Truth vs Reality: Cage Match to the Death (SPXL,TNA)

Executive Lounge, Options Trader Elite / Sunday, May 31st, 2015

We want to focus today on an issue that we’ve mentioned several times before, but that deserves special treatment at this time. It’s the matter of increasing your exposure to big-cap stocks as the bull market proceeds.

Background –

We contend that as the market peaks, it will do so on narrowing breadth, as nearly all bull markets do. But more than that, we’re convinced that the coupling of 1) an unprecedented and ever-increasing global liquidity with 2) access to instruments that permit immediate and easy entry into the blue chip sector (like index mutual funds, ETFs and stock futures) will keep the indexes climbing long after the underlying economic fundamentals and corporate growth numbers support any such advance.

How will it work?

In short, as the rush for increased returns intensifies, an eventuality that we believe will follow the rise in interest rates and a concurrent general exit from the Treasury market, funds will flow liberally toward U.S. equities and will concentrate in the above mentioned index-based instruments.

As a result, the largest, blue-chip value names will soar, morphing into a heretofore unrecognizable asset class, as momentum investing strategies take over, buying begets more buying, and quite possibly even leveraged ETFs on single stocks become available (you heard it here first, friends)!


Those companies that are currently index components – particularly of the biggest and most widely followed indexes – will, of course, benefit most from the surge.

On the other hand, those companies that fail to meet the standard of index inclusion will inevitably drop by the wayside, measured as they will be by the old, conventional investment metrics. The ‘truth’ of the underlying market will actually reside with these failing companies’ performance, while the ‘reality’ of the rising indexes will offer outsized gains to all those who remain on board.

Is this what it’s come to?

Afraid so, friends.

Though it wasn’t always the case.

Recent research from CIBC World Markets indicates a cyclical, broad swing between small-cap and large-cap leadership that can persist for decades before reversing.

For example, large-caps dominated investment returns from the mid-1980’s through 1999, while small-cap issues have bested the field for the last fifteen years. Small-cap performance has also been far less consistent. For example, from 1946 to 1965, 1969 to 1973, and July 1983 to October 1998, small-caps offered flat to negative returns, against a blue-chip performance that was far superior in each time period.

Timing one’s entry point is therefore essential to capturing superior returns from small-caps. Joe Q. Investor allocating funds to that class of stocks in 1980 would have waited twenty years to see his money produce profits.

According to the study, the switchover to large-cap dominance is still in its early stages, though according to CIBC’s figures, it’s already discernible.

The Charts, Huey!

Our own technical studies of the topic show a vast outperformance on the part of small-cap equities since 2001, but recently we’ve seen a new phenomenon.

The chart below matches the Dow Jones Industrial Average (DJIA) – the narrowest of all the big-cap indexes – the NASDAQ Composite Index and the S&P 500 against the iShares Russell 2000 Small Cap Index ETF (NYSE:IWM), the most widely watched of all the small-cap indexes (and a stock that turns over in excess of $3.5 billion worth of trade a day).


As you can see, all three major market indexes have been consistently gaining ground against the Russell 2000 since late March, and stand to rise further as both RSI and MACD indications for the small caps erode and head sub-waterline (in blue).

This is an exceptional event, and because we pay close attention to the movements of all asset classes, we foresee a robust shift coming into play based on the cyclical turn that the CIBC study examined, as well as the liquidity driven push into the indexes that we described above.

Taken together, we imagine there was nary a time more propitious to invest in the so-called blue chips, the biggest, most widely followed names that should attract the most attention as the bull moves into its final blastoff stage.


We have to warn you that this is new investment terrain altogether, and that no one has any experience in playing such a market successfully. The closest likeness we have to it is the bubble blowoff of 1999/2000 that was mastered by just a few momentum managers.

The rest of the investment pack held on far too long amid the promise of an imminent bounce and floundered on the rocks of tech-lust greed.

In that instance, truth eventually won out, but not before reality had its time in front of the mirror. And so it will be this time. Only difference is, the reality phase may continue a lot longer and may drive the market a lot higher than anyone could have even dreamed fifteen years ago.

There’s Mollah to be Made

That said, we’re going to bet on a very long dated trade today that matches small-caps against large, with the expectation that time itself will do all the heavy lifting for us – pushing the big caps into an orbital dizziness while at the same time dragging the punks into the bowery gutter.

The stocks we’re using to effect the trade allow us to stretch the time period to the max, as they both offer options that expire in January 2017.

They also offer us massive leverage, being leveraged stocks themselves from the Direxion family of funds.

And the trade goes like this – we’re going to purchase long CALLs on the Direxion Large Cap Bull 3x Shares (NYSE:SPXL) and sell them on the Direxion Small Cap Bull 3x Shares (NYSE:TNA).

The details are below, but we want to add one important rider…

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For anyone who can’t afford the margin on this play, the option exists to buy SPXL stock, now trading for $94.41 and selling TNA for $88.70. Total debit for 100 shares long/short would be $571.

Options Trader Elite recommends you consider the purchase of the SPXL January (2017) 115 CALL for $14.70 and sale of the TNA January (2017) 109.52 CALL for $15.00 in equal numbers. Total credit per pair is $0.30.


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For anyone who can’t afford the margin on this play, the option exists to buy SPXL stock, now trading for $94.41 and selling TNA for $88.70. Total debit for 100 shares long/short would be $571.

Options Trader Elite recommends you consider the purchase of the SPXL January (2017) 115 CALL for $14.70 and sale of the TNA January (2017) 109.52 CALL for $15.00 in equal numbers. Total credit per pair is $0.30.


With love of the hunt,

Hugh L. O’Haynew

4 Replies to “Truth vs Reality: Cage Match to the Death (SPXL,TNA)”

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