How You Feelin’? (HYG,GS,GM)

It’s rare that we see the sun shining so brightly in the middle of February.

 

For stocks, that is.

 

In fact, can you name a time in the last ten years when a) we’d reached all-time highs in the indexes, b) consumer confidence levels were this robust, c) institutional investors were all-in,

  1. d) business confidence and homebuilder sentiment looked so rosy, e) emerging markets, like a horde of thunderous elephants, had just broken higher after eighteen months in the doldrums, and f) a stack of S&P 500 firms (36 of them – see below) just cracked through resistance into record territory?

 

It would be hard.

Does that mean we’re living in the best of all worlds?  That the country and planet have turned a corner and are headed toward a gold tower utopia that will make all of us bottom feeders rich beyond our wildest imaginings?

It’s more likely there’s something else at work here, and if you’ll permit us a Biblical allusion, we’ll offer it up thus –

 

“Pride comes before a fall.”

 

It was stated by King Solomon some three thousand years ago, and as he’s counted among the wisest of men, let’s look at the old fellow’s words a little more deeply and see how we might apply them to our current situation.

 

To begin, there’s little gainsaying the fact that the last ten years have been hard on the American worker.  A look at the unemployment rolls and labor participation rates paint a grim picture of loss, dread and depression.

 

On the other hand, a glance at the prospects for the coming year and those few, broadly-trumpeted job-creation announcements of the last couple of months demonstrate that we’re moving in the direction of economic expansion – even if they’re still a drop in the bucket, and we haven’t yet seen the tax cuts and other policies enacted that will, indeed, move things in favor of increased employment and prosperity.

 

But the FEELING certainly exists that we’re headed in that direction.

 

Hence all the optimism.

 

Will we actually get there?

 

That’s as much a political question as it is a market-driven one, as we haven’t a clue if lawmakers will see through the promises they made while they were on the campaign trail.

 

We also don’t know what will happen with the rest of the world – if the global economy will cooperate with the desire of so many to “make America great again”.

But there is without question a feeling, a hunch, a sensation of some variety that we are at the very beginnings of what might be called a renewal of American Pride, that we are paving the way toward a national moment that many will be happy to consider a ‘proud’ one.

 

Again, this is not something that can be quantified.  It’s altogether ‘in the air’, unlike the black and white surveys and confidence readings we pointed to above.

 

Something has happened.

 

The mood has turned.

 

And it’s our bedrock belief that, as such, the markets and economy will, in fact, rebound and expand and climb until such time as this feeling of national pride has permeated the great majority of Americans AND THE MAINSTREAM NEWS MEDIA.

 

That’s right, those same folk who appear to have it in for the new president and his team – until they begin printing in colorful hues that “America is Back!” we will have little reason to be anything but stock market bulls.

 

And we reiterate that this is not because the real numbers underpinning any advance in equities justify their further rise.  Absolutely not.

 

What we are plainly saying is that we have entered a new era, as fraught with danger as we know it is to say that.  Call it the era of sentiment – pure sentiment.

 

And we will stand by this until the doomsday clock strikes midnight.

 

Why?

 

Nothing matters anymore but how folks are feeling.  Not earnings, not interest rates, not unemployment numbers, nothing.

 

This is the era of hype and superficiality as we’ve never seen those phenomena before, and likely never will again.  Everything, absolutely everything connected to markets and investing has now been loosed from traditional, rational moorings.

Ask yourself how you feel.

 

And invest accordingly.

 

Close two down and open up another

 

We’re going to shut down part of our January 5th trade today and try to get something back from it.

 

You’ll recall that in our letter called Becoming an Independent Equity Trader we urged you to sell a GS January (2018) 180 PUT for $7.25.

 

Today you can buy it back for $4.35, rendering a $2.90 profit on $4.35 spent, or 67% in six weeks.

 

That’s 580% annualized.

 

And that’s almost as good as deep fried chicken hearts.

 

Next is our trade from a week later (1/12) and a letter entitled Breaking: Transgender NYSE Floor Trader Charged with Self-Rape!  In that missive, we reckoned you could sell PUTs on carmaker General Motors, as the shares were due for a spike, we felt.

 

And so it was.

 

The trade called on you to sell five (5) GM June 16th 32 PUTs for $0.90 each.  Total credit on the trade was $4.50.

 

And today, they’re changing hands at $0.59.  Buy them back and you take home $1.55 on $2.95 spent.

 

That’s 53%.

 

In one month.

 

Spastic fit.

We’re having a look at the High Yield sector this week via the iShares iBoxx High Yield Corporate Bond ETF (NYSE:HYG), whose sensitivity to all things financial should not be underestimated.

 

A look at the chart reveals that after the recent breakout, price is now testing support (red line)

Below that level, we have another line of support at $87 (in blue), and yet another at the rising 137 day moving average, now at $86.50 (black square).

 

Should HYG consolidate, we feel safe that the above three support lines will hold.

 

But we don’t think it will.  Look for more bullish action from the junk sector, as the good feelings permeate.  And consider the following –

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

And with HYG currently trading at $87.75, your long CALL is already $1.75 in-the-money!

 

Many happy returns,

 

Matt McAbby

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