New Leg Afoot (HYG,DIA,QQQ,SLV)
When you start dreaming that you’re a close associate and friend of former presidents and various other statesmen it’s very likely something’s wrong.
Now, that’s not to say that all who mucky-muck about with the bigshots have mental problems; certainly not. But we ham and eggers have to keep our feet on the ground.
After all, if we’ve never even met or seen these fellers in person, what could there possibly be to dream about?
It was with that in mind that we assured the Mrs. our next visit to Dr. Ludmilla would settle the matter; we’d tell her the whole story, purge ourselves of our nonsense and come away cleansed.
Oh dear, Doctor, yes! Yes, yes! Flesh it. Fleshitgrasp.
The point of the matter is that a fellow should never get too big for his britches. He should know his place, more or less, if he wants to have a good, safe and meaningful life. After all, the search for fame and glory nearly always ends – unfortunately – in either death or jail.
That’s what Dr. Ludmilla was trying to explain to me when I finished my rant about the true Hugh L. O’Haynew, how he was, at heart (and therefore in reality) a man of oceanic stature, as great as both Surlepont and Davignon combined, and just wanted a little recognition as such.
But she was having none of it.
And with that, my hour ran out. Morosely, I traversed the city in my rebooted 1966 El Camino, with an 8-track of the Isely Brothers blaring “Shout!” and Jimmy Carter in the bed trying to console me.
You’re a Crazy Shart, Huey!
Before we get to this week’s trade, we’ve got one to report: our May 9th venture from a letter called Precious Inversus Correlatus. In that missive, we recommended buying the QQQ September 29th 121 PUT for $1.06 and selling the SLV September 29th 16 PUT for $1.08. Total credit on the trade was $0.02.
As the world turns, the long QQQ option is well out-of-the-money and there’s little chance of it reversing by Friday. The best we can hope for is a dip that’s deep enough to spark some volatility and maybe permit us pull $0.15 or $0.20 out of it. Today, it’s worth only a couple of pennies.
That said, you’re on your own. Keep an eye and jump if you see it gaining ground. We won’t have an opportunity to get back to you before expiration, so we’ll wish you best of luck with it.
As for the short SLVs, they’re now trading at $0.07, and we say this is not the time to take chances. Our best thinking is to buy it back, take a loss, and see what tomorrow brings.
We’ll, of course, also monitor it and let you next week how things turn out.
We’re going to cover a number of disparate points today to get a feel for immediate market direction, and we’re going to start in an unlikely quarter.
Our first stop is the world of floating rate securities.
To begin, have a look at the following chart of the VanEck Vectors Investment Grade Floating Rate ETF (NYSE:FLTR), a reasonable proxy for the sector at large.
FLTR is comprised primarily of variable rate, corporate debt from the financial sector, and, as you can see, after bottoming in February of 2016, it started rolling higher as the Fed began telegraphing its intention to hike short term interest rates.
But that process stalled just after New Year’s, when the bond market began to doubt the expansion and felt the Fed would be forced to leave rates stand. The latest FLTR action could even be construed as a signal that the Fed’s next move may be to ease!
In any event, FLTR is proof in the interest rate expectation pudding that further hikes are now on hold.
And that sets the stage for an encore bullish performance for stocks.
The only condition that needs to be fulfilled before the next equity engorgement occurs is for sentiment toward ‘risk’ investments to turn positive.
We’ve seen a great deal of anxiety of late – perhaps stemming from the debt ceiling issue (now solved), the North Korean issue (not yet solved), and the NFL showdown (perhaps insoluble). Those items, taken together with the latest earnings and guidance announcements, have put stock purchases on the back burner.
How long they stay there, however, is unclear.
Perhaps the best means of determining when ‘risk’ investments are going to move is by looking at one of the riskiest asset classes in the market – high yield bonds.
Below is a chart of the most popular High Yield ETF on the Market, the iShares iBoxx High Yield Corporate Bond ETF (NYSE:HYG), a stock in which we currently maintain an open position and whose price action has been very positive of late.
Key takeaways from the chart are as follows:
- Moving averages are unfurled and moving higher for almost seven weeks straight (in blue),
- Price is above them all and currently just 0.6% off two year highs (in red), and
- Robust action from energy sector debt has recently buoyed the sector as a whole.
And that last point is key.
Remember, as the price of crude oil swan-dived between 2014 and 2016, it was junk from the energy sector that had everyone in a dither, as defaults real and expected mounted.
But with oil now comfortably cruising back above $50 a barrel, that reality has changed, and many consider the danger to have passed.
Buying non-investment grade oil and gas corporates has become something of a fashion.
You might say it’s ‘risk on’ for what was just six or eight months ago an untouchable corner of the market.
And that willingness to dare, will very likely translate to a new leg higher for the major market averages.
We should warn that it will NOT likely come until we see a new high from the high yield sector. But for that we have patience.
So we’re playing it long term, with the following pairing –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
The trade is based on the prospect of gains in the big caps outpacing any rise in high yield.
With kind regards,
Hugh L. O’Haynew