Enthusiastic Thursday - Dressing The Windows For The Holiday

by: Philip Davis


Yesterday's Futures Trade Ideas gained $5,838.

Our GILD trade is up 66%, but you can still make 33% trading our leftovers.


That's what you are seeing in the markets this morning. What do "THEY" want you talking about with your friends and relatives at the weekend barbeque? They want you to tell everyone how resilient the markets are and how you "can't lose" on bullish bets and how buying the dips is a brilliant strategy. Why? The market needs a fresh round of suckers to keep things going!

Since our down days on Aug. 17th and 18th, market volume has vanished and our "recovery," such as it is, has been very narrowly based - with just a few of the market-moving stocks taking the indexes higher, which forces the ETF algorithms to buy - without the need of human intervention.

Here's a look at the volume on the S&P 500 ETF (SPY) over the past 10 days:

Date Open High Low Close* Adj Close** Volume
Aug 30, 2017 244.83 246.32 244.62 246.01 246.01 58,757,200
Aug 29, 2017 243.06 245.15 242.93 244.85 244.85 51,135,700
Aug 28, 2017 245.17 245.20 244.09 244.57 244.57 40,565,600
Aug 25, 2017 244.90 245.61 244.39 244.56 244.56 64,445,900
Aug 24, 2017 245.00 245.18 243.75 243.99 243.99 49,730,500
Aug 23, 2017 244.33 245.05 244.16 244.56 244.56 50,203,800
Aug 22, 2017 243.57 245.62 243.55 245.44 245.44 63,140,100
Aug 21, 2017 242.64 243.20 241.83 242.90 242.90 65,469,700
Aug 18, 2017 242.90 244.19 242.20 242.71 242.71 136,748,000
Aug 17, 2017 246.24 246.60 243.09 243.09 243.09 128,490,400

We've had 4 down days where 365M shares were traded, 3 up days where 186M shares were traded and 3 neutral days where 157M shares were traded. Even yesterday, where we had a strong finish, had advancing volume of just 1.42B on the NYSE and declining volume was 1.16B while the AMEX has more declines (36.5M) than advances (29.2M) by a wide margin. This is NOT what a real rally looks like.

Image result for trading robot

And, if you think I'm just being paranoid - ask the NYSE, which just this morning has proposed a 5-minute delay for announcements after the market close to combat "sophisticated trading algorithms that scan English-language text in search of signals to buy or sell stocks." The auctions determine the end-of-day price for thousands of NYSE-listed stocks. The NYSE is trying to address a problem that has been around for years, but has gotten worse with the rise of algos that read news releases and execute trades if they spot phrases such as “record revenues” or “merger,” said Eric Noll, former chief executive of brokerage Convergex. They’re building in a buffer so the closing auction isn’t impacted by rapid-fire trades coming into the market.

Don't get me wrong, we love our robot overlords! The fact that they go crazy when they see certain key words is a key way we make our money trading against them. Robots, unlike humans, are nice and predictable and my Father, David Davis, wrote some of the early trading programs that were used by investing firms and banks, and understanding the flaws in those trading systems is one of the ways we are able to take advantage and trade against them.

For instance, just yesterday, in our Morning Report, I told you we were going long Oil Futures (/CL) at $46.15 and long Gasoline Futures (/RB) at $1.63 and we CRUSHED IT - with oil shooting up to $46.65 for a $500 per contract gain, and gasoline made two trips from $1.63 to $1.67 which, as you can see from the chart of the contract, that was good for gains of $5,388 on just 2 long contracts!

Trading is becoming more and more like chess, you can't just think about how you are going to trade but you have to think about how, given what's on the board, your opponent (the Algos) will trade and then come up with a strategy to either counter their move or, sometimes, move along with them.

One trade idea that is not working out yet is our Dow (/YM) shorts. At the moment, we have worked ourselves up to 8 short contracts (now $40 per point!) at an average of 21,903.25 which are down $630 at 21,919 (they aren't all winners!), and because we think this low-volume, end-of-month window-dressing rally is BS (and there was even a tax cut thrown in!), we feel pretty confident those Algos are over-reacting to the upside and we'll wait for reality to kick back in.

I lost money on the Dow yesterday because I violated a cardinal rule of Futures Trading - NEVER LEAVE YOUR DESK! I was being interviewed over at the Nasdaq and ahead of the GDP Report (which was a middling 3%). We initially got exactly the reaction we expected and the Dow dropped from our shorting line at 21,900 all the way to 21,840, which was good for a $1,200 gain on our 4 contracts, but I wasn't around to take the profits and they were almost all gone by the time I got back.

Over at the Nasdaq yesterday, we were talking about the reliability of market data and we didn't get a chance to go over the Nasdaq Portfolio because the Nasdaq changed their policy and does not want us discussing specific trades anymore. We're going to discontinue the Nasdaq Portfolio and initiate a Money Talk Portfolio next week when I do that show next Wednesday.

The above Gilead (GILD) trade was also featured on April 24th. There was no margin at all in the bull call spread - it was a play that could have been done in an IRA.

One of our Options Opportunity Portfolio Members asked me today if we were done with that trade, now that it's up 66%, but I said to him that it's "only" up $2,975 out of an expected $5,525, so we still have $2,550 left to gain, which is 46% of our expected gains and 33% of the current value of the spread. As I said back in the April interview, now that we're up 70% (yes, I hit it on the button), we have to evaluate the risk/reward as a new trade and, as I said, I still don't have much better, safer ways to make 33% on my money, but when I do - I'll know a good place to get some CASH!!!

Of course, the more aggressive way to play was also suggested in the 4/24 Report and that was to also sell 5 of the GILD 2019 $60 puts for $7 ($3,500) which dropped the net of the spread to $1,200 in exchange for our promise to own 500 shares of GILD at $60, which we thought was a terrific price (it was my favorite all spring). You still get back the same $10,000 at $70, but the return on cash is now $8,800 (733%) and those puts are now $2.40 ($1,200) and up $2,300 (65%) as well.

See, not at all complicated. In fact, in that same report, I mentioned we also like Whole Foods (WFM), which has since been bought by Amazon (AMZN) at 20% over the April price and the 2019 $30 puts we sold for $4.50 are now worthless for a 100% gain - very easy money if you can get it!

And you can get it, because SuperValu (SVU) is still down in the doldrums at $19.80 and our trade for our Options Opportunity Portfolio is still playable, but maybe a bit aggressive as a new trade so, as a new play, I would take advantage of the $20 line by playing it this way:

  • Sell 10 SVU 2019 $15 puts for $2.15 ($2,150)
  • Buy 10 SVU 2019 $15 calls for $7.30 ($7,300)
  • Sell 10 SVU 2019 $22 calls for $4 ($4,000)

That trade nets you into the $7,500 spread for $1,150 so the upside potential at $22 (10% higher) is $6,350 (552%) and your worst-case scenario is owning 1,000 shares of SVU at net $16.15, which is still 20% off the current price. When your worst case is owning a stock for 20% off and your best case is making a 552% return on cash - it's probably a good trade!

SVU has 1,900 stores and sell $13B worth of groceries and makes $200M. At $19.80, their market cap is just $759M - less than they make in 4 years. Whole Foods has 465 stores and sells $15.7B worth of groceries and makes $500M (or MADE, as AMZN is cutting their prices). At $42, their market cap is $13.5B.

SVU seems very underpriced in a sector that may be undergoing additional consolidation because I could buy SVU for $1.5B ($40/share) and still have $11B to revamp my 1,900 stores ($5.8M per store) rather than spending $13B for WFM.

Disclosure: I am/we are long GILD, SVU, WFM, SDS, DXD, USO, UGA, SQQQ, TZA.

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).