Ed Bugos March 2019 Newsletter with Reccs:
This is behind a Paywall and I cut down about 20 pages of detailed background info and only included the salient highlights.
TA / US share markets SPX and NDX
Using the Dow Industrials as a proxy we see that the primary bull market trend (i.e., the post 2016 leg) is in
question now that the late last year smackdown took the average, and all the other major averages, below
their last highest primary lows - the ones made in the first quarter of 2018. In the DJIA that level was 23k.
While the longer term 10-year bull market sequence is still in play above the 15.4k (2015-16 low), the break
below last year’s (February) low ended the post-2016 bull leg, which as I mentioned above, was kickstarted by
a pre-Trump liquidity pump in the last half of 2016. It is notable that the long term trend line on the log graph
above approximates the 200-week moving average (i.e., blue line = red line). That probably increases the
significance of the December low at 21.7k as that low seemed to have found support near this area.
As a result, I would suggest that overall bull market support lies between there and the 2015 low, i.e., between
15.3k and 21.7k. At the moment the only thing I can say with confidence, chart wise, is that the three-year
primary leg has ended, and the primary trend is now neutral. Confirmation that we have had a bonafide trend
reversal would at a minimum require a lower low below 21.7k, taking us below the blue line to potentially
confirm a new bearish trend (unlike the situation in 2016 where lower lows never followed).
I’m not sure if we’ll fall all the way to 15k. My bear market outlook is for a 2-3 year downturn that maxes out
at that level, maybe down to 12k at most. I can’t be much more bearish than that because I am looking for a
hyperinflationary response from the Fed on the way down. It could be noted that in the case of the S&P 500
we have touched the 200-week moving average the same as in 2011 and 2016, and that strictly looking at TA,
there’s no reason why the correction couldn’t be over now. However, in our confirmation above, a lower low
in the S&P 500 index (below) would end up piercing the 200-week moving average.
Recommendations:
Ed's March 2019 New Option Strategies
>> Buy to open June 21 (2019) SPY 120 Put at 1-2 cents
>> Buy to open June 21 (2019) QQQ 160 Put at $1.10 or better
>> Buy to open June 21 (2019) FXY 90 Call at $0.25 or better
>> Buy to open June 21 (2019) JNJ 120 Put at $1.00 or better
>> Buy to open June 21 (2019) NKE 65 Put at $0.20 or better
>> Buy to open June 21 (2019) WMT 80 Put at $0.25 or better
Ed tried to time these strategies for as close as possible to when I think the next downturn will begin for US
share markets AND for the US dollar.
In December when we covered most of our last shorts I predicted the stock market would bounce on the collapse in oil prices and sentiment shifts. I was waiting for mid-March as that was the time around which we’d expect the blackout period for share buybacks to start in the tech and
banking sectors where they have been most dominant. I would like to wait out the trade deal and Brexit but
the Fed gave us a good pop in the market, and this is a rally I’m all too happy to sell into.
Our short portfolio still holds swing trading short positions in the shares of the Proshares Ultrashort
QQQ ETF (QID), Microsoft (MSFT), Tesla (TSLA), and GOOG - the latter three were entered in
September - but the options strategies have all been liquidated, mostly at a profit, except for Microsoft puts.
The SPY put is a hail mary far out of the money option strategy that has huge potential upside if there is a
crash or spike in downside volatility all of a sudden, like a black swan type event. I haven’t put out one of
these for a long time but someone reminded me of it, and it seems like a good time for a bet like that.
But keep in mind it is a very high-risk long shot bet, chances are you will lose 100% of that capital.
The $160 puts on the QQQ are more reasonable as they only require a 10-15% decline in the NASDAQ 100 by
June 21st in order to make money for us. We might only make 10 times our money instead of 100, but the
chances are better as there are more possible scenarios that can produce a positive return.
I like shorting JNJ, NKE, and WMT here for a myriad of reasons, but essentially they have had terrible
records of earnings growth over recent years, especially relative to their share multiples, they are very
expensive Dow components, and their charts look weak. In Johnson & Johnson’s (JNJ) case there are issues
related to asbestos in some of their products that aren’t going away. We are adding Walmart as a short
against the US consumer. And Nike seems like it is way overpriced and the market has priced in a trade deal
with China. But I picked these from the Dow Industrials’ ecosphere as part of our macro bet.
