2019 Starts Out With A Big Bang!
Wow! What a way to start the New Year. The volatility in December carried over to the shortened trading week. Traders came back for the New Year with a bearish posture and the major indexes slid the first two days of trading. When Apple announced that you can only do so many things with a phone and they may have overestimated the market, the bottom caved in. However, on Friday the department of labor said “not so fast” as hiring continued to grow and we zoomed back to the upside.
This is now a real market. We have tons of volatility and expectations as to the markets next step. There are so many story lines it is hard to figure out which one to focus on. The new congress in Washington, with the Democrats in charge of the House determined to have Mr. Trump impeached. The FED raising rates, the trade war with China, immigration issues, government shutdowns and whacked out commodity prices. My head is already spinning and we are only three trading days into the New Year. So, let’s look at where we stand and try to figure out which storyline is going to play in 2019.
The impeachment noise will be a payback for Bill Clinton and his wandering eye. I don’t think it will have any effect on the market other than to draw the countries short attention span to a new show. The FED still has to get rid of almost $4 Trillion of securities from the QE era. Not many investors are interested in 3%, ten-year returns so rates will probably gradually rise. The only other course for the FED is allow the debt to mature. Most of that will take at least 20 years, and when the next problem shows up how can they reboot the economy? Surely two stories to watch.
Our trade war with China will play out. I don’t think this is Japan in 1941. China and the U.S. both have too much to lose and in a global economy some tension should be expected. China has had the upper hand for almost two decades. They are now no longer the underdog, I expect that a deal will be worked out and that the past animosities will be overcome by money, which is always good to soothe wounds.
Immigration issues are now favoring a more liberal policy. I am all for that, but I think that it should be legal immigration and not forced. America was built on immigration and the results show that it is a good policy. The problem is both Democrats and Republicans have swept this issue under the rug for almost 50-years. This difficulty must be dealt with, and although it will not have an impact on the markets, the social impact will be significant.
The government shutdown is like little children squabbling over marbles. It has nothing to do with the markets other than to give the talking heads something to frighten their viewers with. This is a political farce and will end until the next deadline at which point the powers that be will resume the world’s biggest Ponzi scheme. I believe that none of the markets influential players even consider this in their models. Ignore it.
Commodity prices are a real challenge. I have traded commodities for almost 40-years and I can tell you that they have a real impact on the markets. Many times, it is the way they react to equity sell offs and rallies. Other times, they trigger it. Wise Guys will be aware of the prices of precious metals, grains, and energy in the coming year. I think investors should follow this story closely as a key to the next big move in equities.
I think that there will many stories told other than the main themes in 2019, but that is what makes the markets so addictive. Once you are in it is hard to look at another business with the same eye. 2019 is going to be a pivotal year and we should all enjoy the price action.
Ask Mr. Seifert
I am constantly asked questions about trading and how to exploit certain market factors to insure success. Each week I will answer one of those questions with a short paragraph which will cover the trading subject.
Question: Why not sell the weekly straddle for a larger credit than a vertical spread?
Selling a straddle for a credit is not the same as selling a credit spread. When you sell a straddle, you are selling two options at the same strike price a put and a call. And while it does create a much larger credit, it also creates unlimited risk. Selling a credit spread doesn’t have as much profit potential as selling a straddle, but it has limited risk. Remember, when you sell an option you create unlimited risk. To negate that risk you must buy an option against your sale. I have seen some of the most brilliant people on earth blow billions of dollars by taking unlimited risk. Don’t be one of them. Stick with the spreads that have limited or unlimited reward but always have limited risk.
The Wise Guy Report: The View from The Electronic Floor
Each week I talk about how the Wise Guys (floor traders) find the soft spots in the market and take advantage of price dislocation in three major commodity markets: Gold (GC), Crude Oil (CL) and Long-Term Interest Rates (ZB). On the equity side, I cover MSS which is the Mister Seifert Sez Composite Index. This is a proprietary index that I created which measures the dollar flow of the four major indexes (S&P 500, Nasdaq 100, Russell 2000 and the Dow Jones Industrials) on an unweighted basis. This week let’s look at how the major markets have started the new year.
U.S. Equities – Possible Blow Off Bottom
The Market Edge computer model turned negative on the equity market at the end of September 2018 (DJIA – 26458). Although the market continued to rally for a few days, we continued to advise against taking any new long positions. We thought it was much better to trade from a safe posture. When the neckline of a head and shoulder chart pattern for the DJIA was violated in early December (DJIA – 24432). we felt that there would be more pain in the market. As it turned out we were right. Late December saw the most volatile for equities in past ten years as the DJIA has traded down to the 21800 area. Is this the bottom? We think that the price action leading into the New Year has signaled a capitulation, price bottom. The Market Edge (www.marketedge.com) ‘Market Posture’ turned Bullish on Friday, 01/04/19. They expect the market to be favorable into March 2019.
Precious Metals – Possible Blow Off Top
For most 2018 precious metals were in a bear market as investors flocked to the U.S. equity markets for above average returns. However, as the stock market started to lose its shine, many investors felt it was time to take advantage of the declining market in precious metals. This market was born out of a large congestion pattern that was frustrating to trade, but once it finally decided it was time to go higher it has had a significant rally. In recent days the rally appears to be a blow off top. If you have not participated in the precious metal markets to this point, it would be wise to stay on the sidelines or if you want to take a shot, a blow off top, short trade would be ok. Until we get a retracement in this arena, I would be hesitant to get involved on the long side.
Interest Rates – Possible Blow Off Top
After sitting in a congestion pattern for most of 2018, interest rates measured by the U.S. 10-year bond, finally took off in mid-December. With the turmoil in the U.S. equity and emerging markets, the 10-year made a large move to the upside. After AAPL announced that they were probably going to have problems making their first quarter numbers and the equities market had a steep selloff the real first “flight to quality” hit the books. It appears now that the price is overdone, and the Fed is taking a second look at raising rates. If the longs lose their position as the strong hands this market could quickly turn to the downside. I would not be a buyer here. I believe this market can only be played from the short side or staying on the sidelines is a strategy that could also work.
Crude Oil – Possible Blow Off Bottom
After making a blow off high at around $75 dollars a barrel in October, the crude oil market collapsed. Concerns over world wide demand plus the fact that there was a glut of inventory sent the crude market in a downward spiral. Crude made an apparent blow off bottom in the last full week of trading in 2018 near $42 a barrel. The market has been recovering since, and West Texas Crude closed near $49 a barrel on Friday, a lift of nearly 20% since the bottom. Frackers that had become unprofitable at the bottom may now consider production again. This market could be shifting back to the long hands. If you missed the break, this is not a good place to get short. Either trade from the Long side or stay on the sidelines.
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“Don’t Buy Them – Sell Them”.
Mr. Seifert