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High-Flying Friday – Dow 20,000 in Sight!

Dow 20,000?  

Why not, nothing is out of bounds now that investors have shown they are prepared to accept insane valuations for stocks.  We're still skeptical and very well-hedged (and our hedges are getting crushed) but it's more than offset by the ridiculous gains in our long-term positions so party on Trumpmerica!

As you can see on the chart, we came off the 10,000 line in 2011 rose 75% to 17,500, pulled back to 15,000 (33% retrace) and now we're on the road to 20K in one mighty leap since the election, adding 1,000 points since election day – not even counting the 500-point sell-off that occurred right before the rally began (blow-off spike down).

The 5% line off 18,000 was, of course, 18,900 and you can see we had a brief pause there before shrugging off resistance and heading higher.  The 7.5% line is 19,350 and not too much upside resistance there and then it's a hop, skip and a jump to 20,000 – no problem! 

In fact, the Russell 2,000 is just under 1,350 and that's up 200 points since early November (not counting their spike down) and that is just shy of 15% so the Dow is MILES behind if the move in the Russell is real (we have bet it is not but those bets are killing us!).  The Nasdaq is up 4.3% and the S&P is up 5.5% and the NYSE, the broadest index, is up 4.8% so it's really the Russell that's a huge outlier – and that's why we're shorting it.

HOWEVER, we could be (and have been) very wrong about the Russell and, if so and it heads higher still, then it's the other indexes that should be catching up so we can hedge our hedges with long positions on the Dow, S&P and Nasdaq.  For example, the Dow ETF (DIA) is at $190 so a 5% move in the Dow would be $199.50 and we can make the following play to gain leverage:

  • Buy 30 DIA March $188 calls at $6.70 ($20,100)
  • Sell 30 DIA March $193 calls ar $3.75 ($11,250)
  • Sell 5 AAPL 2019 $97.50 puts for $10 ($5,000)

This spread requires a net cash outlay of $3,750 and the spread pays $15,000 back…

Provided courtesy of Phil's Stock World.

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