Faltering Friday – Triple Trouble at 2,900 on the S&P 500


"Falling, yes I am falling

And she keeps calling

Me back again"McCartney

Here we go again.  

It's always something that stops us from making new highs as we hover around our 10% line which is the TOP of our expected range into the end of the year.  What we actually expect to happen is we settle back down around 2,700 on the S&P (/ES) but the market doesn't seem to want to correct properly so we keep getting these low-volume rallies that keep us near the top.  

That's fine with us as our Long-Term Portfolio has held up nicely so far while our Short-Term Portfolio, where we have our hedges, made some nice gains on the last dip and we were wise enough to lock them in near the bottom.  We just did an STP Review where we cashed in our Russell Ultra-Short (TZA) hedges and I think, into the weekend, we should add back a new hedge to replace them.  I don't know if rising tensions with Iran and China (who just pledged to stand behind Iran) will bring us back to our DOOM!!! line at 2,800 on the S&P but we can look at hedges similar to the ones we used on May 30th to catch the last dip:

  • Sell 10 Macy's (M) 2021 $20 puts for $3.75 ($3,750) 
  • Buy 40 SDS July $31 calls for $1.50 ($6,000) 
  • Sell 40 SDS July $34 calls for 0.55 ($2,200)
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The net cash outlay on the spread is just $50 and it pays $12,000 if the S&P Ultra-Short (SDS) climbs back to $34 and, of course, stays there into July 19th expirations.  SDS is a 2x ETF and currently $31.85 so we need a $2.15 move which is 6.7% so about a 3.5% drop in the S&P should do it – to just under 2,800.  

There's also the long-term obligation to buy 1,000 shares of Macy's (M) for $20 ($20,000) so make sure you REALLY want to own them and, if not, we had a few other suggestions in the May 30th Report for potential offsets to the cost of the hedge.

The way this market is behaving, it's not clear that even a full-scale war with Iran will give us a proper sell-off but, if that's the case, then Macy's will do well and we can certainly afford a $50 insurance policy against our long positions, right?   We see silver and gold spiking higher (good for our gold miner plays and, of course, Wheaton Precious Metals (WPM)) on war concerns while copper is still in the dirt on Trade War concerns.  Overall, it's a lot of concern out there for a market testing its all-time high. 

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Morgan Stanley's Business Conditions Index fell off a cliff in the last reading and the headline index (as opposed to the more reliable 3-month average) is about as low as it was in 2008, when the economy was in full melt-down – so that should be at least a little bit of a concern.

On the other hand, Retail Sales popped 3.2% and it was all E-Commerce as Department Stores fell 4.6% vs last year BUT, keep in mind that stores like WalMart (WMT) and Target (TGT) have made huge E-Commerce pushes in the past year and it's now not so much Amazon (AMZN) gaining market share as simple more and more business is being pushed on-line.  

EVENTUALLY, if enough buisness moves to the Web, there won't be any point to those brick and mortar stores and we'll get another wave of closings and lay-offs and, more and more, the warehousing work is being done by robots and the sales are obviously being done by machines so the robots are, in fact, still stealing our jobs – only it doesn't seem like it when Target closes 100 stores and replaces them with one automated fulfillment center, does it?

Have a great weekend,

  • Phil