Thursday Follies – Post Fed Depression

What happens to prices when 3M sellers meet 800,000 buyers?

Now what?

What can we do now to boost the markets. We got the Fed minutes yesterday afternoon and there were no new revelations there to justify another 18 consecutive days of new highs. Sure it's being spun that way but that's the same way these depraved Financial Networks spin every rally – at the behest of their mainly-broker sponsors.

Not that the financial press is any better – even as an independent who makes his money selling subscriptions, rather than ads, I still find that we get far less subscribers when we are cautious or negative on the market than positive so, even if you think the Networks are not being specifically paid to mislead you – you can be sure they are doing it for the ratings!

The closer you get to a bubble top, the harder it is to get fresh money off the sidelines and the harder the market cheerleaders have to cheer to get you to put your money into the positions the sponsors are trying to wriggle out of. Meanwhile, the sponsors play their own games – sending their analysts out to upgrade key stocks that boost the sectors they are trying to unwind. As we pointed out yesterday – that's why you see all these upgrades on Tesla – the same week Musk is accused of fraudulent forecasting. That's NOT going away – but their profits are!

Since we first tested S&P 2,500 in July, I have urged caution at these levels and now we're at 2,550 and it doesn't make me feel better. Though it's the opposite, it reminds me of what Jim Cramer said to his viewers on October 31st, 2007 (5:20 in the video):

"You should be buying things and accept that they're over-valued but accept that they are going to keep going higher – I know that sounds irresponsible – but that's how you're going to make the money. " – Cramer, 10/31/2007 – Dow 13,930

"That's why the market just won't quit, no matter how poorly actual companies are doing." – Cramer, 2/1/2008 – Dow 12,743

"Very simply, I believe that it's time to BUYBUYBUY." – Cramer, 6/13/2008 – Dow 12,307

The Dow was at 9,625 by Nov 4th, 2008 and bottomed out on March 9th, 2009 at 6,626 – down more than half from 10/31/07. In case you weren't there at the time – it's HARD to get out of the market while it's falling. You can't always find buyers for your shares while the price is dropping and then you tend to make poor decisions as you keep hoping for a bounce to soften the blow. The average volume on the S&P (SPX) is about 800,000 the past month and that's down 42%, from 1.4M this time last year.

There are NOT 42% less shares so what would happen if there was a rush to sell stocks when there is so little buying volume? During the crash of 2008, average trading volume was 3M/day. What happens to prices when 3M sellers meet 800,000 buyers?

I HATE to be the voice of reason in an irrationally exuberant market but it's my job to tell you what is likely to happen and how to prepare for it. We are certainly not bearish invesors – we are VALUE investors and, while we would love a pullback – we're not waiting for one. Our portfolios are brimming with longs we've picked up over the years that we still haven't gotten tired of but, in order to PROTECT those profits, we insure ourselves with hedges – usually on the indexes.

We have been giving you trade ideas for hedges all month(and in Sept too), both in our Morning Reports and the Live Member Chat Room. Over the past 6 weeks, as we close in on Q3 earnings, we have gotten the most bearish we have been since we cashed out our portfolios in the Summer of 2015, catching a 2,000-point drop in the Dow right on the nose. This is not right on the nose, this one is costing us money (well, costing us potential gains) and we're not happy about that and we WILL use some of our CASH!!! to bottom-fish on earnings but, on the whole, we're sidelined with our portfolios locked in neutral for the moment.

Now that we are past the Fed minutes, it's all about earnings and this morning CitiGroup (C) beat by 0.10 at $1.42 and that's giving them a little pop and JP Morgan (JPM) also beat by 0.11 at $1.76 but revenues are down 27% from last year and expectations were very low and they are essentially trading flat off that news, though flat is $97/share and that's a market cap of $340Bn for a company making about $25Bn so a p/e of 13.6 is reasonable – as long as we assume nothing will ever go wrong again.

In 2015, JPM earned $24.4Bn and in 2016 JPM earned $24.7Bn and this year they should earn $25Bn – this is not much growth, folks. Nonetheless the stock is up almost 100% off the Feb 2016 lows of $50.19 and 50% above the 2015 highs of $66.58. Those guys had two full years to look at $24-25Bn in earnings and decided $66.58 was plenty – what has really changed? JPM, like most stocks, is up on some fantasy-camp scenario of a perfect market with less taxes and less regulation and more profits – not very different than what drove the Bush rally back in 2006 and 2007 – the lesson here is that investors never learn their lesson…

At some point, the market will either have to grow into its valuation or that valuation will adjust downward to fit the market's actual earnings. I don't know when that point it – only that this earnings quarter makes me very nervous so I'd rather sit out this leg of the rally than risk what we've gained so far. Yesterday we talked about picking up lagging International ETFs and we discussed our Russia (RSX) trade idea over at the Nasdaq as well as the reality of tax cuts vs the very high expectations reflected in the indexes:

We will be keeping our Nasdaq Portfolio at Our only losing trade (so far) is our QQQ bear put spread where we bought 10 Jan $147 puts for $9.50 ($9,500) and we sold 10 Jan $136 puts for $5.05 ($5,050) for net $4,450 on the $11,000 spread. QQQ is currently right at $148 and the spread is down to $2.47 ($2,470) for a $1,980 (44%) loss at the moment but it's good for a new hedge – just remember to buy some bullish positions to cover it!