Top o’ the Year to Ya! (DIA,FCX)


Executive Lounge, Options Trader Elite / Wednesday, December 20th, 2017

Top o’ the Year to Ya! (DIA,FCX)

 

It’s always easier to look back after the fact and act the sage, point out how obvious all the signs were, how the charts all pointed to that particular Wednesday being the top, and that particular earnings report triggering the selling, and the weak kneed trader at that hedge fund, already embroiled in a drug takedown that implicated the Gandhi crime family, whose sticky finger opened the selling when his Xanax wore off and he was without pills for better than an hour.

 

Sure.  It was easy as pie.

But the truth, of course, is much more mundane.  Very few see the day or the sign or the true cause of any market’s rollover.

 

Though everyone tries to guess at it…

 

So they’ve been doing since the first day we walked into the business, wide-eyed and expectant, warning us, on the one hand, that the whole thing was about to explode and send up a dust cloud that would cover the earth for a century.  And they had the books to prove it.  We read them all.

 

On the other hand, were the Panglosses of the business, falling over themselves to convince us that the latest momentum chase was a genuine pathway to wealth and stardom, and that the biggest loss would come from not being on board.  And they had their books, too.  We read some of them.

 

In the end, both saw their day.

 

Our career has spanned enough time to have rock solid remembrances of the ’87 crash, the wild ride higher to the dot.com bubble, the subsequent devastating crash, as well as the sub-prime debacle of 2008.

But today’s bullish rise is unlike anything we’ve seen before, because it is, in fact, different.   The difference lies precisely in the unprecedented level of government intervention in markets and traditional market processes.

 

No one can deny it.  And no one can say for how long the government ‘bump-on’ effect will last.

 

No one.

 

So when it comes time to talk of a trigger that will ultimately cause a selloff – even a five or ten percent decline (we’re not asking for a lot here, gang) – again, the scholars and sages got nothing.

 

Because no one really knows.

 

It could just as easily be a real event – like a war or an impeachment or a bankruptcy – as it could be a ‘sell the news’ affair.  That is, something completely expected and baked into the pie – like the latest tax cuts, that finally get passed and have everyone looking left and right for their next reason to buy.

 

And if they don’t find one, maybe they’ll sell.

 

Maybe.

 

That scenario has crossed our minds a lot of late.  So much of the so-called ‘Trump bump’ – the 36% move higher on the Dow that began directly after the election – was predicated on the incoming president enacting his weighty, pro-business, tax slash.

 

And now that that’s been done, is there anything else to come?

 

There’s economic growth, sure.  There could be some earnings growth, too.  But will it be enough?

 

Maybe.  Maybe the market keeps rising here.  Maybe it moves higher through the holiday season in a Santa Claus rally like no one’s ever seen.  Maybe we get another five to ten percent…

 

Until the calendar changes.

Sure.  It could be that, too.

 

A simple rollover of the date from 2017 to 2018 could cause an abundant selloff.

 

How?

 

With their annual stats locked in, all the hedgies and pension and mutual fund managers could send out their self-congratulatory marketing material to customers new and old, colorfully detailing their blockbuster, profit-smashing year (which everyone else also had), and hype the call for new money.

 

That’s the way it works, after all.

 

They could also use that opportunity to sell like devils, knowing that any further rise would likely offer them a chance at a quick catch-up – after all, this train has been relentless.

 

At the same time, knowing that the year past was white-hot and the market is long overdue for a retrenchment, they might also get out with the hope of successfully timing their re-entry.  When?  Hard to guess.  Sometime after the last sucker sold out in early spring maybe?

 

It’s also possible.

 

That’s the way we’re currently leaning.

 

But before we offer you a profitable way to play that eventuality, please consider the following trade that requires your attention.

__________________________________

 

It was offered on July 27th in a letter called Metals. Now.  In that missive, we urged you to sell the FCX September 1st 15 CALL for $0.68 and the FCX November 17th 13 PUT for $0.47, and buy the FCX January 19th 16 CALL for $1.19.  Total debit on the trade was $0.04.

 

On August 31st, we closed the September 1st 15 CALL for an additional debit of $0.06 in a letter called When the Bystander Wins.  The November PUT expired worthless, and today, the long January CALL goes for $1.57.  We say sell it, and be happy.

 

You net $1.47 on a ten cent layout, and that’s a healthy 1470% gain.

 

Make us more money, Matty!  Do it now!

 

You got it, partner.

 

As we stated above, we’re leaning toward a rise through the New Year followed by a selling event immediately thereafter.

 

And it appears we’re supported by the action in the options market, where an overwhelming number of investors have suddenly turned bullish.

This kind of activity regularly portends an upcoming selloff.

 

We also note that the latest numbers from the National Association of Active Investment Managers shows a group climaxing with bullish delight.  Have a look –

It’s happened numerous times before, but never to this extent.  Active money managers heading into 2018 are exposed 109% to the equity market – that is, as a group, they’re significantly leveraged long!  That’s the highest reading in the survey’s 11-year history.  And it shows a group expecting massive gains over the near term.

 

And so do we.

 

To that end…

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Many happy returns and a wonderful and safe Xmas Holiday to all our glorious readers!

 

Matt McAbby

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