Exclamatory Straddle (QQQ)

Exclamatory Straddle (QQQ)

 

We want to lead off with a few trends and predictions that should help guide us over the next six to twelve months.

 

And we’ll start with the following.

 

The American consumer represents two thirds of the economy.  When he’s spending, the economy generally does well.  When he’s burning through huge wads of his bacon, growth surges dramatically.  And when he’s hunkering down, of course, the opposite occurs.

 

And what’s he doing now?

 

February numbers from the Gallup group show that we spent more money on a daily basis this last February than we have for any February in the last nine years.

 

That’s right; have a look –

A hundred and one dollars a day, on average, for the past month.

 

And more than that.  Outside of December’s holiday-induced spending spree of $105 a day, February’s numbers come in better than any month going back to the summer of 2008!

 

And that’s downright good news.

 

Especially so, since it comes at a time when credit card debt appears to be in a freefall.

 

According to numbers provided by the Fed, consumer credit (revolving) for February fell by $3.8 billion, its largest decline since December, 2012 and the first drop in a full year.

 

See here –

Save for that single month in late 2012, we haven’t seen this kind of activity for close to six years.

 

The takeaway…

 

So, if we’re spending more and not using our credit cards to do so, it’s very likely because we’re using savings to finance our latest spree.

 

And that, too, is a good sign.  Not only because it speaks to the fact that there are, indeed, savings in our collective pockets, but also because our ability to continue to spend via either savings or credit appears to be enhanced.

 

Now consider another trend, one we’ve pointed to several times over the last five months, consumer confidence.

 

It’s evidenced in the stock market as much as in the surveys, and it’s not just a blip.  Five months (since the election) of continued good feeling means something genuine is afoot.

 

Have a look –

The above chart is also furnished care of our friends at Gallup and shows record setting confidence levels in its latest read, as folks apparently regained faith that all things economic would continue to shine.

 

But will they?

 

Could be, but that doesn’t mean the market will continue to climb alongside.  In fact, we’re long overdue for a pullback of some sort.  And as the following Rydex readings indicate, the risk of a significant retreat may now be upon us.

 

Have a gander –

For those unacquainted with the Rydex numbers, a great many market watchers use their bull/bear funds as a contrarian indicator.  When too many people are buying their long funds it generally means a reversal is at hand.  And vice versa.

 

As the chart shows, we recently hit new lows for those holding Rydex bear funds.  Assets in those funds slipped to multi-year lows, a development that points to significant current risk in the market.  So…

It’s not too late bail out, that’s for sure.

 

If you want out.

 

And that’s a legitimate question.  Because any drawdown at this stage is likely to be a temporary one, another opportunity, as they say, to “buy the dip.”

 

The broader path is up.

 

And the only wrench in the crotch would come if that man in the Oval Office were offed.

 

And how likely is that?

 

Dunno.

 

But there are a lot of people out there who would like to see it happen…

 

And you can be sure they’re not equity enthusiasts.

 

So sell if you want, but remember that you might lose your position and be forced to buy back in at a higher price.  And remember, too, that we’re at the end of a very long bull trend in the markets, so the final whip-crack rise will be steeper and carry further than many imagine.  It will also be more volatile than many expect, with deep, sharp nausea-inducing zigs and zags along the way.

To the show!

 

Now for this week’s trade.

 

We just saw a report that hedge funds are ‘fully invested’, with record level exposure on the part of both macro and long/short funds.  We also see that short interest across asset classes is coming in at extraordinarily low historical levels – from which we usually see big selling action.

 

Take a look here –

We’re looking at a once or twice a decade event; short sellers as a force in the market are extraordinarily weak.

 

So while the contrarian within us is screaming that now is the time to go short and to do it with full leverage and hate, the final-leg-of-the-bull-market-buy-at-all-costs speculator within us is also yelling GO LONG!

Yet we are sure of one thing.  A final resolution to this contest will not come by way of an extended, flaccid sideways grind.  We’ll see action, and sharp it will be, over the next four to six weeks.

 

So we’re doing the following –

 

Below is a chart of the PowerShares QQQ Trust ETF (NASDAQ:QQQ), a proxy for the NASDAQ 100 for the last half year.  You’ll see from there just how clear and uniform the rise has been since the election (in red).

That said, we have three items worthy of mention:

 

  • First, we’ve stalled for roughly the last three weeks – new highs, yes, but very little north-south action,
  • Second, volume has declined from the first heady days of the ‘Trump Rally’ that began directly after the election, and
  • Three, RSI and MACD indications are near-term bearish, the former now pulling back after an extensive overbought period (in green), the latter rolling under just at the end of last week.

 

All of which points to a break one way or another, and our employing the following straddle strategy –

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Many happy returns,

 

Matt McAbby

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