Friday, October 17, 2014

It's not every day that the Wall Street Journal comes out with an informative article about deflation and the grave threat it poses to the global economy.  The story in today's edition, by Jon Hilsenrath and Brian Blackburn, is the best I've seen in the newspaper, and if you read between the lines, it has even gotten it right about how the Fed is powerless to arrest the trend. That point of view has been verboten in the mainstream media, but the Journal's forthright observation that the emperor is wearing no clothes is going to give the idea a big boost in credibility. The most significant fact missing from the article is the connection between the deflationary implosion that may already have begun and its main source of power: a quadrillion dollar derivatives bubble that has been pumped to the bursting point with hot air.  To access the full article, click here.

The short squeeze off Wednesday's bombed-out low, which was revisited yesterday, makes as appealing a short sale as we've seen in a long while. The devil, however, will be in the details.  We know that in a true bear market, rallies will be so ferocious as to gut any bear who attempts to intercept the ascent of stocks prematurely or too aggressively. The rallies will also seduce bulls into believing new highs are coming, and to string along others who have losses and are hoping to reduce or even elimimate them before cashing out of their portfolios. It would seem like a tall order for Mr. Market to accomplish all of these things, but anyone who has been through a bear market knows the old boy is well up to the task. For now, we'll focus on getting a good read on the bear.  The squeeze off Wednesday night's heavily engineeered low has generated a bullish impulse leg on the hourly chart, and although night owls can try shorting the midpoint pivot or D target of the (tentative) pattern show, I wouldn't suggest doing so aggressively or in any size. One contract will be plenty -- just for training purposes, mind you. Be sure to use a tight stop-loss of no more than 3-5 ticks.

I continue to hold , and to roll forward each week, the Nov 22-117/Oct 18-121 calendar spread, although it would appear that most subscribers -- at least, those who have reported positions in the chat room -- exited various positions profitably over the last week or so after TLT went ballistic. It is hard work to roll a spread so deep-in-the-money, but it is still possible to do so every Friday with a premium gain of perhaps 0.08-0.20 per spread.  The maximum weekly value of the  roll, had TLT loitered near the 117 strike, would have been around 90 cents. Looking ahead, we'll shift to vertical bull call spreads, legging them on with the goal of making our positions virtually riskless. As I implied earlier, this is more risky that opening a position with a spread orders as we did with the calendars. Even so, once TLT settles down from this week's wild gyrations, we shouldn't fear opening naked positions at projected swing lows. We can keep the size down and still get terrific leverage, especially if we are able to leg on $5 verticals at no cost. My bull market target leaves plenty of room for us to be leisurely and relaxed about this play. As the chart suggests, TLT has the potential for a run-up to 145.25 or higher, a clear Hidden Pivot target. In the meantime, we should look for it to oscillate around the 123.21 midpoint for at least a week or two before it can develop escape velocity for the next launch.