225% on Puts and Counting. This Is Only the Beginning

I made a put recommendation in our Weekly Bear letter on September 25, which suggested that you buy puts on the SPY, expiring in about a month to take advantage of the downside that’s likely to follow.

So far, that has worked nicely.

If you had bought the SPY 290 puts, expiring on November 2, at the close on Friday October 5, you would have paid $4.15. This morning they were trading at 13.49 with 3 weeks to go to expiration.

Yesterday, the market broke below key technical levels.

It’s bad news for bulls, but good news for bears.

Now it’s time for me to give you a deeper look at the recommendation I made at the end of September and reveal what we can expect to see from here.

Critical: No one is talking about this dirty, rotten scandal (but we’re blowing the lid off)

This Chart from September 27 Shows Us Exactly How Support Has Broken

I want to reprise a few lines of our Weekly Bear letter of 9/25/18:

    We’ve had enough warning. The market has been generous to those who hung on to their stocks despite the warnings. Those who stayed in have been rewarded again and again. Alarms have been sounding and the market has kept rising. That’s how manias behave.

    Now, the alarm has been sounded again. The late day selloff in stocks on the 26th was a recognition of that by some traders. It brought the market to this rally’s trendline from the June low.

    Closing below that line and below 2900 would be a sign that this would be a good time to buy a few at the money puts on the SPY, expiring in about a month to take advantage of the downside that’s likely to follow…

    And if you’re not already mostly out of stocks, let Powell’s words at the meeting serve as a reminder that the time is growing short to do so. If you choose not to sell, then at least use puts to cushion the portfolio losses that are sure to come.

Last week the S&P 500 broke both that trendline and the 2900 level.

And then yesterday, the S&P 500 plunged beneath the 2800 level.

That’s a start in the direction we have been expecting. But it’s only a start. I think that there’s still tremendous downside ahead, even though the market is trying to claw back some of its losses today.

Wednesday’s market break took back 3 months of market gains in one fell swoop. As the old-timers in the customer galleries where I hung out as a kid used to say, “The market goes up an escalator, and down an elevator.” I would add, “High speed elevator!”

The S&P ended the day at its lowest level since July 11. It was also back below where it was between January 18 and February 2, just before the big break at the beginning of the year.

Anyone who bought an index fund or ETF since July 11 would have a loss. Those losses will grow from here. Those of us who got out of the market before that are resting comfortably with lots of cash, waiting to pounce on the next buying opportunity.

Or perhaps we’re just happy to be getting interest income again, without having to worry about what the stock market will do next. We have every reason to believe that that income stream will continue to increase for the foreseeable future.

Unless of course, this market action is the beginning of Janet Yellen’s “material adverse event”-a real crash-that is the requirement for a return to Fed QE.

I suspect that Sherriff Powell is determined to grin and bear it for quite a while before responding that way. But even if this is the “material adverse event,” you do not want to be sitting through it while holding a big portfolio of stocks. I think there’s going to be immense damage, and that it will take many years to recover.

No, cash is the place to be.

Important: This famed billionaire is “certain” another 2008-style crash is coming

The Market Looks Low, but the Technical View Reveals Even More Pain Awaits

Here’s how the market now looks on a weekly bar chart that I feature in my Wall Street Examiner updates.

At 2785 the market was right on a trendline from the February 2016 market low. It just broke as I write! If it stays below this level, it would be huge.

The last high of this cycle evolved over the period of November 2014 to August 2015. We’re due for another cycle high. The fact that we are 32 months from the last low is another indication that the down phase of the cycle is due.

A second trendline connecting multiple lows from March 2016 lies just below at approximately 2735 this week. If that gives way, the bear has broken down the door and is eating lunch from Wall Street’s refrigerator.

Cycle oscillators are also screaming “Top!” The long term trend indicator isn’t on a sell signal yet, but it is in a massive negative divergence. The 2016-18 Bull Run has been much weaker than the prior leg of this long term bull market. That’s a bad omen.

The 3-4 year cycle oscillator and momentum indicator are also in negative divergences, and both are on the cusp of falling out of bed. When they start to head down, the bear will roar.

10-12 month cycle indicators depict intermediate swings. A bear phase is due in that cycle too. Both indicators are on the verge of rolling over.

Ignore These Bearish Warnings at Your Own Risk

Remember, a bear market provides great profit opportunities, both long and short. I’ll be on the lookout for you and will alert you when the timing looks opportune.

We can profit from market moves by using just the interest from our cash for judicious put and call trades. We need not risk any of our principal.

In addition to my own occasional recommendations, you can follow my colleague Shah Gilani for recommendations along those lines.

You can also follow my weekly technical market analysis for specific targets on where the market is headed over the short to intermediate term, and the long term.


Lee Adler

5 Responses to “225% on Puts and Counting. This Is Only the Beginning”

  1. Looks like low for bear mkt rally is IN. Your puts should have peaked last two days and rally will be pretty big here and will eat much of profits….should have taken at least 3/4’s off the table at the 13 area….your long term work is fine…low in 2020, maybe 2021 or late 2019 too early to pin down depends on fed response rate etc.

  2. […] The timing of that can only be handled with technical analysis, which I address in the Wall Street Examiner Pro Trader Weekly Market Updates.  But when the timing looks good, I’ll give you an occasional heads-up here at Sure Money, as I did back on September 25. Had you bought that SPY put when the S&P 500 crossed under 2900, you would have a nice profit. […]

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