We’re now at the beginning of the final, stock market blowoff top, the one that will go down in history as the greatest and most spastic, bubbilicious equity buying frenzy of all time.
Forget the roaring twenties, forget the South Sea Bubble, forget Tulips and Go-Go and Nifty Fifty and the Singaporean Twin Ballerina Bubble of the mid seventeenth century – nothing will compare to what you’re about to see.
Buy and hold?
Hard to tell, because we don’t know at this stage how long the rally will last.
Buy single stocks, an ETF, or an index?
Sure, if you want. But again, the timing will be difficult here, as it’s sure to be a jerky ride to the top – something like gold in 1979-80-81 – up 20%, down 40%, up another 55%, down 35%, up 60%, etc., etc. Hanging on to anything will challenge even the most testosterone gifted investor.
That being the case, we prefer a slightly different approach, which we’ll outline in further detail in a moment.
But first, a brief refresher.
We got to this stage in financial history on the back of a drug-induced lift by the doctors who oversee the world’s economies these days – the central bankers. And like mainstream western medicine, the central bank cure of choice is also produced by the pharmaceutical industry.
Take a pill.
Take a few more.
Get an injection.
And so it goes.
The central bankers of the world, on encountering a depressed, or even sluggish economy also offer injections – only they refer to them as ‘stimuli’, monetary stimuli.
How banal. How innocuous. And how sinister and deadly!
Make no mistake. These stimulative injections – of cash (let’s be frank here) – may get the patient out of bed and moving in less than zombie-like fashion for a while, say a year or two or more, but in the end, the disease is never cured. The depression doesn’t disappear. It’s only driven deeper and masked and left to boil and bubble beneath the surface, getting more violent and more needy and psychotic all the while.
Until one day it grabs a Ruger 815 and takes down an entire stadium.
Heh, heh, heh…
A psychotic personality on ‘calming’ medication is about the most terrifying phenomenon that exists. Think of the cannibals of Malawi paired with Genghis Khan and then wrapped up in the body of Anthony Weiner.
Oh, the Horror… The Horror…
Our strategy in times like these is to ride the swings as far as we can and then jump. There’s no way of knowing when the jig will be up, and everything in the final stages of a market meltup is sentiment based.
We’ll do our best to measure that sentiment using our proprietary Sentimeter and offer you trades to exploit the ups and downs of the most drugged up financial culture on the planet.
Before we get to the trade, however, let’s have a look at one initiative that expired last Friday.
It was opened on June 21st in a letter called Gulping up the Silver, wherein we advised you to sell the UUP December 24 PUT for a credit of $0.42.
As of last Friday, the PUTs officially expired out-of-the-money worthless, and you therefore pocket 100% of the premium.
Hope you loaded up on it. And well done to Artie, our Bornean night watchman, for the red-headed witchcraft that once again led us to success!
Now the new goods, Huey!
For this week’s trade we’re turning to another bit of brilliant logic the likes of which you will not find in the investment world.
It’s a pairs trade that matches a risk-on favorite sector with a risk-off. And we’re launching it for the simple reason that folks are now preparing to lose their collective minds and throw their money like orangutans at whatever is moving fastest.
And which sectors might those be?
In a nutshell, it’s the financials, which have been afire of late with the realization that the final bubble is starting to go pneumatic. And against them, the consumer staples stocks, a relatively stodgy group as a whole, and a place where scared money generally runs when indecision is in the air.
But with indecision all but past, look for the staples to move out of favor and the banks and brokers to win the laurels.
Here’s a chart that pairs the two sectors’ most recent performance.
As you can see, the financials, represented above by the SPDR Financial Select Sector ETF (NYSE:XLF), have gotten off to a big head start. The Consumer Staples Select Sector SPDR ETF (NYSE:XLP) has done precisely nothing in the last half year, even including the latest Trump rally, that was a big dud for the sector.
And that’s the way we believe it will stay.
The Financials may retrench for a few weeks or even a month, but after that, they should be once again away to the races.
We’re therefore playing the trade with the following rationale –
- First, that the financials will outperform over a five to eight month period.
- Second, that the overall trend of the market will be higher, and therefore, that
- Three, it’s safer for us to employ PUTs for the trade, because if we’re wrong and the staples outperform, the whole project will simply expire out-of-the-money and we’ll have risked nothing.
That last will be true, of course, only if we set up the trade for an initial credit.
And that’s exactly what we’re doing.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
We stand to win on any XLF outperformance, either up or down.
With kind regards for the holiday season,
Stay safe out there!
Hugh L. O’Haynew