It’s Gonna Blow! Lance It! (QQQ)

It’s Gonna Blow! Lance It! (QQQ)

It’s Gonna Blow! Lance It! (QQQ)


At some point, most of us experienced the youthful dread of an overgrown carbuncle that required a quick prick to resolve – or a pebbly growth that emerged as a function of chafing, or some other non-gangrenous topical malady.


And of course, it’s never fun.  The results are so unsightly.


But the resolution of illness often plays out that way.


Like that hockey-puck sized lesion on grandma’s hip that required a brief admission to hospital and even general anesthetic day-surgery to remedy.  It was all so worrisome.


But the end to that slap-shot pain the woman experienced was nothing short of salvation for the entire family.  And what fun we had afterward as the sebaceous disk was stick-handled about our backyard Toronto ice rink for a full frigid January week!


With grandma’s exit from the hospital, she returned to fighting form, her diet changed for the better, and her vigor was re-channeled in a manner that gave the grandkids another full quarter-century of fun at her table.

Well, friends, today’s markets are showing signs of boils.  What was once a less mature, smooth skinned, lithe little equity chickster has now grown old.  And while those in the biz like to refer to these boils as ‘bubbles’, they’re patently not.  They’re boils, plain and simple, the direct result of a cultural ‘obesity’ that has taken a starving bite out of the American psyche.

“Don’t fill up on bread!” Grandma used to say.  But the nation didn’t listen.  It went one step further, gobbling up desserts one after another and finding ways of keeping them coming, fast and without delay, so that no one anywhere would be left unsatisfied.


And the result, as the markets clearly show, is a rotund ogre of a bitch that keeps getting injections of central bank insulin to keep her eating, Wall Street, sell-side Ritalin to keep her deadened to the prospect of bear markets, and a regular, massive dose of mainstream media Zoloft to divert her from the real issues that plague her life.


It’s a mess!


It sure is.  But there’s little to be done about it now.  The disease simply has to run its course.


Once it does, the inevitable lancing of the boil will come, along with its attendant river of pus and the tragic drowning of countless innocent victims.  And only then will we be able to consider re-nourishing the old gal to her former health.


And one more thing: the whole process will be played out over years – if not decades – so don’t hope for a quick resolution.


What to do?


That said, for we today who are aware of the mess we’re facing, the idea is to capitalize, and nothing more.  That’s our sole role in writing these weekly missives, and yours in pocketing a buck or two from them.


So long as the market is open and offering a trade on either the up- or down-side, so long will we be here to avail ourselves of it.


WHOA! Look out!


From Ice Rinks to Corrective Burns


There’s a great deal of negative ink flowing from the mainstream financial media these days, warning of an inevitable correction, of hyper-valuated markets and of the inevitable popping sound that has to follow.  And it’s reached a point that we feel duty bound to address it.


So let’s consider a few items that bear directly on the issue.


First, the media.


In the last few days, the following headline appeared in the New York Times:


When Will the Tech Bubble Burst?


And this one from Bloomberg:


World’s Top Stock Market Really Just a Handful of Top Stocks


While this was taken from CNBC:


There’s a Supervolcano Waiting to Erupt

Beneath a Seemingly Beautiful Market


And this from CBS Marketwatch:


Beneath the Glow of Stock Market Records,

Darkly Bearish Trends Are Lurking


And one has to wonder, has mainstream financial journalism finally won the day?  Can it successfully pick market tops and bottoms where it was once completely inadequate to the task?




But our hunch is that this is a contrarian signal, that all is well with the bull (for now), and that there’s more upside to come.


Decreasing Breadth


Now consider that the most recent equity gains in both Chinese and U.S. markets have come on the back of a few concentrated darlings that everyone owns and talks about, despite their inflated valuations.


In China, that includes companies like Tencent Holdings, a stock which accounts for a full quarter of Hong Kong’s year-to-date gains, and here, the so-called FAANG stocks, including Amazon and Facebook, which have played an inordinate role in all the major indexes’ winnings.


Q: Is it a problem?


A: Breadth is thinner than thin – true.  But the question remains whether 1) the rest of the market is now due to catch up to the tech leaders, or 2) those same overvalued names are due for a pullback that brings them into line with the deadwood.


And absolutely no one knows the answer to that question.


Retail Stock Buyer Chooses Witness Protection Program


There is still relatively little interest in equities on the part of Main Street buyers, whose bullishness – according to surveys from the American Association of Individual Investors (AAII) – is hovering in the 30% range, a level from which no major bear market has ever started, nor ever will.  Without the crowd on board, there’s no one to get fleeced, and that means there’s no serious downside in the near term.


That said, professional investors have been divesting themselves of equities at a NASCAR clip for the last three months and have been hedging against a selloff via options and other means equally fast.  As far as they’re concerned, the die is cast and the markets are headed lower.


But a look at the following chart shows that the “smart money” has vastly underperformed Ma and Pa for close to two decades.


Have the pros lost their mojo?


Our very urgent belief is that the indexes are ready for a spurt higher at this juncture and we’re playing it as plain vanilla as we can, with the sale of an index PUT spread and the purchase of a CALL.

- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]

Let the boil heat and expand!


With kind regards,


Hugh L. O’Haynew

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