WASHINGTON, August 18, 2014 – Irrational exuberance has returned in force to Wall Street, at least for today. The DJI is up around 170 points as of 1 p.m. EDT, while the S&P 500 is up a healthy 15 points and the tech-heavy NASDAQ is up a whopping 39.
It would be nice to say that this summer’s generally tepid volume has picked up, too, but given the unusually wide spreads in many stocks (the gap between bid and ask prices), it looks like the Hamptons are still fully staffed.
Pundits are attributing much of today’s rise to the alleged progress of the Kurds vs. ISIS and the relatively calm situation on Ukraine’s eastern border. But this is all based on wishful thinking and pipe dreams. When today’s poor excuse for the financial punditocracy starts looking deeper and ceases passing off market moves based on the last hour’s international political propaganda, we’ll give them a bit more credibility.
What’s really been driving this market all summer has been the mass withdrawal of big investors and hedge funds from the market even as they encourage
suckers retail investors to buy, buy, buy. We’ll see who gets the last laugh in the end. But it’s usually the .01% that’s gaming this market, usually successfully, by lying to all of us as they’re aided and abetted by the Democrats they own in Congress. It’s a sad game, really. But until the average voter and/or investor gets it, that’ll be the way that it goes.
The likely driving force for today’s up move is actually some positive feeling that’s being generated in anticipation of whatever is going to come out of this week’s annual economic meeting of the Feds and national and international bigwigs. They are all headed out west to enjoy (mostly at taxpayer expense) the lavish amenities available in Jackson Hole, Wyoming.
Fed Chair Janet Yellen is expected to deliver a statement on whatever sometime Friday morning in her keynote address at this 3-day event (August 21-23) and the bulls seem to think it will make them happy.
This year’s Jackson Hole Symposium, BTW, is entitled “Re-Evaluating Labor Market Dynamics.” Our subtitle for the symposium would append “Or, ‘Keeping our Dying Middle Classes Quiet While We Steal the Rest of Their Money.’” Think we’re cynical? Check your latest pay stub.
In any event, Yellen is likely to clarify (if indeed a Fed Chair ever does that) what might be happening when QE draws to a formal close this fall, as in “When exactly will interest rates go up?” The definitive answer again is, “Whenever.”
Problem is, more than her predecessor, Yellen seems genuinely concerned over the utter falsity of today’s official U.S. unemployment numbers, knowing full well that they significantly understate that figure.
Since the administration she currently works for, as well as the U.S. Senate is fundamentally unserious, however, about real, non-public employee union American jobs, she’s on her own, which makes her more than a tad cautious about jacking up interest rates until she actually sees some genuine downward motion in the broader U-6 unemployment rate.
Yellen is at this point inclined to keep rates low for longer than Fed hawks would like. But at some point she’ll have to give in, and if that point occurs before U-6 is beginning to look respectable, the bond market’s march to the bond vigilante scaffold last fall will look like a shoddy dress rehearsal for the real deal.
But we’re thinking that the big money boys are betting that interest rate rises are still a relatively long way off. That, perhaps, is the reason behind today’s big post option expiration market rally.
Or maybe because invited guest, ECB head honcho Mario Draghi will also speak Friday and say wonderful, wonderful things about the dying Euro-economy. Prior to doing nothing about it once again. Lucy and the football. He’s really good at it.
Perhaps only the HFTs’ supercomputers really know the answer. Or are prepared to manufacture one. Even the astute Market Maven is often reduced to playing “best guess” these days on the stock market. At least he admits it.
Usually, it’s best not to start buying on a big rally day like today. If we end up getting to overbought conditions quickly, Tuesday or Wednesday market action could exhibit the Acme Wile E. Coyote over the cliff effect.
We have been sneaking into energy ad lib however, and our long underwater position in refiner Valero (VLO) turned massively positive late last week, a trend it’s following yet again today. Question is, when do we sell.
And that’s the point. If you have positions that are up 5-15 percent right now, you might consider taking profits on at least half the position. Big moves like today’s have a way of getting slapped back 24-48 hours later. Just because.
We backed out of the small gold ETF hedge we’d started to build because…Ukraine. And the reason we backed out is, because…Ukraine. No hedge needed, at least today, because Vlad the Impaler has chosen to play nicey-nice. For a day or two anyway, while he likely sneaks more bombs and stuff over the border in the dead of night.
Pharmas, medical and hospital companies seem to be recovering from a violent July correction, so playing this group via the XLV ETF is a position we sneaked into this morning, even though it was trending up on the buy. If this gets hit in the next two days or so, charts indicate it might be wise to double down on any established position.
Ditto many areas in tech, particularly networking, represented by the FDN ETF.
The Maven has also been sneaking into a decent-sized position in Yahoo (YHOO) of all things. Even as good news and bad news continues to pour in on the upcoming Alibaba IPO (conjectural symbol as yet unknown), YHOO, which still owns a chunk of that Chinese giant, has been scootching up nicely on speculation of some nifty profit numbers based solely on the sales of some of its shares in the IPO.
Sometimes, pure speculation works in a trade and this is one of those times, we think. YHOO has been a dog of a stock for years. But Alibaba’s IPO might just be the excuse for a temporary big jump in YHOO stock, giving us the opportunity for a fat gain on short notice. So we’re giving it a try.
Our modest target for YHOO, likely some time in September, would be around 42. But when a hot IPO is involved in the game, any number is a wild guess. We could get a lot more for the shares. Or we could end up mightily embarrassed if more shady Alibaba accounting news comes out prior to the IPO. Anyhow, we think it’s worth a shot.
If the stock runs up prematurely, we can always hedge either with a trailing stop or via covered calls, which means shorting in-the-money calls equivalent to our stock holdings against stock in hand. If the stock tanks, the premium you got for your now worthless options will cushion the fall. If the stock goes up and over your calls’ strike price, well, you’ll get called. But you’ll still have a profit (presumably) on your stock and you get to keep the call premium anyway, so what’s to complain about?
Disclosure: The Maven currently holds positions in YHOO, FDN, VLO and XLV. Comments and quotes in this commentary should not be construed as buy and sell recommendations. For the last several years, markets have remained more treacherous than ever and are likely manipulated at least in part. So travel at your own risk.