Shall We Take a Dip? (SPY,TLT,GOOGL,TREE)

We’re at something of a crossroads in the market today, and not because the battle of bulls and bears has reached a stalemate.  Those traditional crossings are more easily navigated than our current predicament.  With them, there’s still a set of lights that keeps traffic moving in a more or less orderly fashion.

 

What prevails today, rather, is an intersection that has neither clearly marked lanes nor working lights.  That is to say, everyone is either confused or uncertain and gazing over his shoulder at what the next guy’s doing.

 

It’s not a comforting situation.  And even though analysts and strategists and plain old traders like us are looking at the data and charts for clues as to where we’re headed next (particularly over the short term), the answers provided by those metrics are still fuzzy, and the truth is, we could bandy off in just about any direction over the next thirty days, then retrace just as madly in another.

And the reason for all the befuddlement?

 

You guessed it.

 

The new administration in Washington is about the least predictable we’ve seen in the last half century – if not longer.  The bottom line is there was a great deal of enthusiasm on Wall Street regarding The Trumpeter’s economic program, but now questions are arising regarding how easily he’ll be able to implement it.

 

He has a majority in both houses, yes, but not everyone on the Republican team seems eager to endorse the new man’s plans.  Not to mention the roadblocks the official opposition can set up.

 

The question is whether deals will be made and whether those deals will cost the President some of the meat that he’s promised.

 

The fact that all of this is unwinding in a global financial environment that’s as fragile as it was back in 2007/2008 and a geopolitical situation that feels ever the verge of crisis, and you can understand why both bulls and bears are confused about what’s next to come.

It’s for that reason that despite the recent run-up in stock prices, sentiment among Main Street investors has literally fallen off a cliff.

 

Look here at the American Association of Individual Investors weekly bullish sentiment reading.

Inside a month, bullish sentiment has dropped from roughly 50% to 30%, clearly demonstrating the aforementioned confusion, and all this despite the Dow being just seven tenths of one percent off its all-time highs (and still holding a tad below 20,000), the S&P 500 one percent below and the NASDAQ Composite the same.

 

And it doesn’t end there.  The Russell 3000, a measure of the largest stocks in the American investment universe has also set a new record.

 

As the chart below shows, the market cap for the group has just broken higher, besting its record set a year ago and weighing in at a phenomenal $25.6 trillion bucks.

That’d would, Elroy…

 

Before we get to this week’s trade, we have two initiatives to close down.  The first was planted in our December 6th missive called Money Grows on Trees.  There, we urged you to lean on one of the biggest shorted issues on the market, Lending Tree (NASDAQ:TREE) an outfit that operates in the loan and credit sourcing space of the online market.

 

The trade was based on the premise that a squeeze would do wonders for those on the long side of the ledger, and as the move has now occurred, we want to take our profits before anything untoward occurs.

 

The trade had you sell two (2) TREE April 90 PUTs for $7.10 each and use the proceeds to buy a TREE July 105 CALL for $13.40.  Total credit for the trade was $0.80

 

And today.

 

We’ve got a nice profit in hand.  As of Friday’s close, the PUTs were going for $4.10 and the CALL for $14.30.  Buy back the former and sell off the latter and you net $6.20 on absolutely nothing laid out.  Adjusting for minimum commissions, you walk away with 4033% in just eight weeks.

 

Magnificent.

The next trade was set just a week back in our January 25th letter, Inaugurating the Profit Search.  There, we recommended selling two GOOGL (2) January 27th 812.50 PUTs for $5.40 each, and buying the GOOGL February 24th 870 CALL for $10.90.  Total debit on the trade was $0.10.

 

And now?

 

Our genius is once again proven.

 

The PUTs expired last Friday, as we expected they would.  And the CALLs are selling now for $2.40.

 

There may be more juice in this one, but we don’t believe in risking a bird in the hand.  Sell the CALL and you net 2300% in a flipping week.

 

And be sure to tell yer ma about it, Macey.

 

Old Trades, New Trades, Big Trades, Blue Trades

 

In addition to the aforementioned confusion, we have another chart to show you now, one that we believe will help you understand the immediate pull of the market.

 

It’s the Insider Transactions Ratio, a measure of the total value of shares sold by insiders divided by the total value bought.

 

And the latest reading is a whiz-blur gazoink higher.

 

Take a look –

What’s it mean?

 

Very simply, that underneath the radar, amid the head-spinning and backside-shaking that’s overcome the nation, the guys who run the country’s biggest publicly traded companies are jumping at a rate we haven’t seen in years.

 

And that means you should, too.

 

Risk is going to be a four letter word for a couple of weeks now, we believe.  So the trade is a simple one: bullish Treasuries, using the iShares 20+ Year Treasury Bond ETF (NYSE:TLT), and bearish the SPDR S&P 500 ETF (NYSE:SPY).

 

And it looks like this –

- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]

With kind regards,

 

Hugh L. O’Haynew

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