Trendless Tuesday - Watch Yesterday's Fake Gains Disappear

by: Philip Davis

Summary

We're expecting the oil rally to fade and take the market with it.

A quick list of our current market concerns.

Friday's Apple (AAPL) trade idea made a quick 114% - you're welcome!

Click to enlargeHere we go again.

As you can see from the SPY chart, volume during yesterday's "rally" was 20% lower than even our recent low average (about 100M), which is 50% below last summers levels already and so much of the volume comes in the last 15 minutes of each day and it's generally selling as the TradeBots dump shares into whatever buyers they've managed to attract but, on the whole, the smart money is pouring OUT of the markets. In fact, $7Bn came out of stock ETFs in April while $36.7Bn went into Bond ETFs - that should tell you something.

What it doesn't tell you, however, is that $11.3Bn have flowed out of stocks in the first two weeks of May! And, as usual, what earnings season is not telling you is that, if it weren't for another record-setting round of share buybacks by the S&P 500, we'd be looking at a 7.5% earnings contraction this quarter - much worse than Q4 and guidance has not been encouraging either - so what on Earth is there to rally about?

These are the net incomes per share AFTER the companies have bought back 1.6% of their shares, on average, for the past 4 years. That's 6.4% LESS shares that these earnings are being divided by and they are STILL DOWN 7.5% - that's pathetic! The effect of the buybacks should be exponentially positive to EPS over time - we're going the other way and, aside from indicating a very poor earnings environment - it's a huge red flag that most of these companies have made very poor investments by diverting so much money into their own stocks, rather than investing in turning around their businesses.

I've already put a note out to our Members to short the Futures in our Live Member Chat Room:

People are starting to notice China's debt and that's not a good thing. After a brief flirt higher, we're back to 17,650, 2,060, 4,375, 1,112.50 and 16,720 and I wouldn't use /NKD but the others all make good shorting lines to play (if 2 are under, short the laggards, look for last others to confirm and tight stops if any go back over).

As I'm sick this morning (flu), I'm going to keep my comments brief with an early Festivus airing of this week's market greivances:

  • Brexit - Don't count it out yet. There's about a 1% lead to stay but 20% are still undecided and now the Germans are repudiating Draghi (see below) so maybe a Gexit later this year too? "The truth is that the history of the last couple of thousand years has been broadly repeated attempts by various people or institutions -- in a Freudian way -- to rediscover the lost childhood of Europe, this golden age of peace and prosperity under the Romans, by trying to unify it," the former London mayor told the Sunday Telegraph. "Napoleon, Hitler, various people tried this out, and it ends tragically." Also, see: "Over 300 Business Leaders Call for Brexit in Letter."
  • China - Larry Fink says it all: "You can't grow at 6 percent and have your balance sheets grow faster." It is now costing China $2.8Tn in debt to grow their GDP at the target $700Bn (7%). This is CLEARLY unsustainable. New credit in China increased a record 4.6Tn Yuan ($706 billion) in the first quarter, surpassing the level of 2009 during the depths of the global financial crisis.
  • China's Debt - So large, it needs it's own bullet point.
  • The US Economy - You call this a recovery??? Not sucking as much is NOT a recovery!

Click to enlarge

  • Germans - They are suing the ECB to put a stop to Draghi's monetary madness.
  • German Banks - Deutsche Bank is screwed. They've paid $14Bn in fines for various misconducts and one has to wonder if they even know how to run a legitimate business - certainly there's been no indication of that and shares are down 35% this year - worse than other Banksters (who have also been fined), who are down 23% as a sector.
  • Greece (still a thing) - The IMF wants the ECB to kick the can 24 years down the road. At what point do we admit they need a bailout? We can't - because the whole World needs a Bailout.
  • Inequality - Who exactly does QE help? Only 9% of the bottom 90%'s assets are in Stocks and Mutual Funds. Without a housing recovery, you are deluding yourself if you think the economy is getting better for 270M Americans. Our policies are making things worse, not better.
  • Japan - The only thing scarier than China's economy is Japan's economy. 0.28% Q1 growth rallied the Nikkei to 16,800 this morning but already back below 16,700 and we'll retest 16,500 if you're looking to make a quick $1,000 per contract. Oh, by they way, February had an extra day this year - that's a +1.1% bonus, so -0.82% without the extra day!
  • Japanese Yen - What do they have to do to that currency to kill it? What does it say about the other regional currencies that people prefer the Yen - even with negative rates and 250% Debt to GDP?
  • Luxury Goods - Sales are slipping and, if the Top 10% stop shopping - who's left?
  • Obama - Why does he have to go? I don't think anyone is happy with either of his prospective replacements. We had this problem after Bloomberg's second term as mayor in NY and we changed the rules and elected him again rather than be forced to pick an inferior replacement.
  • Oil - Much of this "rally" is based on oil, which is based on BS (see yesterday's post).
  • SWIFT - "The Society for Worldwide Interbank Financial Telecommunication provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment" (SWIFT Codes on money transfers is an example). Only, er... not too secure as they've been hacked twice this year.
  • Trans Pacific Partnership - Is nothing more than the nail in the coffin begun by Citizens United as we are now giving sovereignty to International Corporations that supersedes even the will of the Governments of the countries they do business in - this is MADNESS!
  • Trump - Really, this is our candidate? REALLY?

Ugh, now I feel sicker - but better for putting it all on the table. Now we can go out and find some things to invest in (fallout shelters come to mind). We hit goaaaaaaaaaaaaalllllllllllll on Friday's AAPL trade, which was right in our morning post:

Also, if you'd like a quick stock play - we picked up Apple (NASDAQ:AAPL) at $90 yesterday and we leveraged it with the May (expire next Friday) $87.50 calls at $3.15, which closed yesterday at $3.25, which is net $90.75 and we think AAPL can at least bounce $1 or two and that should take those calls to $4, which is a very nice, quick gain into the weekend.

Click to enlarge

The $87.50 calls finished the day at $6.75 - up 114% in two trading days - nice work if you can get it. That's why we don't fear being in CASH!!! in a volatile market - we can always find plenty of things to trade to keep our money active - no matter what direction the market may be heading. Our 4 Member portfolios are locked very much in neutral at the moment, with a good mix of bearish hedges to our long positions.

There's plenty of things to be concerned about and that's why we're concentrating on long-term value plays like AAPL while avoiding the momentum stocks, which often don't have enough real value to be something we'd be willing to double down on if the markets dropped 50%. If AAPL, on the other hand, dropped 50%, the market cap would be $250Bn, which would be lower than the amount of cash they have - that's the kind of stock I don't mind being "stuck" with!

Let's be careful out there.

Disclosure: I am/we are long AAPL, SQQQ, TZA, SDS, LL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to RAPIDLY change (currently mainly cash and an otherwise slightly bearish mix of long and short positions - see previous posts for other trade ideas). Positions mentioned here have been previously discussed at www.Philstockworld.com - a Membership site teaching winning stock, options & futures trading, portfolio management skills and income-producing strategies to investors like you.