Diversions! Distractions! Shell Games and Worry! (C,FAS,TYL)

We’ve got one trade to report before we move to this week’s business, and it goes like this –

 

The trade was opened on the 30th of June in a letter which featured Tyler Technologies (NYSE:TYL).  It was called July Rant, and it urged you to sell the TYL July 170 CALL for $1.70 and buy the TYL September 170 CALL for $8.70.  Total debit on the trade was $7.00.

 

Now, it’s never advisable to engage in braggadocio, particularly in this business, where you’re bupkus and spat upon if your last trade was a dud.

 

Fortunately, we’re specialists in ‘last trade success’ (and equally competent in the braggart department), so we offer you a look at the initiative only as a means to swell briefly like the Rhode Island Reds that we are.

 

Consider the chart of TYL that we offered at the time of the trade.  Below is an exact replica lifted from July Rant (with special permission from the author…heh, heh…) –

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Remember it?

 

At the time, we noted the touch at the top of the trend channel (red circle), and bravely asserted that there would be no more gains in TYL for the time being – that the stock would now carry either sideways or lower until troops could be gathered for a new advance.  That’s why we sold the near term CALL and bought a longer dated one.

 

With last Friday’s options expiry, we’re proud to report that the short CALL expired worthless, putting the full $1.70 in our pockets, and we’re still greedily holding the long September 170 CALL with a full two months’ slack to play with and the stock at $167.

 

But even merrier, is the chart of Tyler Tech itself, which shows just how oh-so-right we were about the technicals!  We could tickle the barse all day long just looking at it.  Why don’t you have a go –

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As TYL moves back into the middle of its channel (in green), we’re getting ready for a pop that puts our September CALL well above 170 and deep-in-the-money.

 

And for those of you who missed the initial trade, TYL is trading exactly where it was when we launched the venture.  Consider the same CALL purchase.  You won’t have the reduced cost from the short CALL, but maybe you like the setup in any event?

 

From Here to There in a Single Bound

 

We now turn our attention to the current state of the market, which, on face, appears perfectly bullish.

 

Consider:

 

  1. We have new all-time highs on the Dow and S&P 500, with the NASDAQ not far behind.

 

  1. We have market breadth numbers that are indicative of a full market in motion; this is no wispy, bald guy comb-over involving a few dozen popular issues. Take a look –

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Better than 80% of the S&P 500’s issues are trending above their 50 day moving averages.  That’s extraordinarily healthy.

 

  1. And add the following, too – since the Brexit non-event, Advance/Decline readings on the index have surged to levels rarely, if ever seen. Take a look –

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This is an unheard of print for a ten day period, and it bespeaks a tremendously bullish future for the indexes in the coming weeks.

 

  1. We’ve mentioned it before, but it bears repeating: cash levels on both Main and Wall Streets are exaggeratedly high. As the latest BofA/Merrill Lynch Fund Managers Survey reveals, the professional set is currently hoarding cash at a rate not seen for a decade and a half.  And they’re also buying PUT protection for their portfolios in greater quantity than at any time since data was collected for the series some eight years ago.  Have a look – 5


In short, the fear is alive.  And that, from a contrarian standpoint, is also bullish.

 

  1. Finally, the all-important financial sector has just awoken from a year-long slumber, and that, too, is crucial for the health of the bull. Take a look here – 6

The downsloping trendline on the broadly based Russell 1000 Financials Index (in red) depicts a sector in a bearish funk for a full year since topping last July.  But the last few days’ action (in green) indicate that could be coming to an end.  We have a clear breakout, and with new highs appearing daily on the major market averages for over a week now, we can expect the financials shortly to close ranks and join in the buying bonanza.

The Financials are Crucial

 

It’s another point that bears reiterating, and it goes as follows – there is no bull market in equities, and certainly no grand, blow-off top rally, without the participation of all the major banks and brokerages.

 

A final frothy rally in a bull market is by definition a financial affair – a Wall Street party exclusively.  You can count on a massive expansion of profits and one final outsized hiring binge before it all ends in a great splash of champagne, blood and feces that leaves everyone disgusted, disillusioned and a whole lot poorer.7

 

I’ll say.

 

Diversions!  Distractions!  Shell Games! And Worry!

 

It should be noted that the market could never have accomplished all that it has recently without a very noisy backdrop of conventions and terrorists, wars and threats of wars, an Italian banking crisis, ongoing Chinese devaluations, recessions near and far and so on and so on…

 

It’s the noise that creates the worry that creates the wall that stocks are now climbing.

 

Long live the noise!

 

With that in mind, we’re going to re-enter the financial fray after a good long absence.

 

The trade we’ve engineered is, in truth, an exact copy of one we offered less than a year ago, matching a slow and steady bank performer against a whirlwind wunderkind – a perfect bet for a sector in the process of breaking north.

 

We’re pairing Citigroup Inc. (NYSE:C) against the triple leveraged Direxion Daily Financial Bull ETF (NYSE:FAS), in a long/short effort that looks like this –

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Many happy returns,

 

Matt McAbby

See what people are saying...

  1. Peter Verbeke

    Doesn’t FAS eventually lose even if banks go up? Historical charts show that it is not even close to tracking banks x3.

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