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Thank goodness, the market has moved in our favor on a number of fronts, so we’re going to pause with your permission, light a cigarette and assess the current state of the nation.
Let’s begin with our most recent effort – last week’s calendar spread on Goldman Sachs (NYSE:GS). The letter was called The Fall and Rise of Goldman Sachs, and there we recommended a calendar spread, selling a near term at-the-money CALL and buying a year-end expiration CALL at the same strike.
Our thinking was that Goldman had temporarily topped and was on its way to retrenching before moving higher into the end of the year. Selling the July expiry gave us a nice whack of cash against the longer dated January (2014) CALL purchase.
We wrote –
Between the divergence, dwindling volume, and the extreme stretch that now exists between price action and Goldman’s long term moving average (yellow line), we say a brief pullback would not be out of the question. Look for the Julys to expire worthless on a pullback, and the January’s to reap the whirlwind.
One week later our prognosis for the near term looks to have been accurate. We sold the CALLs at Goldman’s 27 month high, set last week on the 10th of June (the date our letter went out), and have since seen a meaningful enough retreat that we’re going to cash in today.
We sold the Julys for $4.41 and they’re now trading for $2.52. That’s $189 for the first leg of every pair you initiated, and that’s also gravy on your eggies.
Ahh, Trudy. Bon appétit.
You may be wondering why we aren’t sticking with our original plan to leave the Julys to expire worthless and thereby pocket the full premium. And the truth is we simply didn’t expect this much money to fall into our hands this fast.
If Goldman decides again to climb back toward the $170 mark, we’ll reassess the position – we may at that point sell another round of CALLs or, depending upon the broad market outlook at that point, cash in our long January CALLs.
In the meantime, you’ve got some extra fiat currency in your pocket from the short side of the trade.
Buy back the Julys, and stay tuned here.
Moving right along, we’ve got a very similar situation with a trade we struck on the 3rd of June in Playing Commodity Downside with Freeport (FCX).
There, we wrote a bearish CALL spread using an August expiry to raise some cash, and immediately put it toward the purchase of two out-of-the-money August PUTs.
Again, we don’t believe the technical picture has changed so dramatically in the two weeks that have elapsed, but we have made some moolah on the PUTs in the meantime, and we’d feel remiss if we didn’t act quickly to actualize it.
Have a look at the chart –
There’s no question we’re in a bearish downtrend here. All the moving averages are unfurled and streaming lower (top of chart), with price action trending beneath them all.…
The tide is swelling.
We’re seeing indications from across the investment prospect that show a great turn in investor allocations – away from traditional fixed income investments such as Treasuries and into stocks.
The latest AAII data (below) show small investors growing increasingly confident in the equity future, as stock and stock fund allocations pushed as high as 65.2% in May, a new bull market high, and a number we haven’t seen since before the 2008-09 crash (September, 2007, to be exact).
In our view that’s not yet a contrarian signal. Given the reality that’s underpinning the current market, our feeling is that the number will grow significantly, easily topping highs set at the turn of the century when the dot.com fever was hot upon us.
Have a look at the long term AAII allocations chart below –
At the far left of the chart, in blue, are the dot.com highs, a period when equity allocations reached nearly 80%, a wildly high read by any objective standard and clearly a recipe for disaster.
At the right end of the chart is the current read. Just a couple of percentage points higher from here and we’ll be encroaching on summer 2000 levels, when nearly the entire investment world were believers, and multi year tops were set.
So why aren’t you worried now?
Our current posture remains bullish despite the apparent excess in the numbers because it doesn’t yet appear that the process set in place by the Fed’s Quantitative Easing program has run its course.
To wit, bond and bond fund allocations (black line on chart) are still running above their historical average of 16% for four full years now. The shock and awe of the crash in 2008 pulled hordes of mom and pop investors into the apparent safety of the fixed income market. And there they’ve remained ever since.
The current allocation for bonds sits at 18.1% and by our estimates has a long way to drop before the shift from fixed income – an asset that pays investors virtually nothing – into stocks – where capital gains and dividends provide investors with the hope of some mojo for the money – is complete.
Cash allocations, too, are riding above historical norms (red line), and with nothing to be earned on these holdings, we believe the greater mass of investors, from the amateur to the professional, will feel a pressing need to start chasing alpha in the stock market before too long.
There’s little doubt in our minds, also, that 1) continued strength in equities and 2) slowly rising interest rates will force all but the most fearful back into equities. And this is a development we expect to take hold globally – not just at home. The American stock market will shortly become the refugium postremum for the entire world. Anyone looking to hold financial assets will soon turn to us, and the resultant pop in the indexes will be perfectly Krakatoan in its reach and echo.…
The last thing in the world anyone expects is a rising dollar. After all…
“With all that money printing over at the Fed, there’s no chance the dollar will rise.”
“With all that debt they’re running up for federal programs, how in the world can the dollar appreciate? Nobody has faith it’ll all get paid back.”
And yet, as you’ll see below, the dollar has just struck new highs in its two year bull run, breaking above former resistance at 83.25 three weeks ago, then pushing higher to best its 2012 highs just a week later. The dollar index now stands at its best level since July of 2010.
“Ahh,” say the wise ones, “but that’s just the dollar moving against other currencies – one fiat flophead gaining on a basket of monetary basket cases. You don’t expect us to believe that the dollar in real terms is actually stronger than it was two years ago, do you?”
“Hmm… And how does one measure the dollar in real terms?” we ask.
“Why, that’s easy,” say the wise ones. “Look at it relative to gold. Gold is the eternal currency, the ur-money, the first and last word in store of value and means of exchange. Certainly it’s not gaining on gold”
“Hmm,” we wonder. “But gold is getting clobbered relative to the dollar over that period. So is the dollar rising or not?”
“Purchasing power,” they say. “It’s all about purchasing power. With covert inflation running at levels far higher than government statistics admit, the dollar is actually buying far less than it was a couple of years ago – just check prices for common household items and food, and you’ll see.”
Maybe so, we say, but go buy those same items with Euros or Yen or Rupees and you’ll see that you’ve lost even more. The dollar has held up better than other currencies for at least two years, and we expect that trend to continue.
Let’s see if the charts can shed some light.
Here’s the U.S. Dollar Index for the last three years.
We’ll start at the bottom with the oversold RSI read in September of last year (blue box) and the subsequent divergence against price for the next six months (green lines). From the oversold read forward it became clear that the dollar was still holding the reins.
Yet recent developments have only bolstered our confidence in further dollar gains, as two distinct breakouts occurred in the space of three weeks, as we mentioned above. These are clearly visible at the top of the chart in the blue circle.
Furthermore, according to the existing red trend channel, we should see DXY reach toward the 88-90 level in coming months, pushing very close to its upside count for the head and shoulders bottom pattern that was completed exactly a year ago.
Here’s the very same chart of DXY with the reverse head and shoulders pattern mapped on to it (in red).
The upside count for the pattern brings the dollar index up to near 90.…
All stocks must start somewhere, and while newly traded over-the-counter plays almost never get the level of attention garnered by institutionally-backed, major exchange IPO’s, some are worth paying attention to. One of those issues is Montalvo Spirits (TQLA) which just began trading over-the-counter at the beginning of May, and has attracted a fair amount of trading volume over the past two weeks.
Montalvo Spirits, Inc. develops, markets and distributes premium alcoholic beverages, with its initial offering being the award-winning Montalvo Tequila. That product was launched in April 2012, with distribution deals in New York and California. Montalvo’s Plata varietal became a finalist at the prestigious Ultimate Spirits Challenge 2013, garnering a 93 rating out of a possible 100, and at the 2013 Spirits of the Americas Competition, Montalvo’s Reposado was named “Best of Class” in the Reposado Tequila category. In addition to Tequila, the company is focused on other artisanal spirit brands with a tradition of excellence and quality.
Montalvo shares made their trading debut of May 7 at the $0.80 level and went virtually unnoticed during their first five market sessions. Trading remained subdued even after a May 9 announcement that the company had secured distribution for Montalvo tequila in two additional states—Florida and New Jersey—through MHW, Ltd. in New Jersey and Antares, Inc., in Florida.
Although the market was slow to warm to the new distribution deal, Montalvo’s CEO, Alex Viecco, was bullish. “The response to Montalvo Tequila during this past year has been remarkable” said Montalvo’s CEO Alex Viecco. “We are doing our best to grow the brand through strategic, independent distribution partnerships and expansion into Florida and New Jersey was the logical next step.”
Even bigger news was announced on May 21, when Montalvo confirmed that it was launching its first widespread ad campaign. Up to this point, the company had relied on more of a “guerrilla” strategy for gaining brand exposure through grassroots marketing efforts and by continued success in spirits competitions.
Montalvo’s first push into the world of paid advertising will be a full page ad in the June print edition of Robb Report. In case you’re not familiar with the Robb Report, it’s a well-known luxury-lifestyle magazine featuring products — including automobiles, real estate and watches — for affluent connoisseurs. The company plans to continue the campaign in future issues of Robb Report and with additional print and digital ads in lifestyle and industry publications.
According to company management, Montalvo is also in talks to further expand distribution throughout the United States and internationally, with additional wholesaler partnerships expected to be announced early this summer. “We’re excited to take this step and feel confident that placements with prestigious international publications such as Robb Report will benefit our current distribution partners, as well as help the company secure further distribution” Viecco said.
Earlier this week, the company began to capitalize on its expansion strategy, landing a key placement of its products at Disney’s Epcot’s Mexican Pavilion in Orlando.…
We’re going to examine a couple of trades opened in the last few weeks in order to apprise you of some new thinking on our part.
The first was our XLF/XLU pairs trade, initiated two weeks ago in a Long/Short Sector Trade for the Bull Market.
There, we recommended you go long CALLS in the Financial Select Sector SPDR ETF (NYSE:XLF) and short CALLS in the Utilities Select Sector SPDR (NYSE:XLU).
The strike prices we recommended offset one another, so the trade cost you just commissions to initiate, and here’s the way it looks today –
After precisely two weeks trade (shown above), the spread has moved generously in our favor, and the results are also manifest in the options prices themselves –
XLF January 2014 19 CALLS – $1.47
XLU January 2014 40 CALLS – $0.85
The spread between the two now sits at $62 per pair traded, and we’re recommending readers cash in.
There could be more juice in the trade, but if you choose to hold, just know that you’re riding solo. Be aware, too, that there’s much that could go wrong over the short term, and even if you do make off like a bandit in the long run, we suggest readers avoid the ups and downs and take their money. You can always reinitiate the trade down the road.
We were personally deep into this one and are very happy with the outcome.
Trade Number Two
The second trade involves the Facebook (NYSE:FB) initiative we opened back on the 13th of May in Betting Facebook will Outperform. There, we all but assured you that our initial worries regarding a broad head and shoulders top in Facebook were overdone and the greater likelihood was for the shares to surge – or at the very least to outpace the broader market.
Well, just a few weeks later we see that it may not be so.
Let’s have a look at the chart –
As of last Friday, it appears we may be facing a new reality with Facebook, and by extension, maybe the whole market.
The essential question is whether last Friday’s price action completed the six month head and shoulders pattern in Facebook (in red), indicating a definitive top is in and a downward draft is about to begin. Or, whether the slice below the neckline last Friday failed to cut deep enough to inflict a truly mortal wound (in blue).
As they say in sales, “Everything depends on you.”
The tale will be told this weekend after the technical analysis crowd has a chance to eyeball the charts and determine its next course of action. For our part, there’s little left to say. When we last addressed this issue, FB had bested its former high at $28 and was trending above all its moving averages. We were bullish at the time, and our trade, a zero premium initiative using CALLS on FB and DIA, seemed a perfectly logical course of action.…