Market gives us another chance to take advantage of the Boeing snafu again

Exactly 3 years ago in Jan 2013 I make a bold call to "Take advantage of the Boeing snafu", when Boeing (BA) was suffering from a lot of negative news with a quite depressed stock price around $75. It was a lucky but very timing call as BA had since marched up very nicely to have reached as high as $158 recently. A double in 3 years for such a blue chip is by no means a small gain. Now we may likely get another chance to take advantage of the great negativity on BA at the moment to bet on it for good days in the coming years.


Together with the sharp correction of the whole market, the BA shares has started to skid recently and has dropped to its lowest altitude in 2½ years last week after it beat fourth-quarter estimates but followed with a disappointing forecast for profits and airplane deliveries for 2016. Believe or not, industry analysts have been expecting Boeing to cut 777 production for well over a year now, but when the company finally pulled the trigger, investors reacted as if they never expected the change. This is typically a market overreaction in my book. I'm not arguing that BA will not have some difficult time in the near future but this is a very temporary setback. After all, BA still has an existing $490 billion order backlog. On top of that, according to Boeing, there will be a long-term need for 38,050 new airplanes (up from 33,500 jetliners in the projection we cited back in 2011). While this is not something that will be manufactured by BA alone of course, you can bet BA will has a substantial portion to share to boost its bottom line in years ahead. With this 26% haircut from its top with the share price around $120, BA is paying a very respectful dividend yield of 3.7%. At this price, BA is not expensive at all and buying it at this level for long term may turn out to be a very good decision. Please note, I won't call BA a "Strong Buy" at the moment as the overall market is not very pretty, which may not allow BA to jump high immediately from here. It may continue to fluctuate for a while. But starting to accumulate its shares for long term for dividend reinvestment is not a bad idea at all!

A huge catalyst for the US housing that no one is talking about

Early this year, a bill was approved by the Congress and signed off by Obama, which was heralded as a bipartisan agreement that avoided another shutdown of the US government. As usual, it is not a simple legislation to provide more funding to the US government but a bill with over 2200 pages. You can bet buried in the bill there will certainly have something wanted by both parties that would not be easily agreed upon otherwise. There is one provision that will likely provide a huge boost to the US real estate sector.

 

For those who know some history, there was a time over 30 years ago that Japan was an economic superpower. They were so rich that they came to the US to aggressively buy a lot of US real estate assets. Triggered by this fear that Japanese could come to acquire their trophy assets like Rockefeller Center and Pebble Beach etc, the Congress passed the Foreign Investment in Real Property Tax Act (FIRPTA) in 1980 that required the foreign pension funds to pay much higher tax for investing in the US real estate. This had effectively deterred trillions of dollars in foreign pension funds from investing in the US real estate. Now this old tax has been lifted in this new bill, which may likely trigger a massive influx of foreign capital into the US real estate market in years to come. In addition, foreign pension funds were limited to owning a maximum of 5% of a publically traded US REIT (a trust fund for real estate investment) in the old bill, which has been increased to 10% without it triggering a FIRPTA tax.

 

This is huge folks! Think about it. Currently there is approximately $500b invested in US real estate but foreign pension funds are accounting for only less than 2% of that figure. However, there are trillions of dollars available in foreign pension funds. Just a slight increase of  this portion into the US housing market will easily mean tens of billions of new funds to the sector. This will be a huge boost for the ongoing but very anemic recovery of the US housing market. That’s why,  Jim Fetgatter, the chief executive of the Association of Foreign Investors in Real Estate, commented that  “this change is a huge deal and will increase the amount of foreign investment in US property, no question.”

 

So how we as individuals can benefit from this positive move in the US real estate. Well, if you are thinking to buy a property for own living or as investment, now is certainly a good time. Alternatively, you may put more money into the housing related stocks or funds. One area I’m particularly interested in is the REITs for healthcare properties, especially those involving senior cares. Omega Healthcare Trust Fund (OHI) is one of them. As you can easily understand, the demographic trend is a great friend for this investment as more and more US population moving into the elderly age band on a daily basis. This will tremendously increase the demand for healthcare in general and senior care in particular, including hospital facilities, senior communities, and senior care centers. OHI is specialized in this area. The market turmoil at the moment has caused blinded selloff in almost every sector and OHI is not immune to it. It has been hair-cut by over 20% from its high but I think this is overdone. Good news is that with this haircut, OHI will pay investors much more with a current yield close to 7%. The market will certainly continue to fluctuate and no one knows when this turmoil will end. But OHI high yield will ease some pain if it continues to slide down. I’m sure over time this will be a great investment for retirement, especially via dividend reinvestment that will welcome any weakness of its share prices as long as its underlying business is intact and producing sufficient cash flow for dividends. I don’t see anything significant that will negatively impact its business and the new positive change in the real estate tax law on foreign pension funds will only help! I’m adding more shares of OHI and will continue to do so, taking advantage of any weakness of OHI prices.

Why naked puts have less risk if used appropriately

I got an interesting question regarding the naked put strategy as follows. 

@深山老林 really it's all about risk, return and timing. although little it might seems, there is still a chance for a market melt down or MSFT reporting a terrible/underperformed quarter in the upcoming week. If the stock price takes a more than 10% dip at that time, it won't look much appearling from the 5% premium you got from shorting the put @50. At that time, if you take the covered call strategy, you could be caught in deep touble if the market behaves like that in 2008. But I agree that your strategy works in a bullish or range-bound market. The return all depends on the trend of this stock, the 'win-win' situation is not guaranteed. 

 

Here is my response. As a general caution, I totally agree with the above note on the potential risk with this strategy and therefore I’d like to emphasize again that naked puts are not a strategy for anything but only good for quality stocks at good valuation! Having said that, what stocks to get naked puts is all depending on one’s valuation  and risk/benefit assessment, position size and overall investment strategy for the stocks. A few things to consider: 1) while panic selling may bring down anything, quality and cheap stocks will usually bounce back more quickly than others 2) during a market turmoil, people often go to value stocks as safe heaven. This can clearly be seen via how WMT and MCD greatly outperformed SP during the 2008/09 crash. 3) holding a value stock at a good price will hardly go wrong over a long term period, regardless how much fluctuations its price may have, as long as the underlying business is still sound and continuing. Actually lower prices will greatly benefit us, not hurt us and can make us very rich if you can hold it for long and have its dividends reinvested. See my blog here that I can mathematically prove why lower prices are good for DRIP investment. Do I think MSFT’s dividend will be in danger just because of the market turmoil or a few missteps along the way? I’ll never say 100% not but the chance is virtually none/zero as far as I can see, given how much free cash flow it can generate and how much cash it is holding. Financially MSFT is actually much safer than the Treasury bond (considered the safest heaven) and I can trust it as a “safe bank” to pay me (increasing) dividends as long as it can continue with the current business model and development. 4) then I can use covered calls to continue generate additional incomes regardless how its price fluctuates. Don’t forget, with good technical analysis, I may go with the deep in the money covered calls to protect the potential paper loss from its market price decline if I see it is overbought or may face short-term challenges due to other reasons etc. 5) last but not least, one should always have an exist strategy if something goes terribly wrong, e.g. using a stop loss to cut loss. Same here with this strategy.

One misconception about naked puts is that people often think this is a much risker trading strategy. It is true that it could be very risky if it is used for risky stocks and/or with high leverage. But for quality stocks with normal position size at your comfortable level, it is less risky than if you buy the underlying stock outright. Why? Obviously the risk will be proportionally less if you buy something at a discount  via naked puts (e.g. buying MSFT at $47.5) than if you buy without discount via buying the stock outright at the current price (MSFT at $50).  Obviously I’m not talking about a risk free trading/investing but rather how I see the probability of winning is in favor of me for a specific stock at a specific time.

Buy not Run!

I predicted several months ago that S&P could go down to the 1800 level in 2016. While it was a wild call that I may sound like a crazy guy for such a bearish call and likely not many people would believe at that time, it may prove to be too conservative. Honestly I certainly did not expect that S&P would go almost straight down in the past 2 weeks to as low as 1812 in today’s low. Wow, really unbelievable that we are almost at my target!! Now I think the market has A LOT MORE to go downwards and may go down towards around the 1600 level this year. There are simply too many risks out there worldwide that may trigger a meltdown of the market. This world is in a total mess and this market is very sick that nothing can easily fix it. So don’t feel bad at the moment as you may likely see more pain in the months ahead that will make today’s low a lot better.


Having said that, today’s panic selloff is really felt like a capitulation that almost everyone is rushing into the exit and sell whatever they have. A lot of babies have been thrown out with the bathwater. This is a situation where a major bottom may likely be reached (although only for a short term for this market). I think at least a reversion to the mean type of strong bounce will follow in the next days or a couple of weeks. I started to establish long positions for some days and today I added more expecting for a strong snap back. Although I did not catch the exact low today as I could not watch the market closely during the day, I did manage to add more long positions when S&P dropped below 1840. They already turned to good gains when a significant reversal occurred at the last hour. By the way, some of my naked puts sold last Friday have already shown 30-50% gains just within 2 trading days. This is how powerful to trade for income for quality stocks during high volatility by using the odds in favor of you with much higher time premiums that others were willing to offer at panic.

The best time to trade for income

The market is brutal these days for sure. It is simply becoming more and more oversold each passing day. This of course has caused more and more volatility and panic in the market. Although my expectation of a quick rebound has not yet come, the current high volatility has created a great time for trading for income. Generally speaking, the time premium for options will shoot up to moon during panic but such a high time premium will decay quickly when the market calms down, which will always happen sooner or later. One way to make quick income is to sell naked puts and the best time to do this is when VIX is 25 or higher. When you sell naked puts during high volatility, the statistics is your great friend as you generally will have a 90% chance to win. The trick is of course to only trade for income for stocks you want to own, not other risky stocks that may drop to zero. So for a day like today that VIX went up to almost 30, I'm really happy to take the opportunity to sell naked puts for some stocks I love to own, e.g. MSFT, BMY or GILD. Believe or not, their put premium is so high that I have a good chance to get free money at about 5% in 2 weeks. So what's the worst case scenario? Well, I may need to buy them in 2 weeks if they continue to go down but at about 5% discount from today's already depressing prices. The chance of having to buy them within 2 weeks is low at 10% because I have a 90% chance to just walk away with some free money. I feel great with this kind of opportunity for sure!

Moving forward, we will likely see more such opportunities in 2016. Be prepared and have the gut to act when such a day comes.

I’m very bullish for oil now

First of all, we are again seeing a changing tone of the market right now. For the past 2 weeks, traders have been scared to death for owning stocks overnight and therefore they always sold hard before closing every day until yesterday. Yesterday was the first day for some time that investors were courageous enough to buy before closing, although still very nervous to only push S&P barely above the water line. But today, the tone has decisively changed. While most of the day stocks were often under the water, the last half an hour before closing saw an overwhelming buying interest coming in and S&P closed up at almost 0.8% higher. Together with all of the technical indicators pointing to an extreme oversold condition, this bullish behavior is certainly add more convincing evidence that a strong rebound is coming. I even think the Chinese stocks will rebound tonight strongly that I’d be willing to bet for. And I think the oil sector is poised for a rebound as well.

 

Talking about buying oil at the moment may make most of people sick! You see, oil has been down to the level not seen in the past 12 years. The situation is even worse than the financial crisis in 2008/2009. Turning on the TV or looking for online discussions about oil, the overwhelming opinion is that oil will go down towards $20/barrel.  I don’t know how low oil will go eventually and what is its final bottom. We are in an uncharted water that no one really knows how bad the situation will turn into. One thing I fully agree with all these pundits is that oil has a lot lower to go and is certainly not yet bottomed. But the thing different between me and the majority of the opinion is probably how oil will move in the near term. Or let’s put the question this way: what do I think about oil’s prices in the near term?  I bet we may likely see oil shooting up towards $40 before we see it down to $20 in the next few weeks. Why I’m so bullish about oil short-term? For one, it is a contrarian call. As my friends know, I often go against the herd opinion. As I often said, when all the people stand on one side of a boat, it will tip over. I think now is the time with extreme one side standing for oil that we can bet against. Then comes with the technical indicator. When oil is relentlessly testing lows after lows for the past days, its MACD is showing a massive positive divergence, which is often an early sign of a turning point. Last but not least, another powerful contrarian indicator: oil speculators’ extreme bearish sentiment as shown in the COT report. COT is  the “Commitment of Traders” report, in which it will report on a weekly basis what traders are betting almost on anything in the market. At the moment, the oil speculators (such as hedge funds and other traders) are overwhelmingly bearish on oil in the degree that has not been seen since 2013. This is a huge contrarian indicator as history has repeatedly demonstrated that when such speculators are sided on something, you can safely bet for the opposite direction of the stuff they are betting on. So when speculators are really depressed on oil at the moment, I think the turning point is around the corner. Of course I cannot pinpoint the exact timing point but I think it is very close to,  if not yet at the point. Either buying oil vis USO or vie the oil service ETF like XLE will likely profitable in the weeks ahead.

An extremely expensive stock with rather bearish technical outlook

I was thinking to write about this stock a few weeks ago when Alexion (ALXN) was trading around $185ish. This is the stock I wrote about 2 years ago (see here) and it was also quite technically bearish. But it didn't go the way as I had expected; rather it went much higher without a big correction. Then I saw its technical setup again this time and could not help but want to try again for a bearish call on ALXN. You see, ALXN is fundamentally very expensive with a PE of 155. It is showing bearish head & shoulders and has broken down its 3 years trend line and then was bouncing up to challenge its resistance (the trend line). I think this time it could not violate the gravity and will go down much further, mostly likely down towards the support around $150 and if it cannot hold, potentially down to $120.

For some reason, I forgot to write it although I did short it myself. I was again a bit earlier as ALXN went up a bit in the past couple of weeks. However, now it seems to really start to move down as what its technicality is suggesting. In the past few days, it has dropped about $15. Since I used a near term put to trade, I didn't benefit much from this drop due to its initial bouncing up. So I closed my trade with a small gain. At the moment, ALXN is a bit oversold short-term and likely it may go up again to test its resistance around $180, which happens to be its 50 DMA and also the short-term trend line. If that happens, it would be a great opportunity again to short it, aiming for a much big correction. Don't get me wrong. Alexion is still a very successful biotech company, actually one of the most successful. But I just feel too much euphoria has been built into its price for so long, ultimately the Street will get back to the reality based on the fundamentals. I think its price action is signaling that the time is coming.

Should we panic?

The new year start for the market is really brutal and in the first 5 trading days, it has shed more than 5% of its value. Certainly this kid of relentless plunging has made people quite depressed. More and more people, including the talking heads at CNBC are talking about a potential  larger crash from here. The market certainly looks bearish and from longer term perspective, I’m more confident to say it will continue to go down substantially from here. As I said before, I’m expecting SP to test 1800 some time this year. But in the very near term, I become increasing bullish actually. You see, when the herd becomes panicking and depressing, it is usually suggest a short-term bottom is in. Actually all the technical indicators have lined up for an extreme oversold condition including SP closed below its lower BB with VIX above its upper BB. The NYSE McClellan Oscillator and NAMO are above 60. Then I have also noticed an interesting divergence: while SP has been down relentlessly, the junk bonds are holding up surprisingly well. Junk bonds often lead to the stock market, suggesting a bouncing is quietly likely in the near future. I bet next week we will see a quite strong rebound for stocks with a good chance of going back above 2000 for SP, unless more black swans fly out again from China again this weekend. So how to play this short-term bounce? Well there are numerous ways, the easiest way is to simply buy SPY for SP or more aggressively SSO. One may also consider to short SDS. Since strengthening of stocks usually means lower volatility, you may also consider to short VXX or even UVXY for high risk takers. After all, when the rubber band is stretched too much, it will snap back strongly.

But keep in mind, there are going to be a lot of risks in this market and any rebound will be short-lived. If you want to buy stocks for long term, then only look for good quality stocks with good valuation and also with good dividends. As you know I like WMT, which has been extremely bullish in the past week, up 5% vs down 5% for SP. For those bought around $60 or lower, just keep it as I think WMT is a great value stock to own for long term. I personally have traded WMT with call options. As such I have closed my position with quite a nice short-term gain. I think WMT is a bit going up too fast lately and may come down a bit in the next few sessions. If so, I may re-enter the position again. Another good quality value stock is AT&T, a boring company paying a great dividend. Just check its price action in the past few days and you will see it holds up very well in this very volatile market. AT&T will likely be doing well into the future.

Ready for a much better buying opportunity

I was hoping for a big gap down yesterday but it didn't come. However, it came today with a 30 points decline for S&P 500, making it quite oversold. Buying a bit today was already not a bad deal and then the panic selloff came again from China tonight: within just a few minutes of opening the China's stock market tanked over 5%, causing it to be halted for the day. This has hit the US future market. As it stands now, S&P ES is down over 20 points and counting. I hope this can hold overnight till tomorrow. If so, it will for sure bring down S&P to around the 1970 level or lower, and VIX will likely shoot up quite high. This will create some extreme oversold condition with panic sentiment. I like this kind of condition as a trader and will be buying into this oversold condition, anticipating a quick oversold bounce that for sure will come. As I said, the market will eventually go down much further and more but it won't be a straight line downward. After all, the world has a habit of not ending!

I will be a buyer if......

We are seeing another big crash in Chinese stocks as they triggered a new circuit breaker last night that the authority manually stopped the Shanghai stock market trading when it tanked at 7%. This triggered another worldwide selloff today, a phenomenon we saw similarly in Aug last year. Given it was a manually enforced hard stop for the China stocks, there is a good chance more panic selloff may resume when it starts to trade again tonight (US time). If so, a hard selloff may also spread out to other markets tomorrow. If this is indeed the case, I will be a buyer into a gap lower tomorrow morning. While I'm quite bearish in general for the US market for this year, I don't expect this will be a straight line downward. Given the last 2 days of selloff of 2015 has already put the market a bit oversold, this hard selloff will make the oversold more extreme, which will present a great short-term bullish trading opportunity for brave traders. I'm anxious to see what will happen tonight and tomorrow....


A quick word on WMT's performance today. One word: bullish!! WMT again is showing a textbook bottoming process with a clear start of a bullish trend. Gapping lower at opening but closing higher when the overall market is in panic selloff should give WMT a star award. If you bought WMT when it declined towards $60 this morning, which is the target I was expecting for a short-term weakness of it, you would have made almost 2% gain already by closing today. I like WMT more with its performance today!!

Walmart has likelly bottomed

Happy New Year!!

The year 2015 has finally become a history. It is certainly a very disappointed year for investors in general: it started with a great prospect with quite bullish trend continuing for the first half of the year but the trend suddenly turned in Aug when a 10% crash turned a lot of people upside down. Since then, the market has totally lost direction with insane volatility. Sadly, S&P closed 2015 with a loss. If you follow my blog, you may have noticed that since April I have become quite bearish for the market, calling for a trend change. Yes, I was a bit early but eventually the market has turned to a downtrend. Since September, I have pinpointed a few market short-term turning points. My friend, Frank Yang, has summarized these calls in a WeChat group as follows:


今年美股市场比较大的波动中，老林 的博客文章提示了几个 contrarian 风格的相当漂亮的波段：
http://redbullmoneytalk.blogspot.com/2015/09/im-very-bullish.html  9/30    9月底，美股二次探底，跌破1900，市场一片恐慌。老林强力看好超跌反弹

http://redbullmoneytalk.blogspot.com/2015_11_01_archive.html 11/14
11月初，美股 SPX 反弹至2100之上，老林强力建议做空，随后大盘跌至 2020 左右。巴黎恐袭，市场恐慌，老林认为超跌反弹随时来临，但11月底，12月初将有新一波下跌，并跌破 2000 （Dec 14th, SPX 最低1993）

http://redbullmoneytalk.blogspot.com/2015_12_01_archive.html 12/11
美股12月上旬快速如期下跌后，老林预测 FED 加息是必然的，但 FED 对美国资本市场相当关爱，那么宣布加息的那周，很有可能开始 Santa Claus Rally

http://redbullmoneytalk.blogspot.com/2015_12_01_archive.html 12/23
美股如预期般的3天快速大幅反弹后，老林提示了 Junk Bond（HYG）预示的2016年美股大幅波动及调整的风险，VIX 及美股 breadth 的背离(大部分股票的参与程度严重不够，表现较差），认为美股大盘 SPX 快速反弹至 2065 已基本到顶。2016年某时点，美股有跌至 1800 的可能


So what do I think about the market in 2016? Well, unless the market can decisively turned around (meaning S&P will break out above 2130), my general view is still quite bearish at the moment and am even thinking S&P may substantially go down towards 1800 at some point. One thing I'm quite confident to say is that the market volatility will still be insanely high and some big swings will continue as what we saw in the last few months in 2015. This may be good news for traders but for long-term investors, this is not an easy time to invest. You got to be very selective in choosing what stocks to buy for long-term. One stock I think has a great value at the moment and is likely presenting a good entry point now is Walmart (WMT). In Oct 2015, I wrote about WMT after it got crashed: WMT is very cheap valuation-wise. After such a historical bloodshed, I don't think WMT will go down much further from here. The extreme dismal sentiment towards its long-term prospects has likely been priced in its price. Short-term it may still fluctuate a lot due to the overall market uncertainty; longer term however, I'd feel more comfortable to establish a position at this level, if you are willing to stay with it with DRIP in place. After a few months of sideway fluctuations between $58-60, WMT has likely bottomed at this level and is showing a sign of a bullish uptrend. A few technical indicators have made me feel bullish for WMT now:

• In the past month, WMT has clearly outperformed the general market: 4% increase for WMT (pink) vs 2.7% decline for S&P (green). This is typically a bottoming sign for a value stock when they refuse to go down further when the general market is weak.
• Its 9 DMA (red line) has crossed above its 50 DMA (blue), which is another bullish sign, suggesting a turning point to the upside may be starting.
• Its momentum indicator, MACD is also positive in supporting the early uptrend

Of course, its prices may still fluctuate, especially it is likely WMT may come down towards $60 in the next few sessions but I doubt it will go down much further from there. Using any weakness as your entry point for long term may be a great idea in a volatile market! In the next few months, WMT may challenge its next resistance around $66 and then around $70. Personally I really like what I'm seeing of WMT!!