Tuesday - Brexit Fears Boil Over

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Includes: AAPL, SDS
by: Philip Davis

Summary

Last week's Futures shorts are up $15,450 this morning.

We're looking at our S&P hedge (SDS) as well as our oil trade.

Brexit and the Fed Meeting dominate the action today.

It's good that we cashed out last week!

As you can see on the chart, the Euro Stoxx 50 is now down from 3,050 last week to 2,800, down 250 points (8%) since we took the money and ran in our Long-Term Portfolio at 1:31 pm in our Live Member Chat Room and, the next day, I reiterated our call for CASH!!! during our Live Trading Webinar (replay available here). It is so much easier to cash out while the markets are still going up - that's why we didn't want to wait for the news to catch up with what we thought was a very obvious market call. As I said in last Tuesday's morning post:

Meanwhile, while we wait, we continue to short the Index Futures when we get a good signal and we didn't get one yesterday but today we have 2,110 on the S&P (/ES), 17,950 on the Dow (/YM), 4,530 on the Nasdaq (/NQ), 1,175 on the Russell (/TF) and 16,850 on the Nikkei (/NKD) and we can short the laggards if 3 of 5 cross under AND the Dollar is over 94 - those are our marks for the day and VERY tight stops above.

Look, I don't want to be Mr. Doom and Gloom - as I have pointed out, we have TONS of long positions because the Fed(s) have TONS of money to prop up the markets with. I just think it's a good idea to protect them from a potential revisit to 1,850 (-12.5%) because, truth be told, we've made more money in our Short-Term Portfolio (400%) on our downside hedges than we have on our Long-Term positions (100%) so hedging is great fun when it pays off and merely an annoyance when it doesn't - kind of like making small bets on long-shots at the track except, in this case - we also have our money on the favorites!

That afternoon, we decided enough was enough and we cashed out about 1/2 of our LTP positions, which left us tilted much more bearish in our Member Portfolios. Meanwhile, our Futures shorts are paying off fantastically:

  • Dow 17,600 is down 350 points at $5/point = $1,750 per contract profit
  • S&P 2,063 is down 47 points at $50/point = $2,350 per contract profit
  • Nasdaq 4,400 is down 130 point at $20/point = $2,600 per contract profit
  • Russell 1,140 is down 35 points at $100/point = $3,500 per contract profit
  • Nikkei 15,800 is down 1,050 point at $5/point = $5,250 per contract profit

Click to enlargeThat's $15,450 in profits from just one contract short on each of our Futures targets! As I've said many times in the past, the Futures are a fantastic trading tool to have at your disposal - well worth learning how to play them and we teach Futures trading techniques every week in our Live Webinars (Wednesdays at 1pm, EST).

The next day, Wednesday the 8th (also for free in our morning post), we called oil short (/CL) at $51.15. Those contracts are now $48.15 for a $3,000 per contract gain but this is the spot ($47.50) where we said we'd go long so short plays are back off the table and we're going to see if we have real support here (we already have long-term longs on oil in our portfolios).

Speaking of things we predicted that are now coming to pass. Back on Thursday, May 18th, when everyone was still betting on a rate hike at tomorrow's Fed meeting, I said:

Despite what you are hearing from pretty much every single person on TV today, there is no way the Fed hikes in June. First of all, it's ahead of the Brexit vote and that could be a complete disaster to strengthen the Dollar 10 days ahead of the collapse of the Euro. Secondly, since the Fed had their meeting on April 27th, the data has gone significantly downhill and the Fed said they'd LIKE to raise rates - IFF the data supports it. It doesn't - QED.

Click to enlargeWe'll hear from the Fed tomorrow but now no one thinks they will be raising rates so they can only surprise to the downside IMHO. For those of you who are Futures impaired, we had a FREE hedging idea for you last Monday (6th) using the S&P Ultra-Short (NYSEARCA:SDS) in a very simple bull call spread:

SDS - Those were more emergency protection, leftover long leg of an old spread (2/18) so, logically, we'd want to pick up the Sept $17 ($1.55)/20 (0.70) bull call spread for 0.85 so 100 of those is $8,500 and SDS is at $18 so worth $10,000 and the only way you lose money is if the S&P is higher than it is today and that would be GOOD for your long-term positions. Let's officially add that to the STP!

SDS has already plowed up to $18.31 and the Sept $17 calls are now $1.82 and the short $20 calls are 0.88 so just net 0.94 at the moment, only a $900 (10.5%) after our first week but, if we were to expire here, we'd actually get back $13,100 as the short calls would be worthless (because we're below their strike) and this spread maxes out at $30,000 at $20 - not bad off a net $8,500 entry!

As we have removed many of the long positions this trade was protecting (the next day), this trade is now more of a bet than a hedge so now we have to consider the likely path the S&P will take for the next few weeks. It's all about the Brexit until the 23rd and, at the moment, the S&P has fallen 5% less (counting this morning) than Germany's DAX and that's not likely to continue so either the DAX bounces back (not likely) or we have more downside on the S&P to come:

Click to enlarge

So, no reason to pull our bearish bets based on our TugBoat Model™ and our 5% Rule™ tells us that 2,100 to 2,047.50 is a 2.5% drop and we'll be watching that line on /ES to see if it holds up but we're not even there yet so we'll watch 9,500 on the DAX, which is 10%(ish) below 10,500 and we'll see if that turns out to be weak bouncy (9,700) or strong bouncy (9,900) and we already tested 9,500 this morning and the bounce, so far, has been far less than impressive.

Click to enlarge

If Dax fails 9,500, expect the S&P to complete it's move to the -2.5% line (2,047.50) and then we'll see how that bounces but it's a long way to Brexit so tomorrow it's up to Yellen to steer the markets but, before that, we'll have to get past the oil report - where we need to hold that $47.50 line or then the energy sector will begin to sell off again and there's no way the markets can stand up to that.

Meanwhile, we have a Fed meeting in progress today with the statement tomorrow at 2pm and then Yellen will say a few words to really confuse things - so we have that to look forward to!

Best trade of the moment is Apple (NASDAQ:AAPL) back at $97.50 with the VIX at 21 so the AAPL 2018 $85 puts are $8.50 which nets you into the stock at $76.50 (21.5% off) in the worst case and, in the best case, you get $850 per contract for free (anything over $97.50 in Jan, 2018). ToS says the margin on the short puts is just $850 so it's a 100% return on margin in 19 months - not a bad placeholder trade!

Click to enlarge

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). 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 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.