Finally! A Financial Ever-gasm! (AAPL,TLT,SPY)
Is this it?
Like the long sought after Fountain of Youth, have we finally managed to create financial perfection? A means by which wealth never dies? A device by which it only grows and grows? Where profits are guaranteed in a never ending advance toward greenback bliss?
Could it be that there is, indeed, a place where glad tidings and robust, good cheer flow in swaying amplitude? Where the champagne flows, the laughter spills and the bad guys are routed regularly? Where the Leafs finally win the Stanley Cup?
Could it be?
There are many who point to signs that the Trump Rally is coming to an end, but we say to hail with that! Mr. Trump, it could be, has provided just the right mix, a perfect elixir of Tweetery and policy that’s neither too hot nor too cold that keeps the pie baking sweet and crisp for all eternity.
Could it be?
Let’s look a little deeper.
We’ll start with the sentiment numbers we always rely upon to determine if a top is in, those from the American Association of Individual Investors (AAII). They run a weekly survey of their member ship to determine how bullish/bearish Main Street is, and these are their latest results –
In short, no dramatic change in bullish sentiment has occurred of late, despite regular new highs on the major indexes over the last four months. Yes, there was a brief blip back in December and January (blue circle), but that number very quickly faded over the next five weeks.
So, not only do we see no change in sentiment today, but it’s no change at relatively muted bullish levels. That is to say, there’s no preponderance of bullish sentiment at present, nor has the general public caught on to the fact that the market is hot – save for that brief seven week period in which they found some inspiration.
Bullish sentiment continues to waver between 20% and 40% as it has for the last two years (red square).
And what does that mean?
First off, that no matter what happens in the next month or two, no matter how shallow or deep the pullback is – and there will be a pullback – this is not the end. Without Main Street participation and a gung-ho AAII bullish indication, the party has a ways to run.
Have a look at the following –
The above stats from Deutsche Bank show that we’re way beyond the statistical average duration for a 3% drawdown. That means one’s now very likely.
Will it happen tomorrow? Maybe. Could we wait another three or four months, or longer, before it occurs? That’s also possible, but statistically unlikely, for whatever it’s worth.
In general, final phases of bull markets are long, drawn-out affairs, as was the top of the dot.com bubble of 1999-2000. In that instance, and others like it, the market just kept climbing beyond the rational, then beyond the absurd, and made fools out of a great many naysayers and otherwise bearish prognosticators, who bailed (very) early and missed out on literally years of profitable equity action.
This Time Will be Worse
We use the term ‘worse’ here in a very narrow sense. We’re suggesting that the sober calls to bail out of equities will grow to a cacophonous din – far louder and longer than they were in the last major bubble – before this treasonous, heathenous monster of a bull finally takes the sword.
And while many will lose a great deal on the short side, many more will suffer from the opportunity cost of sitting it out.
Only the fools – like us (hee, hee) – will attempt to continue to wade in its warm waters ‘til the end.
In our own, steady and safe Normandy way, of course.
Moving Right Along…
Now we examine a few trades.
Let’s start with our February 8th initiative, Overripe Fruit, in which we instructed you to consider selling ten (10) AAPL February 24th 135 CALLs for $0.18 each and one March 24th 134 CALL for $0.84, for a total credit of $2.64.
It wasn’t one of our better efforts, as we noted last week, in From Trump Tower to the Seeonee Jungle. The 135 CALLs expired in-the-money, and we were forced to take immediate action to fend off a loss. What did we do?
First, we sold ten AAPL March 31st 136 PUTs, each of which went for $2.17.
Your credit on that segment of the trade was $2170. The action was taken to ensure the shares were bought back should they fall below 136 by expiry.
Next, we advised you to take those proceeds and buy ten March 3rd 137 CALLs for $0.85 each, for a net total credit of $1320.
We explained at the time that if the stock traded north of 137 by this last Friday, you would also be bought back in.
So where do we stand today?
Well, last Friday, the CALLs expired in-the-money, effectively closing out the short for a loss of exactly $2000. Against that, we took in $1584 in credits (1320 + 264), which leaves us with a net loss of $416 on the trade with 10 short March 31st 136 PUTs and one short March 24th 134 CALL still open.
Not a great position to be in.
AAPL shares, as far as we can see, have not as yet drank the juices of the Ever-gasm tree. But neither has their bull run ended. The stock will certainly retreat. And if it doesn’t, we’re prepared to take evasive action, as we’ve done above.
For more on Apple, and our next moves going forward, see below.
We’ve a second initiative to report on today, our January 31st trade from a letter called Shall We Take a Dip? wherein we encouraged you sell the TLT February 24th 117 PUT for $0.75 and buy the SPY February 24th 220 PUT for $0.73. Total credit on the trade was $0.02.
And that’s where it ended. The two expired out-of-the-money just over a week ago, and we’re left with our big-deal 100% profit of two bucks.
Today, we continue to play with our apples.
Our feeling is that it’s best to hedge our current set of short AAPL options (10 short March 31st 136 PUTs and one short March 24th 134 CALL) by taking the following action.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew