The Dam Begins to Crack (FCX and TLT)

We’re starting to experience some VERY NICE movement in the market after a period of stagnation that feels like forever.

In point of fact, it’s been anywhere between two and five months of sluggishness, depending upon the sector examined, but as the dams begin to break and the flows begin again to rejuvenate, we’ll likely see increased opportunities to make fatter profits than we’ve enjoyed in a good half year.

But before we get to looking at where that movement is centered, let’s take a second to close out a recent corpulent trade and bank ourselves a bellyful of bills.

HILLARY-LOVES-BILL

We start with a trade launched March 31st in a letter called A Treasury Bond Longshot, in which we argued that an overbought read from the long bond’s weekly RSI indicator was as good a sign as any that we were heading for a decline.

We wrote –

The most salient feature of the chart is the overbought RSI read that was registered in January (red circle). Only twice in the last decade [have]such readings been recorded, and the market sold off dramatically in the months that followed. The first was in December of 2008, the second in the fall of 2011.

Using the iShares 20+ Year Treasury Bond ETF (NYSE:TLT) as our proxy, we also examined the stock’s daily chart and found her RSI and MACD indicators pointing toward immediate weakness.

So we jumped.

We bought the TLT December 112 PUTs for $1.62, and this is what happened –

TLT-PUTS-CHART

The stock dropped like a stone.

And it has momentum – it could fall a lot more.

But we’re not chancing it.

TLT could just as easily bounce from here and float up to the $127 neighborhood, where it could loaf for months before resuming its downtrend. And with an RSI read fast approaching the oversold 20 level (in green), we might get that bounce any day now. Put plainly, it’s not worth the risk.

The PUTs are now trading for $2.55, offering $0.93 net on $1.62 initially tendered. That’s a profit of 57% in just five weeks, or 597% annualized.

SHAKE-DONT-BREAK

Buffett: Bonds Have had their Day

Market wizard Warren Buffett also believes the bond market is a losing bet. In a recent CNBC intervew, Buffett said –

If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I’d do it. But that’s not my game, and it can’t be done in the kind of quantity that would make sense for us. But I think that bonds are very overvalued, I’ll put it that way.

We’ll put it the same way.

But for us, there are a great number of ways to short the bond market, and our trade above amply demonstrates that. Buffett can’t do it because he needs to position anywhere between five and fifty billion dollars on the short side in order to make the trade meaningful to him and his shareholders. And that’s nothing he can accomplish without leaving a big fat skidmark on the stock that everyone would see. And that’s not the way Warren works.

The takeaway here is that the bond market is, as we’ve been saying, overvalued, and as it begins to sell off in earnest, a tremendous amount of cash will be freed up to course its way into the equity markets, where we expect monumental rises to ensue in the indexes.

How big is the bond market?

To give you some perspective of just how much cash could be headed toward stocks, we offer the following chart. It’s not up-to-date by any stretch, but it’s the best we could find, and it does offer a sense of the proportions involved.

Have a look –

US-BOND-MARKET

The data is two years old, but it’s likely the ratios have remained roughly the same – debt issuance in America has climbed dramatically these last two years, even as the stock market’s overall market cap has expanded. The chart shows a ratio of roughly two to one – two dollars of bond debt for every buck’s worth of stock.

Globally, these proportions also hold, and for that we have more current figures: last September, 2014, global equities were worth close to $53.8 trillion, while global debt just nudged above the $100 trillion mark.

All told, the numbers are staggering. It’s hard to fathom hundreds of millions of dollars, let alone hundreds of billions or trillions. Suffice to say that a strong selloff in bonds, quickly becoming a widespread expectation, could send unparalleled investment flows into the equity arena. Remember, too, we’re coming out of a thirty-five year bull market in bonds. No one has any clue what happens as it reverses.

Erratic Beginnings

As the flows begin coursing more vigorously, they’ll likely gouge deep furrows into well defined investment streams. But until that time, we’re going to see a more hectic, heaving about, as the money grapples with precisely where the best returns are to be found.

And that’s exactly why we’re seeing the bumps and leaps that we’re encountering in the natural gas, oil and copper markets, to name just a few.

And that, dear friends, leads us to our trade for the week.

There’s a good deal to be said about mining giant Freeport McMoRan (NYSE:FCX), a company we’ve had on our radar for decades, and which serves as a keen barometer of the mining sector. The company, with a market cap of $24.6 billion and a tremendously diverse array of both base and precious metals assets across the globe, has recently come to life along with copper’s recent price rise.

But we believe that move is about to splutter.

Have a look here –

FCX-CHART-41-RISE

The key to this trade is easy to miss.  So here it is, much larger.  And then, we’ll get into how we’re going to play this easily over-looked, but very important, indicator for big profits.

Have a look at what we’re talking about –

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BEARISH-ENGULFING-PATTERN-FCX

As mentioned, from her mid-March bottom at $17, FCX has risen 41% on the coattails of gains in copper. But we’re nearly overbought (blue box), and a bearish engulfing pattern formed yesterday (brown square) indicates the top is in.

In late February we saw one of these and the stock sold off abruptly.

Options Trader Elite recommends you consider the purchase of a speculative PUT on FCX. Buy the August 20 PUTs for $0.79 each.

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BEARISH-ENGULFING-PATTERN-FCX

As mentioned, from her mid-March bottom at $17, FCX has risen 41% on the coattails of gains in copper. But we’re nearly overbought (blue box), and a bearish engulfing pattern formed yesterday (brown square) indicates the top is in.

In late February we saw one of these and the stock sold off abruptly.

Options Trader Elite recommends you consider the purchase of a speculative PUT on FCX. Buy the August 20 PUTs for $0.79 each.

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With love of the hunt,

Hugh L. O’Haynew

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