The markets have been erratic over the past week and it’s no surprise given the news flow.  I’ve had my head on a constant swivel this past week, playing defense and attempting to not get blindsided.  Presidents Day has provided me with an extra day to take a deep breadth, soak in all the relevant information and update the forecast.

Working off of my last forecast (click here) I will provide an update and then briefly discuss the risks and rewards playing out in our financial markets.

As you know, I am currently keying off of the Russell 2000 Index and still believe we will hit the 2007 highs of around $850 by this summer (at the latest).  Last week we briefly broke through support at around $960 before reversing rather quickly.  Refer to the chart below:

Now that there’s numerous market participants caught short (including myself), there is increased risk of the market bouncing higher before reversing and continuing the primary downtrend.  I will cover my short exposure above $984 and let my long hedges run while the market bounces.  I expect equities to reverse near $1024 on the Russell (and possibly even as high as $1077 – but I give that less probability).  Refer to ‘L1’ and ‘L2’ in the chart above.

The long term chart is below:

Once it’s clear that one of the above scenarios is playing out, I will jump all over the short ideas I’ve discussed already – and I’ve added a few new names below.  When the time is right I will discuss which ones I’m focusing on in a follow-up post:

1. NFLX
2. TSLA
3. EA
4. BAC
5. MON

Regarding the rest of the financial landscape, I think it’s important to understand what the central banks are trying to accomplish.  Neil Howe possibly put it best and I’ll paraphrase:

Central banks are trying to pry the extra cash out of peoples pockets with negative interest rates.

They’re trying to get you to spend your money!  They desperately need inflation.  Removing cash currency under the guise of illegal activity is simply another maneuver to gain control over the economic levers.  If we can’t horde cash, then the negative interest rate policy (NIRP) will have more of an effect.  I’m sure the iBankCoin readership realizes this.

I’m trying to figure out how to 1) safeguard myself from this development and 2) position myself to prosper from it.  Gold seems obvious at this juncture, but I don’t feel comfortable chasing it.

I’m leaning toward simply shorting the Japanese Yen and/or the Nikkei.  I think there’s a chance the USD/JPY currency cross and the Nikkei correlation breaks down – is it possible for them both to go down?  Last week’s carry trade unwind has me sitting on the sidelines.  I also think shorting the Euro (EUR/USD) could be a compelling idea, now that it’s had a pullback.  However, I don’t have a lot of conviction yet.

The question remains: is what we are seeing in Japan (and Europe) going to be what plays out here in the US if/when the economy rolls over??

I’d love to hear what you think and I encourage you to post a comment below.

And follow me on Twitter @dyer440

The hardest part of the trading game is sticking to a strategy.  Short term-ism is pervasive is our culture and more so in finance.  Therefore, I’ve provided a quick reminder of what is working below:

First and most importantly, Netflix – the chart below has my original forecast along with the various maneuvering I’ve done:

NFLX target = anywhere in the $60’s.  Refer to the previous posts here and here.

Next up is the Visa vs. American Express pair.  Refer to the original post here.

This pair has worked out well and we haven’t been stopped out of either leg of it, which I hope continues.  Either way however, this is a great trade setup in order to pivot with the market either up or down.  I really like the short on AXP here:

Regarding commodities – which I have beaten to death – literally (shorting) and figuratively, I believe value investors are putting money to work in these sectors to begin 2016 (especially oil & gas).  This should have the effect of holding them up relative to the underlying commodities. I therefore favor shorting the commodities over the equities right now.

However, keep in mind the currency trigger levels I pointed out here.  If/when those break it’ll be time to get long commodities again – as inflation perhaps finally wakes from it’s slumber.

Currencies are volatile these days (huge understatement).  I’m beginning to believe that Crude Oil is the dog wagging the proverbial US Dollar tail – and not the other way around.  The FX flows due to the crude trade are simply massive.  For example, since Q3 2014 the Saudi Arabian Monetary Agency’s reserves in foreign securities have declined by $71 billion! Reference

These could be are the capital flows causing the US Dollar to rally.

Good luck out there.  I’ll have another trade setup later this week, but for now “Stick to the Plan”.

Only a few times per year do you get a shot at making F-U Money.  I think we have such a setup for 2016 here, and I’ve written about it before (which didn’t pan out), but the upside is such that it could pay to take another look.

IF we have a moment where the market wake’s up to reality I think Netflix (NFLX) could see a 50% pullback.

Doing some research I came across this David Einhorn gem:

NFLX changed its story and pushed its promises into the distant future, with grand hopes for the decade starting in 2020. It transitioned from being a company judged by how much it earns into a company judged by how much it spends. Whether the spending proves successful won’t be known during the investment horizon of most NFLX shareholders.

Here’s the link to Greenlight Capitals Q2 Letter.

Einhorn hasn’t done that well in 2015, but I largely agree with him in regards to NFLX and the market in general, specifically this quote:

In today’s market, the best performing stocks are companies with exciting stories where accountability is in the distant future.

You can easily add Tesla Motors (TSLA) to the list of companies with exciting stories, blowing through tons of money, and lacking any accountability.

However, if you’d like your shot a F-U Money it doesn’t come without risk.  That’s how finance works; it’s not the person with the largest work ethic, or the best of intentions, it’s the person willing to risk hard earned capital using insane leverage in a low probability scenario.  Even if you get the setup and price direction correct, you won’t make F-U Money unless you have the patience to hold onto the trade, even when you’re up 500% – you’ve got to go for the jugular in order to make F-U Money.  It’ll take some brass balls to pull it off…

So Here’s the Trade:

Go SHORT NFLX using way out-of-the-money (OTM) Put Options on a break down through the $110 level, refer to the chart below:

I’m currently in this trade; I’ve recently rolled some Dec. 31 121 puts to Jan. 15 115.71’s.  On a break through the horizontal resistance at today’s low $115.7, and the trend line resistance rising up towards that level, I will be fully locked and loaded with OTM puts. Price target is anywhere in the $60’s.

I’ll probably start with February puts using the 70 strike, with the goal of around 2,000% profits.

This sort of thing isn’t for everybody.  I will follow-up with the setup for TSLA once the price action becomes clearer.

I’m a minerals specialist by profession, so I typically stick to natural resources investments and ideas since that’s my expertise.  However, I think there’s good risk to reward being offered in some of these high flying momentum names.  Netflix (NFLX) is a prime example.  I could write a lengthy article on the fundamentals of NFLX, but I’ll sum it up very simply by saying the following:

NFLX IS EXTREMELY OVERVALUED

I know what you’re thinking, the term “overvalued” is subjective, but look at any metric you like and it’s overvalued compared to it’s peers.  What about Growth?  Well, they sure are growing users, but they aren’t growing cash nor revenue.  In fact, cash from operations has turned extremely negative and it’s my belief that the downside risk is not being priced-in the stock.

So here’s the thesis:

IF equities experience a significant pullback, NFLX will lose approximately 50% of it’s all-time high value.

If equities have hit multi-year highs (which I think they have) and if equities are due for a significant pullback of say around 20% or more (which I think they are), then I think shorting NFLX is the best trade around.  There’s a lot of IF‘s in that statement, but it’s also a really good risk/reward setup.

Here’s the Trade:

NFLX had an all-time of $129 (and change) on 8/5/15, that puts my 50% downside target around $65.  At the time of this writing NFLX is around $117.  I’m giving myself a stoploss level at around $119 (not much room I know, but NFLX was at $114 when I started writing this article earlier today- and entered a portion of the trade!).

I’m giving the downside target ($65) until March to play itself out.  Since I’m going to use options I have established target levels at various option expiration dates as follows:

• December 18; Target = $100
• January 15, Target = $85
• March 18, Target = $65

Since it’s moving up so rapidly today, I’m going to enter a very small starter position, and spread the entry as follows:

• Dec 18 expiration, ATM (at the money) puts (strike of 115 when I entered it)
• Dec 18 expiration, strike = 100 puts
• Jan 15 expiration, strike = 85 puts
• Mar 18 expiration, strike = 60 puts

Here’s the trade plan:

• If NFLX trades below $108, I will double my position in each tranche (except the Dec 115’s).
• If NFLX trades below $100, I will roll the Dec 115’s to Jan 15, 100’s (ATM).
• If NFLX trades below $94, I will roll everything that is in the money to ATM January or March expiration (depending on the date)

If NFLX trades above $119, I will cover my small position for a loss and wait for it to reverse (market to exhaust).

Refer to the chart below.  Note the rising trendline that I believe will break, my stoploss areas in red, my “add-to” levels in yellow, and the target boxes at each upcoming option expiration.  The red arrow is my entry today.