Wheeeeee - what fun!
The markets have flown higher on fairly light volume but who cares as we are making HUGE amounts of money on our bullish bets. We are exactly on the path we expected for the week with just a few more data points to go but I did already tell you on Wednesday:
Hopefully tomorrow, improving sales of Durable Goods, which were down 1% (ex Aircraft) in the last reading. We'll get an update on Personal Income and Spending on Friday, which should be improving (rising wages) but also a revised Q4 GDP report, which will likely be a bit lower in light of recent data.We're hoping the indexes hold up at S&P (/ES) 1,900 and Russell (/TF) 1,000, where we're playing the Futures long for a bounce with tight stops below. DAX 9,200 needs to hold up in Germany and we're already surprised that 15,700 isn't bouncing on the Nikkei (/NKD) as people have panicked into the Dollar, driving it back to test 98 this morning. The Nikkei loves a weak Yen.
The S&P hit 1,960 this morning (up $3,000 per contract), the Russell hit 1,040 (up $4,000 per contract) and the Nikkei hit 16,300 (up $3,000 per contract) so you are very welcome. We even had a live Futures Trading Demonstration on Wednesday in our webinar where similar picks made $320 in the 30 minutes we were going through the trading examples (replay available here), in case you are wondering if you are capable of learning how to make money trading the Futures too.
We took the money and ran, of course, as we're expecting a disappointing GDP number and then we'll play it by ear. For those of you who are futures-challenged, we still have our ultra-long Russell (TNA) trade idea from last Thursday's post (again, you are welcome), which was:
Buy 10 TNA March $41 calls for $3 ($3,000)Sell 10 TNA March $44 calls for $1 ($1,000)
Sell 1 BA 2018 $80 put for $7 ($700)
TNA is already over $47 this morning and BA has popped back to $116 so that net $1,300 spread is right on track for the full $3,000 payoff (up 130% or $17,000 in less than 30 days). The $3,000 will drop in your pocket on March 18th (if TNA holds $44) but it will be a long time before the BA puts expire worthless so you still carry that obligation (to buy BA for $36 (31%) below the current price). As we like to say, that's an obligation we can certainly live with and we'll be more disappointed if we DON'T get to buy it and only get to keep the $700 on the short puts.
Now, here's how hedging works: UNLESS the Russell is lower than it is now, we DEFINITELY have $3,000 coming to us from the TNA spread plus we gained a lot of money on our long positions (we flipped very bullish last week on the dip) and we want to lock that in so now we can pick up an ultra-SHORT hedge on the Russell (TZA) that will pay us if the Russell fails to hold 1,040. Something like this:
- Buy 20 TZA April $52 calls for $7 ($7,000)
- Sell 20 TZA April $57 calls for $5.50 ($5,500)
- Sell 5 FCX 2018 $5 puts for $2.10 ($1,050)
As you can see, TZA is a very violent mover and will be well over $57 if the Russell even twitches down on us. Now we're spending net $450 cash on $10,000 worth of protection, using just 1/4 of the profit from our TNA trade. This is how we set ourselves up to profit in either direction in volatile market conditions and we'll follow up on this pair of trades next week.
To summarize, we have an obligation to buy 500 shares of Freeport McMoran (FCX) (now $7.40 - a trade idea I featured at this week's Trader's Expo - see Monday's post) for $5, which is 32% off the current price and $2,500 total outlay, worst case. Our best case is netting $10,000 back on a $450 cash outlay for a $9,550 profit (2,122%) if the Russell doesn't hold our gains. We've gained a lot more than $10,000, of course, we just want to mitigate some of the potential losses if the market doesn't hold up over the weekend.
Remember, we still have our TNA play, which pays +$1,700 if the Russell merely holds 1,040 and ANYTHING lower than this will pay us $6,000 or more on TZA, because the trade is already in the money, so it's possible to win on both ends and, if we lose, the profits from either side of the trade should nicely offset the losses on the other (barring a black swan event - these are not magic beans, you know).
8:30 Update: Q4 GDPs second estimate came in way better than expected, up 1% revised from up 0.7% in the initial reading. I'm liking this report because the big positive changes were bigger contributions from Personal Consumption Expenditures (PCE), Residential Fixed Investment, and Federal Government Spending and the biggest negative was a downward revision in inventories but, as I often say, that's a false indicator because of course inventories go down when people surprisingly buy more stuff - duh!
Now, the real question is, is good news good news or bad news? We have had a lot of signs that the Fed was right on the money with their rate hike (market taper-tantrum aside) and this data puts another Fed hike back on the table and, generally, the markets don't like that. To complicate things today, we have Fed Governors Powell, Williams and Brainard spinning during the day and they can send the markets up or down with a word.
On the positive side (for FREE MONEY lovers), the Price Index slowed - up just 0.4% vs. 1.3% in Q3. Core prices gained 1% vs. 1.3% in Q3. That keeps the Fed from hiking so this may be a "Goldilocks" report for the Bulls that shows an improving economy AND a Fed that's still on hold. This won't change our plan of adding a hedge but it does make it a lot less likely that we'll be needing it.
Now it's all up to the brain trust of our World Leaders at this weekend's G20 meeting.
Have a great weekend,
- Phil