Oooeee! That feels good.
There’s something about a home run that beats it all. And as you’ll see below, that’s exactly what we hit. But first a very brief update on the market’s current direction and prospects for the months ahead.
We turn first to sentiment – as we regularly do – to get a picture of Joe Q. Investor’s stance vis-à-vis the market, and, lo and behold! – he’s not ‘in’. In fact, he’s as confused as ever.
The American Association of Individual Investors (AAII) bullish percentage reading, a proxy for Main Street enthusiasm for stocks, paints a picture of a man as reluctant as ever to turn over his earnings to a market that, despite being just inches off its all-time highs, still scares the bejeezus out of him.
Have a look.
Bullish sentiment on Main Street is on the low end for the entire length of the bull market that began in March of 2009. In fact, it has declined over the last two weeks even as the indexes gained ground! Today, at 27.2, it’s unreasonable in the extreme to expect falling action in the markets for the coming months.
Why all the worry?
With the market rebounding to just below the last retracement highs set in November, one has to wonder why the reluctance? Shouldn’t such a quick rebound be a confidence-builder? How did all the negativity come about?
And the answer is: it’s not all negativity. As the following chart from AAII points out, the market’s gain hasn’t led to an increase in bears. It’s led to confusion.
Have a gander –
This is the AAII Neutral Sentiment paste-up, and it clearly shows that all the while the market was climbing, so, too, was the befuddlement of the Jack and Jills who were out there watching. Neutral sentiment sits today at 47.1%, its highest read in 2016 and barely lower than its bull market high set in December.
Strange, we think, that over the course of the entire bull market the number of fence sitters has risen incrementally, trending ever higher with every new gain in the market.
Our take on the phenomenon of the rise in confusion/neutrality goes like this: folks got scared stiff in 2008/09 when the market melted down, and for many, the first time in their investment lives. Their shock and trauma from that event made it increasingly difficult to consider participating in the buying frenzy that commenced in March of 2009. We therefore see a pattern of extreme bearishness at the bear market bottom giving way not to increased enthusiasm as the market climbed, but increased anxiety (neutrality) regarding whether this thing called ‘the market’ was actually something that could be trusted again.
And that sentiment has persisted until today.
That said, we firmly believe that all the fence sitters out there will not only climb aboard buying but will become frothing manic bulls before this is all over. And mark our words: THERE WILL BE NO SELL OFF – NO BULL MARKET TOP – UNTIL AAII BULLISH NUMBERS HIT A PEAK, PERHAPS EVEN A RECORD PEAK.
Until we get there, all this chest beating is a bullish sign.
Get on it.
Short Interest Climbing
One more point to badger you with before we move on, and that’s short interest.
It’s been widely documented that the latest market rise has come as a function of short sales from program selling, quant and macro funds, but that both speculators and retail sellers have yet to close out their shorts, a fact that could well lead to another burst higher should the current climb continue.
Here’s a chart of S&P 500 short interest, which clearly shows that there’s great deal more potential ‘buying’ that could occur shortly.
Short interest took a massive spike higher in the last half of 2015. And with markets approaching their November highs, anyone still holding out is about to start losing money.
Look for an unrelenting squeeze higher over the next three to six weeks.
Trades! Trades! Trades!
We’ve got great news today for those, like us, who enjoy the sight of big, fat blammo profits!
Two trades, in fact, that we’re going to run down for moolah galore, and they go like this –
On the first of December, we opened a trade that called on readers to consider selling the GLD March 109 CALL for $1.17. The letter was called Why Go to Hell in a Golden Hearse?, and in it we took dim view of the metal’s prospects. As is well known, we were subsequently proven wrong and watched GLD climb to the 120 area.
Fearing a loss as the March expiration approached, we again hopped in the saddle and took the following defensive action. On March 15th in a letter called Kill the BuzzTurds, we bought back the same CALL for $9.00 and immediately sold the May 110 for $8.85. We recovered $0.15 in that manner and are now looking to ‘regain’ even more.
With the May 110s now trading at $7.60, we say shut ‘er down. It could well be that gold falls further before expiration, but we could equally see a bounce that wipes out the profit we currently have. And with the options already trading deep in-the-money, we figure it’s not a time for dice rolling.
When all is said and done, you net out $23 ([8.85 – 7.60 – 1.17 + 0.15] x 100). And that beats the alternative.
The next trade brings us directly to the ‘blammo’.
It was called Kill the BuzzTurds, it was written three weeks ago, and in it we urged you to buy the NFLX April 29th 98 CALL for $8.35 and sell the NFLX April 29th 98.50 PUT for $8.30, for a total of debit of $0.05.
The technical setup was just too good to be true.
And so the trade ends.
The CALL is currently going for $12.13 and the PUT for $4.70. Sell the former and buy back the latter and you can shimmy and shake all the way to the go-go for a grand total take of $7.43 on a nickel expended – that’s %14,760 in a quick-like-a-bunny three weeks.
We’re going to play the upcoming short squeeze in a very simple manner. We’re going to buy a super-leveraged, long-dated CALL on the big caps (using the Direxion Daily S&P 500 Bull 3x Shares (NYSE:SPXL) and hedge it with the sale of a PUT.
This recommendation is for members only…
Our recommendations have yielded over 1,247.91% since 2011. Cancel any time – manage your own membership…
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Wall Street Elite recommends you consider purchasing the SPXL October 86 CALL for $10.00 and selling the October 83 PUT for $10.10, for a total credit of $0.10
With kind regards,
Hugh L. O’Haynew