The Mad Hedge Fund Trader“Getting Indigestion”
With John ThomasSan Francisco
January 22, 2014www.madhedgefundtrader.com
Trade Alert PerformanceMaintaining Momentum, but Cutting Back Risk
*2013 Final +67.45%, compared to 26%for the Dow, beating it by 41.45%
*January MTD +5.78%, versus -1% for Dow
*First 162 weeks of Trading +128.3%
*Versus +47% for the Dow AverageAn 83% outperformance of the index9 out of 9 closed trades profitable in 2014
100% Success Rate in 2014
Portfolio Review-Reassessing riskwaiting for next capitulation day in a modest correction
Expiration P&L+6.74% YTD
Chart Title
12
current capital at risk
Risk On
(SFTBY) shares long 20.00%
Risk Off
(T) 2/$35-$37 put spread -10.00%
total net position 10.00%
2014 Performance +5.78%Since 2013 +73.23
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37 Months Since Inception+128.3%, Averaged annualized +41.26%
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Strategy Outlook-Buy the Dips, Risk On Lives
*Bull market in risk assets continues well into 2014, but are now vastly over extended, take short term profits
*Time to reassess, reduce risk
*Bonds testing bottom of new range at 2.80%
*Yen oversold, needs to consolidate a big move down
*Don’t catch the falling knife in gold,the world wants paper assets, bottom isn’t in yet
*Emerging markets still unloved, but may bottom soon, will be a rotation play
*Commodities looking very cheap, must do well this year
The Global Economy-Ramping Up
*Global synchronized recovery still the play for 2014, the US, Europe, China, and Japan all grow together for the first time since 2007
*World Bank ups forecast for global growth from 2.4% to 3.2%, with developed countries taking the lead for first time in 7 years
*December nonfarm payroll on only 74,000 is an anomaly caused by weather, short calendar, expect upward revisions next month, 6.6% unemployment rate is the real number
*Watch out for an Iran peace dividend
*China reports Q4 GDP of 7.7%,better than expected
Weekly Jobless Claims-2,000 drop to 339,000
December Nonfarm PayrollThe big anomaly, weather driven
Bonds-Another Poor Year Ahead
*Bear Market continues
Taper II scheduled for next week, another $10 billion cut in Fed bond buying to $60 billion a month
*Most analysts targeting 3.5% yield on ten year Treasury for 2014, up from 2.95%, could spike to 4%
*No Fed move on interest rates for a year
*Another taper will come in the firsthalf, but is already priced in
*Sell every rally
Ten Year Treasuries (TLT) took profits in the 1/$104-$107
don’t sell into a pit
10 Year Treasury Yield ($TNX)-Yield 2.83%
Junk Bonds (HYG) 6.17% Yield
2X Short Treasuries (TBT)-Entering buy territory
Investment Grade Corporate Bonds (LQD)3.84% Yield
Emerging Market Debt (ELD) 4.18% Yield
Municipal Bonds (MUB)-2.93% yield,Mix of AAA, AA, and A rated bonds
MLP’s (LINE) 9.60% Yield
Stocks – Indigestion Time
*Still digesting the enormous gains of 2013
*Could flat line longer before the next rally
*Is a temporary move, bull market resumeswhen year end effects end
*Wait for a capitulation day to rebuildpositions
*Money moving from crap to quality
S&P 500 (SPX)-Begging for a Correctiontook profits on the 1/$173-$176 call spread
Dow Average-Down on the Year
NASDAQ (QQQ)-New 13 year Highs
Europe, Asia, Far East (EFA)
(VIX)-Dead as a Doorknob
Russell 2000 (IWM)
Apple (AAPL)-Takes a Hit on tax selling after 48% gain in 6 monthstook profits on the 1/$490-$520 call spread
earnings on January 27
Technology Sector SPDR (XLK), (ROM)took profits on the 1/$33-$35 call spread
Cyclicals Sector SPDR (XLY), (UCC)
Industrials Sector SPDR (XLI)
Health Care Sector SPDR (XLV), (RXL)
Financial Select SPDR (XLF)took profits on the 1/$19-$21 call spread
Financial Select SPDR (XLE)took profits on the 1/$83-$86 call spread, but came out too soon
Softbank (SFTBY) – losing momentum
Gilead Sciences (GILD)took profits on the 1/$67.50-$70 call spread
Shanghai-Double Bottom setting up?
(DXJ)-Upside breakout on more aggressive monetary easing,assets up from $300 million to $12 billion in 14 months
Emerging Markets (EEM)Trapped by the commodity complex, and rising rates
Dollar-Yen is the Big Story*Successful breakdown targets ¥125 in the cash, $75 in the (FXY), will be the big foreign currency trade of 2014, again.
*But needs to consolidate first
*Eurozone inflation falls to 0.7% vs 2% target, Q2 & Q3 GDP 0.3% and 0.1%, so more room for interest rates cuts and a falling Euro
*Ausie Central Bank Governor still talking it down, December 22,600 jobless figure kills
*Euro downtrend resumes, sell rallies
Long Dollar Basket (UUP)-Ready for Takeoff?
Rising Dollar is Great for US Stocksstrong greenback sucks in huge foreign inflows
Strong Dollar is Terrible for Commoditiesas investors flee dollar alternatives and deflation
Japanese Yen (FXY)-Consolidation of Major breakdown Next
long the 1/$95-$98 put spread
Short Japanese Yen ETF (YCS)-
Euro (FXE)-Double Top in Place
Euro (FXE)- Rising Unemployment and falling inflation is bad for the Euro, leaves room for more interest rate cuts
Australian Dollar (FXA)-Talking down the Aussie again
Emerging Market Currencies (CEW)
Crude-In balance, stuck in range, no trade
*Harsh east coast winter is supporting oil and natural gas
*So is a global economic recovery
*Geneva Iran negations overhanging the market, but is a multi year affair
*Ever present new supplies ofnatural gas
United States Oil Fund (USO)
Natural Gas (UNG)-Another Cold weather spike
Copper-Dragged up by Improving Global Recovery
Freeport McMoRan (FCX)-2013 Losers punished one last time
Precious Metals-Signs of a Pulse
*Long term investors picking up gold for a one year play
*Physical buyers still there
*Emerging market central banks buying every dip
*Gold miners are outperforming on upside by 2:1
*Sell the current rally,bottom is not in yet
Gold-(GLD)
Barrack Gold (ABX)-
Market Vectors Gold Miners ETF- (GDX)
Silver (SLV)-
Agriculture-A Little Government Assistance
* Positive Dept of Agriculture report provides a one day respite only
*New of global surpluses is everywhere
*Chinese buying can’t offset supplies
*Failure to rally suggests new lows
*Distress selling by farmers to meet cash flow continues
*US Midwestern draught is over, moved to California, water rationing is on
(CORN)-
(CORN)-
(CORN)-
DB Commodities Index ETF (DBC)-buying for a later play
Real Estate-Slowing Down
*Existing home supply is increasing, while buyers are disappearing
*Rising rates scaring off buyers, with 30 year fixed mortgages at 4.25%
*Homebuilders prefer profitability overmarket share, creating new home shortages
*Nothing to do here
Home Equity versus Home Mortgagesanother reason to own the banks
September S&P/Case–Shiller Home Price Index
(ITB)-US Home Construction Dow Sub indexNot the Sector to Own in Rising Interest Rates
Trade Sheet-No Change“RISK ON” Good Through Q1 2014
*Stocks- buy the dips, but cut back size, running to a new highs*Bonds- sell rallies, trade the 2.80%-3.5% range*Commodities-start scaling in on dips*Currencies- sell yen on any rallies, buy (CYB)*Precious Metals –wait for the final flush *Volatility-stand aside, will bounce along bottom*The Ags –stay away, no trade*Real estate- no trade
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