In the buying bonds recommendation I had just posted a few moments ago, I demonstrated how overbought the stock market is compared to bonds and recommended buying bonds as sort of a synthetic short of the stock market. There is a safe way you can short the stock market that is a direct short, not synthetic and has no margin risk. That is to buy puts.
Again, I want to stress how stretched the stock market really is. Just today, Sentiment Trader posted that the spread between Smart and Dumb Money Confidence has widened further to the second highest level on record.
Price on the /ES is now stretched to 284 points and 8.75% above the 200 day moving average. We are past the holiday shopping season and soon the realities of a new year filled with impeachments, trade wars and maybe shooting wars will start sinking in. When you have lofty prices at such extremes as we have now, prices usually come back to average quickly. A 10% correction actually sounds pretty mild but would take price back below the 200 day moving average to 2924 probably by the end of February or early March.
Stocks like any other asset gets overbought over and over and it always....ALWAYS comes back down.
I generally do not like trading options. Most options expire worthless. They have a lot of working parts, and you really can't get in and out like you can with futures. The advantage in this case is that you can short the market and not have to deal with margin calls. Who knows how much longer this market can stretch.
An option is like buying insurance. When you pay the insurance company your premium, you collect if an event occurs where you are qualified to collect. With an option, you pay the option writer your premium, and if the price event occurs then you collect. It is really that simple. Like an insurance policy, an option covers you for a given length of time.
There are three components which determine the cost of the option. The intrinsic value, the amount of time you buy and volatility. Put options are actually not very expensive right now because volatility is very low. The VIX index shows you what the volatility for S&P options is, and we are actually near record lows now. The stock market is VERY complacent right now.
My recommendation is to buy the 3230 or the 3240 put option as soon as tomorrow. Once the stock market begins to dip, volitility is going to spike and the cost of the options will increase sharply. Below is how the option chain looks for the March put option.
Here is how the math works. Using the last traded price, the price of the 3240 is 75.25. Take $75.25 X 250 = $18,812.50 X .2 = $3,762.50 premium.
Remember that for S&P Index futurtes, every point is worth $50. For $3,762.50, you are gambling that the stock market will drop 76 points by expiration. 76 points X $50 = $3,800 would give you your premium back and the stock market would be around 3175. That is only half way to the 50 day moving average.... not very far. Like I said earlier, a 10% correction would bring the stock market below the 200 day moving average near
A 10% Correction would be worth around 325 points X $50 per point for a $16,250 gain. This is better than a 4-1 risk return ratio over the cost of the option.
There are many assumptions made to calculate this which is why I much prefer using straight futures to options most of the time. Options have many moving parts to them which can affect the outcome of the trade. This model assumes you would be holding the option to expiration which is on March 12.
If this interests you, give me a call to discuss it. For the track record, I will probably be buying this put tomorrow.
We are running out of superlatives to describe this stock market. Lets see, there is "All time highs", "Never before seen", "Bulletproof"..... the list goes on. The headlines are pretty accurate, but understanding what this means requires perspective.
Sentiment Trader tracks the risk levels for a handful of assets that interest us as traders. They do not do this for all commodities, but they do measure the risk levels for stocks and for bonds. They rate stocks as being the riskiest asset ahead of gold, agricultural commodities and oil, and they rate bonds as having the lowest level of risk. I believe once stocks begin to drop, we will see a lot of the liquidity held in stocks to flow into Bonds. In fact, as stocks continue to make new all time highs on a daily basis, bonds look to have bottomed.
Below is the 30 year continuous bond chart. The first thing which really sticks out in my mind is how similar the chart pattern looks to gold. We do not have a lower low in recent weeks which we had with gold, but the overall pattern looks very similar.
Looking at the weekly chart, we have reached oversold conditions on the stochastics and are very close on the RSI. If stocks really surge higher over the next week, we could see bonds drop and push the RSI into oversold conditions as well but I don't see that happening.
So Bonds bottomed a week ago, yet the stock market continues higher. I believe money is already leaking into bonds from stocks anticipating the eventual sell off in stocks. You can see from this chart that I have already bought bonds at 156'18 and have a stop set at 155'12. My recommendation is that you buy at least one position to get started at 156'16 (that is the same as 156.5) and have a stop set at 155'12 (155.375). You would be risking 1'04 points (1.125 points). Each point is worth $1000, so you would be risking $1,125. The opportunity is that bonds will move back to the 161 area at a minimum. This is a 4.5 point move worth $4,500. This is a 4 to 1 risk reward ratio.
I really expect we will see stocks drop into the end of February or early March. If this holds true, we will most likely get a move to the 165 area which would be worth $9,500. I would never directly short the stock market because of it's melt up potential and the backing of the Fed, but a synthetic short by buying bonds is a reasonable way to play the short side of the stock market.
My wife is very different for a LOT of reasons. One of the things we enjoy doing in our downtime is looking at charts of commodities believe it or not. It is sort of like a treasure hunt for us. On Christmas Eve before the markets closed, she told me I needed to buy cocoa and like any good husband, I did what she told me to do.
Seriously, here is why she suggested buying Cocoa without knowing anything else. She saw that cocoa had made a swing low. That was it. The swing low is the first indication that there is follow through in the market. In this case, the swing low would indicate that there was follow through to the upside. Because it happens at what could very well be a low, the amount of money you would risk on such a trade is minimal. The trade could very well turn and go lower, but I would be stopped out with a minimal loss so therefore I am taking the trade most of the time.
Moore's Research does not have a buy recommendation for Cocoa in Dec or January, but Sentiment Trader tells us that December and January are two of the best months to own Cocoa.
Cocoa futures contracts are 10 Metric Tons in size and require $2,090 in margin. Each penny cocoa moves is worth $10. Every dime $100...… Every dollar worth $1,000.
I think this trade has the potential to make a quick $2000. The risk would be $400. That is a 5 to 1 risk reward ratio which is pretty good. This is why I am recommending that you buy cocoa this week at 2440 or better with a stop at 2400.
Revised - We were stopped out of gasoline this morning at 184 giving us a tiny profit before rocketing higher. Gasoline is a nickle higher now at 169 and is now at a level of resistance. That is the aggravating thing about using stops, but I won't trade without them. Anyway, according to Moore's, we should expect gasoline to move higher into the end of February. Once the 3 day RSI reading reaches over sold levels I will look for an opportunity to get us back in again.
12/13/2019 - The energy sector looks strong this morning, and with word of a trade deal being agreed upon, it appears that stocks, metals and energy have been unleashed. The cycles on many of these assets are difficult to read because of the enormous volatility. Gasoline is no different. Sentiment values are neutral. This is more of a seasonal trade based on research by Moore's that shows that gasoline bought December 9 and sold February 28 has appreciated in value 13 of the past 15 years. The gains on those winning trades has averaged $6118.
We tend to believe gasoline should go up in June due to peak driving season. In the winter, refiners maximize production of heating oil at the expense of gasoline, but when is gasoline the least expensive? In the winter! Buy low, sell high, right? You want to buy when demand is low and BEFORE prices begin to rise. The seasonal uptrend may take time to develop but prices often bottom in December. Sentiment trader shows this tendency. Gasoline appreciates over 12% in February alone.
So given the trade agreement and the relatively flat gas price we have had since back in September, I think the price of gas could take off sooner than later.
Margin on a gasoline contract is $5500. Gasoline trades in 42,000 gallon quantities. Every penny gasoline moves is worth $420. So I am recommending we buy the June gasoline contract at 1.83 with a stop just below the 10 dma at 1.79. We are risking 4 cents which would be $1,680. A break higher will likely send gasoline back to 1.95. A move that strong would be worth .12, or $5040. Remember, Moore's says the average is $6118.
I issued a notice on WhatsApp this morning at 10:48 to buy the Feb LE and the April GF. This is the second half of the LE short we did in November. That short never went anywhere but sideways. It was always my intent to go long the LE and GF Friday but if you recall, the markets were very volatile that day and cattle prices had rocked higher so quickly that I never really had a good chance to make a recommendation.
You Cattle slaughter tends to be at or near its annual nadir in December, but peak hog slaughter overwhelms the market with meat. Further, retail grocers feature poultry and pork for the holidays at the expense of beef demand. Thus, cattle prices tend to be pressured lower into early/mid December. However, heavy beef consumption during winter then drives demand for live cattle and forces prices higher.
Cattle feeders fill their lots in October/November in order to take advantage of plentiful feed supplies during and after corn harvest. But because cattle in outdoor feedlots gain weight only slowly during cold weather, slaughter remains muted until March/April, when it soars toward its May/June peak. Thus, demand for feeder cattle will surge in April to replenish numbers.
The tables below show the tremendous track record of the LE and GF the last two weeks of December with Live Cattle having success 15 of the past 15 years and Feeders having success 14 of the past 15 years.
Sentiment levels are neutral and seasonals this time of year are not very impressive. This is a trade based primarily due to historical data specific to a very small window of time..... about two weeks.
Live Cattle contracts require $1,980 margin, are 40,000 pounds in size and are valued at $400 per CWT, or $4.00 per pound. Feeder Cattle contracts require $3,712.50 in margin, are 50,000 pounds in size and are valued at $500 per CWT, or $5.00 per pound.
My recommendation is to buy the Feb Live Cattle at 127 and the April Feeder Cattle at 147.5 with stops at 125 and 145 respectively. By risking $2 on LE and $2.50 on the GF, you are risking $800 on LE and $1250 on the GF. A 10 point move in either is certainly possible, making the LE worth $4,000 and the GF worth $5,000.
We were stopped out of our previous ZM (Soybean Meal) positions with a slim profit. I am recommending that you buy soybean meal based upon the research from our previous trade at 309. It appears that Trump has unleashed all of these markets which have been pent up the past month.
12/4/2019 Moore's Research shows that soybeans purchased on the 2rd of December and held until Dec 28 has appreciated 12 of the past 15 years.
The logic is that Soybean Meal is consumed the most heavily during the cold of winter. Because it can turn rancid and there are no commercially viable substitutes, livestock producers cannot maintain significant inventories. Thus, demand is strong during and immediately after soybean harvest, and prices tend to trend higher as soybean supplies dwindle for months.
Technically speaking, soybean meal bottomed on day 59 of this previous cycle. It actually caused a failed daily cycle. We also nearly got a CCI Buy signal. This usually marks a new intermediate cycle.
Though we do not yet have a swing low on July Soybean Meal, the March Soybean Meal contract has given us a swing.
lThe oscillators on the weekly soybean meal chart look like you would expect at an intermediate cycle low.
Soybean meal futures (ZM) trade in 100 ton increments. Each dollar that SBM moves is worth $100. Margin required for 1 contract is $1122. A 20 point gain is certainly possible over the next month and would be my target for the trade. This would take the price to 326, the same price as the October high. A 20 point gain X $100 per point is $2000. That more than doubles your margin. My recommendation would be to buy the ZM July 2020 at 306 with a stop placed at 304. This would be risking 2 points or $200.
Revised - This post is a revision to the Dec 5 post (which you can still read below). All the parameters of the original gold and silver trade have not changed and are still in place. If you want a refresher on why we wanted to trade gold in the first place then read below.
Despite getting stopped out of our original trade on Dec 6, gold never made a lower low. Gold today is on day 21 of a new intermediate cycle. Gold has done nothing really but grind sideways the past month. These long sideways moves tend to be followed by more powerful moves. Yesterday gold closed above the 10 day moving average. This to me, coupled with the fact that gold never made a lower low was the signal to me to re-enter gold. Despite the negative tone gold and silver took this morning, both closed above their respective 10 day moving averages.
The entries are nearly the same as they were back on December 5 and you can see from the chart your trade has a fairly lose stop at 1460 gold and 16.6 silver.
One other element that has me cautiously bullish is research from Moore's that shows that gold bought December 23 and held until January 17 has appreciated in value 13 of the past 15 years.
When you combine together the historical record gold has, along with the positive seasonal track record gold has in December and January (see the seasonal chart just below), AND you combine that with the positive cycle and technical analysis gold has, I think we still need to be positioned in gold. This is why I issued the buy recommendation this morning.
I have been in and around and out of gold and precious metals trades now for over a month. I have not done great, but because of fairly tight stops have not done badly either. It is time though to begin thinking seriously about metals. I am recommending that if you are not already in gold that you buy at 1480. If you are not already long silver, you should get into position at 17.
As I explain these positions, I will just be talking about gold for now. Silver is going to do as gold does but at a magnified level. Gains and losses in gold will be magnified with silver.
One other thing I wish to get out of the way now is the seasonality of gold. Moore's Research does not have a buy on gold until December 23. December is typically not the best month to buy metals but it is not bad, and it is a great month to begin getting into position ahead of what is typically the best month of the year....January.
I want to begin looking at the longer term weekly charts before zeroing in on the daily. In weekly chart below it is pretty easy to see a very large bull flag. The height of this flag is about 290 points. This means that if gold breaks higher out of this monster bull flag, we have a move that should be worth around $29,000 if you can manage to hold onto your position. This would have gold at around 1800. More on that later. The other thing I wanted you to see is that the chart shows we likely had an ICL on November 12.
Doesn't take rocket science to see the cycles here.
Now, zooming in on the daily chart, I want to point out what I see. First, I see the same pattern.....nearly identical to the one that happened from Feb through May of this year. What is happening now is the same long drawn out consolidating flagging pattern that occurred before the last major trending move.
I would also like to point out that we had a Commodity Channel Index Buy signal on November 13. This is one of those times you really must pay attention to the CCI.
Looking closer into the big flag, you clearly see the pattern of lower highs and lower lows until after the November 12 low. The same thing happened in the Feb-May flag. Also, can you see the much smaller bull flag developing? If this little bull flag completes, it should take price up to 1500. This will break the green downward sloping intermediate cycle trend line and confirm a new intermediate cycle is under way. I believe the price will get back to the 1560-1570 range very quickly.
Gold futures (GC) trade in 100 troy ounce increments. Each dollar that gold moves is worth $100. Margin required for 1 contract is $6750. An 80 point gain is certainly possible over the next month and 1560 would be my target for the trade. This would be near the September high. A 80 point gain X $100 per point is $8000. That more than doubles your margin. My recommendation would be to buy the Feb GC at 1480 with a stop placed at 1465. This would be risking 15 points or $1500.
Likewise Silver futures (SI) trade in 5000 troy ounce increments. Each penny that silver moves is worth $50. Margin required for 1 contract is $5,720. A $1.20 move which would take silver to my first target at 18 would be worth $6,000. If silver can get to the September high of 19.80, then you are talking an additional $9000. This would be a $15,000 move if that happens. You would buy the March Silver contract at $17 with a stop at $16.80. You are risking 20 cents or $1,000.
Gold looks to be moving finally and am hoping there are no more surprises. At any rate, I am taking more risk off the table by increasing the stop up to 1464. This is above the level where we got in so you are no longer exposed to risk on gold.
Because our exposure to risk on gold is limited on our first positions, we could add additional positions here with a stop below the 10 day moving average. If you have not taken a gold position yet, don't feel like you have missed the bus. We are still VERY early. There is a lot of room to the upside from here. At $100 per point, you still have the opportunity to more than double your margin.
Revised - The gold market is very strong this morning and is taking Platinum with it. I have raised stops on Platinum this morning 10 points to 897.
12-2-2019 Just an FYI, If you are in Platinum now as I am, there are danger signs ahead, The latest commitments of Traders report was released, covering positions through last Tuesday. The report shows that smart money hedgers have moved to a multi-year short position against platinum. When this group of traders held more than 50,000 contracts net short over the past 8 years, platinum declined over the next 2-3 months every time, and the average loss was 9-13%.
Commercial Hedgers - Commonly believed to be the "smart money", are the traders who are involved in the day-to-day operations of each commodity. They have an excellent handle on the underlying market, and it typically pays to follow their positions when they reach an extreme.
This does not mean that PL will crash tomorrow but my suggestion is that we tighten up stops quickly. PL stops are currently set at 887.5 which is currently about 13 points below the current price. Lets see what happens but I am looking for a good opportunity to get our stop raised near our entry price.
Recommended entry or exit prices may not necessarily be reflected on the track record. Markets can change quickly resulting in stops being moved or profit levels changed based on new information. Brokerage customers are the recipients of these potential price adjustments made after initial recommendations.