If you are long stocks, you have to be worried by my Market Timing Indicator.
For it is starting to move decisively into “SELL” territory.
After being stuck for weeks around the neutral “50” level, my proprietary algorithm is finally telling us to “Sell in May and GoAway” (if algorithms could talk).
How much damage are we in for?
Will it be another 3% correction? Will we stretch to 5%?
Or will we continue with the dreaded flat line of death, a trader’s worst nightmare, where the Volatility Index (VIX) permanently stays around the $10 level.
Warning: Markets always do what they have to do to screw the most people, and that would be it.
If you are wondering what the problem is, look no further than the cover of the New Yorker magazine which I have been reading for 50 years.
It is hilarious.
It shows former FBI Director James Comey being dragged off a United Airlines flight by Attorney General Jeff Sessions, overseen by a domineering President Donald Trump.
And that tells the whole story.
For we traders and investors are being dragged off the plane as well, kicking and screaming all the way.
The harsh reality is that the noise from Washington is becoming so cacophonous and disoriented that it is starting to weigh heavily on the market.
If only fundamentals were at play now, strong corporate earnings would be driving stocks to new highs every day.
But they are not alone.
For the first time in my life, people are questioning the rule of law in the United States.
Journalists are asking Vladimir Putin if HE is the one who ordered the Comey firing.
With each comment and tweet the president is digging himself deeper and deeper into an inescapable hole.
He just doesn’t know when to shut up.
He comes across as a person desperately trying to talk himself out of something serious.
Those who remember Watergate are seeing a perfect replay.
Back in 1972, FBI Director, J. Edgar Hoover, unexpectedly died.
Instead of moving up the number two, a lifetime career man, President Richard Nixon appointed a hatchet man who’s sole qualification was loyalty to Nixon.
Number two, Deputy Director Mark Felt, became so angry that he unleashed a Niagara Falls of leaks to the Washington Post that ended in Nixon’s resignation.
We learned yesterday day that Trump demanded a loyalty oath from Comey as a condition for job security which he refused to provide.
Comey instead ramped up the Russia investigation.
What’s next in our present drama?
Look for Trump to fire Federal Reserve Chairwoman Janet Yellen next out of the blue, probably via Fox News. The Dow should plunge 500 points on that horrific day.
It’s all about the exercise of personal power and loyalty, not competence, duty, professionalism, or patriotism.
Look for things to get a lot worse.
The market seasonals are looking awful. We have just entered the six months of the year with the lowest stock market returns.
The earnings season is now over, with only a few tag ends to report.
It sounds to me like a really GREAT time to go to Australia.
It actually was a pretty good week for subscribers to the Mad Hedge Fund Trader Alert Service.
A tidal wave of hedge fund stop losses crushed the VIX and quickly stopped us out of our long iPath S&P 500 VIX Short- Term Futures ETN (VXX) position as well for a small loss.
I then rolled down the strikes the next day for an immediate profit.
I took profits on my SPY short.
I also took profits on both longs AND shorts in the Treasury bond market (TLT).
This all leaves me up +23% so far in 2017, and a few basis points short of a new all time high.
Life is good!
It is going to be a dreadfully slow week on the data front.
On Monday, May 15th, at 8:30 AM EST, the first report of the week is the Empire State Manufacturing Survey, a survey of 175 business executives in New York State.
On Tuesday, May 16th at 8:30 AM EST, we receive the Housing Starts for April which should be very healthy.
On Wednesday, May 17th, at 10:30 AM EST, the weekly EIA Petroleum Status Report is out, probably with dreadful news.
On Thursday, May 18th, at 8:30 AM EST, we learn the Weekly Jobless Claims. Last week’s number was essentially unchanged close to a 43 year low.
At the same time we also get the May Philadelphia Fed Business Outlook Survey.
On Friday, May 19th, wrapping up the week at 1:00 PM, is the Baker Hughes Rig Count, which has been up for most of the last year, boding ill for oil prices. Last week saw a doubling of year earlier rig numbers, and 17 straight weeks of rises.
As for me, I’m sending my resume off to Washington. I hear there have been some new openings at the FBI.
Good luck and good trading!
J. Edgar Hoover
The Original “Deep Throat”
Up 23% in 2017, Life is Good!
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ABOUT THE AUTHOR
The Diary of a Mad Hedge Fund Trader is written by John Thomas, one of the founding fathers of the modern hedge fund industry.
Seeing the incredible inefficiencies and severe mis-pricing offered by the popping of multiple bubbles during the Great Crash of 2008, and missing the adrenaline of the marketplace, he returned to active hedge fund management. With The Diary of a Mad Hedge Fund Trader, his goal is to broaden public understanding of the techniques and strategies employed by the most successful hedge funds so that they may more profitably manage their own money.
John graduated from the University of California at Los Angeles (UCLA) with a degree in biochemistry and a minor in mathematics in 1974. He moved to Tokyo, Japan to join a Japanese securities house as a research analyst, becoming fluent in Japanese. In 1976 he was appointed the Tokyo correspondent for The Economist magazine and the Financial Times. For the next seven years he published thousands of articles about the economies, companies, and leaders of Asia. He was one of the first American correspondents to cover China during the Cultural Revolution.