A Higher Market… in Spurts (IYZ,IBB,TUR)

Despite the wild move higher since the infamous Brexit non-event, the current stock market rally (some 18% since the February lows) may still have room to run.

 

A look at recent short interest figures shows massive capitulation on the part of the bears, who, until recently, had been holding out in archetypical ursa fashion.  Why, just in January, short interest figures were closing in on five year highs.

 

Take a look –

1

The latest bout of short covering brings to an end the bear-y banquet that began last summer and peaked twice, once last October and again in March, when truly giddy downside expectations came to predominate.

 

New Highs! New Highs!

 

With stocks notching new highs on an almost daily basis for the last few weeks, the shorts are getting choked like fairies at a biker party.

2

Sorry, Dani.

 

The latest tally has over $60 billion flowing into equities from short covering since March and a full $26 billion of that sum arriving since June.

 

And that helps the bulls.

 

In case you’re wondering who the other big buyers behind the rally are, consider: over the last four quarters, corporate buybacks have accounted for a sweet $500 billion in equity inflows.

 

And while it’s true mom and pop haven’t yet joined the buying, the pressures are starting to build.  It won’t be long before dreams of greed and gravy start to bubble on Main Street.

 

Squeezing the Bigshots

 

Certainly the weakest shorts have been squeezed from the pack, but many others abound, not the least of which is Carl Icahn, investment giant, whose exposure to stocks has careened deeply to the short side since New Year’s.

 

Have a look –

3

Icahn took the shocking step of moving Icahn Enterprises’ (NASDAQ:IEP) capital from a roughly 20% short position in January to a more recent 150% net short standing using a variety of derivatives.  It’s a move that could put a vicious choke-hold on the octogenarian’s fund should the indexes keep rising.

 

And he’s not alone.  We’ve catalogued a number of hedge fund wizards who’ve all proclaimed Armageddon of late and recommended taking everything off the table – Soros, Druckenmiller and Gross, just to name a few.

 

So who’s right?  Will Icahn Enterprises go bust?  Or will the cagey old fox again prove himself the iconoclast, outmaneuvering the amorphous masses in true vulpine fashion.

4

The question is not moot, either.  The fact that so many ‘wiseguys’ are on the short side of the market while the indexes themselves keep trending higher means we have an altogether unprecedented situation on our hands (no guff, Matty!) whose ultimate outcome is unknown.

 

The Secret Revealed

 

Readers of these letters will not be surprised to hear that our take on the market is entirely bullish, and that unlike the conmen and drunken swillers of the investment elite, we foresee an asymptotic blowoff pop on the Dow that brings the index well north of 20,000 on thinning breadth and seduces Main Street like a high-priced Bangkok whore to pony up its cash and hop aboard.

 

Expect it.

 

Embrace it.

 

Ride it.

 

And run.

 

Before we turn to a trade for the week, let’s close out one effort from a letter published three weeks back called Red on the Med.  The story there was Turkey and the increasingly totalitarian nature of its governing regime.

 

Specifically, we wrote –

 

We believe the Turkey story can’t get worse.  If folks are buying and prices are rising after all the nonsense we’ve witnessed recently, then the bottom’s in and the elevator’s going up.

 

And so it has been.

 

When we launched the trade, TUR was trading for $37 and change.  Today, it has popped to $39.65, and along with it, our carefully selected options have moved nicely into the black.

 

DETAILS: You’ll recall that the trade recommended you buy one TUR November 38 CALL for $2.50 and sell one TUR November 38 PUT for $3.40, then use the proceeds to purchase one TUR August 34 PUT for $0.50.  Your total credit on the trade was $0.40.

 

And today?

 

The 38 CALL fetches $3.25, the 38 PUT $2.09, and the 34 PUT (which expires tomorrow) $0.05.  Sell the first and third and buy back the second and you exit the affair with $1.61 on nothing down, including the initial premium.

 

And that’s steak and potatoes, folks.

 

But Why!

 

A legitimate question arises of why we would choose to close the trade at this juncture, with so much time left before expiry and the underlying trending strongly in our favor.

 

And the answer is fairly simple.  We see the potential for the stock to get stuck here in the $40 range for some time, as a band of congestion exists between roughly $38.50 and $40.50.  A great number of resistance points exist in that area, including moving averages and pivot points.

 

Have a peek –

5

The danger is that the stock will slide sideways here for a while and erode the time value we currently have in our pockets.

 

And that would be a shame.

 

Get on with it!

 

This Week’s Initiative

 

Our play this week is based on the tremendous move we’ve already seen in the indexes over the last 60 days or so, a move that has been dominated by just a few sectors, the strongest of them biotech, up over 20%, as represented by the iShares NASDAQ Biotech ETF (NASDAQ:IBB).

 

As with any lengthy move that isn’t given a chance to rest, however, eventually it gives way to other market participants that didn’t perform as well over the same period.

 

Among the worst performing sectors in the last two months is the telecoms, represented below by the iShares U.S. Telecommunications ETF (NYSE:IYZ).  The group has been flat to slightly higher in that time frame, and our thinking is that a simple sector rotation will inevitably unfold that has the two reverse roles.

6

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

We win on any outperformance of IYZ.

 

Many happy returns,

 

Matt McAbby

 

 

 

 

Share your thoughts...

We encourage people to join in on the discussion. Please keep in mind however, that all comments are moderated according to our comment policy, and all links are nofollow. Let's keep the conversation professional and meaningful.