After two months of ups and downs, bad news, worries and political uncertainties, you will be forgiven to have thrown in the towel and sit on the sidelines for a while; is it a Bull or Bear market you keep asking yourself! Here we look at what we believe is going to happen and how we can position ourselves in the best possible way to make a longer term profit. We will look to monetize the uncertainty and to take advantage of the speculators.
1 – The Dow Theory
The Dow transport is showing healthy gains thus far, in the region of 7%.
How can I make money from this?
The Dow theory tells us that when transports are up, the market will follow. Currently we are in the Bear Market phase, you have a bit of time to take action before we grow into the Bull, use this time wisely!
2 – Oil
It has bottomed for a while, as the shorts have piled up to unbalance the markets and they will be looking for cover as soon as a whiff of good news will hit the markets.
Morgan Stanley said a potential Russian-Saudi agreement to freeze output at January levels could also drive prices up. President Vladimir Putin called a meeting with top managers of Russia’s leading oil producers on Tuesday.
A 10-day outage of a major pipeline from the Iraqi semi-autonomous region of Kurdistan to Turkey was also supporting prices in Europe. Turkey said over the weekend repairs on the 600,000 barrel-per-day link would take more time.
Morgan Stanley cautioned that a global production overhang estimated at 1 million to 2 million bpd was still massive and was accompanied with a “deceleration in demand growth”.
Trading data, however, suggested shifting sentiment. The amount of open positions in U.S. crude contracts betting on a further fall in prices has fallen more than 17 percent since mid-February to the lowest level in 2016.
At the same time, financial traders have raised sharply their bullish bets on oil after talk of a global production freeze, signs of falling U.S. shale crude output, as well as growing gasoline demand.
How can I make money from this?
The market weakness has been attributed to the slide in oil prices mainly as companies in the sector will probably suffer from weak balance sheet and induces domino effect bankruptcies. Speculators have been queuing up to short oil companies and this is the first sign of danger for them. In our opinion, March will signal a recovery in oil prices as the OPEC is fighting back and that will force a powerful short covering of the heavily battered sector. Here are a few strategies you can try to profit from the situation.
BUY a CALL (CL April) strike 32 for 200$ more or less
BULL PUT exp. 15 April 19,5/17,5. Actual price is 0,12 but we can put 0,2$ to take an advantage on the market.
Margin 300$ with a ROI about 30% in 2 months.
For those of you in disbelieve and still think that the oil price is going down, try
BUY a PUT (CL March or April) strike 30 for 250$ more or less. NB: WITH MARCH EXPIRE ATTENTION ON TIME DECAY
BEAR CALL on CL April 52/70 with a premium of 20/25$. Expire on 15 April
3 – YEN
The dollar yes pair has lost almost 10 figures since the Bank of Japan has introduced negative rates. The Yen may have surged since the Bank of Japan shifted to a negative interest rate policy in January, but the Japanese currency is set to weaken ahead, Goldman Sachs said.
While the markets interpreted the BOJ’s moves as a signal that the central bank was out of bullets, “We strongly disagree,” Goldman said in a note titled “The Yen: Why it’s wrong to be long,” dated Friday. “Fundamentally, we think this is about whether the BOJ is backing away from its 2 percent inflation target and we see no indication – whatsoever – that this is the case.”
The BOJ blindsided global financial markets on January 29 by adopting negative interest rates for the first time, amid pressure to revive growth in the world’s third-largest economy as it struggled to create inflation. The move aims to motivate banks to both lower lending rates and lend more by charging banks to hold their reserves with the central bank.
In the wake of the decision, the Yen surged. Before the decision, the dollar was fetching more than 120 Yen, compared with around 112.86 Yen on Monday.
While the move to negative rates should have been expected to weaken the Yen, it helped spark a resurgence of safe haven flows back into the Yen, even as global market volatility added to risk aversion. Additionally, investors have begun to recalibrate expectations that the U.S. Federal Reserve won’t hike interest rates as many times as anticipated this year, which helped to weaken the dollar.
Goldman doesn’t expect that will last and it’s sticking with a 12-month forecast for the dollar to fetch 130 Yen.
That’s partly because the bank sees signs the BOJ’s qualitative quantitative easing (QQE) program is working. That program aims to increase the monetary base by 80 trillion Yen ($710 billion) a year through the purchase of assets including Japan government bonds(JGBs) and exchange-traded funds (ETFs).
The JGB yield curve has flattened and stabilized since the QQE program started, Goldman noted.
“This means that portfolio rebalancing (out of JGBs into risk assets, including other currencies) is underway in Japan, which is a force for a weaker Yen even before additional BOJ easing (which we anticipate) is taken into account,” it said.
Goldman also sees signs that fund outflows from Japan are picking up, which should help to weaken the Yen. It cited a total balance of payment outflow of 9.5 trillion Yen in the fourth quarter of 2015, marking seven straight quarters of net outflows.
One source of that outflow: The Government Pension Investment Fund (GPIF), one of the world’s largest pension funds at more than $1 trillion in assets, has continued to seek overseas investments, Goldman noted. In the third quarter of 2015, GPIF invested 1.6 trillion Yen overseas, according to data from Goldman.
The GPIF has been pushed in recent years to diversify its holdings away from JGBs and into riskier assets, including a greater allocation into foreign stocks and bonds.
But Goldman noted the outflows from Japan have been broader based than just the GPIF’s overseas forays.
“Although the portfolio shift from the GPIF into foreign assets is large, it certainly does not account for the pick-up in outward investment from Japan that looks to have accelerated from 2014 onwards,” Goldman said.
“We think (this) underscores the genuine portfolio rebalancing that is taking place in reaction to the BOJ’s aggressive implementation of QQE,” it said.
That’s the “fundamental force” for the Yen to continue to weaken, Goldman said.
“This portfolio rebalancing will only become more powerful given the large flattening in the JGB yield curve that has taken place since the BOJ’s move into negative interest rates,” it said. “This is likely to accelerate the search for yield among Japan’s investors.”
With the 10-year JGB trading at a yield of negative 0.057 percent, Japan’s investors aren’t likely to find much income in their home country.
How can I make money from this?
The Yen will weak substantially as Japanese investors will take advantage to position themselves in foreign markets awaiting a definite intervention from the Bank of Japan. Many hedge funds have been caught by this trade and it has unbalanced the foreign exchange markets substantially. Once they are forced out, and we are almost there, plus an intervention that is almost as certain as debts and taxes themselves, the dollar Yen will skyrocket and will free huge amount of cash to be invested.
4 – SUPER-TUESDAY
Finally, we will know the candidates in the running for the White House. Super-Tuesday has often signaled a short-term bottom in the stock market.
The evidence suggests investors tend to panic about who the presidential nominee will be. But that panic and rebound only come in years when there is an obvious nominee that everybody had been expecting to win.
This year, the big primary day is Tuesday. About a dozen states will hold presidential primaries, assigning a fifth of all party delegates, likely offering some clarity on a presidential race that’s seen its fair share of red faces, upsets and collapses.
Super-Tuesday brings out the true herd mentality of the investor base — skittishness when uncertainty lies ahead, and overconfident jumping on the bandwagon when the coast is clear.
Take 1996 for example: the S&P 500 dropped 2.9 percent the week before Super-Tuesday. Then-favored candidate Bob Dole swept the contests, sealing his GOP nomination. Investors celebrated by pushing stocks up 2.3 percent the next week.
Or look at 2012. The S&P 500 dropped 2 percent in the five days leading up to Super-Tuesday. But Mitt Romney had a solid win, and you can guess what happened next: The markets rose almost 4 percent in the next week.
This concept of a drop and immediate rebound only works when there’s a clear-cut favorite. After the candidate seals the deal, shares can rise again after Super Tuesday. When there isn’t an obvious favorite, and no candidate locks up the nomination is when stocks keep dropping, like they did in 2008 after Hillary Clinton and Barack Obama split Super-Tuesday Down the middle.
Investors look to a future of uncertainty and party bickering as a danger point for stocks, opting to sit on the sidelines rather than buy.
That brings us to 2016. The Republicans aren’t anywhere close to securing a nominee. But Clinton may be able to lock up the Democratic nomination if she has a strong Super-Tuesday. As far as Wall Street is concerned, she might not seem like the friendliest candidate, given some of her recent campaign rhetoric.
But remember, the market’s short-term bias doesn’t care so much about who wins, just that somebody emerges as a front-runner. Clarity and direction is good. More debates and campaign commercials are bad. That’s what the market’s animal spirits want to see.
How can I make money from this?
Once Super-Tuesday is over, history tells us that the markets will move up, simply because the uncertainty is over. The “better the devil you know than the devil you do not know” motto always cheers the markets.
Finally….here is what we can do to position ourselves by taking advantage of the current news:
Sell a call 0.91 March 24
The key is to position ourselves gently over the next coming days, no point on firing all our bullets at once!
Remember our philosophy (the Alpha4All Team) is to trade steady and slow, not double or bust!
We hope you have enjoyed our first instalment, with everything that’s happening in the world, we’ve got plenty more ‘newsintoprofit’ to come, till next time!