Bears were caught in yet another short squeeze Monday night, inadvertently helping their taskmasters on Wall Street recoup all of the regular session’s moderate losses. The squeeze has not yet taken out the intraday high, which, as is nearly always the case these days, was achieved on thin volume before the opening bell. However, unless there is world-shaking news overnight to disturb the flow of Other People’s Money into shares, or to diminish seasonal mark-ups that are as much a tradition as Santa himself, the rally seems a good bet to continue. For precise measure, we’ve been using a 2126.25 target for the E-Mini S&Ps. That is where the futures have seemed headed since around mid-November, and that, we would warrant, is where they are going at a minimum. If so, it would imply that a 300-point rally lies just ahead for the Dow Industrials.
Bears Doing All the Heavy LiftingPosted Monday, November 30 0 comments
$GLD – SPDR Gold Trust (Last:101.92)Posted November 30, 2015, 9:04 pm
$BKX – KBW Bank Index (Last:75.90)Posted November 29, 2015, 6:30 pm
$DJIA – Dow Industrial Average (Last:17798)Posted November 29, 2015, 6:05 pm
$ESZ15 – Dec E-Mini S&P (Last:2089.00)Posted November 29, 2015, 6:04 pm
$GCZ15 – December Gold (Last:1055.90)Posted November 29, 2015, 6:03 pm
Subscribers were advised on Friday to cover a short position that would have produced a gain of as much as $12,000 per contract over the month it was held. The $18 selloff that ended the week fell a tad shy of our longstanding target at 1044.50. However, because I expect a strong bounce from the target or very near it, and because the intraday low coincided with the Hidden Pivot target of a lesser downtrend (see inset), it was time to cover the position rather than try to milk it for a few more drops.
As the new week begins, we’ll look to stake out a long position somewhere near these levels, but I didn’t want to attempt it by trading ahead of the weekend. (Note: The best way to stay apprised in real time is to tune to the chat room or sign up for intraday email alerts on your account page.) Earlier, I had provided explicit instructions for using GLD to leverage a possible bullish reversal. However, this vehicle looks more precarious than the futures, having breached a major Hidden Pivot target on Friday at 101.56. We’ll consider it nonetheless if it flashes opportunity.
$M – Macy’s (Last:38.59)Posted November 15, 2015, 6:03 pm
Executives at both Macy’s and Nordstrom’s profess to be mystified by the sharp downturn in business since July. The CEO of the former, thinking positively, promised some big surprises in the way the upscale chain meets the problem. We should wish him good luck, since he’ll be dealing with nothing less than the slow asphyxiation of brick-and-mortar retail in this country. He’s right in pointing out that many pessimists have been sounding the death knell for department stores for many years. But just because a few upscale chains have survived Amazon thus far hardly guarantees that they’ll be around in another ten years. It’ll be too bad, because Nordstrom’s in particular seems to be doing everything right. Whenever I’ve bought something from the local store, I’ve always been impressed with how hard they try. Their policy on returns is extremely generous, their sales people are knowledgeable, polite and well groomed, and the merchandise is high-quality and fashionable. Despite this, the store seems empty most of the time. Macy’s is the more aggressive marketer of the two, but like Nordstrom’s, they are having serious problems attracting a younger generation of shoppers who seem to prefer cut-rate merchandise and outlet stores over full-service retailers.
The respective stocks of the two companies have taken quite a beating this year. Nordstrom’s shares fell 23% last week alone, from 65.80 to 50.43, and are down 35% from March’s multiyear high at 73.81. Macy’s stock has fared even worse, falling 47% since July, when it capped a seven-year run-up at 73.61. It was trading for 29.10 at the final bell on Friday. This left it just a hair above a key Hidden Pivot support at 38.66, but if that number were to give way, I’d infer the stock was on its way down to 31.80, or even 25.12. As for Nordstrom’s, which settled at 53.96, it could grope its way all the way down to 32.43 before picking up good chart support — in this case, a key low there recorded in August 2011. ________ UPDATE (November 22, 11:29 p.m.): After slipping a bit below 38.66, Macy’s shares have picked up support. If it turns out to have been a consolidation, I doubt the stock will get very far.
$CLZ15 – December Crude (Last:39.39)Posted November 12, 2015, 8:08 pm
$TLT – Lehman Bond ETF (Last:121.45)Posted November 8, 2015, 6:06 pm
$JNK – High-Yield Bond ETF (Last:35.37)Posted November 5, 2015, 7:29 pm
This proxy for junk bonds is primed to collapse, but experimentation has taught us that it’s well nigh impossible to make money on weakness in JNK, even when pronounced, by simply buying put options. Near-the-money puts are priced in the stratosphere, sporting implied volatilities of around 21%. The underlying ETF, meanwhile, has a historical volatility of around 6%. Therein lies the problem: Buying puts would be like getting 4-to-1 odds on a horse with a broken leg. The gate opens…and they’re off! Except for our nag, which must be removed from the track by a John Deere tractor. Well, okay, the metaphor is a bit overworked, but you get the idea: Using put options to bet on JNK’s collapse, even when it is likely, is a sucker’s bet.
However, we can use an alternative strategy designed not only to reduce premium exposure, but to make a few bucks even if we are wrong. Specifically, let’s try legging into an out-of-the-money calendar spread targeted on the 31 strike. That’s where I expect this sack of garbage to be trading six months from now. One-month at-the-money calendar spreads are trading for around 0.35. Our goal is to start with a long position in June 31 puts; and then to sell short against them 31-strike puts in each successive month. If we short December puts that eventually expire worthless; and then Januarys; then Februarys, Marches, etcetera, we can conceivably take in more in premium over the next six months than we’ve paid for the Junes. We can easily do this if JNK slowly falls toward 31, since that would increase the value of the puts we will be selling short each month. Ideally, come May, JNK will have fallen to 31 and we’ll be holding June puts worth 0.35 whose cost basis has been reduced to a minus number (i.e., a credit) by the premium we’ve taken in for puts sold short each month.
To get started, let’s test the water with a 0.25 bid for 60 June 31 puts, good till next Friday (November 13). These options have yet to trade, but we may be able to force a trade by collectively putting up a “size” bid that attracts the interest of market makers. The puts are being reflected on a 0.20/0.50 spread, so our bid is pretty niggardly. If no puts come to us at that price, we’ll consider alternatives. If we get filled, it will be a great start for legging into cheap calendar spreads. Immediately thereupon, we would want to short December 31 puts for 0.05-0.10 against them, effectively legging on the initial calendar spread for 0.15 to 0.20. When those December puts expire, presumably worthless, we’d short 60 January 31 puts against our Decembers. And so on and so forth. Rinse and repeat. (For a detailed description of this strategy, click here to access the article I wrote on the topic for Stocks, Futures & Options magazine.) _______ UPDATE (November 11, 10:29 p.m. ET): A nasty slide hasn’t budged the puts. Let’s raise the bid to 0.30 for now, just to let the market makers know we’re still there._______ UPDATE (November 16, 11:33 p.m.): We’ll chill for a while and wait for a rally, since this vehicle’s dive over the last two weeks has hardly been conducive to implementing our strategy.
_______ UPDATE (November 29): Shorting this flotsam every time it rallies 3%-4% is as close to a sure thing as we could hope for in the trading world. An indirect way to do this is to go long in Treasurys; the worst way to do it is to buy puts. If there’s interest in the chat room, I’ll look for set-ups and update as warranted.
$+USH16 – March T-Bonds (Last:154^01)Posted November 1, 2015, 8:34 pm
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