Seeking Alpha

Failing Thursday - Rally Has A Hard Time Justifying Itself


The S&P continues to struggle at 2,700.

A quick review of our Benzinga Trades.

Yield curve sounds the alarm - is anyone listening?

2,707 on /ES (S&P Futures).

Technically, it's bullish, but we are sputtering out, and I don't see enough good news to sustain us here - even though here is still 170 points (6%) off the January highs and only 150 points (6%) off the Feb. and March lows. So, we've hit the lows twice and hit the highs once, and now, we're struggling at the halfway point? That doesn't sound very good, does it?

Apparently, it doesn't sound good to Bond traders, who are close to inverting the Yield Curve for the first time since 2007, which led to a total melt-down of the Global Economy 18 months later. The good news is, the markets didn't crash in 2007 - they just flailed along near the highs before completely collapsing. I tried to warn people then too...

If the barrage of Fedspeak this week is any indication, the persistent flattening is creating a dilemma for officials, who appear intent on gradually tightening policy. St. Louis Fed President James Bullard was the latest to weigh in, saying that central bankers need to debate the yield curve right now, and that it could invert within six months. "A potential curve inversion should be taken as seriously as always," Citigroup analysts led by Jabaz Mathai wrote in an April 13 report.

"The historical relationship between the curve and implied recession probabilities is highly non-linear: implied probabilities grow very fast when the curve moves into inverted territory."

A truly inverted curve "is a powerful signal of recessions" that historically has occurred "when the Fed is in a tightening cycle, and markets lose confidence in the economic outlook," John Williams, the next president of the New York Fed, said Tuesday.

I'll be on Benzinga Radio this morning at 8:35 and last time (Feb. 23rd) I was on, we discussed our GreenCoin (GRE-USD) Trade, which was up to 0.004 at the time, a 10-bagger from where we picked it for them in January, and now, it's at 0.0098 so almost a penny! Certainly, it's doing a lot better than Bitcoin, so we're thrilled.

We also talked about Barrick Gold (ABX), which has popped 10% since that interview (still cheap), and we discussed the hedging strategy we also discussed during yesterday's Live Trading Webinar (replay available here), and we predicted 2,728 would be the strong bounce line for the S&P 500 on the way down. Still waiting for that line to be taken back and actually held.

Today is also a good day to revisit my suggestion for a long-term catastrophic hedge like the SQQQ 2020 $20 ($4)/30 ($3.50) bull call spread at 0.50, which pays a fantastic 20:1 if the Nasdaq falls apart. As I noted on the show, it's useless as a short-term hedge as the short calls will wipe out the gains on the long calls but, if the market tanks and stays down, you can turn $5,000 into $100,000 so we can COMPLETELY insure a $100,000 portfolio for $5,000. Since our $100,000 Options Opportunity Portfolio is already up 11% ($11,000) for the year, putting aside $2,500 a year for insurance is not that big a deal.

Our Helios and Matheson Analytics (OTCPK:HMNY) idea was doing well until this morning, when they announced a highly dilutive $150M raise (against a $175M stock), and now, we're dropping back from $4 to $3 pre-market. As I pointed out, however:

As a general note on diluting companies: If you own a stock at $175M at $4 share and they sell $150M worth of stock. Now you own 53% of the stock you had + $75M. In HMNY"s case, there were 45M authorized shares so you own the stock + $1.66 in cash. Of course the company plans to spend that money but anything less than a $1.66 drop is in your favor for now and then it's up to the company to make good use of the cash and get your share value back to $4 before the next time they need $150M but, if they can do that, the next round will dilute you much less and, if they grow on track and keep costs down - they'll start to look exciting to investors, like NFLX or AMZN.

This morning, HMNY is trading at $2.50, down $1.50 from $4, so this is about the point we want to add to our position to maintain our share of the company against the dilution. In our Options Opportunity Portfolio, we have the following position:

Since we sold the $5 puts for $2.60, our break-even is $2.40, so nothing to really worry about there. Our net outlay on the spread was $1,225, so we need to be at about $3 to make that on the spread (0.50 x 2,500 options), and we'll see what prices we get today, but it's likely we double up on the $2.50 calls if they go below $1.60 and maybe we sell 10 more puts if they are over $4, which would obligate us to own 2,500 shares at $5 ($12,500) as a worst case.

We shorted oil at $69.50 (discussed on Benzinga earlier), and we already hit goal at $69 so we cut back 1/2 and keep tight stops on the rest. The 0.50 drop will get a 0.10 weak bounce to $69.10 but, if that fails, we can get back in the shorts with a stop over $69.20 (strong bounce) but, hopefully, we hit our goal at $68.50 before that happens.

Disclosure: I am/we are long HMNY, SCO, SDS, DXD, SQQQ, TZA, ABX. 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).