Financial Two-Timer (FAS,DBC,OSX)
You won’t see this talked about too much anywhere else, but we feel it’s worthy of your attention.
On Tuesday afternoon, Transportation stocks logged new, all-time record highs, with the Dow Jones Transportation Average reaching 9795 intraday. Yesterday it tacked on a further gain.
As we’ve pointed out numerous times, we’re not whistling Dixie when we say this is news. There’s no question about it.
For as Dow Theory tells us, when the averages are rising in tandem to new highs, we have what’s termed a ‘bullish confirmation’. There have been six such instances of that this year, and as the chart below shows, that’s exactly what Tuesday’s action again achieved.
Have a look –
This is the last six months of the two bellwether indexes charted against each other.
The Industrials have been making successive new highs all year, never going more than a few weeks without triggering the confetti. The Transports’ celebrations, by contrast, have been less regular. Their last major high was registered in mid-July, and after some steep losses thereafter, they only managed this week to pull ahead of their former championship mark.
But a win is a win is a win. Whether it comes by a point or by blowout, it still registers with those who follow Dow Theory as a ‘confirmation’ and should therefore elicit a good measure of follow-on buying in the weeks ahead by a sizeable cohort of Dow Theory traders, at least.
Against a general bullish backdrop for the intermediate term, we have also have a few other specific considerations to share with you.
But first, let’s pause to examine two open initiatives.
The first was launched way back on September 1st, 2016 in a letter called Oil Services About to Spill and asked you to take a short position on an OSX option.
After moving against us, we were compelled to initiate a series of rollouts to fend off a loss on the trade, and we now hope to be done with this scrapper once and for all.
It’s going to require that we roll out at least once more, however.
The last roll called for you to buy back your OSX June 145 PUTs for 11.50 each and sell the OSX September 145 PUTs for $11.50 each. Net zero was the result.
And today, just a day before expiry, it looks as follows: with OSX trading close to $42, this Friday’s 145s are selling for $6.00. Our advice is to buy them back and sell the OSX December 29th 145 PUTs for $7.00. In so doing, you add another dollar to the credit side and buy 90 more days of play.
Next up is our April 27th joyride with the commodities from a letter entitled Trump Builds Spectacular Wall… of Worry. There, we urged you to take the following action – buy the DBC October 20th 15 CALL for $0.75 and sell the DBC October 20th 15 PUT for $0.60. Total debit on the trade was $0.15.
And today it pans out as follows. The CALL trades at $0.50 and the PUT at $0.15. Sell the former and buy back the latter, and you net a grandiose $0.20 on $0.15 spent, or 133%.
It’s a nice take on a trade that still has time to run, but considering that we’ve waited five months for it, and that anything could happen in the next three weeks, we feel it’s prudent to jump now. In spite of the fact that commodities are on the march and everyone is talking about higher oil prices, we have a profit.
And we’re taking it.
Now back to the action.
We’re encouraged by the Conference Board’s latest polling results on consumer confidence, and, in particular, the numbers related to the stock market.
As the chart below shows, expectations of gains in the market have declined steeply since the last report – even more than they did prior to the elections last November.
Have a look –
In green, you see the post-election sentiment moon-shot that followed the market’s tremendous ascent in November. Again, this was a reaction to gains that had already materialized. And it reflects the expectation of more.
In red, is the latest deterioration of sentiment, the steepest month over month retreat since early 2014. This, in our view, comes as a function of the marginal declines we’ve seen in the tech sector, and, more importantly, the tremendous publicity that has surrounded those losses.
It no doubt also comes as a function of tensions surrounding North Korea, the inevitable September jitters that inhabit the market, two wild hurricanes that destroyed lives, homes and tens of billions of dollars’ worth of infrastructure, and perhaps, too, concerns about the Special Counsel on Russia, the NFL stink and a host of other negative stories that have soured the mood of the country.
And that’s precisely why we take heart. Not because people feel lowly – heaven forfend!
Rather, because it’s nearly always prior to great market gains that the mood is as such.
And for that reason, we’ve set our eyes once again on the financials.
Last week, in our letter called President Hope, we placed a wager on the financials using the ultra-leveraged Direxion Daily Financial Bull 3x Shares (NYSE:FAS). We sold a PUT spread and used the funds to buy a CALL.
This week, the structure of the financials is far superior (as we’ll show you below), and for that reason we’re going to add to our FAS position. We believe the banks and brokers are gearing up for a knock-out climb of the same magnitude as we saw back in November.
Have a look now at the Russell 1000 Financial Services Index, upon which Direxion’s ETF is based.
After more than two months, we finally have the long awaited breakout (in blue).
It’s time to act.
We’re doubling up on our trade of last week, and it looks like this –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns