The Mad Hedge Fund Trader
“Trading the Crash”
With John Thomas
from San Francisco, August 26, 2015
www.madhedgefundtrader.com
Trade Alert Performance
New All Time High!
*January +0.53% Final *July +6.42%
*February +7.73% Final *August +1.27% MTD
*March +3.00% Final
*April
+6.62% Final
*May
+5.15% Final
*June
+3.68% Final
*2015 Year to Date +34.40%
compared to -8.8% for the Dow Average
*Trailing 1 year return +40.1%, +187.21% since inception
*Average annualized return of 40.1%
Portfolio Review
Run a small book in crash conditions
a very wide short strangle
Mad Hedge Fund Trader
Trading Book
Asset Class Breakdown
Risk Adjusted Basis
Expiration P&L
36.40%
current capital at risk
Risk On
World is Getting Better
(SPY) 9/$171-$176 call spread
1
2
10.00%
3
4
5
Risk Off
World is Getting Worse
6
7
(SPY) 9/$204-$208 put spread
-20.00%
total net position
-10.00%
Paid Subscriber Trailing 12 Month Audited Return +35.55%
Ouch! Snake Bit by the Crash
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
Series1
15.0%
10.0%
5.0%
0.0%
8/22/14 9/22/14 10/22/14 11/22/14 12/22/14 1/22/15 2/22/15 3/22/15 4/22/15 5/22/15 6/22/15 7/22/15 8/22/15
-5.0%
-10.0%
8/8/15
6/8/15
4/8/15
2/8/15
12/8/14
10/8/14
8/8/14
6/8/14
4/8/14
2/8/14
12/8/13
10/8/13
8/8/13
6/8/13
4/8/13
2/8/13
12/8/12
10/8/12
8/8/12
6/8/12
4/8/12
2/8/12
12/8/11
10/8/11
8/8/11
6/8/11
4/8/11
2/8/11
12/8/10
57 Months Since Inception
Daily Audited Performance
Averaged annualized return +39.35%
250.00%
200.00%
150.00%
100.00%
Series1
50.00%
0.00%
10 Stocks to Buy at the Bottom
Lennar Homes (LEN) $53.45
Home Depot (HD) $116.16
Walt Disney (DIS) $98.84
General Motors (GM) $29.60
Tesla (TSLA) $230.77
Apple (AAPL) $105.76
Solar City (SCTY) $40.99
Gilead Sciences (GILD) $105.33
Wisdom Tree Japan Hedged Equity (DXJ) $52.01
Wisdom Tree Europe Hedged Equity (HEDJ) $56.95
How to Trade A Crash
*Shrink trading book to a single position so it’s easier to watch
*Shrink your size so its small enough for you to sleep at night…. Even during a crash
*Watch the (VIX) as a leading indicator
*Don’t be afraid to trade, now is when risk is the lowest, don’t give up and go into
hiding
*Expect breakdowns everywhere, trading platforms, PC’s, and the Internet to slow
down
*When you buy single names, focus on quality,
it is a rare chance to buy the best at a discount
*Don’t even think about calling your broker,
you’re on your own
*Maintain discipline, let the other people panic
*Now is when you define yourself as a trader,
anyone can trade a bull market
Strategy Outlook*China crash brings an American one, but there were no confirming moves in
other asset classes, Beijing cuts interest rates by ¼%, but doesn’t help
*The bottom may be in, but expect a retest
*Oil hits the $30 handle, we may see the $20 handle before it is over
*Bond market gets a flight to safety bid,
which vaporizes quickly
*Profit taking on King dollar returns
*Economy is too strong for crash to continue,
therefore, you buy stocks
*Gold finally gets a “flight to safety” bid
The Bill Davis View
Picks of the Week
Buys:
QIHOO 360 Techology (QIHU) $53.13 Target to $62.50
SolarCity Corp (SCTY) $43.75 Target to $50
Facebook (FB) $78.13 Target to $90
Keurig Green Mountain (GMCR) $50 Target to $75
Alexion Pharmaceuticals (ALXN) $156 Target to $181
Sells:
3M Co (MMM) $155 Target to $131
Wynn Resorts (WYNN) $87 Target to $81
Federal Express (FDX) $165 Target to $148
L-3 Communications (LLL) $114 Target to $106
Deckers Outdoor (DECK) $70 Target to $64
The Global Economy-Hot US, Cold Cruel World
*July retail sales up a hot +0.6%, July industrial production up a dynamic
+0.6%, auto production up a stunning 10.6%, housing is on fire,
July durable goods up a hot 0.2%
*US job creation is growing at twice the rate as the workforce, taking
employment to all time highs and unemployment to decade lows
*First read on Q2 GDP is a sub par 2.3%, but Q1 revised up by 0.6%, so we
really got 3% in pieces, Europe still a weak 0.3%, green shoots barely there
*Japan Q2 GDP drops 1.6%
*Is China downshifting from 7% to 5% growth?
August PMI drop from 47.8 to 47.1 causes a panic
*European green shoots need fertilizer with
0.3% Q2 growth
Weekly Jobless Claims – Another Run at the Lows
4,000 to 277,000, NEW 42 YEAR LOW!
headed for Full Unemployment at 5%-Global Recovery a Driver
Bonds-Flight to Safety
*China crash spills into the the US Treasury bond market, bringing price spike and
flushing me out of my short
*Crash eliminates any chance of a Fed rate rise in September, even though the
economic data say otherwise
*215,000 nonfarm payroll and 5.3% unemployment rate puts a cap on any bond
price rises, floor under yields
*The China crash has slowed things down, with IMF and World begging for a rate
hike delay, is basis for the recent 11 point rally
*Junk bonds get slaughtered, touching
October, 2014 low
*Good time to reach for yield in
energy MLP’s with oil bottom in,
check out (LINE)
Ten Year Treasuries (TLT) 2.08%
The down trend is in place! Sell Rallies!
Ten Year Treasury Yield ($TNX) 2.15%
Testing the 1.95% Support
Junk Bonds (HYG) 6.44% Yield
Big Hedge Funds lining up to short-Classic head and shoulders top
2X Short Treasuries (TBT)-Second Half Big Trade?
Buy at the Dip, $41 will hold
Investment Grade Corporate Bonds (LQD)
4.27% Yield
Emerging Market Debt (ELD) 5.50% YieldBig hedge funds lining up to sell-Identical chart to junk bonds
Municipal Bonds (MUB)-1.74% yield
Mix of AAA, AA, and A rated bonds-another Puerto Rico Crisis looming
Stocks-Flash Crash Again
*Monday morning opening flash crash may be the 2015 low, 18 months of stock
appreciation given up in 5 minutes, retests to come, worst August since 1998 LTCM
(Liar’s Poker)
*Watch the stocks that bounced back the fastest, they will lead in next rally, (HD),
(DIS), (AAPL), (GE), (SCTY), (NFLX)
*Crash was exaggerated by Friday option expiration and low August liquidity
*Stocks have gone from fairly valued to cheap in a week, multiple falls from 17.5 to
15, bringing in buyers in droves
*Upside breakout happens when we
start discounting 2016 earnings to be up 11%
*China is a train wreck, increasingly
volatility globally
Shanghai ($SSEC)-The Bad Boy
S&P 500-200 Day MA in Play at $203.50
Took Profits on 8/$214-$217 and 8/$211-$215 vertical bear put spreads
long the 9/$204-$208 vertical bear put spread
long the 9/$171-$176 vertical bull call spread
(SPX) 20 Year
Dow Average-Boring!, Down -8% on the year!
200-day MA break! Down on the Year!
NASDAQ (QQQ)-The new leadership
NASDAQ (QQQ)-20 Year
Solar City (SCTY)-Elon Musk engineers another short squeeze,
Buys $50 million of stock
Europe Hedged Equity (HEDJ)-Greek bounce
(VIX)-Four Year High!
(XIV)-Velocity Shares Daily Inverse VIX Short Term ETN
buy on next market selloff and VIX spike
Russell 2000 (IWM)-The Weak Link
most affected by rising rates-Great leading indicator
Palo Alto Networks (PANW)Taking Profits Where There Are Profits
Regional Bank Basket (KBE)-Who Killed the Rate Rise?
(MTG), (RDN), (SIVB), (CFG), (CFR), (BXS)
Technology Sector SPDR (XLK), (ROM)
(AAPL), (MSFT), (VZ), (T), (FB), (IBM)
Industrials Sector SPDR (XLI)-Dow Mainstay
(GE), (MMM), (UNP), (UTX), (BA), (HON)
Transports Sector SPDR (XTN)-Another Dow Mainstay
(ALGT), (ALK), (JBLU), (LUV), (CHRW), (DAL),
Health Care Sector SPDR (XLV), (RXL)
(JNJ), (PFE), (MRK), (GILD), (ACT), (AMGN)
Financial Select SPDR (XLF)-Party Postponed
(BLK/B), (WFC), (JPM), (BAC), (C), (GS)
Consumer Discretionary SPDR (XLY)
(DIS), (AMZN), (HD), (CMCSA), (MCD), (SBUX)
Apple (AAPL) –$92?!
Tim Cook Says Business is Great in China on Monday Opening
waiting for the next catalyst-the iPhone 7
Biotech iShares (IBB)-The Generals Get Shot
China (FXI)-The party is over
Japan (DXJ)-Hedged Japan Equity
took profits on 20% weighting-Global contagion kicks in
Sony (SNE)-Buy Territory
Emerging Markets (EFA)another big short sellers target
India (EPI)-Buy it Here
Foreign Currencies-Farewell to Janet
*Global panic brings dollar profit taking as traders dump all interest rate rise
plays, no chance of September Fed rate rise, if they do rise, it will bring
another crash, is all bad for the dollar
*Will create another great long dollar entry point
*Commodity currencies (FXC) and (FXA) get demolished
*China devaluation reaches nearly 5% to
boost economy and exports, slaughtering (CYB)
*Panic brings Euro spike
*Yen spike too, flushing me out of shorts
Euro ($XEU), (FXE), (EUO)-Playing Both Asides
Post Greece Hangover
Long Dollar Index (UUP)Kiss this Baby Goodbye for Now
Canadian Dollar (FXC)-Commodity Collapse
Japanese Yen (FXY)stopped out of (FXY) August $82-$84 vertical bear put spread
Short Japanese Yen ETF (YCS)
Australian Dollar (FXA) –Commodity Disaster
Chinese Yuan- (CYB)-5% Devaluation
Emerging Market Currencies (CEW)
another hedge fund short target and flash crash
Energy-Lower for Longer
*Has become the new industry mantra
*Dividends dropping like flies throughout the energy space, cut by half or all?
*BP Midwest Whiting Refinery taken off line for surprise maintenance, flooding
the market with 240,000 barrels a day of crude
*At what price does Saudi Arabia take the pressure off and cut production?
*Wide futures contango shows the fall has further to go
*During Q2 production outpaced consumption by
3 million b/d, the last time the gap was this wide,
crude traded at $10.
*Buy this final washout
Oil-May Be a Q4 Story
United States Oil Fund (USO)
Energy Select Sector SPDR (XLE)
(XOM), (CVX), (SLB), (KMI), (EOG), (COP)
stocks lead oil turnaround by 6 months
MLP’s (LINE)-Dividend Suspended!
Shares fall to option value
Exxon (XOM)-A Perfect Storm
Oil Crashes, then the Stock Market Crashes
Occidental Petroleum (OXY)-
Conoco Phillips (COP)-
Natural Gas (UNG)-Bouncing along a bottom
Copper-Commodity Collapse
Freeport McMoRan (FCX)-New Lows
Precious Metals-Don’t Chase Here!
*Total gold purchases fell to 916 tonnes H1, 2015, half of the decline from
India and China
*Chinese sold gold to buy stocks until June, the sold more to meet margin calls
after crash started
*Chinese Yuan devaluation gives a brief respite to selling
*Ongoing production cutbacks could lead to stable prices by next year, Hedge
fund legend Stanley Druckenmiller buys $360 million worth for his
personal account
*Gold buying rose in Europe as investors
fled falling Euro
*As Fed interest rate rise looms,
the fundamental picture for
gold goes from bad to worse
Gold (GLD)- Finally, A Flight to Safety
Market Vectors Gold Miners ETF- (GDX)
Silver (SLV)-
Silver Miners (SIL)
Palladium (PALL)
Agriculture-Sunny Days Return, Except for Prices
*Return of fine weather in the Midwest ends the rally, new lows in
reach
*Floods in Texas finally end
*Extreme drought conditions continue in California, bringing back
the water wars
*No trade here, dragged down by the
global commodity bust
*Pass for now, bigger fish
to fry elsewhere, US stocks
much more interesting
(CORN) –Back to the Bottom
(WEAT)-
Ag Commodities ETF (DBA)-New Lows!
Real Estate-Gaining Speed
*New housing starts hot eight year high, up +13% YOY, but still 25%
below long term average
*Multi family strong, making up for apartments not built during the
crash
*June Case Shiller up +5% YOY
*Homebuilders to lead stock for rest of 2015
*Predicted rush to buy homes to beat
the fed interest rate hike is unfolding
*Spillover occurring into the
existing home market, pushing
Case Shiller data upward
June S&P/Case–Shiller Home Price Index
+5.0% YOY, Denver, San Francisco, Dallas
US Home Construction Index (ITB)
(DHI), (LEN), (PHM), (TOL), (NVR)
Trade Sheet
So What Do We Do About All This?
*Stocks- buy the next retest of the lows
*Bonds-the top is in, sell rallies, buy (TBT)
*Commodities-stand aside, buy the next oil down leg
*Currencies- Sell short the Yen and Euro on rallies
*Precious Metals –stand aside, wait for new low
*Volatility-sell short through (XIV)
*The Ags –wait for new lows
*Real estate-buy the homebuilders LT
To buy strategy luncheon tickets
Please go to:
www.madhedgefundtrader.com
Next Strategy Webinar
12:00 EST Wednesday,
September 9, 2015
San Francisco, California
USA!
Good Luck and Good Trading!