A Lightning-Fast Trade to Play “Animal Spirits”

Keith Fitz-Gerald Feb 10, 2017
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EDITOR’S NOTE: Keith prepared and submitted this story for publication Thursday afternoon a few hours prior to the 9th Circuit Court of Appeals ruling release.

Dear Total Wealth Investor,

When I started Total Wealth I promised you that we’d take a good hard look not only at the best investments, but also exceptional short-term trading opportunities when they arose.

Like the one I see developing as I type.

When Euphemisms Signal Big Profit Potential

You may have heard the term “animal spirits” on TV recently or popping up across the Internet on various financial websites.

Ostensibly an ode to economist John Maynard Keynes, who used the term in his 1936 tome The General Theory of Employment, Interest and Money to describe the instincts and emotions guiding human behavior, the expression is really Wall Street code-speak.

I think it’s more like they “have no idea what’s going to happen next.”

Blunt?

Yep.

If there’s one thing I’ve learned over the past 35 years about global markets, it’s that euphemisms like “animal spirits” usually enter the lexicon when there is a great trading opportunity in the works.

Sometimes those are long-term opportunities but more often than not, they’re great short-term trades.

For instance, by now most people have heard of derivatives. Those are billed as insurance by Wall Street, but they’re really an excuse to burn your neighbor’s house down if you understand how they work.

Underperforming assets are really low quality loans that never should have been issued in the first place, are better characterized by a certain four letter word.

Moving forward, an expression you hear a lot during earnings calls, usually means the company isn’t – a la Twitter’s CEO Jack Dorsey, who uses the expression frequently.

You get my drift.

And that brings me to our trade.

I am very leery that the markets have rallied absent any final judicial decision on President Trump’s immigration ban. I’m very suspicious of yesterday’s trading, in particular, especially when the explanations for what’s happening center on “animal spirits.”

Volume was generally low and activity quiet despite the fact that the Dow rose 118.06 points, the S&P 500 tacked on 13.20 points, and the Nasdaq hit yet another all-time high adding 32.73 points to the tally.

Traders I’m talking to around the world just aren’t putting a lot of money on the table even though President Trump is talking about a “big league” tax announcement.

In fact, the S&P 500 hasn’t moved more than 1% in either direction – higher or lower – since December 7. That’s the longest, narrowest trading range on record since 1978, according to Bloomberg.

And if they’re not putting money down… who is?

I think there’s a very large, well-capitalized trading shop out there looking to pull a fast one.

And I’m not alone.

Jeremy Klein, chief market strategist at FBN Securities, noted to CNBC that “there is a very persistent buyer out there pushing the market higher.”

My guess is that they’re trying to suck every possible dollar they can from unsuspecting investors using FOMO – fear of missing out – as their motivator. That’s why Wall Street is talking about animal spirits… because they can’t tell you point blank that they want to fleece millions of investors.

The situation reminds me of an old-fashioned frat party where new party-goers are being invited in the front door even as those in the know are quietly going out the back door…right before the cops arrive.

So how do you play this?

Quickly.

And, with a limited amount of speculative risk capital.

For one thing, these kinds of moves rarely last more than a few days, so you don’t want to do anything reckless like sell everything. Longer term, what we’re talking about today will be nothing more than a speed bump.

What the professionals are looking to do with a move like the one I think is coming is shake out the weak money, buy shares at panic prices, then go for the next leg up.

I say that because breakouts still outnumber breakdowns. Technically that tells me there’s still a lot of money wanting to go to work, which in turn, speaks to higher – not lower – prices over time. Effectively, there are still buyers.

If you’re an investor, I want you to do two things.

First, take advantage of the calm before the storm to move your trailing stops higher. This will help you lock in profits on stocks you’d like to sell when traders make their move, and not a minute earlier.

Second, make a list of stocks you’d like to buy if they’re suddenly “put on sale.” Or, a list of positions you’d add to if you got the chance at a lower price.

In other words, use the one-two punch that’s going to clobber other investors as an opportunity.

By the way, Total Wealth Tactics like the Lowball Order or Selling Puts are ideal for this type of short-term move because you can set them in advance using your favorite online brokerage firm. Better still, you don’t have to wait in front of your screens all day!

If you’re a trader or an investor with trading funds and you want to play the situation more aggressively, buy put options on the major indices. One strike in the money and about 45 days out ought to do it.

Or, consider buying a triple-leveraged inverse fund like the Ultra ProShort Dow 30 ETF (SDOW). Basically, this fund is designed to deliver a return that mirrors the daily performance of the Dow… multiplied by three.

In other words, should the Dow plunge 6%, you’d be staring at profits of 18% before fees and commissions.

As always, there’s a caveat.

Most investors make the mistake of getting greedy when it comes to short-term tactical plays like we’re talking about today. So they stay in the trade too long.

Moves like this are one of the few times where you want to “take the money and run” to paraphrase one of my favorite old Steve Miller songs by the same name.

Short-term profits about being nimble and flexible. The beauty of put options and triple-leveraged funds is that you only have to invest a little to get a lot.

While you’re at it, set both profit and loss targets to maximize your returns and minimize your risk. The type of move I think is coming will be over in a day or possible a week at most.

When?

I believe traders are going to keep the illusion going until there’s a specific event that shatters the calm.

Right now the highest probability earth-shaker I can think of is when the 9th Circuit Court of Appeals rules on President Trump’s travel ban (which hasn’t happened yet as I write). Traders may crush the market immediately, but I’m betting that they’ll use the ruling to suck in FOMO buyers for the first hour or so then yank the rug out.

If you miss this trade, don’t worry.

There’s still tax reform, Obamacare, and Dodd-Frank to go!

All of which can be terribly profitable if you understand how to play the game…

…and animal spirits.

I’ll be with you every step of the way.

Until next time,

Keith

3 Responses to A Lightning-Fast Trade to Play “Animal Spirits”

  1. Greg says:

    Most interesting. Getting the timing right on something like this so crucial.

  2. R. J. says:

    Article states the following: “…Total Wealth Tactics like…Selling Puts.”

    Why would one sell a put in anticipation of a declining market or stock and not a call?

    Would one sell a covered put knowing their cost basis was lower than the put’s strike price, so if the put were exercised they would still collect the premium plus have the appreciation on the stock price gain?

  3. R. J. says:

    It seems the market has stayed the course after the 9th circuit court of shlemiels — the most overturned appellate court in history — decision to stay the order. .

    With that said, my second point is the media has completely mis-reported the executive order, and the court apparently has ignored actual law, vested by Congress to the President.

    For those of the liberal persuasion, wise up because you’re being lied to by the media. The President is within his authority. Moreover, Article 2 of the U.S. Constitution states that the President must follow the law. That law is spelled out in complete clarity here:

    8 U.S.C.
    United States Code, 2011 Edition
    Title 8 – ALIENS AND NATIONALITY
    CHAPTER 12 – IMMIGRATION AND NATIONALITY
    SUBCHAPTER II – IMMIGRATION
    Part II – Admission Qualifications for Aliens; Travel Control of Citizens and Aliens
    Sec. 1182 – Inadmissible aliens
    From the U.S. Government Printing Office
    Article (f) Suspension of entry or imposition of restrictions by President

    I found the search engines skewed the results, almost deliberately shunning those who wanted to find the authority granted the President. You’ll need to go to the U.S. Government Printing Office website for the actual text.

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