Breaking: Transgender NYSE Floor Trader Charged with Self-Rape! (GM,HD)
Sometimes you get hit with a single news item or piece of data that literally knocks you off your feet.
It’s unnerving, to put it mildly, because over time one gets used to the sanguine moves to and fro in the regular series that one examines.
And then whammo!
We had a day like that yesterday when the NFIB released its small business optimism survey, and we were thrown to the mat like “Killer” Kowalski in his title match against “Mad Dog” Vachon back in 1978.
We were there at the old Maple Leaf Gardens when it happened, and no kidding, it looked exactly like this –
Call it euphoriorus de la Trumpus, but c’mon guys, is it not a little overdone?
Anyway, it got us thinking.
How much optimism is this guy really worth?
The market flew after the election. Homebuilders’ confidence soared. Small business has now apparently gone messianic. And, as we’ll show below, investors’ propensity for risk has just breached a fold in the space-time continuum and entered a hybrid dimension known as eh-nys.
Is it not overdone?
Small business may have something to look forward to under a Trump administration, granted. But the move to 105.8 from 98.4 in November on expectations of just 99.1 has the look and feel of Aesop’s Fables.
According to stat analysts at the Bespoke Investment Group, this was the “5th highest monthly reading in the history of the survey (going back to the 1970s) and the best reading since December 2004.”
Couple that with the chart below from Goldman Sachs that scores investors’ risk appetite, and you have a picture of excess that defies even the most liberal notions of the term.
Have a look –
The chart dates back a quarter century and shows a similar penchant for risk on only two previous occasions.
The first time Goldman’s Aggregate Risk Appetite Index reached these heights was at the time of the 1999/2000 dot.com bubble, after which the whole market edifice crumbled in spectacular fashion.
The second instance was less than a decade back, at the time of the sub-prime lending fiasco that led to the Lehman fiasco which brought about the current government-induced QE fiasco, which will eventually spawn the mother of all equity bear market fiascoes, but cool your jets, Matty, because we’re not quite there yet.
Take a breath!
In any event, none of the foregoing is tradable per se, but it does push the case that we’re in for a cooling period over the next short while, a theme we’ve been pressing for a couple of weeks.
And with that in mind, we turn to our trade for the week.
But before we do, we have to close out one trade that we initiated just two weeks back on the 29th of December. It arrived in a letter called 2017: Year of the Hair-Ball, wherein we urged you to consider selling two (2) HD February 17th 130 PUTs for $1.95 each and using the proceeds to purchase a single HD May 19th 140 CALL for $4.25. Total debit on the trade was $0.35.
We liked the near term prospects of the homebuilder group, and Home Depot, we felt, was the best way to play it.
And how’d we do?
Well, today the 140 CALL trades at $4.10 and the two 130 PUTs go for $1.16 each. Sell the former and buy back the latter and you pull in $1.78 on $0.35 invested. That’s a 408% return in two weeks, and for those interested in annualized equivalents, it’s a 10,608% score.
And that ain’t no PB&J.
This Week’s Drive to the Bank
In order to understand our trade for the week, we have to bump back up to the phenomenon we described at the outset. Call it what you will, Trumpmania, Donald J. Wow, or just outright foolishness, it matters little. The bottom line is it has gotten hold of people on a personal and business level, and has them thinking in ways they haven’t for a long time.
Some of it, as we’ll show below, is driven by the president-elect’s rhetoric and policies. But just as much is related to how people are reacting to that rhetoric and policy package – and that includes not only Main Street’s working people, but business and political leaders, as well. They’re incredibly optimistic.
Our trade is based on the auto industry, the subject of a great deal of talk and actual policy from the Trump team.
In the first place, all the major American auto manufacturers, and even the foreign ones who build here, are thrilled about the corporate tax breaks the incoming Prez is offering. They could also live with moving production of their larger vehicles back to the U.S. rather than facing tariffs on entry from Mexico. Why? Because there’s a great deal more profit in the big machines. Pulling production stateside wouldn’t put such a great deal at stake. Ford’s recent announcement of its cancellation of a new Mexican plant is proof enough of that.
All told, investors in the automakers have also warmed to the Trump presidency, as they like the talk of rolling back regulations and investing in infrastructure. The general theme of bolstering American manufacturing is also a winner.
The number of potential car buyers has also exploded, as the chart below demonstrates –
Clearly, the post-Trump period has given a great many inspiration to either buy, or consider buying a new vehicle over the next six months.
And as the chart of GM, below, shows, recent trends in the stock are also bullish.
This is a monthly chart of GM for the last decade –
Since the election, GM’s price has broken higher, completing the three down-trending fanlines that mark a bear market’s duration (in red) – in this case, since the winter of 2013/2014.
RSI has been bullish for three months (in green), and barring a wild dive in price, MACD will shortly confirm that we’re once again in bull mode for the stock and the auto industry in general.
Now look at the daily chart –
The run-up got a little too hot, we feel, and needs to meander a little before making its next break higher. That’s why we’re selling premium here, right at the bunched moving averages at 32.- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,