Follow the Leader (HYG, FB)

We’ve got a hoard of trades to run down today, as last Friday’s options expiry ushered in a bevy of new results.  We start with our HYG trade from October.

Sharpen your pencils and take out a fresh sheet of paper, ‘cause here we go…

On the 27th of October we wrote a letter called Launch the Dirigibles! in which we urged you to consider buying a beaten-down junk bond sector. Specifically, we wrote –

We say junk got smacked because an overly sensitive, Prozac-popping news-addicted investment community can’t see the big picture sufficiently to wait out these minor storms. Nor will they be sufficiently wise to get back in early enough to capitalize on a tremendous buying opportunity. Our recommendation is to buy the junk sector using CALLs on HYG and at the same time sell some premium to offset the cost.

HYG is the iShares iBoxx High Yield Corporate Bond ETF and it trades on New York.

When we recommended the trade, HYG had just bounced off its bottom. Have a look at the chart –

HYG Moving Averages

Since then, there’s been little excitement in junkland.

Our recommendation was to purchase the HYG March 94 CALLs for $0.55 and sell the HYG December 89 PUTs for the same price. Total cost for the trade was nil, and that’s the way it ended up. We spun our wheels. No gain. No loss.

The junk bond sector, as we’ve noted many times previously, is crucially important for understanding the overall health of the market, and we’ll be returning to it often in coming letters. Precisely how to trade the sector today, however, is unclear to us.

On the 15th of December we opened a pairs trade that matched the Dow Jones Industrial Average (NYSE:DIA) against Facebook (NASDAQ:FB). We were expecting outperformance by the latter, and although we got it here and there, it never bore fruit the way we expected.

The letter was called Bailing Early – And Taking our Money with us!, and the recommendation was to buy the DIA March 156 PUT for $2.49 and sell the FB March 70 PUT for $2.52, for a total credit of $0.03.

There, too, it ended in a stalemate much like our HYG trade. Both options expired worthless and we were left to pocket our initial credit of three bucks.  

Not great, but not bad.

Go get yourself a donut.

On January 5th we penned a letter called Study and Win, urging you to buy the AAPL March 105 PUT for $4.30 and sell the AAPL March 100 PUT for $2.57. Total debit for the trade was $1.73, and here’s how it ended up –

We sold the long March 105 PUT on the 26th of January in our letter called Learning to Fix with a Bite from Apple. We took in $2.38 for that side of the trade and held our short 100 PUT with the hope that it would expire.

And so it did. Last Friday’s expiry brought the sucker to a dismal dead end, giving us full premium on the short and leaving us with a profit of $0.65 on $1.73 initially expended. That’s 38% in ten weeks, and we like it.

Hope you did , too.

Let us know how it panned out.

One More Go!

Our last trade to report was initiated on the 12th of January. The letter was entitled Bellybuttons and Zeroes, and there we recommended you consider a pairs trade in the energy sector – Exxon Mobil (NYSE:XOM) against the Select Sector SPDR Energy ETF (NYSE:XLE).

The specifics were like this –

We bought the XOM March 100 CALL for $0.59 and sold the XLE March 86 CALL for $0.54 for a total debit of $0.05 per pair traded.

And whaddaya know, here, too, everything ended in a standoff. Both options expired without value, and we find ourselves without the initial $0.05 we expended.

Spare a donut

Today’s Market is Joe DiMaggio

The big news today, friends, is that the NASDAQ is just a rat’s whisker from retaking its all time high. That’s a development that’s going to be more psychologically exciting for investors than genuinely technically meaningful.

The original closing high back on March 10th, 2000 was 5048 and the ‘DAQ now sits at 5042. But by week’s end, you can be sure we’ll be kissing that old number good-bye on our road to the lunar ether.

What makes it all but certain is a swiftly dropping VIX indicator, a sign that all the fear that was sucked into the system over the last three months has now dissipated.

Take a look here –

VIX Volatility

The VIX is a measure of where the market sees volatility roughly 30 days from today. As of last Friday’s close, the read comes in below all her moving averages and appears to be safely ensconced there.

Lower VIX reads are almost always a harbinger of higher prices ahead.

At the same time, the latest AAII numbers reveal a general public that’s doodoo scared of what the markets are about to bring. Here’s a chart of the latest bullish sentiment readings –

AAII Bullish Sentiment crash

At 27.16%, we’re at our lowest level since April, 2013. And the major indexes are just off their all time highs! What the…?

Contrarians recognize that this sort of extreme read is often a sign of a near term bottom. We like the fact, too, that the bearish sentiment reading from AAII is also up four weeks in a row, to 31.48%.

More bears than bulls is a great sign for the longs.

Trade it, Huey! Go, man, go!

The best way to go when the indexes are about to catch fire is with the match that’s gonna light them.

And for that reason, you can count on the poster child of this bull market, none other than Facebook (NYSE:FB), the world’s greatest time waster, to lead the pack.

Look at her chart –

FB resistance break

Technically, we’ve got a winner.

After six months of doing exactly nothing, Facebook’s moving averages caught up to her price. That gave technicians a little more incentive to climb back aboard, and last week, they did precisely that.

A new high was set for the stock as FB shares broke above a long term line of resistance (in black).

And with both RSI and MACD (in green) cruising firmly above their respective waterlines, we say it’s time to pile on.  Here is, specifically, what we’re going to do…

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Wall Street Elite recommends you consider a speculative CALL purchase on FB using the November 85 Strike, now selling for $8.15. We’d also offset the cost by selling the November 70 PUT for $2.18. Total debit on the trade is $5.97 per pair traded.

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Wall Street Elite recommends you consider a speculative CALL purchase on FB using the November 85 Strike, now selling for $8.15. We’d also offset the cost by selling the November 70 PUT for $2.18. Total debit on the trade is $5.97 per pair traded.

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With kind regards,

Hugh L. O’Haynew, Normandy Research

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