Despite the strong move in the US dollar over the past while, the greenback remains in a long term downtrend. It is peculiar why so many traders focus on the short term. Why ignore what has been happening in the US dollar over the past few cycles? As the chart illustrates below, the recent damage was done to the greenback in 2017 when the dollar index lost more the 15 points. This caused the long term moving averages to cross over which usually means the long term direction of the greenback has changed.
Now Donald Trump has being doing everything he can to change the paradigm here. From trade tariffs, to tax cuts and lower repatriation capital costs, all of these have helped in bolstering the strength of the US dollar. There are many things out of his control however and one of them is inflation. Trump in fact recently made his opinion known about the Fed’s latest interest rate increase. He wants lower interest rates which would result in more money spent. The less the US government has to pay on interest on its debt, the more it can spend on defense, infrastructure, etc. Spending ( as we are seeing on main street) can bolster an economy and its currency in the short term. Therefore, more short term signals such as the 24 monthly average is now showing a bullish signal as we see below.
Now if we turn to a more near term chart, we can see that for the US Dollar to resume its bull market in earnest, it would need to take out its December 2016 highs of almost 104. On the contrary, if all we are getting here is a bear market rally in the greenback, expect the sub-89 lows that the US dollar printed at the start of this year to get penetrated. This is why the next month or so is critical not only to the greenback but also for commodities and particularly precious metal positions. Why? The late 2016 top and the bottom the US dollar printed earlier this year seem very much like multi-year pivot points. The question is whether the US dollar can make new highs or will be make new lows. The answer to this question has huge ramifications for precious metals positions.
We may get some further strength in the greenback simply from a momentum standpoint. It is though due a drop into a daily cycle low any day now due to its technicals being overbought. It will be interesting to see how it holds up during that downturn.
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Our stance has not changed. We remain heavily long stocks although we have been expecting a trip down into an intermediate bottom. This is why we took profits on some equity positions recently – including our TQQQ position. I still maintain we will be able to buy this NASDAQ leveraged ETF at a cheaper price than our sale price. Yes we are up 41 handles on the NASDAQ futures this morning but considering the amount of capital we have in equities at present in our portfolio, it was best to take some risk off the table as this rally was getting long in the tooth.
Although only a few days to go to expiration, we may take profits on our Sanderson Farms (NYSE:SAFM) $100 put option today. We sold it for $2.54 and now its worth close to $0.60 although it should open much lower today if the share price remains steady due to time-decay really being in our favor.
Spontaneously we will take out these type of trades. Make no mistake about it though, to succeed in our method of trading, one needs to take the long game. If SAFM for example was trading at $95 at expiration this Friday, we would be taking possession of the shares at $100 with our cost basis being $97.46. We have researched Sanderson Farms and like both its fundamentals and current valuation. However, we should be able to pick it up cheaper over the next few weeks if our expected correction takes place.
Concerning our precious metals positions, we will continue to stand pat. This intermediate bottom has been very difficult to time. Again yesterday, the bears got control of the sector which drove Gold well below $1,300 an ounce. Gold‘s long term sentiment readings are now on a par with the bear market bottom in December of 2015 which is unprecedented. We have made our play and will wait for sentiment to return to optimistic extremes and for the weekly slow stochastics to return to overbought conditions. Again we have no reason to believe that gold has entered a bear market. It has continued to make higher highs since the bear market bottom. We just need to hold on until it eventually does the same. We are at least now looking at a month to a 4 month trade until we see the next intermediate high.
Source : Sentimentrader.com
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This is not a time to long call options in precious metals. The right play is to be out or to be long ETF’s where one can withstand this prolonged bottoming process. The gold collapse has resulted in the yellow metal dropping to $1,207 an ounce. It has broken the July lows and the main reason is the strength of the greenback. We are now well into August and the complex is well overdue an intermediate cycle low. Sentiment is well in the buy zone and the long term technicals remain heavily oversold. We cant have long to go now.
The S&P500 gapped down today before making it to $2,837 by the close. Our opinion on equities remain clear. We believe they are going higher. Yes we still expect some sort of intermediate decline in the near term. We are definitely due one. However any meaningful correction will be once again bought. We monitor the fundamentals, technicals, COT reports and investor sentiment and nothing is telling us that a bear market is close. In fact, we could have multiple years here of a bull market before we see a cyclical bull market top.
My guess would be sooner or later when equities drop, we will see some buying in the precious metals complex. We still maintain the metals complex is where one should be putting more of their capital. The US dollar has had some run and is due a drop down into an intermediate or daily low. A weaker dollar will give gold the opportunity to rally. Remember, the FED will not be able to keep raising rates indefinitely if we were to get a steep move down in stocks. That would take the Fed’s interest rate policy firmly off the table which would alleviate the gold collapse one would think. This then would probably weaken the greenback and strengthen the euro. This too shall pass. The first part of August will tell us a lot.
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I have written extensively about this stock recently as the investor can now really avail of Cardinal Health leverage. Cardinal Health ($:CAH) is practically a dividend aristocrat having raised its pay-out for the best part of 22 years now. It has an enviable 10 year dividend growth record of 16% per year on average. The stock’s earnings multiple has now dropped to under 10 and the yield has spiked to almost 4%. The company has about 20% more interest bearing debt than equity and has earnings per share of $5.36 over the past four quarters.
These types of numbers definitely are in “value play” territory. I acknowledge that we may not see significant movement in the shares for a significant period of time. However Cardinal’s valuation and dividend warrants attention at present. Long term investors do not mind waiting for the turnaround. That really is the issue. To be a true value investor, one needs to have buckets of patience.
The firm’s Cordis segment was a prime reason for the very poor March quarter. This division may put a lag on growth over the short term. However, Cardinal has the tailwind of increased pharmaceutical spending which is the first bit of Cardinal Health leverage we can gain. Why ?
Well if we look at the chart above, we can see that the biotech complex continues to make higher highs. The Nasdaq and the semi-conductor industry have already broken out to new highs. I just don’t see the biotech sector not following suit. One just has to see the M&A activity in this area which has bounced back significantly thus far in 2018.
Now look at the long term Cardinal Health chart below. I can’t see the divergence lasting long term. Cardinal Health is a go between between the manufacturers and the retail pharmacies. If activity goes up, it stands to reason that eventually Cardinal will benefit. Presently Cardinal’s weekly slow stochastics are heavily oversold. We should get some upside traction here soon enough and it may happen on earnings.
The dividend is another tailwind that has been growing meaningfully over the past 10 years. From a free cash flow perspective, the pay-out ratio is only 22%. This means there is ample room for the dividend to grow over the long term. The best time to get compounding work in your favor is when the yield is at its highest. For example, over the past 10 years, an investment in CAH (assuming all dividends were reinvested) would have more or less doubled. Cardinal’s earnings multiple is well under 10. These are the times to be reinvesting heavily in order to reduce that cost basis aggressively. This is the second form of Cardinal Health leverage one can attain from a present investment in Cardinal Health.
Another form of leverage one could use in conjunction with Cardinal Health would be to sell options. For example, with CAH about to announce its quarterly earnings, its implied volatility is pretty high.
One can sell naked puts or covered calls when IV is high to bring in additional income as well as the dividend. Selling options places theta decay in your favor. Furthermore in periods of heightened volatility, one could maybe sell two or three contracts in a 30 to 45 day window if profits were taken early. Again, this is form a leverage as “Good to Cancelled” closing trades can be set-up to automatically to take profits out of the market for you. Selling options is another way one can attain Cardinal Health leverage
These are three distinct ways one ca attain leverage from an investment in Cardinal Health. Whether it be a capital gain headwind, dividends or the sale of options, one can have their money consistently working for them. Combining them is true Cardinal Health leverage.
We have not seen these levels of sentiment since the bear market gold bottom more than two and a half years ago. The gold bottom in fact may have occurred on the 19th of this month. It will be interesting to see if the lows get tested this week. Remember the longer the lows stay intact, the more likely that the intermediate bottom is in. Why? Well this intermediate cycle is long in the tooth as it is. We are well overdue an intermediate correction due to the last clear bottom taking place last December.
Aggressive traders could place stops below the lows last Thursday. Usually the thrust out of an intermediate bottom is very powerful. As mentioned, we have had multiple intermediate gold bottoms since December 2015 and none of them have retraced to sentiment levels this bearish. We have a daily swing in place. Honor stops though at all costs.
The Poor Mans Covered Call involves the buying of a LEAP call options and the frequent sale of short dated out of the money calls. Similar to a traditional covered call, the goal is income or cash flow. This also is a neutral to bullish strategy. Here though are some of the pitfalls of the Poor Mans Covered Call
Usually the spreads on long dated options can be really large. This is really noticeable in stocks with low liquidity. When the spread is too large, it just doesn’t make sense to try and take on the trade. The alternative is to move down closer to the share price. This though will reduce the delta which means the long call is not really a worthy stock substitution. Traditional covered all traders do not need to worry about these pitfalls.
When one buys theta, the trade is against the clock. Obviously one does not have to worry about the “clock” when the trade goes in the right direction. However, it is when things go pear shaped when one has to think about selling or rolling the long dated call option. All options eventually end up worthless no matter how many years to expiration they may be. Again traditional stock holders do not have to worry about the time element here.
When holding a long call for 2 years on end for example, one can’t collect dividend payments from the company. Dividend payments can reduce one’s cost basis if invested back into buying more shares. So one top of the time decay that eats into the option value every day, one also can’t collect dividends.
The only advantages which I can see from the Poor Mans Covered Call strategy are less capital requirements and the possibility of losing less if the share price falls off a cliff. The ends don’t justify the means here though. We recommend the traditional strategy. Low priced stocks which are undervalued, liquid and pay a dividend are the best stocks for traders to start using this strategy.
Many experienced traders will state that the article title is impossible to achieve. In fact, professional traders are only right just over half of the time but they still manage to make money. However for novice traders, getting one’s mindset down pat from the off is crucial in order to stop losing money in trading. Now of course, one is going to lose money. However desperately wanting not to can really help one’s progress especially in the early innings
Why do I say this ? Well when novice traders come into this game, one of the biggest things they have to learn is to control risk. If one though has been pre-wired or pre-trained to manage risk aggressively, then the odds are high that at least the trader in question wont lose his shirt in his first year or so of trading the markets. Anywhere near breaking even in the first year is an excellent start in my opinion. Its time to get intentional.
Look how Warren Buffet puts it when he talks about debt for example. Just say a trader has $100,000 of debt at a 5% interest rate and comes to the markets with some capital wanting to trade. If we are talking in real terms, the trader needs to make a 5% return on his money just to break even. Why? Because the trader could have used that trading money to pay down debt which would mean a guaranteed return on his capital. This example puts the whole idea of risk management into perspective. If you are going to trade, the number 1 rule has to be to protect the downside. To do this, we like to set up our trades with the following tailwinds. This gives us the maximum opportunity of success in order to stop losing money in trading.
So what is a stock which holds good fundamentals ? We like to look at the financials at least over the past decade. If we can see solid trends such as rising revenues, rising cash flows, rising margins and earnings, then this usually bodes well for the future. Many opportunities present themselves when a sound company for whatever reason announces one or two bad earnings reports.
Depending on the reasons, the market many times can take earnings misses and guidance cuts pretty badly which results in the stock tanking. Our portfolio may have plenty of positions which are under water at any given time. We do not panic. We know we have selected fundamentally sound companies at attractive valuations which grow their dividends. These characteristics all mitigate risk to the downside to some degree which is key.
Far too often we ignore the basics of trading and investing which is to buy low and sell high. By simply being as choosy as possible when selecting the investment, one immediately improves one’s probability of success on that given trade.
When the given stock has liquidity, it opens up the whole area of options. If one can get this strategy down pat, it will transform how you trade/invest if your goal is cash-flow. Selling puts and calls against long positions increases one’s probability of success for the following reason. When one sells a covered call, one is essentially getting paid for giving the call buyer the right to buy the stock off you at a determined strike price ( usually higher than the share price).
One can go a step further by buying back the call (for a profit) before it expires. This makes sense in a lot of covered call trades. For example if a call loses 60 to 70% of its value ( stock price decline) but still has plenty of time before it expires, there is no point in waiting until expiration to make full profit. Take it off for profit while one has it and then sell more calls once the share price recovers. This way, one can sell calls multiple times in the same expiration cycle which drastically increases one’s probability of success.
When a stock has liquidity, earnings plays for examples really come into play as a way of improving probability of success. By selling premium just before a company announces, one can pocket decent premium due to inflated volatility (fear) which all goes towards improving that initial cost basis. When there is no liquidity, trading options on the underlyings just doesn’t make sense. Why? Because when the spreads are too wide, the fills one gets can be disastrous which are obviously not conducive to profitable trading.
Its all about intentionality and doing everything with a purpose. The next time you pull the trigger on a long trade with sizable capital, remember Buffet’s example on debt. Any extra payments towards debt gives one a guaranteed return. Nothing is guaranteed in the trading world which is why one must be ultra-careful in both idea generation and risk management. Anything else is just fools play which will result in the market spitting you out in no time. Stop losing money in trading. Start getting ultra intentional.
Gold (NYSE:GLD) suffered its biggest loss today (15th of June) for more than a year. It looks like the recent dollar strength has finally caught up with the yellow metal. There was basically two options that Gold had I felt before the FOMC meeting announced yesterday. Basically, I thought we would either revisit and breach the lows we hit in May ( Just over $1280 an ounce) or we would rally on the news meaning that in all probability the intermediate low was in.
Today’s move would have caught a lot of gold bugs by surprise especially considering how silver finished yesterday. The move below $1,280 today in gold means we are still in an intermediate decline. Considering though the higher lows pattern of gold, I don’t see the $1,240 level being breached. Around this level, gold completed its last intermediate cycle low and as the chart illustrates above, the previous intermediate low in July of last year was a higher low compared to the previous intermediate low.
Suffice to say, there is no reason to believe the higher lows will not continue. Why? Well I maintain the higher high gold printed in April of this year is significant as it confirmed the bullish trend. Therefore gold bugs need to be patient this week coming and wait for a swing to take place before adding or scaling into a long position.
In hindsight though, we just didn’t get our V shape snap back rally out of those May lows. V shape rallies as we can see in the first chart are indicative of an intermediate cycle starting. The down-day today though is going to set the stage for a powerful snap-back rally – something that again was amiss on the 16th of May.
The updated long term sentiment reading in gold is indicating that we may still have some more downside next week. We use sentiment as a contrary indicator especially when it gets down to ultra pessimistic levels. This means we could have a trip to the $1,240 range and this is what gold bugs need to expect next week.
Source : Sentimentrader.com
Therefore although days like today (15th) can make a gold bug feel like throwing in the towel, we actually need big down-days in order to reset sentiment and get rid of the loose hands. If one is already long (large position), I would advise to turn off the machine and ignore the price over the next week or so. If one is long with a small position, one could use this intermediate decline as an opportunity to double down. Emotions can run havoc in intermediate declines. However, these 3 points should demonstrate that a buying opportunity may be right around the corner.
The wrong decision would be to bail from this market next week especially if you see other markets like the stock market rising aggressively. One needs to buy into weakness and sell into strength. I expect a weak bounce at the start f the week maybe followed by further losses. The key here is to wait for a swing. Let the market do what it needs to do to flush out the weak hands. Good luck.