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BotTrigger Trade Alert:

→SPY June 2018 $290 Puts sold our entire 7% allocation @ $20 for a -1.66% loss weight adjusted to the portfolio. Although the loss for this single trade was -15% on the first buy alert & -31% on the 2nd alert....since the total of the 2 trades represented only 7% of our entire portfolio, the weight adjusted total net loss on the entire portfolio was only -1.66%

→ GLD January 2019 $120 calls bought @ $13.20 for a 5% allocation

→ OSTK January 2019 $60 calls ADDED @ $22.00 for another 5% allocation

We're not convinced that we won't be adding those $SPY Puts back. We're going to see how strong this market really is right here and see if it can retest the highs on strong volume. This bounce was to be expected, but I'm not yet convinced it's the real deal just yet. We need to see more data. Right now this entire bounce is happening on palty volume for one, and we're seeing inverse rotational plays as Bitcoin reclaims above $10,000 & Gold is holding its uptrend.

First off, let's acknowledge something that is important to distinguish utmost as we guide portfolio direction. This is perhaps one of the most important things to shine the light on: Macro Trend Bull Markets Don't Die Easily...They Fight Every Last Ounce Even When They're at the Precipice of the Next Major Bear Market. Timing the turn of the bear market is largely difficult because there is so much capital already oiled into the machine that it's not going to just drain out without a fight. It has more of an incentivize to thrive than to perish. As they say in show business...the shot must go on! Thus the Quantitative Easing pump & the Plunge Protection Team etc for example. US & Global confidence relies on our market to outperform for the health of the economy & consumer confidence to ensure spenders keep spending. The market is very much like this. Betting on a doomsday scenarios are largely a fool's errand. But that doesn't mean we won't always be cautiously on guard evaluating market variables that suggest when the tide will indeed change.

Bull markets don't die easily for a number of reasons which we could certainly get cerebral about ....I'll spare you the meta detail but understand that much have it has to do with overwhelming amounts of liquidity reserves that are tied up in equities. It's not as easy as Goldman Sachs simply flipping a switch to a close out a position and move on. There are trillions of capital that have been invested into these equities and when they want to close out a position, it's not something they can do in a single trading day. It takes weeks if not months & quarters to liquidate said position in many case. That's why the topping pattern before the .com bubble & even the financial crisis of 2007 were nearly a year long topping pattern formation. They did not simply top overnight. For example, Warren Buffet's $23 billion accumulation on AAPL stock would likely take more than a few calendar quarters to liquidate on stealth mode so as to note plummet the stock. There is more incentive to fight for the market's uptrend and foment impressions of upside resolve than there is for their to "tank a market."

Our objective is to identify which direction the economic wind in blowing. You never want to get caught on the wrong side of a trend. As a continuation of last weeks post, we can all agree the market’s 2-year uptrend is now less certain than it was prior to January 29th. When defining a trend, one should consider the sustainability of current market moving variables. One trend we are certain of is that the United States Treasury will issue a record amount of debt (approximately $955 billion in 2018 vs. $519 billion in 2017) in order to compensate for tax cuts and finance government spending. Debt issuance is then expected to far surpass $1 trillion in 2019 and 2020 as well. This explosion in debt issuance has garnered the attention of international investors who are growing concerned. Recent bond auctions have been weaker than expected. This new dynamic is uncharted territory for most market participants.

2018 may require a revised playbook. A guy named Peter Toogood was recently interviewed on CNBC, his commentary of recent bond auctions was eye opening: ‘The bond auction last week failed, basically. People didn't want to step up at that point. How about this old idea that maybe the Treasury yield has to go up because it has to be higher to attract capital?’

The 10-year will surpass 3 percent, Toogood predicted. ‘I think it will go past that, and for the wrong reasons. Because they're issuing a lot of debt, and people want more money. They want to be paid a higher yield to take that debt...Thanks to Mr. Trump's efforts, they've got to issue a trillion dollars of bonds into a market which has got $500 billion of tightening from the Federal Reserve because they're going to be selling. That's not a healthy environment. That is the outlier here — the yield goes up for the wrong reason. It doesn't go up because of growth, it goes up because the auction needs to go up to attract capital," he warned. ‘At the end of the day the U.S. government is flooding the market this year with bonds. And that is the thing no one is discussing...You're issuing a trillion, which they are this year, that's going to need a higher yield, I would argue. Could be towards 4%. And no one is talking about it’.

Debt as a market moving variable is here to stay. Even as the stock market has gone up over the last five days, I would argue we’re worse off today than we were last Thursday when the Dow dropped 1,000 points. The 10-year yield is now higher at 2.89% than it was last Thursday and the dollar is lower. The 10-year yield is likely to rise faster than expected over the next two years. Perhaps the stock market can absorb it without further correction, which is the signal being sent this week, but investors should not be blind to the potential risk. As we’re technically forced to sell the 7% allocation of SPY puts today I just want to be clear from a fundamental perspective that we believe this debt trend is here to stay. For now, our response to this debt variable is to have high allocations of portfolio cash.

Bond king Jeff Gundlach commented, ‘Clearly, the market gets shaky when the 10-year hits 2.85%, just look at (last) week. Makes one consider what could be coming if 10s push over 3%. Rising interest rates are a problem and the U.S. is in debt and there is massive bond supply…the low rate-low volatility market environment went on for so long that now the unwind will be turbulent and not over in a couple of days.’

With our establishment financial system in tightening mode, it makes sense to diversify into alternative assets like gold, bitcoin and blockchain when the hedge of SPY puts isn’t working. Nobody wants to miss out on upside, but in our opinion the broad market remains susceptible to massive dislocations due to fear of higher interest rates. If gold, bitcoin and blockchain are rising alongside the broad market, investment makes a lot of sense. Quietly, bitcoin has reclaimed the $10,000 price level today. Today we are adding a 5% allocation of GLD January 2019 $120 calls. Both bitcoin and gold should theoretically rise in value if the fiat financial system comes under pressure because of debt trouble. With momentum sell points serving as protection, we have no problem loading up the portfolio with GLD and GBTC on positive momentum. We are also adding another 5% allocation of OSTK January 2019 $50 calls for its exposure to the blockchain economy.



Wild market swings are indicative of bear market action. Today marks the 7th triple digit Dow move since Monday January 29th. The worst performance during this volatility window happened last Thursday at Dow -1,033 and last Monday at Dow -1,175. Even after accounting for today’s Dow +500, the total tally remains in a downtrend at Dow -2,000 over the last two weeks. This has quickly evolved into an uncertain time for investors. After ignoring the risk of deficits and debts for decades, it seems the market is awakening a sleeping giant. Let’s dig into two pieces of relevant analysis:

1- Trump’s budget director Mick Mulvaney issued an optimistic sound bite in an interview with Fox Business News regarding the budget, ‘If we can keep the economy humming and generate more money for you and me and for everybody else, then government takes in more money and that’s how we hope to be able to keep the debt under control.’

In a separate interview on CBS News’s “Face the Nation,” Mulvaney expressed concern that rising budget deficits are ‘a very dangerous idea, but it’s the world we live in.’ Shockingly, Mulvaney also acknowledged he would ‘probably not’ have voted for the deal when he served in the House of Representatives and was known as a fiscal hawk. ‘Keep in mind I’m not Congressman Mick Mulvaney anymore,’ he said. ‘My job as the director of the Office of Management Budget is to try to get the President's agenda passed.’ The additional spending could increase the deficit to about $1.2 trillion in 2019, and there’s a risk that interest rates ‘will spike’ as a result, Mulvaney said.

Hearing the budget director warn about spiking interest rates is not very reassuring in the current environment. SocGen issued a warning that historically high stock valuations combined with rising interest rates is likely to cause addition selling: ‘with the equity risk premium approaching levels last seen during the dotcom era, any further rise in the 10y government bond yield to 3% would put pressure on the equity market to adjust lower…this rich valuation means US equities cannot absorb higher bond yields.’

2- Brian Levine, head of global equity trading at Goldman Sachs placed this 2-week return to volatility in context: ‘I’ve heard many write-off this correction as being technical in nature. Well, yes, that was the trigger, but if you're hanging your hat on that, you're missing the bigger picture. The market had effectively quadrupled over the past 9 years. Why? Obviously numerous variables contribute, but it would be hard to dispute that unprecedented, globally coordinated easy monetary policy was your primary driver to force investors out on the risk curve. Sure, rates have been gradually rising the past few years, which the stock market has easily digested, but there's always a threshold that sparks a seminal change. And I don't think it was a coincidence that the S&P topped out on the very same day 10-year yields made 4-year highs (a week ago Monday the 29th)....and rates have backed up a further 15 bps to 2.8% currently. The fact that bonds couldn't rally in the equity selloff is evidence of a regime change in the multi-year equity bull market. The "buy on the dip" mentality needs to be thoroughly punished before we find the bottom…

There’s a good chance Goldman Sach’s declaration that a ‘regime change’ is upon us is an accurate description of what we’re seeing…especially since the 10-year yield is up to 2.86% today. As far as we’re concerned, the remaining 6 weeks of Q1 2018 stock action is on red alert. Any data that implies higher interest rates is likely to be met with violent selloffs. All eyes will be on Wednesday’s CPI inflation report. If it comes in higher than expected, the market will probably give up Monday’s gains. Under bear market conditions there are extreme dips and rips. It may seem counter intuitive but today’s Dow +500 rip is actually more indicative of a bear market than it is a bull market. Bull markets tend to be much more orderly.

Some of the greatest pearls shared by Jesse Livermore:

“Money is made by sitting, not trading.”

“The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.”

“Buy right, sit tight.”

“Nobody can catch all the fluctuations.”

“There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.”

“It takes time to make money.”

“Don’t give me timing, give me time.”

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