Just a few reminders…
Back in the fall of 2008, when the indexes were almost at their bear market lows, and the situation looked as dire as it’s ever been, we saw an unprecedented government intervention and knew immediately that the markets would be buoyed and eventually lifted to new highs.
We repeated our claim numerous times in the months that followed, and those who heeded the call when the market was off nearly 50% from its peak are today sitting in the lap of luxury, not owing a penny in debt, howling like the pack of mother-stuffing money badgers that they are!
And today, we’ve come full circle.
We’re now witnessing a growing crisis of confidence in the market, but this time it’s with the ability of those same government interventionists to maintain the upward trajectory of the market. With the S&P 500 now off some 10% from its all-time highs, and other sectors even more, the question on everyone’s lips is whether we’re in for a repeat of the 2008/09 bounce, or that’s it, kaputski, sorry Charlie, g’bye.
The Rise of the Bears
Oh, the bears have their arguments, to be sure. Growth in the emerging market economies, most notably China, but also Russia and Brazil, has hit a wall, Europe has done nothing but tread water for the last decade, and our own corporate earnings trend has been ground blunt by both weakening global demand and a continuing employment crisis.
Truth be told, though, the general economic picture and corporate earnings numbers, while important in themselves, are actually of less interest to us than the market itself, which has an uncanny ability to detach itself from reality for, at times, a very long while. It’s therefore our aim to read the market on its own terms, in order to get the clearest possible determination of where it’s next headed.
Are we saying we don’t trust the official monthly release of employment and GDP figures?
Are we saying we don’t trust the big name taking heads, fund managers and other VIPs at home and abroad who are saying ‘it’s over’, ‘turn out the lights’, ‘pack it in’, etc.?
We’re simply saying that we’re more comfortable sticking to our guns and seeing the picture exactly as it is, rather than relying on someone else to interpret it for us.
And that means we’ve got to look objectively at the charts and all the salient data series to get our answers.
And nothing is more salient than sentiment.
Consider – bullish sentiment numbers from the American Association of Individual Investors (AAII), perhaps the truest guide of Main Street’s confidence in the market at any given time, look as follows –
Not by a longshot, friends.
We’re now situated at the worst bullish read for the AAII series in a decade (red dot at bottom). In fact, at 17.9% bulls, we’ve only encountered reads this depressed three times in the last 22 years! And at each such point the market bounced strongly higher.
But bullish sentiment is only half the equation. Bearish participants in the weekly survey jumped to 45.5% last week, the highest number since 2013.
And together, the bulls minus bears figure offers the following telling paste-up –
As you can see, Main Street is collectively more panicked about the market’s prospects today than it was during August’s waterfall selloff (in red). And almost as desperate as it was in April of 2013 (in blue), just prior to the S&P 500 lifting off on a one-way, non-stop 550 point (35%) express getaway to riches.
Will it happen again?
In our estimation – it’s likely.
Roundup, Recap and Revisit
Before we offer a trade based on that understanding, let’s look back at four initiatives that now require some attention.
We start with a trade opened on December 22nd as part of our ongoing Tyler Technology (NYSE:TYL) saga. The letter was called Chilled by the Weather; Warmed by Hope and the trade was a simple bullish ratio spread initiated for a credit of $110.
As of last Friday, the trade expired with all options out-of-the-money, and so we pocket the full premium and log it as a 100% gain.
Next up was a trade that didn’t work out as well. It came from a letter called If You’re Gonna Do it, Do it Right, published on the 8th of December, in which we urged you to sell the Facebook (NASDAQ:FB) December 31st 100 PUT for $0.88 and use the proceeds to purchase a FB January 110 CALL for $2.19. Total debit on the trade was $1.31.
The PUT expired worthless in its time, and the CALL also retired out-of-the-money last Friday. Nail up a loss of the initial premium – $1.31.
On the 15th of December we wrote a letter called The Great Wall Street Book of Revelations, in which we touted the prospects of Netflix (NASDAQ:NFLX). We promptly ordered a CALL ratio spread, recommending you sell the at-the-money NFLX June 120 CALL for $20.12 and buy two out-of-the-money NFLX June 145 CALLs for $10.30 each. Total debit on the trade was $0.48.
NFLX has tumbled with the rest of the market, and we’re backtracking.
We now urge one and all to sell the two long CALLs, now trading for $3.55 each. You pocket $710 for your trouble, and we await the outcome of the short 120 CALL. With NFLX now screening at $104 – and looking due for further weakness, we feel safe letting time decay do its work for us.
This one was worth the wait.
It was another Netflix initiative, shot out on the 12th of January – just a week ago – in a letter called Trades for Volatile Times. We told you to sell one at-the-money NFLX January 29th 119 PUT for $10.30 and purchase two NFLX January 29th 109 PUTs for $5.60 each. Total debit on the trade was $0.90.
Today, the short 119 PUT goes for $17.90 and the long 109s fetch $11.05 each. Buy back the former and sell the latter and you make off with a fat $330 ($4.20 – $0.90), or 367% in five weeks.
Get on it!
We’re going to close today with a bear ratio spread on Microsoft Inc. (NASDAQ:MSFT). Why? Because a look at the chart tells us she’s also due for a spill here, though one limited in nature, and likely to hold at the long term moving average.
Have a look at the chart –
The late October gap has to be filled, requiring a decline to $49, at least. Count on a little follow through, but no lower than her long term moving averages in the $46/47 range by expiry.
Microsoft will bleed. But she won’t die.
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Wall Street Elite recommends you consider the purchase of one MSFT February 12th 51 PUT, now trading for $2.20 and sale of three (3) MSFT February 12th 46 PUTs, now going for $0.64 each. Total debit on the trade is $0.28.
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With kind regards,
Hugh L. O’Haynew