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Investment Capitalist and its founder, Peter "Pej" Hamidi, a well known trader on Wall Street, present a unique global macro perspective of financial markets, technology and the geo-political landscape affecting market movements. There is also an important "micro-structure"... More
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  • The Long Case For ProShares UltraShort S&P 500 ETF And The Broader Market 1 comment
    Jan 29, 2014 10:20 AM | about stocks: GLD, OIH, SRS, SDS

    Elevator Pitch

    How should traders and investors position themselves to profit from what is likely to come in the near term? One thing which has been a constant is talk of the "reduction" of quantitative easing. Such a malign way of putting it, but only the thought of removing some of the punch might collapse this house of cards we've managed to build hoping Asian consumers can pick up the slack. Let's remember critical "Stock Market Almanac" truisms. The Fed rarely intervenes during a Presidential Year, so not much room in 2016. This year is too premature for anything drastic, which itself will require more drastic action in 2015. The party who occupies the White House in the next administration will rein upon a period of US economic prosperity and expansion never before experienced, and behind it will follow global prosperity, until someone finds a reason to go to war again.

    Thesis & Catalyst For ProShares UltraShort S&P 500 ETF (NYSEARCA:SDS)

    It was and remains widely discussed that $SPX 1850 would prove major overhead resistance among a style of market observers who rely on technical analysis and mathematical equations to project both retracements as well as rallies. That said 1850 is also psychological in the institutional psyche. 1550 to 1560 were previous all-time highs from 2000 and 2007. In the 10 months since prices broke through in 2013, the global economy has hardly stabilized to warrant what some refer to as the "Peace Dividend". The trader knows when prices are making all-time highs, there's nothing to the left to give any indication of possible price resistance, itself a result of older buyers who held for "break even", if it meant for their grandchildren. A different generation of indicators had to be used: indicators that combined fundamental and behavioral economics with mathematical formulas to produce uncannily accurate projections and price points. The trick will always fall to the Global Macro market thinker, who has to first see then understand the big picture before implementing appropriate tactical strategies for short-term oscillations.

    Valuation

    What used to be the domain of "market technician's" is now fusing with quantitative trading and behavior analysis. As such, a successful market operator is not one who focuses on a single weapon, but the type who masters them all and understands when and where to deploy each weapon to achieve long-term market gains. For example, consider how "relative strength" behaves after prices reach new all-time highs. This is why the Nobel Prize in Economics went to Behavioral Economists. In truth, George Soros hit upon this topic with his "Theory of Reflexivity" in 1987 when he published "Alchemy of Finance". From a purely fundamental picture, we are witnessing the most encouraging fiscal and monetary policy from Washington D.C. Conducted in a coordinated action, wrangling in central bankers from the rest of the world to unequivocally put to rest the possibility of a challenger to US Dollar hegemony. One of our Founding Father's said; "The greater the debt, the greater the credit and power of these United States" (Alexander Hamilton). With overnight US Dollar Repo's set-up globally for almost any bank to exchange toxic assets for US Treasuries, which could then be used to collateralize loans, what was once the domain of major commercial banks in short-term trouble became the drinking fountain of life for the countless nations who realized what it meant when there's literally only 8% of all currency actually printed and in circulation. Even the Vatican Bank experienced a US Dollar run, as well as other sovereign entities. The flood of US Dollars into the global economy, sold as the "solution", was in fact it a fait accompli. The Euro is in tatters and the United Kingdom is well positioned to exploit intra-euro weaknesses from her Bank of England. Global oil markets may have weaned themselves off the US Dollar as the only trading cross to purchase crude oil, but in 5 years, the US is destined to be the largest single exporter of crude oil, so again, the US Dollar is the fiat backed by Oil (vs. gold).

    Company Management

    Long term optimists see 200 approaching but unless we hit this price point in February through March, seasonal market influences will begin to act as further impediments. Since November of 2013, prices in the SPY's have been rising overall but at a volatile rate, creating a lot of whip-lash among too-short traders.

    A most surreptitious position would be the Pro Shares Ultra Real Estate Short ETF (NYSEARCA:SRS). With rates rising, we'll see this sector initially squeezed, but as the economy heats up, this sector will make its contribution to GDP and SRS won't be on our radars. In the near term, SRS should be on long radars. If Tuesday's feeble bounce in the market was a dead cat bounce and the cascade picks up a 2nd leg, SRS will be trading at $30 before the month is over. On the bullish side, I would observe healthcare, biotech and Bio-Pharma as the entire sector continues to show unrelenting strength. Healthcare REIT's are equally attractive with solid yields and less BETA (i.e. volatility). Rising rates will hurt the commodity sector, starting with oil (NYSEARCA:OIH). The low of 2009 appears to be a medium term low with prices drifting higher until early 2011 but then the sector ran out of steam. UBL was dead, Saddam was dead, Iran's agreed to dismantle and the US is ramping up production at a scale difficult to fathom. A collapse of Crude prices would be tremendous to US consumers, especially with the US responsible for most of the production. But geo-political enemies of the United States, who have thus far relied on Crude as their most powerful negotiating tactic are about to find themselves with rather hollow arguments. From a purely disciplinary perspective, ETF's which are based on derivatives, themselves leveraged 3 times like FAZ for example, should be avoided no matter how tempting intraday volatility is. These quasi-derivatives are randomly traded mainly based on intraday order flow, a majority of which is from "main street", while the actual instrument is priced near the close of trading, sometimes within minutes.

    More in line with a potentially rising interest rate environment, the Gold ETF (NYSEARCA:GLD) appears to have completed a well needed 40% correction over the past 2 years while higher risk asset classes underwent brilliant rallies. The price of 140 on the ETF will be a staging ground for an attempt to break through 200 if interest rates suddenly move faster than expected, as is often the case historically. A long position just above $120 with a few dollar stop and a target of $150 present an ideal trading risk/reward ratio. Alternatively, large long only portfolios should be hedged with until the first week of Feb.

    Competitive Landscape

    There are high flying sectors in play while others are undergoing what might become Round 2 of the Credit Crisis. The next few trading sessions should be monitored to see these price points behave as they are tested because the Bull's and the Bear's will be firing with all guns blazing in the coming days.

    Revenue & EPS Outlook

    Trader's looking for actionable data, 177 on the SPY's are a short-term low and will remain that way unless something triggers unforeseen selling. However, as prices rally back up from the high 170's, 185 will again turn prices lower. Without a catalyst for a decisive push through 185, we'll drift in a shallow rise between 175 and 185 on the SPY's. Which means it's once again a stock picker's market. The macro themes are once again relevant. Higher anticipated yields will make dividend paying stocks more attractive now, especially those with unusually high yield's because they're still tarnished by CDO's and MBS's. Those might actually be the best deals because the toxic junk is not as prevalent. Most were used as collateral for loans from the Fed Open Window while the rest was written off or fire-sold for pennies on the dollar. With REIT's exploiting these fire sales, coupled with their structure requiring 99% payouts as dividends, there is a large list of highly attractive dividend plays. The only Caveat Emptor here is that not all REIT's with high yields are worth a look. Familiarize yourself with the primary asset class or classes a REIT holds. Are they derivatives or actual properties? What's been the trend of debt to equity over the past 5 years? Are there still significant tax write-off's the REIT can use in future years? What are some recent transactions? All of these will have answers that affect the other questions, so it's very hard to guess. Do your homework and the real names will stand out.

    Variant View

    There is no primary macro catalyst that can set this market off on a high volatile move. On the SPY's, 182 is the long-term trend median price point, but this is insignificant from a fundamental perspective. Only reason to be aware of it is the idea of "full situation awareness". Like a soldier cut off from his/her platoon, a trader without full situation awareness is about to get crushed by a "Black Swan" level event, which for many traders can be extinction level events.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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: Short-term actionable information should be displayed to your readers sooner rather than later.

    Themes: etf-long-short-ideas Stocks: GLD, OIH, SRS, SDS
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  • GloMac
    , contributor
    Comments (26) | Send Message
     
    @InvestmentCapitalist, thank you for having posted this for benefit of Seeking Alpha readers. Your prescience into the market continues to impress me. Although new to Seeking Alpha, I have been a professional hedge fund manager for 17 years and your work is absolutely top notch. I'm glad they're not putting it in their "PRO" articles to be accessed only by paying members. :) Thanks Seeking Alpha
    16 Feb, 09:35 PM Reply Like
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