Slap-Happy Credit Trade (V, AXP, FAS, HD)

We start today with the dollar, as we believe the case for long term dollar strength is a powerful one.

 

And that’s not just because the Euro is taking a drubbing after Italy’s latest referendum results.  The Euro will likely see a continued arse-kicking as France, Germany, the Netherlands and other countries begin their move to the political right over the next year.  Elections are expected to significantly weaken establishment parties in those countries in the spring and summer, and with it, support for the very idea of a unified Europe and currency.

 

That’s all dollar positive, of course, as are current weaknesses in the Japanese Yen and Turkish Lira.  The latest dollar-yen move was, in fact, the biggest in more than twenty years!

 

As for Turkey, we’ll likely see other Emerging Market nations following that country’s lead into the land of currency weakness, while still other nations, like India, in attempting to enact a cash-free society – with all the pain that entails – will further boost to the U.S. Dollar.  There’s nothing like telling people that every one of their financial transactions will be monitored by government to give them a hearty desire to hold on to something tangible.  And if all that’s available is greenbacks, so be it.

 

Have a look now at a chart of the Dollar Index for the last half year –

1

The latest, Trump-induced pop higher for the dollar has added constructively to the technical condition of the currency.

 

To start, her moving averages are all trending higher and are nearly unfurled (we’re just a session or two from seeing that happening), while price sits above them all.

 

And that’s bullish.

 

What’s more, that also puts a solid floor under the dollar at roughly DXY 96.5, where the MAs are currently bunched (in blue).  We could see a retest of that level in the short- to intermediate-term.

 

And finally, both RSI and MACD are offering hope that the retracement is close to complete, as the former has already retreated to its waterline, while the latter looks ready now to roll higher (in green).

 

BUT WAIT! THERE’S MORE!

 

With higher interest rates in the pipeline, the dollar will also be the recipient of fresh flows of foreign funds, as U.S. assets climb both absolutely and in relation to the world’s major currencies.

 

It’s a bet that the so-called ‘smart money’ has been increasingly willing to make of late, as the chart below shows –

2

The hedgies and big speculators, as you can see, began piling on their longs from late September through the end of last month.  And we see no reason why that should cease.

 

The trade has legs.

 

Have a look now at the Dollar Index’s weekly chart, from which it becomes clear that the buck’s latest move higher also constitutes a breakout from a nearly two year sideways meander between 93 and 100.

3

The dollar’s next surge is now upon us, and if it goes anything like the last one (at the end of 2014 – far left of chart), we could see DXY 125 before the close of 2017.

 

Surging Dollar; Fancy Financials

 

The greatest beneficiary of all this dollar strength will be the financials.  There’s no doubt other sectors will see benefits, but the banks, brokers and insurers, by and large, stand to profit most.  And that’s why we’re focusing this week’s trade on that sector.

 

But before we get there, we’ve got two trades to tend to.

 

The first was opened back on July 21st in a letter called Diversions, Distractions, Shell Games and Worry, and in it we recommended you buy the FAS January 28.50 CALL for $3.50 and sell the C January 45 CALL for $2.88, for a total debit of $0.62 per pair.

 

Since then, the financials have been on fire, but the triple leveraged FAS hasn’t been able to keep up with the performance of Citigroup, as unlikely as that may seem.

 

That said, both stocks are overbought – as is the whole financial sector.

 

And we believe it’s bound to cool off before New Year’s.

 

That’s why we’re selling the FAS CALL, cashing in on the gain, and waiting for a pullback on the Citi front.

 

The FAS CALLs trade for $13.05.

 

Dump ‘em and wait.

4

Next trade on the block is from two weeks back, a letter called Big Fat, New-Home Trade, wherein we urged you to sell the HD May 125 PUT for $4.75 and buy the HD May 135 CALL for the same price.  Zero premium was the result.

 

Today, the CALLs are going for $5.55 while the puts are trading at $4.15.  Sell the former and buy back the latter and you emerge with $1.40 on nothing committed.  Adjusted for minimal commissions, that’s a profit of 833% in a freakin’ fortnight!

 

Take that to the enlistment office, buddy.

 

Matt McAbby for Secretary of State!

 

And now we move to the new trade portion of our letter.

 

We’re going back to that same overbought financial sector and offering a pairs trade we believe has some good fat to it.

 

Both stocks are big wheels, trading as members of the Dow Jones Industrial 30, and both are credit companies – American Express (NYSE:AXP) and Visa (NYSE:V).

 

You don’t come across too many bigger names than these.

 

But lo and behold, they’ve traded in different directions for the last couple of months.

 

Have a look –

5

As you can see, AXP is securely in overbought space, while Visa is stuck in the ‘oversold’.

 

Our trade is based on the two finding a happy middle ground over the coming months.

 

This is the way the two chart for the last sixty days –

6

With a 25% differential in returns since mid-October, AXP and V are bound to close the gap.

 

And likely very soon.

 

That’s why…

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

Both options are at-the-money.

 

Many happy returns,

 

Matt McAbby

Share your thoughts...

We encourage people to join in on the discussion. Please keep in mind however, that all comments are moderated according to our comment policy, and all links are nofollow. Let's keep the conversation professional and meaningful.