Low Rider (QQQ)

Low Rider (QQQ)

There’s a great deal going on at present both in the investment sphere and on the geo-political front that has America hyperventilating, and while much of it is less than meaningful, a good deal of it demands our attention.

 

We’ll start with the tremendous cacophony surrounding the latest Trump/Flynn/Putin brouhaha, a matter that, in and of itself, constitutes no significant threat to markets, except that it may lead to greater headwinds on the road to a full Trump policy implementation.

 

In short, the markets like Trump.  Say whatever the hell you want about him – he’s ‘authoritarian’, he’s a ‘bullsh*tter’, he’s a madman – it matters little when it comes to the language of money: Wall Street and Main Street both adore the guy.  There has been no president in history who commanded similar gains over a similar time period directly after taking office.

 

Fact.

 

Next.

 

The latest song out of the Washington Hate-Trump Choral Society is IMPEACHMENT, a word laden with gravitas, and one that could gather a broader following if the man on the street comes to sing along.

 

It appears to be catchy.

 

But for us, the matter is less a question of politics, of course, and more of dollars and cents.

 

For if the man gets hauled in front of Congress for impeachment proceedings, even for ostensibly flimsy ‘Obstruction of Justice’ charges, the whole financial project that began after the election in November will come to a grinding halt.

 

And all the money that was betting on further gains will become scared.

 

And go elsewhere.

 

And that’s fine.

 

Because we can also bet on the downside.

 

But for those who were looking for some kind of stability, some chance of rejigging a situation that for many years was derailed and just adding to the rust heap, there will be very little hope.

 

And that could lead to a number of unpleasant outcomes occurring in a much faster than anticipated time frame.

What we’re looking for is some sign that investigations into any untoward activity on the part of the President and his team are actually progressing and starting to bite, exposing factual wrongdoing on the part of the White House and not just fishing to confirm more or less baseless allegations.

 

Remember, too, that it’s Republicans running the show on these investigations, so there’s more rear-end-covering than genuine zeal-to-convict involved here.

 

That would all change of course, if we saw the appointment of a Special Prosecutor.

 

In light of what we’ve seen to date, there’s little chance of that occurring, though anything’s possible.

 

In the meantime, we face a potential avalanche of piling on the ghost of General Flynn while the President is out of the country on his Middle Eastern tour, during which time the markets could take a significant, albeit temporary dive.

 

All told, markets will decline in line with the probability that the Trump agenda has been stalled, or that he is losing his base – and along with that, his will to press on with the program that originally got him elected.

 

May You Live In The Most Interesting of Times…

 

The beneficiaries of any respite in the accumulation of American assets will, of course, be foreign assets – particularly those viewed as safe haven investments.  Fixed income – Bunds, Gilts and JGBs will likely become investor favorites, but, again, we see this as a temporary unwind at this point, and a healthy one at that.

 

There will very likely emerge on the far side of this media-centered wrangling an excellent buying opportunity for the choicest American equities, most prominent among them the tech names that have dominated the landscape over the last six months.  That is, Apple, Facebook, Amazon, Alphabet (Google), Netflix, and Microsoft.

 

But we’ll have more to say on that when the time arrives.

For now, we’re focusing on the following, intense reversals we see taking place as the heat inside the Beltway gets turned up.

 

Consider –

 

Hedge funds, those most-confused scions of the investment establishment, just last week dumped gold futures to the tune of close to $6 billion notional.  It looked like this –

This represents the largest drop ever recorded in the series by the CFTC.

 

And lo and behold, what happened directly after?

 

Gold surged!

 

Now this –

There has been a huge shift in asset allocation by traders in the last four weeks.  One month ago everyone was worried that the investment community was too extended in the U.S. Dollar.  And sure enough, the dollar has tumbled significantly ever since.

 

Today, the worry is too many hands in the long NASDAQ pie.

 

And yesterday the NASDAQ (indeed, all the indexes) backed off dramatically.  The NASDAQ was off 2.57% and pre-trade numbers show the decline continuing.

 

Now look here –

This is a chart that records the instances in which the VIX closed below 11 for at least four consecutive days, a marker of complacency among investors and a signal that volatility is poised to go boing!  At no other time since this series was begun has volatility been so low.

 

All of which means…what?

 

Bottom line is that anytime there’s a violent reallocation of resources like we’re currently experiencing, and it’s taking place before a backdrop of apparent political instability, there’s going to be some selling.  How much, ultimately, will depend upon the factors we enumerated above, most important among them, whether the Republican Party itself decides to ditch its leader in favor of a more boring Pence-like alternative.

 

Until then, we’ll have some selling, and it’s to that eventuality that we now turn with a trade.

 

We’re keeping our strikes and expiries very close for this one, so pay attention.

 

The market will likely flounder until President Trump returns home, and that means a simple PUT purchase should carry us until then.

 

We’re looking at a roughly two-week time interval, and the details look like this –

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Many happy returns,

 

Matt McAbby

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