ICARUS ALTITUDES (IYT,DIA,FAS)

ICARUS ALTITUDES (IYT,DIA,FAS)

 

Everyone wants to fly.  Everyone wants to be a spaceman and soar to the heavens, free from the shackles of this mortal coil.

 

Look at Playboy Branson of Virgin Airlines fame, look at Amazon’s Bald Bezos, look at Elon Musk from the Tesla boondoggle, and you’ll understand that the rich and famous no longer believe that flying across the ocean on a private jet is chic.  Today’s vogue travel plan has to involve oxygen tanks and space suits.

How it all turns out is anyone’s guess.  Sure, it could be like Apollo 11.  Or, it could end up like another Kim Jong Un flop that blows up as it leaves the cold dark earth.  We all remember what happened to the Space Shuttle Challenger.  That one never even made it into the bleak reaches of the final frontier.  And that was NASA.

 

The reason for our jaunt today into the ether is a nagging feeling that the transport stocks have simply gone lunar.  A look at the latest price action (below) shows a wonderful rise that has the bulls all a’twitter and the possibility of an overbought signal arriving any day now.

 

That’s not to say there won’t be further gains.  Indeed, we could see contrails sailing north of the exciting 10,000 point mark, and no doubt we will eventually get there.  But as of today, it appears the vehicle is losing steam.

 

Have a look –

This is the Dow Jones Transports for the last six months, and as you can see, they’ve been on a moon-shot winning streak for six straight weeks (trend channel, in red).  We’ve registered new, all-time highs for five of the last six days, and, as mentioned above, the action from the Relative Strength Index (in green) is now blasting an unequivocal –

Now, there’s no doubt a ten percent gain in little more than a month for an entire sector is a bit rich – even for us lovers of the quick zip.  Which is why we also believe that we’re headed for a sideways to lower move in the trannies over the next six to eight weeks, at least until the RSI indicator pulls back well below the 80 line, perhaps even trailing as low as the midway (50) waterline.

 

At that point we’ll be more convinced that the Transports are ready for a new burst skywards.

 

So How to Play it?

 

Our experience is that it’s always best to trade these overachievers against a separate security – one that has been less impressive of late in price performance, but now appears poised to play catch-up.

 

Exactly who that second party is, we’ll get to in a moment.  But first, we have to run down a number of trades that require your immediate attention.

 

And we’ll start with this…

 

Two weeks ago we penned the following provocative yet prophetic bit of prognostix –

 

[Today] we return to the aforementioned financial sector, where, after a near nine-month hiatus, we fully expect the banks and brokers to separate from their moving averages and begin a fresh ascent.

 

The letter was called President Hope, and in it we recommended you buy the FAS December 15th 57 CALL for $1.70 and subsidize it by selling an FAS January 19th PUT spread – sell the 48 PUT for $2.21 and buy the 41 PUT for $1.03.  Total debit for the endeavor was $0.52.

 

And with the ink hardly dry on that offering, just a week later we returned to the scene of the crime and urged you, again, to consider buying the FAS December 15th 57 CALL for $2.39 and, this time, subsidizing it by selling an FAS January 19th 51 PUT for $2.41.  Total credit on the second effort was $0.02.  The letter was called Financial Two-Timer.

 

And today?

 

We’re shutting down the whole fandango.

Here’s how it breaks down –

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Your net gain in two weeks is $3.21 on $0.50 spent.  That’s 642%.

 

And that’s a dance in a brassiere.

 

This Week’s Thunderbolt Trade

 

We’ve made hay out of the recent bullish confirmation from the Dow Theory, an indication that signals the bull market that began some nine years back is still in force.  That means we’ll likely get further gains on both the Dow Industrials as well as the Trannies in the months ahead.

 

But what we’re attempting to achieve with today’s pairs trade is outperformance.  And a look at the following comparison of the Industrials and Transports over the last six weeks shows that it’s very likely the Industrials’ turn to pull forward.

 

Have a look –

It’s less important to us whether both are rising or falling.  The important thing is that the Industrials rise faster, or fall slower than their fuel guzzling counterparts.

 

For their part, the Industrials have also recently set new highs.  But their journey has been far less dramatic, and on a percentage basis, doesn’t come close to the wallop emanating from the transports.

 

Anecdotally, we should also add that stocks on the Shanghai market have also just posted new 52 week highs, with today’s (Wednesday afternoon’s) read bringing the Chinese market to levels not seen since July of 2015, a month after the Shanghai exchanged burped its last and began its descent from all-time highs.

 

We raise the China issue because at several points over the last decade, the Shanghai market has led U.S stocks in direction, if not magnitude, and we believe today’s action from the Far East is a harbinger for what’s to come in New York.

 

With that, we’re going to offer the following long/short pairing that uses the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) and the iShares Transportation Average ETF (NYSE:IYT).

 

And it goes like this…

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Many happy returns,

 

Matt McAbby

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