You can't say we didn't tell you so.
In Friday's report I said: "***We're now only 5% below the "obviously overbought" market top. What changed in the past 7 days?… The reason I'm skeptical of the rally is that we've bounced back on 1/3 the volume at which we sold off and forming a weak base is why we were shorting the market in the first place a few weaks ago. Apparently, traders have learned nothing at all this month and we're right back to the madness of the Dow moving up 1,500 points on ridiculously low volume. This is simply a lack of sellers at the moment and God help us all if they come back!**" Fortunately, we also followed through with our hedges and went into the weekend with a bearish tilt to our portfolios – locking in last week's silly gains\*.
/YM is 25,300, that's my favorite short and we have /ES 2,740, /NQ 6,845 and /TF1,545 and my stop-outs are if we get over 2,750, 6,850 or 1,550 but, otherwise, I want to accumulate /YM shorts.
As you can see, we already had a nice $4,385 gain on the /YM shorts by 1:15 on Friday – not bad for 4 hours' work! After that we were able to rely on our index hedges to protect us and, into the close, we addred the following trade idea for the Russell Ultra-Short (TZA):
I'd go TZA July $11 ($2)/15 (0.90) for $1.10 you get $5 in protection and it's almost $1 in the money to start.
TZA closed Friday at $11.84 and is should still be a playable hedge this morning if you think your portfolio is too vunerable. A $3.14 gain in TZA would be 26% and, since TZA is a 3x short for the Russell, that would mean a 9% dip in the Russell should correspond to a 27% gain in TZA, putting the hedge in the money for a $3.90 (354%) gain and, since 354% is 39 times more than 9%, each $1,000 you play on TZA protects $40,000 of your bullish plays against a 9% loss. See – hedging is not really that complicated, is it?
The Global situation is still very complicated and we prefer to error on the side of caution – especially after seeing a demonstration of how quickly this market can unwind when it's in the mood. Obviously Trump has his troubles and so does the UK as Brexit begins to look more and more damaging to the World's 5th-largest economy. China has been on vacation with Hong Kong back on this morning and the mainland coming back to work on Thursday. The Hang Seng had a considerable drop into the close, getting the week off to a poor start for China.
WalMart (WMT) has disappointed the Dow this morning with a miss on earnings and is down over 5% so far and that could get worse as profits in Q4 were only $2.18Bn compared to $3.76Bn last year as they simply got their asses kicked in on-line sales, even as same-store sales grew a strong 2.6%. Walmart's plan to raise wages to $11/hour have spooked shareholders and the bonus payments of $700M they made to make Trump happy ovewhelmed the actual tax savings of $207M since, as I've been saying for ages – these big companies already pay no taxes so tax cuts don't really help them!
We still like WMT overall, but not for $110 or even $90. We were buying them last year in the $60s – THAT was a fair price. Even $80 is not bad but $110 was just silly – part of the overall mania that has been gripping the market since the tax cuts were formally announced.
This is the case with so many companies that we simply can't get more bullish on the markets until the forward earnings hype comes back to reality – and that may take the rest of Q1, into the next earnings (April) before traders (who aren't very good at math) begin to understand that there are no magic beans that will drive earnings up 20% on tax cuts and the repatriation of overseas funds – both of which are one-time events that cannot be repeated going forward.
There's very little data this week but plenty of Fed Speak and the Fed Minutes will be released Wednesday at 2pm. The US is auctioning off a huge amount of notes this week as well as our debt soars back to record highs in the first year of Trump's first budget – so that's going to be fun and it's going to put more pressure on the already-strained bond markets.
In addition to the 6 speakers you can see, Raphael Bostic speaks at 12:10 pm on Thursday so the Fed will be giving us a lot to chew over and don't forget earnings, which are still coming hot and heavy as the final 100 of the S&P 500 are still turning in their reports along with hundreds of other smaller companies:
In fact, according to Value Trap: "Screening all S&P 500 constituents, tax law change adds ~5% to EPS growth this year, summing bottom-up and median rate. It's not the bonanza bulls believe and it's been discounted over and over again."
This is no reason for the markets to be up 20% – or even 10% for that matter and I stand by my assertion that the bottom we hit last week is more likely to be – at BEST – the middle of the range for the bulk 2018 and, very possibly, the top.
So please, be careful out there!