Dip and Fly (QQQ)

It’s a rule known up and down Wall Street – and anywhere else they trade securities – that when there ain’t no skin in the game, there ain’t no top.

 

What does it mean?

 

Put simply, when investors are sitting on the sidelines, and cash hoards are high, as they are now, the market cannot possibly have topped.

 

Why?

 

Well, because it’s also axiomatic to those with even a modicum of experience in investments, that the job of the stock market is to reach into the pockets of as many investors as possible and separate them from their hard earned cash.

 

That’s right.  Sometimes it does it stealthily.  Sometimes brazenly.  But that’s exactly what it does.

 

So it stands to reason that if there ain’t no money in the market, there also ain’t no money to be absconded with.

 

So there ain’t no top.

 

And how do we know there ain’t no money in the market?

 

Look here –

 

According to the latest data from the Global Fund Managers Survey (FMS), the bigwigs are currently more cash heavy that they were at the peak of the 2008 Lehman crisis!

 

Look here –

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As the chart amply demonstrates, fund managers peak fear levels have coincided with demonstrably calamitous occurrences in the financial or geopolitical spheres, such as the aforementioned sub-prime lending meltdown of 2008 or the World Trade Center attack (far left of chart).

 

The problem with the data as they currently stand is that we’re now very close to a market top, and under normal circumstances fund managers’ cash positions would be extraordinarily low – not high – at a juncture like this.  The data point is a contrarian indicator, flashing high at market bottoms and low at tops.

 

In our view, that doesn’t mean there won’t be any swoons or whips in the market – indeed, we’re in the midst of one now, and it could carry lower in a meaningful way.  But that would likely only push cash hoards higher, and that, as they say, is good for business.

 

Corporations, too, Amassing Cash

 

Along with fund managers, the biggest titans of the corporate world are also in on the savings action.  Latest figures from Moody’s indicate that just five companies: Apple, Microsoft, Oracle, Cisco and Google account for a full $500 billion of the current $1.7 trillion cash stock in the coffers of American non-financial companies.

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For the most part, these companies are holding tight to their money in an attempt to avoid being taxed, but eventually the money will have to be spent.  Microsoft’s acquisition of LinkedIn last week was the exception.  Everyone else has in large part refused the call of the M&A wolves, refused, too, to dive into a whole-hog capex spending spree, and have even pulled back on purchasing their own stock.

 

But we believe it’s this last area that will lure a great deal cash back into action.  On the next pullback – again, one which we’re in the midst of right now – we suspect the itch to invest in company stock will be all too great to resist.  Look for Ma and Pa Sixpack to join in the action at that time, too.

 

Main Street Sits it Out

 

As we’ve mentioned in this space many times of late, the average American investor is either on the sidelines, confused, or outright bearish on the prospects for the market.  The latest American Association of Individual Investors (AAII) survey numbers reveal a mere quarter of their membership has hope for stocks over the next half year.  An equal number are bearish, and the rest are non-committal.

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Put plainly, the market is not about to crash.  It may drop somewhat, but it will not go to hell until the vast majority of cash outlined above is back in play and everyone is once again confident that buying is all one needs do with respect to stocks.

 

We’re not there yet.

 

Short Term Trading Bonanza!

 

Last week we announced our intention to steer the Normandy ship more in the direction of short term, or ‘swing’ trades, a function of our belief that going forward, traditional means of valuing equities and assessing the overall market will become challenging.  There are too many new and intrusive facors to be reckoned with, we argued, and the time was right to scale back our trading horizons.

 

To that end, we offered you our inaugural short term trade just last week, in a letter called World is Burning; Stocks are Up; Film at 11.  There, we recommended you do the following:

 

Purchase the QQQ June 30th 106 PUT for $0.47 and set a stop sell should QQQ move through 111.

 

And it worked out formidably.  The QQQ June 30th 106 PUT now trades for $1.21, and as we go to press, indications are that the NASDAQ will open considerably lower.

 

As it stands, your profit is 157% in a week, and, of course, we urge you to take it at the open of trade…

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Unless you want to continue.

 

And if you do, we implore you to lower your stop from 111 to 108.25.  On any move higher than 108.25, you must close out the put.

 

Terrors and Pitfalls

 

As we’re currently constituted, we haven’t the ability to send you a trading alert on a real-time basis.  Though that may change in the future, reality dictates that all those who decide to hold the trade are on their own until next Thurday’s Options Trader Elite arrives on the doorstep.

 

It’s the downside of being a weekly publication and trading short-term.

 

But we’ll manage.

 

And for those looking for a brand new way of playing it, we offer the following.

 

Have a look at the trading charts below, indicating another quick decline may now be in the works.

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The above is a composite of a number of charts that present a picture of weakness to start the day – and one that we believe is tradable.

 

To that end, we’re purchasing another PUT on the QQQ.

 

And it goes like this.

 

- Content protected for Normandy Executive Lounge, Option Trader Elite members only]

 

Many happy returns,

 

Matt McAbby

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