That’s Some Horse! (DIA,AAPL,UUP,IYT)
There are stats and there are stats. And, of course, when the market is in the middle of a panic breakdown, all the facts fit to print are lugged out of the analyst valise in order to convince you of what’s to come.
And here at Normandy, we’re really no different. Regardless of how little we trust the mainstream, fundamental approach to investing in this era of absolute government intervention, we have to rely on something. Coin-flipping went out at least a century ago in the stock buying game.
As we’ve stated repeatedly, the contest is now being played on the sentiment front – in large part – while flows of funds, sector rotation and some basic technical analysis still offer clues to market direction.
The larger picture will continue to be dominated by the size and degree of intervention by the Fed and Treasury, and while we’re always watching those two do-gooders like a chickenhawk, much of what they do is simply not transparent and the rest grinds its way through the system very slowly.
So it’s to the stats we’re forced to return for our commentary.
And we start with this –
As the market melted up through January, we saw an increase in retail investor participation and confidence, and, as the chart below shows, a never before four-week inflow into equity funds to the tune of $33.2 billion, including a wild $12.2 billion, one-week surge into active funds.
Take a look –
That was January 26th.
And as you can see, history was made.
But it wasn’t long before historians were prying open the record books for a second time.
Just one week ago (two weeks after the above), fund flows out of equities tallied their biggest ever read, registering a whopping $30.6 billion for the period ending February 7th!
Have a look here –
It’s clear that we’ve got an ADHD market that apparently forgot its Ritalin, and is running helter skelter from the buy to the sell with nary a moment to stop and consider what might be coming next.
You’ll also recall that in the midst of all that record buying, back on the 18th of January, we wrote:
And so they have. With an unprecedented wave of both buying and selling that we’re certain is going to characterize this last, blow-off phase of the greatest bull market in history, investors finally managed to climb aboard the equity horse… only to be summarily thrown off.
And to us, that’s a good sign. Because there’s very little that could better contribute to an environment of stock market fear and loathing than the sight of a wild bronco kicking about while you roll about on the ground beneath him.
Main Street is skittish, friends. And that’s bullish.
Take, also, the fact that the so-called smart money is also petrified of losing everything.
According to BofA/Merrill Lynch, over the last thirty days, fund managers in control of over half a trillion dollars rushed maniacally to take out insurance (buy PUTs) on their assets. As the chart below shows, this was the biggest spike in protective PUT buying in the history of the survey.
It also demonstrates just how skittish the so-called experts are, and points directly to the contrarian conclusion we’ve been pushed toward – that an interim and swift rise in the markets is all but inevitable.
But before we sit down to trade it, we have several open initiatives to report on.
And we begin with our December 14th rollout of our AAPL CALL options, from a letter called The Crypto-Reformation. Our instructions at the time were to buy back your open AAPL CALL and sell the February 16th 140 CALL for a credit of $0.50.
And because they come due tomorrow, we do it again today.
The options go for $27.50. Buy them back and sell the May 18th 140 CALL for $29.20. You get another 90 days and $1.70 more on the credit side.
Next up is our January 18th trade from Out With the Old. There, we urged you to buy the DIA March 2nd 265 CALL for $1.91 and the DIA June 29th 227 PUT for $2.09. Total debit was exactly $4.00.
We sold the CALL on February 1st in Let’s Talk Dollars for $2.02. And today, the PUT goes for $4.10, We say close it down.
That gives you a $6.30 take on $4.00 spent, or 58% in a month. Annualized, it’s a 696% haul.
On the 25th of January we wrote a letter called Don’t Look Back, in which we recommended buying the UUP September 21st 20 CALL for $3.65 and selling the IYT September 21st 220 CALL for $4.00. Total credit on the trade was $0.35.
Today, the UUPs are at $3.44, and the IYTs go for $2.05. Sell the former and buy back the latter and you net $1.74 on zilch up front. Adjusted for minimal commissions gives you a return of 1060% in a mere three weeks.
Finally, last week we penned a missive called Jimmy, We’re Caught in a Market Maelstrom, in which we suggested selling the DIA March 9th 256 CALL for $1.23 and the DIA February 16th 240 PUT for $1.36. Total credit on the trade was $2.59.
With the PUT ready to expire worthless tomorrow, and the CALL trading for $1.20, we say leave the former to rot and buy back the latter. That’ll give you $1.39 on $1.20 laid out, or 116% in just a week.
And that’s just fine.
Best thing to do when you fall off the equine monster is to get right back on.
And so we’re doing.
With a twist.
For anyone who sold out of their holdings while Humpty Dumpty was a’tumbling, we say now’s the time for a renewed bullish bet on the broad market.
‘Cause she’s on the rise.- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,