We don’t live in a land of fairies and elves and a 35% rise in all three major indexes (in only 8 weeks) without even a hint a of pullback or adjustment is completely out of line. Bull sentiment is increasing (never a good sign), insiders are selling, volume is weak and the overall economy sucks. Needless to say the market’s way overbought.
(Recommendation at the bottom)
As Option traders, our goal is not to suck every last dime out of a trade or to call tops and bottoms. It’s just not possible and a losing proposition. That said;
- Sell VE at the market. The option closed @ 3.90 and the July 25 calls were bought for 2.40 It’s been a great run and may go higher, but who cares. Close it for a 62% profit. If you bought it down as I suggested (the July 22.50) you really scored.
- Arch Coal: For those of us trading ACI it’s been another great run. Our May 15 calls are trading @ $18 today for a net profit of 134% and were rolled over to the June contract. The breakout is $20 and the position should be closed as stock price approaches $30.
- Marathon Oil (MRO) closed @ $32.56 Fri. up 22% on the day. The July 30 calls were @ 4.00 and initiated @ 1.10 per contract. MRO has a gain 263% and counting.
- UNG (Nat Gas) closed @ 16.93 and the July 15 calls are up 32% to date. UNG is in a trading range. There is no underlying price pattern to indicate that it will exceed that range. Trade was initiated based upon the bottoming price (7 year low) of the commodity itself and the historic ratio to the price of oil. Though it may continue to move up in sympathy with rising crude oil prices, there is no reason to believe it will break out of it’s trading range.
The chart can be seen as a “narrow sideways channel” and a break above that channel ($20) could prove to be a move that is 75% of the length of the 4 month sideways channel it was in. This channel is not clearly defined and I don’t like gambling on stocks (craps is another story).
SELL UNG as it approaches the $20 price (top of the range). A solid double.
- DBA July 24 calls are up 62% and just at the beginning of a what will prove to be a strong summer rally. Hold DBA.
- ExonMobile (XOM) price moved up to $70.80 on Fri. the option was up 32% on the day. This wasn’t an easy call when it traded at $65 but it made for a great entry price. XOM has an intermediate price target of $83 and if it breaks that level should see $90. What determines this is explained below. (hint: it’s the dollar)
THE BEST MONEY MARKET MANAGERS IN THE WORLD
The market is overextended. Period. Years ago I leaned a important lesson from a guy named Bill Donovan. Donovan wrote the first ever Interest Rate Advisory which tracked “The average maturity of Money Market Funds.” The way it worked was that he tracked the average maturity (length of days) of 550 money market funds with just over $100 billion dollars invested (chump change today but that was a lot of cash in the 70’s). He hypothesized that when 550 of the smartest money managers in the world lengthened the average maturity of their funds, they believed that short interest rates would remain steady or fall. Extended maturities meant they could take advantage of higher rates for a longer duration.
Pay close attention, this part is important. When they shortened their average maturity they fully expected interest rates to rise. The genius of Bill Donovan was that he created a range in which he determined, with laser certainty, when interest rates would rise or fall. The guy was a friggin’ genius.
When interest rates rise it makes business’s borrowing cost higher, reducing profitability and choking off investment. When rates are steady or falling it makes business’s more profitable and promotes business investment.
It doesn’t take a brain surgeon to know beyond a doubt that we are entering a period of sustained rising interest rates and all the costs and hyperinflation that that implies. The stock and bond markets are a forward looking mechanism, which means that if they so much as sense rising interest rates or an uptick in inflation they will sell off brutally.
Every major market sell-off in history has been preceded by a sudden and substantial rise in rates.
Which brings us to today. Look at the TLT (Proshares 20 year Treasury). There’s no question that rates are rising. The Fed’s Bond Auctions are a shame and a travesty. They’re printing their own money to buy their own bonds to pay the interest on their own debts, bailouts, guarantees and legacy obligations (11 Trillion and counting). There is no Sovereign Nation that will continue to hold these bonds (think debts) at .25% interest. The borrowing cost must rise to meet the level of risk of inflation or default.
I know what you’re saying, The US of A is not going to default of it’s debt! Maybe not, but foreign debt buyers will need to be compensated for our inflationary spending. Because we are the “world’s reserve currency” it is unlikely that we would loose our AAA credit rating but there is talk about replacing the US dollar with an alternative reserve currency (I’m for going back to the Gold Standard). If that happens all bets are off.
Follow the TLT, ie; rates rise, borrowing costs go up, profitability goes down, the stock market circles the bowl. It might be slightly different if the economy were stronger, but as I said the overall economy sucks with darkness on the edge of town.
Action to Take:
Over the next few days I will be building a SHORT position in the SPY. I am looking at the July 87 puts(.SZCSI) & July 89 puts (SZCSK).
Unwind any economic or interest sensitive positions NOW. You may be early to the party but you really don’t want to be the last one to leave.
Also, Buy the TBT (ETF Proshares UltraShort 20 US Treasury). With no expiration you can safely build a position on pull backs. When treasuries tank, as they surely will, you’ll be coining money.
Continue to hold all commodity positions, ie; DBA, energy stocks as these will dramatically increase and the Dollar declines. It’s already begun. This is what is fueling the price of crude oil and the “Ag’s.”
Sorry for the length but I thought you should know.
Just trying to make a buck,
Ray
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