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John Thomas graduated with a bachelor’s degree in biochemistry with honors and a minor in mathematics from the University of California at Los Angeles (U.C.L.A.) in 1974. He moved to Tokyo, Japan where he was employed by a medium-sized Japanese securities house. Thomas became fluent in Japanese... More
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  • Will The Market Crash In October?

    Editors note: Originally published September 22, 2015 -

    I think the bull market has at least three more years to run, but I'll tell you why later.

    In the meantime, we have to survive October first.

    That is easier said than done.

    October has long earned a notorious reputation as a wealth confiscation month for both professional traders and long-term investors.

    If you go broke during this always challenging month, you won't have any money left to play the coming price rises.

    Over the weekend, I did my usual scan of the 200 most important charts for the global financial markets. The technical picture that leapt out at me was nothing less than atrocious.

    Failure to break the old support/new resistance level in the (NYSEARCA:SPY) at $203 means we now have to retest the August 24 lows at $186, or $182 in the intraday futures.

    If $182 doesn't hold, then we're breaking to new lows, and entering a new bear market.

    Every technical service I subscribe to was repeating the identical pattern. This is rare enough that when it does occur, I stand to attention.

    Look out below!

    This year, October will be particularly vexing.

    The newly elevated level of volatility has scared the daylights out of a lot of stockholders.

    Look no further than last Friday, September 18. Just when everyone thought it was safe to nibble on some new longs, the Dow Averaged came out of the blue and whacked them with a 300-point loss.

    I don't even recall the reason. But it is irrelevant. Traders were gun-shy. No one wanted to hold a position over the weekend, and risk that China would have a bad Monday (it did).

    It get's worse.

    Congress is now threatening another shutdown. Be it over Planned Parenthood funding or the Iran Treaty, it makes no difference. Closed is closed.

    This is exactly what the market doesn't want to hear.

    Then we have three more months of Fed torture to endure. Failure to move on September 17 means that uncertainty surrounding the first interest rate reversal in nine years has been given another fresh three months of life.

    As if we didn't have enough to worry about!

    It all adds up to a nightmare for neophyte traders. No one has the slightest idea of what the market will do next. If they pretend to, they're lying.

    That is, unless you happen to have a half-century of trading experience, as I do. Then it's a piece of cake.

    Just hit the mute button on the TV and close your eyes. Then buy every big dip and sell every substantial rally. Don't try to rationalize this in any way. This is trading and investment totally devoid of the thought process.

    Overthinking your trades right now can be hazardous to your wealth. Just let your primordial brain stem take over for now.

    And it works like a charm.

    Just look at my trades of the last few days. When the market opened high, I bought the October $204-$207 vertical bear put spread.

    When it then dove 300 points I bought the Home Depot (NYSE:HD) October $105-$110 vertical bull call spread as a hedge.

    When the market popped 200 points on the following Monday morning opening (and 300 points if you count the overnight Asia low), I kicked out Home Depot for a nice little 6.2% one day profit.

    I then rolled down and purchased the October $203-$206 vertical bear put spread to double up my short exposure.

    I ended up +0.91% on the day on my total portfolio, just 1.23% short of a new all time high, and ahead 37.14% so far in 2015.

    I don't normally trade this fast. But they're running the movie on triple fast forward now. A month's worth of price movement is occurring in a day.

    Bob and weave, bob and weave. We have to trade the market we have, not the one we want.

    While a technical breakdown is looming, and the fundamentals seem to be backing it up, I don't think a real bear market will appear.

    Historically, stock markets continue rising an average of 30 months after the first Federal Reserve interest rate hike. That hourglass won't even get turned over until December, or maybe even not until 2016.

    The longest data point on this chart is 73 months. That means the Fed inaction means THE BULL MARKET COULD HAVE ANOTHER SIX YEARS TO RUN!


    Beyond the hysterical, oops, I mean the historical analogies, the economy is just too darn strong to grease the skids for a true bear market.

    I had to call three restaurants to get a dinner reservation in San Francisco this weekend, and finally got one only because it was a dive. I can't get a plumber to unblock my toilet because he is too busy. And these were the guys who were collecting unemployment checks only four years ago.

    For more glorious detail on the current state of the economy, please click here for "The Bear Market That Isn't".

    The dreaded October effect traces back to the 19th century, when agriculture accounted for 50% of the US GDP. Right before crops were harvested in the fall, farmer outlays to pay for the inputs of seed, fertilizer, and labor were the greatest.

    Yet, the crops hadn't been sold yet, so farmer borrowing also hit a peak. The aggregate of all this hit the financial markets with an enormous cash call, which led to the inevitable crashes.

    Once the trend was established, it became a self-fulfilling prophecy, even though agriculture presently accounts only for 2% of the American economy now.

    It is traders that sweat October now, not farmers.

    SPX 9-18-15

    SPX a 9-18-15

    SPX b 9-18-15

    Black Tuesday Newspaper

    Back for a Replay?

    Sep 28 12:27 PM | Link | Comment!
  • Thank You Janet Yellen

    Editors note: Originally published September 18, 2015 -

    Email sent to Federal Reserve Governor Janet Yellen, 9-17-2015 2:30 PM EST:

    Dear Janet,

    A great big thank you to you!

    All is forgiven!

    I apologize for those snarky questions I used to ask at your San Francisco Fed press conferences years ago.

    And I don't regret for a second all those times I walked you to your car after your night economics class at UC Berkeley because you were afraid you would get mugged.

    The insights I gained to your thinking have been worth their weight in gold.

    A few minutes before your interest rate decision, I placed bets with some hedge fund friends of mine.

    I went for NO INCREASE, citing your insistence to me on many occasions that you needed to "see the whites of inflation's eyes" before you'd make a move.

    I am also averse to betting against nine year long trends.

    So, I won! BIG TIME!

    It's clear that you have subscribed to Verizon's new international dialing plan. It's such a great deal, as I found myself traveling last summer in Europe.

    That would explain your newly heightened sensitivity to economic conditions abroad, with a weak Europe and a China slowdown.

    A strong dollar was also clearly in your thinking, as it is a big drag on the earnings of large US multinationals.

    And the massive collapses in oil and commodity prices obviously indicate that inflation is nowhere to be seen.

    So being the central banker to the 50 United States is not enough? You want to take on the world?

    If anything, deflation is accelerating. So why rush to head off non-existent inflation?

    I suspected as much.

    That's why I went into your meeting with no positions whatsoever. That is very rare for a person like me who has to be making money all the time. The risk/reward was just lousy.

    What you have done is set up one of the greatest "BUY THE RUMOR AND SELL THE NEWS" markets in recent memory.

    In a few days, once the smoke clears, we should go back down and retest the recent lows, even if we don't get very close.

    That will give me the entry point for me and my many new followers to buy stocks once again.

    If you really do need to see inflation before you raise interest rates, you might not raise them for three more years!

    What we now have to look forward to is three more months of uncertainty, speculation, and prognostication about a December rate rise. I can't imagine a more ideal trading environment.

    But you have to go into this with dry powder, which I, with a 100% cash position, have plenty of.

    While I have your attention, let me tell you about this neat little trade I discovered in the Velocity Shares Daily Inverse VIX Short Term ETN (NASDAQ:XIV), which is a bet that S&P 500 volatility will fall.

    I made two round trips on this baby in the past two weeks, getting followers in as low as $23.20. It hit $32.40 after the announcement, an unbelievable two week gain of 39.66%.

    A few more trades like this, Janet, and you will more than make up for the pitiful pension that the government pays former Federal Reserve governors.

    You won't have to do any TV gigs at all!

    Just let me know and I'll get you set up. You see, I know this broker…

    So once again, thank you Janet. The box of See's candy is in the mail.

    XIV 9-17-15

    VIX 9-17-15

    Janet Yellen. Dear Janet…
    Sep 28 12:24 PM | Link | Comment!
  • How To Spot A Market Top

    Editors note: Originally published September 16, 2015 -

    What has to happen for even me to believe that the market is topping?

    I have a laundry list:

    1) Retail buyers enter the stock market on a large scale. So far they are missing in action.

    2) S&P 500 profits historically peak at 50% above the old high. In the last cycle they got to $100 a share. So we still have room to soar to $150/share, some 20% above today's probable $120/share.

    3) The yield curve is always inverted at a market top (short term interest rates are higher than long term ones.) Now, the reverse is true.

    4) Stocks are always more expensive than bonds on a relative basis at bubble tops. Currently, stocks are two standard deviations cheaper than bonds, largely through the grotesque over valuation of bonds.

    5) Even if the Fed does raise interest rates tomorrow, historically markets were higher in nine out of the last ten first hikes.

    How soon will our sideways correction end? Possibly as soon as Thursday afternoon at 2:00 PM, when Yellen shows her dovish hand (wing?).

    SPX a 9-15-15

    SPX b 9-15-15

    John Thomas

    Are We At The Top Yet?

    Sep 28 12:18 PM | Link | Comment!
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