Testy Tuesday - 2,180 And Bust?

Includes: LNG, MCD, SPY, WMT
by: Philip Davis


The markets push higher and the volume goes lower - something's gotta give!

Oil keeps setting us up for quick shorts in the Futures.

Productivity disappoints again - another nail in the coffin for the rally?

Big push or last gasp?

2,200 is the top of our likely range at the moment and it's just 20 points away on the S&P and that's 400 points higher (22%) than we were in February and, according to our 5% Rule™, a 20% move up with a 2% overshoot is very likely to lead to a 4% pullback to about 2,120 before we'll see anything higher.

The volume gets lower and lower while the market climbs higher and higher and that's exactly the sort of thing Willie Wonka says just before something horrible happens. I'm just saying...

We're having lots of fun scalping profits intra-day but we still have a generally bearish stance. This morning, in our Live Member Chat Room, we already had a nice $250 per contract winner on the oil dip from $43.25 to $43 and now (8:15) we're back at $43.25 and, you know what? We can do it again! That's the nice thing about fake market moves - you can bet against them over and over.


I was over at the Nasdaq yesterday discussing my broad market outlook on FaceBook Live, so you can watch that and save us the trouble of going over it again. Needless to say we're still using yesterday's shorting lines on the Futures as, much like oil - they made great money yesterday and they can make great money again today as the market bucks like a bronco, trying to toss off the bears before it gets too tired to fight the gravity.

Remember, I can only tell you what the market is going to do and how to make money trading it - the rest is up to you!

We did pick up a long this morning in the Futures and that's an old favorite as well. It's good not to have all your bets in the same direction but our conviction trade is the oil (/CL) short - that's a melt-down waiting to happen (also outlined in yesterday's post). Gasoline (/RB) is already well off the highs of $1.39, back to $1.36 and that would put oil back at $42, for a $1,250 per contract gain if all goes well but, while we wait, we'll take our $250 profits over and over and over again, right?

Hopefully we can do a little Futures Trading Workshop in tomorrow's Live Trading Webinar (1pm, EST) as we'll need a little vacation money at the end of the month.

Productivity is already on vacation, dropping 0.5% in Q2 after a 0.6% drop in Q1 and that's just TERRIBLE and should give us a nice win on our index shorts because no amount of QE is going to fix that if employers aren't willing to spend on CapEx. Even worse for our Corporate Masters is that Unit Labor Costs have jumped another 2%, pushing the two trends very much in the wrong way from each other. Several factors are in play here:

  • A lot of hiring means a lot more training
  • Lack of CapEx is catching up with companies as new workers use older equipment. What I mean by this is that the companies that had 20 people and cut back to 15 to save money also didn't upgrade their computers (for example, could be a production machine) and that didn't seem to matter as the 15 people left used the newest ones but now they hire 5 more people, who they have to train and those 5 new people get the old machines no one wants and they can't be as productive - no matter how hard they try.
  • Low unemployment means employees are empowered to get better wages (lowering productivity per Dollar).
  • Low unemployment means employees don't feel pressured to work overtime for free or take work home on weekends, like they did when they lived in constant fear of losing their jobs (and the Affordable Care act is another factor in their favor because losing health care is not an issue).

Though this is not a good situation for our Corporate Masters, this is wonderful news for Humans, as we've been under-compensated for 40 years! As you can see from this chart, Productivity has gained 143% since the early 70s while wages have gained 9% - this is just a normal, HEALTHY correction that has been a long time in coming and is also one of the reasons we didn't believe the markets could go any higher - the wage slaves are finally revolting!

Of course, having to pay employees a fair share of the profits will quickly be considered a crisis by the Top 1% and we're already seeing the trend forming where labor-intensive businesses like Wal-Mart (NYSE:WMT) or McDonalds (NYSE:MCD) are starting to disappoint the bulls. I don't expect this to be a short-term thing - there's a lot of ground to be made up by labor but, of course, soon they will be replaced by machines and this too shall pass.

For now, while we still can, humans can still have fun trading the markets and this morning we'll be hearing from Cheniere Energy (NYSEMKT:LNG), who was a Top Trade Alert for our Members back on Feb 23rd, when they were down at $30 and our trade idea was:

We already have UNG as our trade of the year so it's kind of redundant to play LNG but they can be a little money machine if they hedged their supply. 2018 $25 puts can be sold for $5.50 so that's hard to turn down and you can be more aggressive with the $25 ($13)/35 ($8) bull call spread at $5 and you have a net 0.50 credit on the $10 spread that's $7 in the money to start.

Although it's only been 6 months, this trade is so deep in the money that the spread is $8 and the short puts are $1.70 so net $6.30 plus the 0.50 credit we started with is a $6.80 cash profit (1,360%) already and, if we hold on to the end, it's $10.50 so, even if we took this as a fresh trade at $6.30, it still should make $3.70 (58%) in 16 months - there's another PSW scrap the free readers can have!

Our last Top Trade Alert went out on August 3rd and all 3 trade ideas (all bullish) are on track. Just because we think the market will correct doesn't mean we aren't able to find individual stocks and ETFs that are on sale.

Be careful out there.

Disclosure: I am/we are long LNG, SQQQ, SDS, TZA, UNG.

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.