Coming Out Ahead In A Frothy Market

September 27, 2019

All three major indexes have been stuck like a tire in mud this week, but there’s been a lot going on under the hood.

The Federal Reserve Bank of New York injected an additional $110.1 billion into the repo market after injecting $53 billion last week as overnight rates spiked.

What that means is there’s a shortage of cash and to stem the natural rise in rates, the Fed turned on the printing presses to nip that in the bud.

But when you plug a hole here, there’s going to be another hole somewhere else.

Another red flag has been the implosion of the unicorns.

As a former financial professional and part of the syndicate of a dozen of IPO offerings, I can’t remember a time in the last 15 years I’ve seen two large offerings tabled as we saw with WeWork and Endeavor.

If things were as great as the headlines say in the economy, with the S&P 500 just off fresh all-time highs, then fund managers, institutions and endowments would have a greater appetite.

It’s not the small investors like you and I that are deciding to throw this back — it’s the big dogs.

Their job is to deploy money into the market because that’s how they get paid…

And when they aren’t deploying capital, that’s a big cause for concern.

If the Fed’s actions recently are the telling sign, then my theory is that cash is tight.

We’ve seen things yo-yo up and down in the market because of the lack of liquidity and algorithmic trading systems flip-flopping.

The fear gauge known as the CBOE Market Volatility Index (VIX) for the S&P 500 has quietly crept higher and now is over our key level of 15, trading at 16.60 – which means we could see a quick move lower.

At this same time last year in Hot Money Trader, I called for a large sell-off that helped readers sidestep that drop and still make money on the downturn.

So in market talk, “frothy” is just another way of saying stock prices are unsustainably bubbly.

Market winds can shift quickly…

However, when we follow our system trading options and manage our risk before entry, we can weather any storm. That is our game plan — we’ll stick to it.

Let’s talk about our newest position.

Portfolio Update

On Tuesday, we bought to open Ally Financial Inc (NYSE: ALLY) October 18, 2019, $33 puts up to $0.65 per contract.

Right now, we’re holding:

  • Ally Financial Inc (NYSE: ALLY) October 18, 2019, $33 puts.
  • Toll Brothers Inc (NYSE: TOL) October 18, 2019, $41 calls.
  • Goodyear Tire & Rubber Co (NASDAQ: GT) November 1, 2019, $15 calls.
  • Barrick Gold Corp (NYSE: GOLD) October 18, 2019, $22 calls.

As always, keep sending your questions and feedback to [email protected]

My team and I will have a new trade for you on Tuesday.

Joshua M. Belanger
Joshua Belanger is founder of CounterVest and the editor of Hot Money Trader. He has been providing ordinary investors blockbuster returns since 2008. In 2018, the average return of Hot Money Trader beat the markets by over 15%