“I Hear Voices…” (QQQ,TYL)

“I Hear Voices…” (QQQ,TYL)

“I Hear Voices…” (QQQ,TYL)


There’s different kinds of insanity.  There’s the psychotic kind that no one likes to talk about, except when it exits the world, as Charles Manson did just weeks ago.


There’s also the less dangerous but far more common ‘dementia’ that strikes far too many good souls in their later years.


Then there’s a host of other illnesses for which both prescription meds and the ‘talking cure’ have been administered, with more or less success, for decades.


Schizoid Market


Schizophrenia is one of those illnesses, and it’s also what first pops to mind when we consider the current state of the stock market.  For how could it be that among the major equity indexes in the country, one has moved staggeringly higher while the other has slumped meaningfully?


Sure, there will be those who offer immediate pat answers to the question, citing the overbought condition of tech stocks that led to the NASDAQ’s recent sell-off, but we’re not satisfied with that.  We acknowledge the argument, but aver that it ignores some of the tougher realities at work in the market.


But before we get to that, take a quick look at a chart of the Dow and NASDAQ for the last ten trading sessions.  The Dow is represented by the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) and the NASDAQ by the Power Shares QQQ Trust (NASDAQ:QQQ).

The difference in performance is noteworthy, particularly because this kind of divergence has never happened during the course of the current bull market, a span of nearly a decade.  Outperformance, yes – we see that on a regular basis.  Diverging performance of this variety, no.


More than that, it’s simply not a normal part of market psychology to watch huge name stocks like Facebook, Google and Amazon streak earthward without triggering a sympathetic sell reaction from other quarters – ALL other quarters.


So is it schizophrenia…?



Our feeling is that there is a certain brain-fog active in the current market, at the very least.  As for full blown schizophrenia….


The Evidence Mounts


Consider Merrill Lynch/Bank of America’s 2018 forecast, penned by Chief Investment Strategist Michael Hartnett, in which he calls for a steep rise in equity prices in the first half of the year followed by a steep decline in the second.  The report is sub-titled:

“A Year Ahead Forecast So Bullish, It’s Bearish.”




After skimming the report, we can only offer that neither Mr. Hartnett nor his merry band of believers at ML/BoA know if a decline is going to come, when it will come, how deep it’s going to be, or if it will be followed immediately thereafter by a surge to even greater heights.


Now on to this –

The above chart is an attempt to dissuade you of any notion that stock prices have been tied to earnings growth.  They patently haven’t.


For the last three years cumulative gains on the S&P 500 have resulted in a 35% rise in the index (red circle, top).  Against that, cumulative corporate earnings growth for the period have amounted to a measly 2%.


Which raises the question – if corporate profits are only 2% higher today than they were three years ago, where does the 35% stock gain come from?




Some will point erroneously to corporate buybacks accounting for the rise, but again, these kinds of gains are not within the realm of even the most cash-rich corporations to accomplish.  They may induce confidence, to be sure.  But the money has to come from the street.


Which leads us to this –

The above chart shows a wild rise in the flow of cash into U.S. ETFs, a phenomenon that more than amply accounts for the move in equities since last November.


What’s bizarre, however, is that concurrent with the rush to own all of these ETFs, bullish sentiment on Main Street – as measured by the weekly AAII bullish sentiment survey – has barely managed to climb as high as 40% during that entire period.


Look here –

The average bullish read over the last year is a pale 34% (blue line).  Bullish sentiment did climb as high as 49% in the initial ramp-up of late November/early December, 2016, but since them, bulls and bears have been jockeying for pre-eminence on a week by week basis in the 25-35% range.


And the question again has to be asked – if Joe Investor is so hesitant about market direction, why in the name of Vladislav Tretiak was he doing all doing all that ETF buying?

Our Psychiatric Trade


Just one open trade to deal with before we move to the couch.


It was opened last week in a letter called Caution! Disaster! Markets on the Rise!, wherein we urged you to consider selling three (3) TYL June 15th 165 PUTs for $5.80 each and using the proceeds to purchase a TYL December 21st (2018) 185 CALL for $17.30,  Total credit on the affair was $0.10.


And now, the stock is trading strongly, but the tenor of the market – as we’ve outlined above – is difficult to read, let alone predict.  And it’s precisely because of that we’re recommending you move to take profits.


The June PUTs sell for $5.20 each and the December (2018) CALL runs for $18.83.  Buy back the former and sell the latter, and you gross $3.23 on ten cents spent.  That’s a 3130% win!


And it smells just like a 50 ounce, longhorn t-bone with a butter-drenched baked potato on the side.

This week’s trade is made with the full expectation that markets will move in schitzy fashion over the next thirty days, one way or another – and strongly.


To that end, we’re buying a straddle on the QUBES, the NASDAQ 100 proxy seen on the chart above (NASDAQ:QQQ).


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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