EOT position update May 28, 2014

| May 28, 2014

May 28, 2014

Market Snapshot

I hope everyone enjoyed their Memorial Day holiday.  The unofficial start to summer has been accompanied by the typical slowdown on Wall Street.

And the bears have been out in full force with their warnings for the demise of financial markets.

The main thing they’ve been pointing to is the breakdown in US small cap stocks and the rally among US Treasuries.  And for good reason… more often than not, this is a strong indication of de-risking by investors.

When investors sell high risk/reward small cap stocks in favor of the safety of US Treasuries, it’s often a sign of fear.  And fear can snowball into an avalanche of selling.

But here’s the thing…

The bears have it wrong.  The rally in Treasuries isn’t being driven by fear.

It’s being driven by easy monetary policy in the US and the expectation of even easier monetary policy in Europe.

What’s more, the ‘interest rates have nowhere to go but up’ trade everyone knew would happen this year as the Fed began to taper their bond buying program hasn’t materialized.

Now all of the traders that shorted Treasuries in anticipation of higher rates are being run over.  And they’re being forced to cover these shorts and buy Treasuries.

This is a good old fashioned short squeeze that’s helping push Treasuries higher.

And that’s not all…

Transportation stocks are one of the most economically sensitive areas of the market. They should be falling if the bear argument held water.  But instead of crashing, transportation stocks have been one of the top performing industries this year.

The bottom line is the bear argument doesn’t hold up if you dig into the details.

The way I see it, the current environment is more volatile than what we’ve been accustomed to over the last few years.  But the overall trend is still up, and until we get a meaningful breakdown in large cap stocks or a slowdown in economic data, the market is likely to grind higher from here.

Let’s move onto the updates…

Position Updates

Just a quick note:  Remember, we won’t update every open position every week.  I try to focus on the positions that have some significant news or price movement.

HIMX September 2014 $7 Calls
HIMX was off to a fantastic start.  The stock was up 16% and our call options had increased 58% from 95 cents to $1.50.  Then something unusual happened… a rumor began to circulate that Google (GOOG) wouldn’t be using HIMX for their micro-display drivers in Google Glass.  Needless to say, this would be a big blow to HIMX.  But I haven’t found anything to substantiate these claims.

However, I did uncover an unusual option trade that took place just before the rumor started. Someone bought 5,000 June $7 puts for around 15 to 25 cents.  As you know, these put options go up in value when the price of HIMX falls.  I can’t prove that this is outright manipulation of HIMX’s share price by someone who stands to make a killing if the price of HIMX falls, but it certainly looks that way.

The good news is we still have plenty of time until these options expire in September. And if these rumors turn out to be unfounded, HIMX should come roaring back. Continue holding… Support is at $5.75 and $5.00.  Resistance is at $9.00 and $11.00.

JOY June 2014 $60 Puts
JOY continues to trend lower.  It’s made a series of lower highs and lower lows since April 24th.  Aggressive traders should keep an eye on the 200-day moving average – currently $55.59 – as a good exit point to take profits.  Resistance is at $63.00 and $65.00.

Category: EOT Update

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