Measuring the Worry one Cup at a Time (GMCR, TSLA)

So just what is this so-called ‘wall of worry’ that epitomizes bull markets on Wall Street?

It’s a phrase that’s bandied about by just about everyone. But until you open up the patient and actually stir about in his guts, you really have no idea what it means.

It’s for that reason that we’re taking a minute to opine on the exact meaning of the term, its relevance, and how it works in reality.

We’ll start like this.

‘Bull Markets Climb a Wall of Worry’

We’re in a bull market. It’s been going on for five years and, for technical and other reasons, there’s little reason to think it will stop.

That being the case, one would expect people to be jumping out of their britches and throwing their money into the market like a pack of crazed baboons?

monkey

So why aren’t they?

The simple answer is – they’re scared. Or, to put it into the terms we framed above, they’re worried.

Worried? About what?

For starters, Russia and the Ukraine. Israel and the Palestinians. Obamacare. The IRS.  The NSA. The NBA. The Justice Department. George Clooney. Rick Perry. Benghazi.  Obamacare. Cows in Nevada. Immigrants on the border. And Obamacare. (Did we mention that?)

And while they’re busy being scared, they positively refuse to behave like baboons.

Ahhhh…

In other words, investors are still people and not baboons, and when we see baboon-like behavior, that will mark the end of the wall of worry, the end of the bull market in stocks, and we’ll have arrived at the precise moment to sell.

CASE STUDY:

The dot.com bubble popped precisely at the turn of the millennium, when an alleged computer glitch was supposed to darken the skies and make the heavens rain sulfur.

And when it didn’t happen, the biggest worry of the day was removed – and what followed?

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And today?

In the meantime, stocks will continue to rise, because at the end of the day markets are more a gauge of investor sentiment than they are a true pricing mechanism.

That is to say, the market is more efficient at telling us how the general public is feeling – optimistic/pessimistic, euphoric/depressed – in essence, how baboon-like we all are, than it is at giving us fair value for the 500 biggest companies in the land  (the S&P 500).

And what am I supposed to do with all of this?

To put it simply, you’re supposed to be in the market. You’re supposed to understand that there is no better time to be loading up on shares than when the Russians are poised to recolonize the Ukraine – or, at least, when the media is blaring that the threat exists.

Why?

Because markets climb until everyone has finished buying – until the last dollar is in. And so long as there’s fear among investors, that means there’s still more money to be soaked up. Remember, it’s not until that last dollar has been absorbed that the great day of wealth destruction can actually come to pass. And considering the vast amount of liquidity currently in the system, and the tremendous rate at which funds are still being added to it, we suspect the final spongebob soak up of cash remains yet a good ways away.

PIC: Taking the corners a bit too fast.

We’re going to review a trade we opened on the 31st of March in a letter called The End of the Road for Tesla, in which we projected some immediate downside for shares of this up-and-coming car-making superstar.

In a nutshell, we thought the run-up into late February was a little too hot and a subsequent cooling period would be necessary.

We wrote –

In our view, the mid-term prognosis for Tesla Motors (NASDAQ:TSLA) is about as promising as a hemorrhaging pulmonary trunk. TSLA lost nearly a quarter of its value in the last thirty days, and we say it’ll continue to fall until it hits the 137 DMA, currently rising in the vicinity of $180. That’s another 15% loss, and if we’re right, there’s money to be made both on a speculative PUT position for the short term, and possibly a long CALL option once our target is struck.

So far, so good.

We sold a short-term April 175 PUT on the company that expired last week and bagged us the full premium value of $1.89. Still open is the May 180 PUT that we bought for $8.05 and that’s now changing hands for $8.10.

Considering we still have three weeks until our open PUT expires, one would think we’d be as joyful as a baboon (!) to wait it out and cash in like the lucre-loving lepers we always wanted to be.

But we’re not sure.

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If TSLA retraces higher from here, even briefly – for a week, say – or if she surprises us and turns north with a vengeance, we’ll be out the profit we currently have in hand.

And what is that profit? The current $8.10 we have in the option, less the $6.16 we originally laid out for the trade. That’s $1.94, or a blockbuster 31% in just under a month.

We like that, and we’re urging all but the most rapacious of risk-takers to follow our lead on this one. There will be other opportunities to hit a homer with Tesla, and perhaps very soon. Perhaps even on the long side.

We’ll see.

Congrats to all who cashed in.

Our Trade for the Week.

In our last missive, called Make Money While the Coffee Spills, we suggested that a number of high-flying issues, like Tesla and Facebook and the stock we’re about to trade, were in the midst of a significant retreat that was both necessary and healthy for the market’s continued advance.

The ‘coffee’ referred to was none other than Keurig Green Mountain Inc. (NASDAQ:GMCR), a stock whose round trip from $115 down to $15 and then back to $120 over the course of just two and a half years must have set records, somewhere.

But the company has been retreating since those latest highs, down 25% since the late February summit, and we think the road lower is yet incomplete.

Take a look at the chart.

chart4

The same reasoning we applied in the April 14th article still adheres. We have a gap that needs filling, the bottom end of which aligns with strong support at the 137 DMA.

And that’s where we’re headed.

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Wall Street Elite recommends you consider the following trade – selling the GMCR May 80 PUT for $1.65 and buying the June 80 PUT for $2.86.  Total debit on the trade is $1.21. 

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We believe the Mays will expire out-of-the-money, giving us a nice profit on the Junes.

With kind regards,

Hugh L. O’Haynew
Senior Analyst
Normandy Research

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