Neither Here Nor There (QQQ,TLT,FB,IEF,SPY)
It happens all the time. The Mrs. goes out to buy some fish for Friday, and the boys and I are left lunchless, waiting all afternoon for the car to pull into the driveway.
Not that we object to her having a few hours with Meave down at the Brutus Café on Plympton St. And I can certainly whip up a round of tomato, mayo and cheese sandwiches that the lads are downright fond of…
But in the meanwhile, we still get to worrying.
Oh, she’s never delayed too long – and certainly the habit is so common now that we should have faith that all’s well, and her need for a break and a wee chat is just fine.
It’s just not knowing that’s the hard part.
Kinda like today’s market direction.
Where the Hellarwee!?
It appears that any confusion you’re currently experiencing regarding the next moves in equities is now as widespread as the flu.
NOBODY has a clue.
As the following charts from the American Association of Individual Investors (AAII) show, the normal order of sentiment amongst investors has been inverted, shaken, pilloried and set to Stravinsky’s ‘Rite of Spring’.
Have a look –
As the above charts show, since the beginning of the year bearish sentiment has zigzagged from 15 percent up to 35, dropped back to 20 and then reversed higher to its current 35.
The confused ones (neutrals) have gyrated from A low in the 20 percent range up to 45, only to settle back down recently at 32.
But what’s maybe more important than all the meandering and dithering hither and thither, is the fact that this is only one of a handful of occasions over the last two years that bulls constituted the smallest of the three cohorts in the Ma and Pa investor class.
And what’s more, that occurrence has generally coincided with a new move higher on the indexes. And it’s been most explosive when bears were the leader and bulls brought up the rear, as is the case today.
The last time we saw such a BEAR/NEUTRAL/BULL sequence was back in the first week of September, 2017.
Right before this happened –
Is it proof positive that we’re now in for a wicked rally?
Does it mean the potential is there for an upside surprise that catches the simple folk – mainstreet’s ham and eggers – by surprise?
There’s a Fly in the Ointment
All is not yet perfect in stock-land, as a cursory look at the charts below reveals.
Not only do we have breakdowns in a number of the tech darlings, viz. Facebook, Tesla, Alphabet (Google) and Nvidia, but the broad market averages seem to be in trouble.
Take a peek –
This is a chart of the Dow, with the S&P500, NASDAQ and Shanghai big-caps (FXI) squished in alongside.
And all of them, save the NASDAQ, appear to be dangling by a thread.
In each case, price has been playing about the 137 day moving average for better than a week (red circles), and whether that line holds is crucial for understanding whether we’re yet out of the woods.
And isn’t it fascinating that, despite the battering we’ve seen from the NASDAQ’s market leaders, that index presents as the most resilient of them all – with price all the while above the 137 day moving average, barely even engaging it.
What That Says About Market Leadership
Before we parse the meaning of all of the above and offer you a trade for the day, we have a couple of open initiatives to discuss.
And we start this –
On January 30th we penned a letter called Getting Carried Away, in which we urged you to purchase the IEF June 15th 105 CALL for $0.70 and sell the SPY June 15th 310 CALL for $0.75, for a total credit of $0.05.
Today, the IEFs trade for $0.20 and the SPYs for $0.05. Sell the first and buy back the second, and you net $0.20 per pair traded on nothing laid out.
Next on the block is a trade sent in a letter called The Wisdom of Solomon from February 6th. There, we recommended you consider buying the TLT May 19th 124 CALL for $1.64 and selling the TLT May 19th 117 PUT for $1.49. Total debit on the trade is $0.15.
Today, the CALLs are trading for $0.77 and the PUTs for $0.43, and we’ve had enough. Before it gets turned around, sell the former and buy back the latter, and you come home with $0.19 on $0.15 laid out. That’s a profit of 127% in two months.
Finally, last week we recommended you purchase one lot of Facebook shares, then trading at $160.06, and sell a lot of the QUBES (QQQ), then going for $164.40. Total credit on the trade was $4.36 per board-lot matched.
And today, it looks like this – FB trades at $156.87 and QQQ at $157.76. Sell the former and buy back the latter and you net out $3.47.
This Week’s Trade
We’re going to play the above ‘neither this way nor that’ market in a manner that’s best designed for such a reality.
We’re going to make a few critical assumptions, too. Foremost among them, we’re going to assume that over the next three weeks market volatility will decline. That is, we neither expect a white hot rush to the buy side, nor do we foresee an immediate fail that would bring equities lower to the next line of support.
If it happens, the bull case will require time to garner adherents. And the technical strength of the NASDAQ offers hope that any further decline will also take time to unfold, as market players decide whether the tech leaders have it right or the old bellwether Dow is once again the standard bearer of market direction.
In either case, the market will muddle for a little while before deciding.
So we’re selling volatility.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider selling a diagonal strangle using the PowerShares QQQ Trust (NASDAQ:QQQ). Sell the QQQ April 13th 150 PUT for $1.60 and sell the QQQ April 20th 162 CALL for $1.44. Total credit on the trade is $3.04.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Upside breakeven is $165.04
Downside breakeven is $146.96.
With kind regards,
Hugh L. O’Haynew