Money-Guns Blazing! (SWHC,QQQ)

Money-Guns Blazing! (SWHC,QQQ)

After hitting new all-time highs, the stock market managed to pull a small cohort of investors onto the bullish rail, but we’ve also seen a great number of high profile dissenters, as well.


Consider Jeff Gundlach of DoubleLine Capital, arguably the hottest name in the investment world over the last half decade, who just last Friday warned that investors exist in a “world of uber complacency” and recommended they “sell everything. Nothing here looks good.”


Gundlach manages $100 billion out of his Los Angeles offices.


Consider, too, billionaire political hack George Soros, who, according to his latest 13F filings, bought a whale of PUTs to insure his equity portfolio and loaded up on gold at the same time.


Bearish, anyone?


Moving right along, the chaps and lassies over at brokerage behemoth Goldman Sachs (NYSE:GS) made waves last week with the following pronouncement –


…We downgrade equities tactically to Underweight over 3 months, but remain Neutral over 12 months. We remain Overweight cash and would look for resets lower in equities to add positions.


We should clarify that “tactical downgrade to equities for the next 3 months” means, in plain language, that they’re expecting a downturn and folks should sell.


Among their reasons are – “equities remain expensive and earnings growth is poor, [so] in our view, equities are now just at the upper end of their ‘fat and flat’ range.”


Could it be?


What about banking giant JP Morgan (NYSE:JPM)?


In a similarly themed note to clients, JPM recommended that the…


Longer term picture is not very attractive; one should use the current rally to ultimately sell into; we think equities will keep lagging other assets in ’16.


Their reasons?


Among the many, they state, ‘Global P/E multiples are elevated, in outright expensive territory. The P/S metric is higher today than it was at any time in the ‘07-’08 period, also outright expensive.’




What are we to think?


With all the gloom out there, is it possible the market will continue to rise?  And what about legendary Wall Street icons like Icahn, Druckenmiller, Singer and Gross, all of whom have spoken publicly about the need to exit the stock market, and who’ve put their money where their mouths are?


Hell, even Donald Trump opined this week that it was time to exit stocks.  He’s a real estate man, but he does have a notion of money and the excesses of government in financial markets.  As he put it, investors could face some “very scary scenarios” because of the Federal Reserve’s current policy position.


In his words,


“I did invest and I got out, and it was actually very good timing… But I’ve never been a big investor in the stock market… Interest rates are artificially low… The only reason the stock market is where it is is because you get free money.”


Not such a radical stance.  We’ve offered much the same from the bull market’s beginnings back in 2009: a market engineered by government forces to rise will, in the end, rise.  Full stop.


But have we reached the end of that intervention?  Or more specifically, is it becoming clear that the engineers are no longer achieving the bullish outcomes they desire?  Many are arguing the case that a massive liquidity pool and cheap lending rates are, in the end, a failing proposition.


We’ll see, eventually, whether that position holds any water, but in the meantime, our position is clear.  Politics trumps economics, if you’ll excuse the pun.


It doesn’t matter where you go, politicians will do whatever is in their power to retain their power.  Whether it’s a perfectly well-heeled developing nation like Venezuela, where rather than cede power, socialists succeeded in destroying a relatively smooth-running economy, or the United States, where pols will rig and contrive in every possible manner to keep the appearance of wealth alive, politicians will ever strive to remain in the driver’s seat.


A look at the following graphic makes clear why –


In the land of the free lunch and the home of the subprime mortgage, money talks, and the Washington elite knows that.


As the chart illustrates with uncanny accuracy: the incumbent party wins the election if the market is rising come ballot time.




So simple, it works better than 86% of the time.


So, to translate, the sitting Democratic president and his administration, and all those who agree with him and prefer the maintenance of a status quo that may not be conducive to the long term financial health of the nation, will still do everything in their means to goose the market higher, even if that means crossing people like Jeff Gundlach and JP Morgan and Donald Trump, among others.


Yet whether they succeed is an open question.  And whether they have the guns to pull it off is another.


But they’re going to damn well try.


And our money’s on them.


Before we get to our trade for the week, we’ve got one open initiative to close


It was launched last November 19th in a letter called Running from the Guillotine, wherein we urged you to purchase a deep-in-the-money QQQ January 2017 60 CALL, then trading for $54.74.


As you well know, the Qubes went literally nowhere since then, and we’ve been sitting on more-or-less dead money with the trade.


Today, the options are fetching $55.17, and we say take it.  If we’ve run into resistance here, as so many of the bigwigs are convinced, better we redeploy into something more productive.  Your profit is $0.43.  In percentage terms, that’s a whopping 0.78%.


Something New


This week we’re picking up on the big gun theme by trading firearms maker Smith and Wesson (NASDAQ:SWHC).  As the chart below shows, the company’s shares recently hit new all-time highs after a wild, ISIS-inspired six week climb.


Have a look –


It’s very likely we’ve seen an interim high and will drift sideways for the next short while.  Both the double-top (resistance at $30.50) and the diverging RSI and MACD indicators speak to a cooling off period in the making.


We’re going to use that opportunity to sell a skewed calendar strangle and buy a CALL with the proceeds.


And it looks like this –

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

Many happy returns,


Matt McAbby

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