Taking Three Trades by the Throat (TBT, MBI,and DBC)
We’ll begin with some comments on a few open trades before getting down to this week’s business.
The bond market just sold off in the worst week we remember in nearly 25 years of market watching. There’s weakness all across the yield curve and to what it’s attributable has been among the hottest topics of the week.
Some say Ben Bernanke and the Fed bear the responsibility for announcing a possible end to open purchases on the bond market. Others claim the economy is genuinely turning a corner, as witnessed from some solid, recent homebuilding (and buying) stats as well as new auto purchase numbers.
But we don’t care for proximate causes. We’ve seen this in the making for a long time, and the turn from bonds to stocks has clearly begun to gain speed. Let the media and blogger types spin it how they want, let them point to Bernanke, let them point to Vlad the Impaler or Josef Stalin – we care not. This is a liquidity issue. Period. The ocean of new money in the system has begun to flow into the stock market and out of bonds because after 30 years of bullish action on the latter there’s clearly no juice left to be squeezed there.
A Doozy of a Rotation
We should add that the market for fixed income securities, including Treasuries, corporates, munis, etc., absolutely dwarfs that of equities. And it’s our firm opinion, therefore, that the shift from fixed income into stocks will bring a deluge of buying that will be nothing like anything we’ve ever seen.
The stock market will climb through every bit of bad news – bar none – for the foreseeable future, including the current spate of apparent Fed induced selling.
And the lesson?
Don’t listen to the news. Don’t listen to bearish commentary. Because the bears are right. The world is upside down. Nothing make sense. And it’s all going to implode one day.
Fine. But not yet.
And in the meantime, the stock market is rising because there’s money out there and it’s got to go somewhere. Our advice is therefore simple – get on board and stay on board. The thing is starting to gain some speed.
Trades Looking Good
Because of the bond selloff, our open TBT CALL is performing wonderfully. We bought it for $34.40 back in our letter entitled A Long Term Bond Play on February 4th, where we wrote –
From nearly every angle it’s becoming clear that there is, in fact, a rotation out of fixed income securities – particularly mid- to long-term investment grade bonds, regardless of the issuer – and into equities. We’ve been trumpeting the likelihood of this for a long time, and recent signs have confirmed for us that there’s no other explanation for what’s happening
Our option is now trading for $40. That’s a gain of 16% and we still have plenty of time to run. We purchased the January 2015 expiry, so the only reason we have to close the trade is over concerns that we’ve temporarily entered overbought territory.
Any sign of that yet?
Have a look at the chart.
A true technician would say that this baby still has a ways to run, that time is on the side of the longs and there’s no need to do anything yet. And he’d be right if he were talking about stock in TBT. But that’s not where we’re at. We bought CALLs on TBT and that means time is our enemy.
Our calculus is different – we have to figure at the end of every trading day whether the trend might turn against us, chew up several weeks of precious time value before again moving in our favor. And if that’s the case, we have to be ready to bail.
And we are.
TBT is strong for the long run, but today it’s signalling enough strength to make it prudent to jump.
- The runup over the last eight weeks has been formidable – nearly 30%.
- The break above the long term (yellow) moving average will require a retest before support is established (back to 68), and
- RSI’s ascent, while not yet at nosebleed elevations, appears to be headed in that direction.
It’s enough. We’re calling it quits, taking our cash and looking to reposition on any pullback.
Moving Right Along…
Three weeks after opening the above (TBT) trade we went short on the commodities with the purchase of a PUT on the PowerShares Deutsche Bank Commodity Index ETF (NYSE:DBC). The article was called Commodities Downbound, and there we bought the October 24 PUTs for $0.55 and sold the July 29 CALLs for $0.40, for a total debit of $0.15.
Here’s what happened since –
There’s been a clear, deep retrenchment in the commodities since then, our long PUTs are trading for $0.45 and the CALLs last went for $0.04.
We’re in a nice profit position and could close the whole affair at once if we chose, but we’re going to leave the July CALLs alone. With DBC just having broken to new lows last Friday, and with all her moving averages streaming lower, we feel confident the Julys will expire out-of-the-money worthless.
The October PUTs, on the other hand, we’re going to take off the table. We’ll pocket the $0.45 they give us (on a $15 outlay) and be happy with it – that’s 200%, after all (should our July CALLs expire worthless).
Trading MBI Both Ways this Week
We’re going to put on a trade we’ve already executed profitably in our Options Trader Elite letter. It’s an initiative that’s built for success with a particular financial stock, MBIA Inc. (NYSE:MBI), with which long term readers have a good acquaintance.
The stock has been volatile. And we’re presuming it will remain so, particularly if the market continues to jerk around here for a while.
So we’re buying a long dated strangle on the stock with the hope of catching big swings in both directions.
Here’s MBIA stock for the last six months –
This one could go in either direction and will most likely do both!
Wall Street Elite recommends readers consider immediate purchase of the MBI November 17 CALLs for $0.42 and November 9 PUTs for $0.35 ,for a total debit of $0.77 per strangle.
With kind regards,
Hugh L. O’Haynew, Senior Analyst, Oakshire Financial