well, no sooner had the words spilled out of his Visconti fountain pen, than old Huey was once again proven King Solomon, wisest of all men. Our fellow Modern Bully got his timing wham-doggy perfect.  The market did a flip like a four egg omelet down at the Canary Restaurant on Cherry Street, splashing the butter and bacon fat this way and that, and scorching old Netflix by a greasy 6.5% on the day. There were signs over the weekend, of course (for those without crust on their eyelids – thick crusts like you find on the toast down at the Canary), that a selloff was in the making.  But Huey already laid it out here.   What remains for us to determine is whether the selling will continue or was just a one-off, bad hair day for the big tech NASDAQ honchos.   And the answer is…   A look at the chart of the…

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Child’s Play (GDX,XLP,DIA)

Child’s Play (GDX,XLP,DIA)   It’s fun to be a kid in the summertime, and play all those games.   When we were little, there were a bevy of inventive minds on our street, children who were just as happy to make up their own amusements as play ‘Kick the Can’ or ‘Hide and Go Seek’.   There was Stewie Ferguson, for example, who invented a real doozy of a game called “Smell my Finger”. The Viccari twins, I think, made up “Where’s the Worm?” And both those games, of course, became threateningly exciting when a blindfold was added to the mix.   It was rompus fun for all, summer and winter, too, when the O’Malley dog had puppies and we sat in a circle around the Sedgewick’s chestnut tree playing “What’s Barney Licking?”   How Little Things Change…   Today, the blindfolds are still on while investors carouse with “Run up the Techs” and “Valuation Revulsion”. And while no one seems ready to join in a round of “Pliny the Prudent”, we’ve decided to initiate a bout of that classic game today, regardless of who throws in with us. We’re not the only ones peddling the commodities story these days….

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Buyback Perplexity? Try Italy. (EWI,GLIBA)

Buyback Perplexity? Try Italy. (EWI,GLIBA)   Our partner in crime here at The Modern Bull, Her Majesty’s Senior Liege, Hugh L. O’Haynew, earlier this week outlined a quasi-criminal project so widespread in corporate circles today that the Securities Exchange Commission felt compelled to investigate it.   The transgression?   Corporate insiders selling their holdings on the heels of share buyback announcements. And one might wonder, what’s the big deal?  Fellow wants to turn a buck; let him sell into strength.  Hell, let him sell whenever he wants!   But there’s more to this little trickster play then meets the eye, my innocent little doe-eyed peach.  For the endgame may not be so straightforward as ‘turning a buck’, or cashing in to pay for daughter Wilma’s graduation dress.  Oh no… Conspiracist Banter There are those of us in the investment game who are more jaded, you might say, and can’t help but think that these sales are coming precisely now because corporate players are worried that the highland jig is up.  And they’re implementing the buybacks as a prop to get out of their positions at a time when confidence is thinning and mom and pop market participation is thin-thin-thin.  …

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Monster Chiller Horror Market! (QQQ,DIA,USO,IYT,GLD,SLV)

Monster Chiller Horror Market! (QQQ,DIA,USO,IYT,GLD,SLV)   There’s a point in every horror movie in which the terror and gore can get no worse.  And then, as if the gods had collectively reached into their cruel joke handbag, it manages to do just that.   It gets much worse.   The freight train has just leveled the town, the bodies are strewn everywhere, widows and orphans and crying babies, fires burning, carnage, mayhem, bubonic sores and pus galore … and whaddaya know, that neo-Viking motorcycle gang from Peoria arrives, thirsting for a good mead-induced blood-letting and plump, diabetic children to sacrifice to Odin. It’s precisely at that point that the fright turns almost comic.  Sure, there are those who get up and leave because they can’t handle what they know is going to be barbarism for the most barbaric.  But for others, it’s hard to contain; the giggle is on, and it’s gathering strength, because the whole affair has been transformed into some sort of ‘surreal state of cognition’ – a dreamlike situation where you’re watching the horror, still somewhat involved, but you know it’s a dream.   Welcome to the Stock Market!   The current market set-up bears a striking…

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Haughty, Haughty Boy! (NUS,NOC,SPY)

Haughty, Haughty Boy! (NUS,NOC,SPY)   Much of the commentary here at Modern Bull over the years has been dedicated to preparing for a bear market – and a potentially devastating one, at that.   It has long been our belief that we’re now witnessing the mother of all bull markets, the final, euphoric blow-off top to an advance that began in the depths of the Great Depression some eight decades ago.   It’s an hypothesis shared by others, though to our credit, there are very few who are willing to stick out their necks and claim – as we do – that we still have one more ‘Old Faithful’ spasm of buying ahead of us, the likes of which has never been experienced by today’s market players. What follows, of course, will not likely be pleasant.  And we’ve been proponents of stocking up now in preparation for what’s liable to come.   Banking on Yourself   We, of course, were the first to introduce the world to the Four Gs Investing regimen – Guns, Gold, Gas and Grub, a catchy and poignant slogan that a number of ill-witted, unimaginative copycats have since gone on to pilfer.   As you’ve come…

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Equity Happy; Treasury Crappy (TLT,DIA,FCX,UUP,IYT)

Equity Happy; Treasury Crappy (TLT,DIA,FCX,UUP,IYT) We’ve been talking in more emphatic terms about the bond market lately, though not because we have anything new to say on the matter. The message has been consistent for several years – that a grand selloff in Treasuries would funnel tremendous flows of cash into the equity market, precisely at the moment that U.S. stocks were perceived as the greatest possible investment holding of the last three centuries. In other words, there’s a bullish equity bubble in the making that will eventually tear the buttocks from Ginger May Gorilla, while sending the bond market lower for potentially many years to come. So CRASS! Our latest rantings, however, come at a time when the yield on the three year Treasury has come up even-steven with the yield on the S&P 500 (see below), an inflection point that could have a significant impact on the direction of both asset classes. Here’s the way it looks graphically – The last time the two met, the vectors were reversed, with a breakdown in Treasury yields creating an advantage for equities (red rectangle). That took place, of course, while the stock market was melting down, and nary a lad…

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Wrap It Up and Ship Her Away! (IYT,AAPL,DIA,XLP,DBC)

Wrap It Up and Ship Her Away! (IYT,AAPL,DIA,XLP,DBC) We’re going to open today with an indicator that gets far too much attention, but that still has much to offer if taken in proper perspective. It’s the VIX Index, the Chicago Board’s measure of implied volatility in S&P 500 options, sometimes called the market’s ‘fear gauge’. Those with a simplistic view of the VIX claim that when it’s low – watch out! – the market is about to take a spill. These folk see the complacency behind low volatility in options as an inevitable contrarian sign that the market is about to explode. And there’s truth to the notion that low volatility is eventually replaced by high volatility. The opposite is also true. Periods of high volatility lead directly to periods of low volatility. On a long term chart, it looks like this – But it’s also clear from the chart that volatility can remain excessively low for extended periods of time, rendering the “VIX at historic lows!” crowd all but irrelevant. A New Take We were been pioneers in the formulation and application of a related indicator that we termed ‘volatility compression’. It’s a marker that has served us well…

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