Contrarian Sentiment Bullgasm (SPY,TLT,AAPL,TLT,XLK,DB)

Contrarian Sentiment Bullgasm (SPY,TLT,AAPL,TLT,XLK,DB)

These are our kind of headlines –


It’s not often we get a splash of copy that includes the likes of the above on just a single perusal of the news galaxy, but that’s exactly what happened when we powered on yesterday.


And we’re pink-tickle drunk over it.




Simple.  The Iron Law of Investor Certitude (ILIC) makes it perfectly clear that –


  1. The stock market is a machine that is built, maintained and finely tuned for the express purpose of separating Joe Average Investor from his life savings.


  1. It therefore follows that if no one is invested, there’s no such separation of savings to be had.


  1. That being the case, the market will now be forced to rise until a threshold level of average Joes are teased back into the game and can be fleeced of their hard earned cash by the machine.


Hate to get nasty about it, but when the thing is a screaming buy, we just gotta scream ‘buy’.


That being said, the world is not all headlines, as you well know.  Sometimes the contrarian message is hidden in the actual article that follows.  And sometimes, as we’re about to show you, the headlines and the copy that follows both tell a tale of contrarian delight.


So listen up.


Fund Managers and Hedge Fund Operators are currently indicating with near consensus lemmingitude (pronounced le-MIN-je-tude) that they hate the prospects of equity markets for the next six months.


The latest Bank of America/Merrill Lynch Global Fund Manager Survey indicates that the bigshots have increased their portfolio cash allocations to 5.8% (see below).  That brings them to a fifteen year high and is indicative of near panic levels of sentiment toward stock ownership.


What’s got them so worried is the prospect of rising interest rates over the next six months, a development that will almost certainly come to pass, as the Fed has all but sent the world a WhatsApp announcement to that end.


But it’s how the bond market adjusts to that eventuality that appears to have them most spooked, with many fearing an indelicate run to the exits would dislocate an otherwise orderly norm that exists in that market.  To date, the selloff in U.S. Treasuries has been severe, amounting to some 8% since July (the U.K. and Japan have lost 11% and 12% respectively over the same period).


And that’s before a rate hike has even occurred.  What if another, unexpected or more aggressive hike is required?  What if two?  That’s what instills terror in these investment pros.


The other things they fear are 1) a Trump Presidency, with all the renegade unknowns it entails, and 2) a breakdown of the European Union, an occasion whose likelihood has apparently grown since the September survey results.


See here –


Note that a crash in the bond market (in red) was not even on the investment radar in September!


Hedgies Scream Bloody Murder!


As to the hedge funds, they’ve apparently decided after a full six months of net bullishness to get the heck out of Dodge.


Yet it’s the speed at which they did it that’s so impressive.


The chart below shows the current net short position (at top) and the number of contracts transacted required to get there (bottom).


The hedgies got scared.  At a rate unseen in half a decade.


When this kind of fear has stricken the silk tie set, it’s time to pile in – not without the understanding that we might yet see some short term turmoil; indeed, it’s likely.  More, we should remember that no market ever falls significantly when the masses are on the sidelines.



You should also take to heart that the financials as a group have been soaring of late.  That includes the banks and brokers, with financial behemoth Goldman Sachs (NYSE:GS) making a tabuli salad of Wall Street’s earnings expectations.


For us, that’s all that needs be said.  When the financials start turning it on, you can be sure that we’re headed into the final, blow-off bull stretch.


Trades That Open and Trades That Close


Before we offer you your money-making caper for the week, we’re going to close down three successful initiatives that need immediate attention.


The first was opened over a year ago, on May 19th, 2015, in a letter called Yields on the Rise Means Techs are in Play.  There, we advised the purchase of the XLK January (2017) 47 CALL for $2.38 and the sale of the TLT January (2017) 140 CALL for $2.39.  Total credit on the trade was $0.01 per pair.


And today?  The XLKs go for $1.71 and the TLTs for $0.96.  Sell the former and buy back the latter and you net $0.76 on nothing down.  That’s a very worthwhile 407% when adjusted for commissions.


Next was a letter called New World Volatility, sent out a month ago, on September 15th.  The trade recommended you sell the AAPL October 28th 116 CALL for $3.70 and the October 28th 108 PUT for $1.48.  Total credit on the trade was $5.18.


We still have a week to go, but we’re not taking any chances.  Buy back the 116 CALL for $2.93 and leave the PUT to wither.  We’ll get back to you next week with a final tally.


Last Up a Doozy


Finally, we opened a trade on Deutsche Bank three weeks ago that had you buy the DB January 14 CALL for $1.05 and sell the DB January 9 PUT for $1.00.  Total debit on the trade was $0.05 per pair.


The letter was called The Ineluctable Course of History, and, as fate would have it, it meant big profits.


Today, the CALLs go for $1.40 and the PUTs for $0.35.  Sell the former, buy back the latter and you walk home with 2100%.


In less than a month.


Today, Matty!  What about today!?


Today we’re playing a theme we’ve trumpeted for several years – long equities, short bonds.  The Great Unwind, as many have called it.


We’re using the SPDR S&P 500 ETF (NYSE:SPY) and the iShares 20+ Year Treasury Bond ETF (NYSE:TLT), and it goes like this –

- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]

Many happy returns,


Matt McAbby

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