Turn Tide, Turn! (TLT,LVNTA,SPY)

Turn Tide, Turn! (TLT,LVNTA,SPY)

Turn Tide, Turn! (TLT,LVNTA,SPY)

We file these reports on a strict weekly deadline. No matter what happens, we’ve committed ourselves to arriving at your inbox on time, week in, week out, every Thursday by noon.

And, of course, it’s tough nuts to us if we have to offer a trade in the midst of a major market selloff. Lord knows how tough it is to read markets while a storm of volatility is crashing down upon us, just like that which appears to be at our doorstep.

We have a few options available when this happens, to be sure. We can refocus on a calmer quarter of the investment world and attempt a trade where no one is looking, so to speak, and, indeed, that has proven an effective strategy on several occasions. The commodities, as a group, have been surprisingly stable during this week’s five percent NASDAQ selloff, and could provide us with a safe harbor trade, if needed.

Or we could hedge ourselves with a bet on just about anything that offered limited upside or loss potential. A short term spread in either direction would accomplish that.

But we’re going to undertake something a little less conventional at this point, a trade that could offer us a great deal of profit. But before we get to it, we have three other trades to update and then some background data to offer.

We start with the trades.


In the first place, you’ll recall that back on the eighth of August we initiated a trade using Liberty Media (NYSE:LVNTA). We subsequently bought the stock and sold a CALL option in a follow-up letter. As it turns out, Liberty Media recently hooked up with another media concern, and the new ticker is GLIBA. Note it down for future reference. The price of the stock and strikes on our options remain unchanged.

Next up was our Treasury trade of September 7th. The letter was called NORTH KOREA PIZZERIA BALLERINA SHOP IKEA, and there we urged you to take the following, multi-layered action – 1) buying back your short TLT 124 CALL for $5.55 and 2) selling four (4) TLT October 20th 124 PUTs for $0.50 each, four (4) December 15th 121 PUTs for $0.65 each and four (4) March 16th 118 PUTs for $0.97 each. Total net credit on the two initiatives was $2.93 (8.48 – 5.55).

After that, we took in another $0.92 on TLT options sold in The Problem With Flying. And as of this last Friday, the rest of our options retired out-of-the-money.

That offers us a total net take of $3.85 on $5.55 laid out. Call it exactly 69%, and go get some sleep.

Lastly, on the 19th of October we wrote a missive entitled WAR! All the Latest Bellicosity and Bombast!, in which we urged you to buy the SPY January 19th 230 PUT for $0.98 and sell the SPY March 220 PUT for $1.38. Total credit on the trade was $0.40.

And that’s precisely where it ended. Both options expired worthless and we pocketed our premium.

And now to our trade for the week…

We’re going to begin today by saying that the volatility of the last few days has yet to abate as of the time of this writing. That in itself poses risks to those in the prognostication business. But the mid- to long-term picture is also cloudy.

For though we’ve been bullish on markets for the last decade, our attention is increasingly turning toward those indicators and trends that point toward a less than sanguine future.

Take, for instance, the following bit of chartitude, that maps how much margin borrowing exists in the investment realm –

The red circles indicate borrowing plateaus, the first of which preceded the devastation of late 2008/09 in the equity market, and the second of which ended just a month ago.

Got your attention?

The extreme drop in margin numbers over the last few weeks is indicative of a sentiment wipeout, and one that, for the time being, we’re projecting will last for some months to come.

Yes, there are those who will read into the above a contrarian bullish signal, and under normal circumstances we might do the same. But we’re less inclined to do so for several reasons.

The first is shown here –

This is a thirty year paste-up of the AAII’s bullish sentiment readings, with our latest, January high labeled: ‘Euphoria?’, in red.

At the time sentiment highs were struck, we put on a bearis bet, and since they declined we’ve gone in both directions. But because of the sheer number of bulls on board at the January high – commensurate with numbers seen at a number of former bull market highs – we’re leaning once again in a bearish direction.

Margin, Sentiment and Fundamentals Aligned

It’s rare that we see margin and sentiment levels so bloated at the same time, but when fundamental values are also thrown into the mix, it’s hard not to get the chills.

Consider now three charts: the first, Price/Book for the market’s leading FANG stocks; second, Price/Sales for the S&P500; and third, the S&P500’s CAPE Ratio –

With a P/B over 15, the leading FANG stocks look increasingly long in the tooth. They’re now set to surpass levels set by the dot.com wipeouts of a generation ago.

Now Price to Sales –

Also wildly inflated.

And here’s the S&P’s PE ratio adjusted for inflation, also called the Shiller PE

Have a look – we’re well above levels struck before the market crash of 1929 (in red).

Taken together, there’s a good deal to worry about.

And that’s likely to mean a good deal of volatility at some point.

But as we mentioned above, we’re going to tackle the problem in a slightly different manner.

We’re going to bet on a safe haven retreat to Treasuries in the event of a broad selling scare.

And it looks like this –

- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]

TLT 129 is situated well above overhead resistance.

Many happy returns,

Matt McAbby

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