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Philip Fanara
Author, Investor, Internal Auditor, Data Miner
Author, Investor, Internal Auditor, Data Miner


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Wow. If there ever was a bubble, this is it. Yes you can make money riding the bubble but do you want to be the person holding the bag during the inevitable crash?
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Poppin’ Bubbles

Many bubbles can exist at once within the stock market. Some will grow slowly over time and pop years later while others grow quickly and pop soon after.

This phenomena is present in various forms within the universe. Stars exhibit the same behavior as an example. Some stars burn relatively cool and last tens of billions of years; others burn extremely hot and use up all their fuel in only a few million years.

We see the same thing today in regards to the overall stock market (a slow bubble), and Bitcoin (a fast bubble). Both will eventually pop, one sooner than the other. Either way we need to be prepared for the inevitable fall.

Let’s get Bitcoin out of the way first because it is a speculative joke at the moment and not worthy of your investment. Bitcoin is exhibiting nearly identical behavior as the tech bubble of the late 90’s.

A few years ago Bitcoin was known as the younger generation’s technology. Now everyone is talking about Bitcoin and its unknown price ceiling…just like the dot-com stocks of the late 90s. And the price has parabolically surged upwards as a result…just like the late 90s.

Bitcoin does have value and a place in society, and years later may even stabilize at a price much higher than today. However as it stands now, the hype is overcoming logic and people are buying in out of fear of missing the boat. Bitcoin has not experienced any fundamental benefit that would justify daily double-digit percentage gains.

In my past postings I mentioned that traumatic experiences have a lasting effect on people’s behavior. The older generation who traded through the dot-com era will always be on the lookout for a repeat of this bubble and is less likely to make the same mistake again.

However the younger, Bitcoin generation has not lived through such a bubble, thus is very prone to making the same mistake that every generation goes through once. They let greed and hype overcome logic and end up chasing the bubble to the top, until the eventual pop and panic crash.

Besides Bitcoin, the overall stock market is a slower bubble in the making. The nearly 300% gain since 2009 has pushed multiple metrics of market valuations to highs last seen during dot-com bubble and years leading up to the Great Depression.

These market valuations are constantly justified by the media because companies are beating guidance and the economy is healthy. That’s all great, but the hard truth is that companies can beat guidance at ANY market valuation, and the economy can be healthy at ANY market valuation as well.

The Federal Reserve is in the process of unwinding the largest stock market welfare program in history and this bull market is the second longest running in history, yet the market continues higher because everyone is feeding into the notion that these valuations are justified.

Once the natural business cycle takes its course and earnings start declining, inflation picks up, and the Fed is forced to raise interest rates back to a normal level – there will likely be an enormous stock market correction.

And if heaven-forbid the economy goes into a recession or stagflation; the Fed can’t cut interest rates much lower than they already thus the stock market may very well have to endure a recession without the Fed’s hand-holding. If you think the dot-com and housing crashes were bad, imagine how much worse things can get if the Fed can’t react to a recession.

As we approach Dow 24k everyone is talking about how high the Dow can go, rather than realizing “normal” market valuations can mean the Dow index dropping less than 16k. That’s not even a low point, just a normal point!

I am fully out of stocks and solely trading both sides of volatility. I generally hold 100% cash until a volatility spike, then short volatility when it stabilizes. However as I’ve mentioned in previous posts, short volatility is its own bubble in the making that many people take for granted because the volatility ETNs did not exist during the last recession.

As always, keep logic in your investments and stay an outsider from the media hype. Invest wisely.
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We are seeing the effects of the volatility bubble discussed here.

Today's volatility spike allowed a great profit on the upside, as well as presented a great opportunity to get in short. If the markets calm down tomorrow then I'll sell my short volatility and again take a significant profit.

However if markets cannot calm down within 2-3 days, expect a bursting of this volatility bubble as people who were shorting on margin while $VIX was at 10 - those people are pushed out of their positions through margin calls. And I'll continue buying short volatility.

Either way, short volatility is looking very interesting now...Profit from other's fear and greed.
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The Volatility Bubble – Part II

A few months ago I communicated that investors are becoming ever more complacent in the market, causing extreme speculation on short volatility.

The VIX has fluctuated up and down which has given great trades on both the long and short side. Nevertheless, the VIX has trended even further down and is now flirting with all-time record lows.

Investors have a natural inclination to become comfortable with slow, steady upward moves. A year ago many people thought Dow 18k was overvalued. Today you will be hard-pressed to find someone who still thinks that!

Nothing much has changed since last year. Earnings have improved somewhat and are now around late-2015 levels.

We have a pro-business administration, which is great for the economy, however Congress has shown they have trouble agreeing on the simplest of things (due to politics). One side of Congress is trying to push legislature through as soon as possible while the other is trying to subvert – with both sides making their decisions based on the upcoming 2018 elections.

Things aren’t going to change at the pace that many investors expect. It takes a while to put together tax reforms, for the cuts to be implemented, then a while for the effects to show up in tangible earnings. If people do not see these positive effects soon, the 2018 elections will sway the other direction and the administration will lose some of its control over the House and Senate – making it even harder to push through legislation.

Despite all of this, investors are becoming more complacent as time passes because they have gotten accustomed to the market’s valuation. Remember how I said Dow 18k may have been considered overvalued a year ago? Well today it may be Dow 22k, and anything under 21k would be considered a great buying opportunity.

The financial media justifies the current market valuation because certain companies have been making or beating their earnings guidance.

However simply beating earnings does not mean that the market is a great buying opportunity. The market can trade at 500 P/E multiples and still beat earnings estimates!

This shortsighted view of the market is how bubbles form – people convince themselves that the market “should” be at these valuation levels.

This relates to the “boiling frog” analogy: throw a frog in boiling water and it’ll quickly hop out. Place a frog in warm water and slightly raise the temperature, and it’ll stay there until being boiled.

It is easy for investors to look in hindsight at the dot-com and housing bubbles and think they could have predicted the subsequent crashes based on their knowledge today. However most people do not realize that things weren’t that different back then.

The financial media and investors were justifying the high market valuation in 1999, just as they are doing now. And 18 years from now investors will look back onto 2017 and say the same thing – they could have easily seen the market was overvalued in 2017, and they definitely won’t make that mistake in 2035. The cycle continues…

The long volatility ETNs are nearly 100% shorted, with the VIX at record-lows.

If and when the market experiences a hiccup – whether it be companies missing earnings, the Fed tightening faster than the economy can sustain, a geopolitical event (ex. North Korea) – there will be a massive volatility short-squeeze and a huge number of volatility speculators will lose money.

I do believe shorting volatility is generally a wise decision depending on the individual’s particular circumstances, however shorting volatility at this moment is no wiser than buying technology stocks during the dot-com bubble.

Invest wisely
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The Volatility Bubble

For over a year there has been increasing talks on just how high this market can go.

Sound, fundamental investors are nervous for a good reason – nearly all traditional metrics point to this market being extremely overvalued.

However the market keeps chugging along, why is this?

The reason is because there is no one particular sector to blame. It is not like the dot-com bubble where technology stocks were the main culprit; it is not like the housing crisis where real estate was bubbling and mortgage defaults were popping.

This time, the whole market is overvalued pretty much the same across all sectors. Because there is no perceivable bubble looming, investors are all too comfortable pouring money into the currently overvalued market. The rock-bottom interest rates don’t hurt either.

People are questioning which bubble will cause the next market correction, crash, or even recession.

Remember that bubbles do not occur when people are expecting them. If people expect a bubble then it wouldn’t even form in the first place.

We must look outside the normal stock market chatter in order to understand what is currently bubbling and the reason behind it.

And that bubble is volatility.

Volatility (^VIX) is a complex calculation that is used to measure investor sentiment. As investors become more nervous on the future of the stock market, they begin purchasing S&P Put options and selling call options. This increase in option supply causes an expansion between the price of a Put option relative to a call option, and consequently, raises the volatility index (^VIX).

Last week volatility hit its lowest level since 1993, and it has barely recovered upwards and is still trading at unusually low levels.

This indicates a level of extreme complacency in investor sentiment – people just aren’t scared of the market and are willing to risk more and more money.

Investors aren’t the only ones to blame; the Federal Reserve has brought this onto themselves (and Congress to some extent), as the Fed has held the stock market’s hand since 2008.

The extreme amount of liquidity that the Fed injected into the market through its QE program, in combination with 0% interest rates, has increased the money supply to the point where consumer demand just isn’t high enough to outpace product supply.

When demand is less than or equal to supply, then prices fall or stay the same. And thus, inflation decreases, with the potential of deflation occurring.

We’ve seen this happen over the past 8 years – it’s the reason we’ve experienced the slowest recovery since the Great Depression. It was not a true recovery based on productivity increases, fiscal policies, or U.S. competiveness, but a mass injection of printed money into the economy to stimulate spending.

The end result is that businesses and individuals were encouraged to take on enormous amounts of debt at low prices (particularly the more naïve individuals), which they will be paying interest on their entire lifetime.

When people are using money to pay off debt, they aren’t consuming new goods or services. Subsequently this leads to demand decreases, lower company earnings, layoffs, then a recession or even depression.

The end result? We’ve spent trillions of dollars to push the 2008 recession further into the future, and in doing so made the resulting impact much worse than if we would have let the economy recover itself back in 2008. The more you coddle something, the less chance of its survivability when the coddling stops.

So this leads back to the Volatility Bubble. The longer that investors are nonchalantly putting money into the market, volatility continues scraping the bottom which encourages people pile into inverse volatility positions (shorting VXX or longing XIV).

We’ve seen this play out over the past few weeks. Short interest in the volatility ETN VXX has dramatically risen to a near 100%! This is insane when you think of the level of risk these people are taking.

An individual shorting volatility during the stock market’s little hiccup in August 2015 would have lost nearly half of their portfolio – and short interest back then was only 30%!

Imagine what would happen if the current market experienced another August 2015, or a Brexit, or a recession, or a North Korea conflict with short interest at 95%! A massive short squeeze in volatility would wreck havoc on the market.

What do we do in this situation? Before I recommend going long in volatility you must realize that it is extremely risky – volatility ETNs are based on S&P short-term futures, so these futures will lose value the longer the market continues chugging along at low volatility.

I strongly recommend doing your homework before going long volatility. Other options include investing in bearish ETFs, buying long-term Put options in overvalued companies, or even sitting on cash.

I don’t mind holding cash waiting for an opportunity – if everyone invested 100% of their portfolio on Day 1, they would not be to quickly adapt to market shifts. Adaptability equals survivability, both in the stock market, business, and life in general.

Invest wisely
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The Biggest Intraday Drop in Over a Year

The financial media was celebrating the “Return of the Bulls” this morning as the market flirted with a 1% intraday gain. It only took two hours for a total reversal, with the marketing closing a half percent down.

It was the biggest reversal since February 2016. What happened?

The Fed happened.

The Federal Reserve’s meeting minutes were released this afternoon and traders were hit with a bit of infamous nostalgia by some Fed members viewing “equity prices quite high relative to standard valuation measures.”

This hit a nerve with investors - particularly those that remember the dot-com bubble and subsequent crash in the late 90s.

A little over 20 years ago, the Federal Chairman at that time Alan Greenspan made his famous “irrational exuberance” speech that questioned how long the market could hold its unusually high valuations.

The market initially dropped at Greenspan’s 1996 comments, however greed eventually won over and the market recovered for a while, bubbling all the way up to the eventual crash in 2000.

High valuation signals have stared traders in the face for a couple of years now, however many have chose to ignore the elephant in the room, comforted by the fact that the financial media has been giving excuses why the market “should” be at these valuation levels.

But all goes out the window when a higher authority says the market is overvalued. Suddenly people start questioning whether the market is too high, and whether it could actually crash worse than the dot-com bubble.

If you’ve been following my posts, you know that I’ve been consistent in saying the market is overvalued and cannot sustain these valuation levels. Whether we get many small corrections or one large crash – the market will eventually revert to the mean.

How do we handle this situation? Buy dips in strong sectors or capitalization levels, and quickly sell for a small gain. Keep your portfolio hedged with bearish ETFs, inverse ETFs, Put options, or short positions in overvalued companies. Also sell when the opportunity presents itself to make a profit.

Since mid-last year I’ve maintained an average portfolio of 50% bearish positions, 25% bullish, and 25% cash.

Although my percentage allocation remained consistent, I’ve made hundreds of trades and took profits as they presented themselves. And although my bearish-weighted portfolio has contrasted against the extreme bullish market since the election, my portfolio gains have still far surpassed the S&P 500 – all while having ample protection against a crash.

Trust the signals facing us and do not let the financial media or anyone else that tries to “justify” high market valuations influence your trading behavior. Those who can ignore the noise and rationally trade are those that profit in good times and bad.

Invest wisely
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The Fed’s Rate Hike Today – Read Between the Lines

Many people were surprised today that the market went up on a rate hike increase. News outlets joked about how things have changed nowadays – when in the past a rate hike would send the market falling.

The market went up today largely because the Fed didn’t pull any surprises. That’s the easy part.

However we must look between the lines at what’s going on.

Today Yellen made a familiar comment, as quoted:

“Today's decision also reflects our view that waiting too long to scale back some accommodation could potentially require us to raise rates rapidly some time down the road, which in turn could risk disrupting financial markets and pushing the economy into recession.”

Yellen is known as a dove, yet she continues making this statement and many people either ignore or miss the point.

The truth of the matter is that Yellen has been continually warning us that low interest rates (aka “accommodation”) has been going on far too long. For the past 8 years the stock market has been propped up with a combination of 0% interest rates and the Fed purchasing treasury securities, accumulating over $4 trillion of assets.

Most investors have become so comfortable of the recent “norm” that they have lost sight of the drastic effect that the Fed has impacted the stock market over the past 8 years.

Take a look at the S&P 500 historical prices as an example. We know that prices are expected to trend upwards over time due to inflation and earnings growth. However “trend” is the key word. The movements we’ve seen over the past 8 years has not been a trend, but an artificial spike.

Yellen has been subtly warning us that the U.S. is in a risky position.

The Fed was given two tasks after 2008: reduce unemployment while stabilizing inflation (two factors that can sometimes oppose each other). Because the economy has not recovered fast enough since 2008, the Fed couldn’t justifiably raise rates in prior years. However keeping rates low for such a long time has exposed a different risk upon itself. Catch-22.

If we took the current economy, with its current GDP growth and employment metrics, and backed up 6 years… would the Fed be raising rates as it’s doing now? The answer is a definite NO.

I believe the Fed sees the current market optimism as a chance to dig themselves out of this hole because it may be the last chance they get. If market sentiment was low, the Fed would be much more cautious about raising rates, fearing a recession or market crash. See how the market reacted after the December 2015 rate hike, and how the Fed waited a whole year before raising them again?

Yellen, the gentle dove as she is, has given us two strong warnings. The first was the earlier quote mentioned, and the other warning was during her last congressional committee meeting - where she urged Congress to take charge of creating jobs and strengthening the economy.

It is my opinion that Yellen, in all her politeness and political correctness, wishes she could have raised rates sooner and blames Congress for falling asleep at the wheel – letting the stock market become artificially inflated through the Fed’s accommodative policies rather than of substance. Just watch her last few press conferences and read between the lines in what she’s saying.

What does this all mean? Expect frequent rate hikes as long as market sentiment stays positive. The market may continue rising during this time - however the higher it goes, the less stable it becomes. And the less stable the market becomes, the more prone it is to a significant correction at the slightest hint of negative news.

Hedge your portfolio, take small gains as they come, and keep yourself agile in this market.

Invest wisely.
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Updated Stock Analysis Workbook for free download -

Update notes:

> Stock market data updated as of 3/7/17

> New Feature Added - Ability to filter certain criteria by multiple ranges (ex. P/E, Fwd P/E, etc.). This is useful for instances where you want to include stocks with either extreme negative P/Es and extreme positive P/Es.
Happy Trading!
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DOW 21k in only 4 weeks! Deja vu anyone?

May 3, 1999: 4:48 p.m. ET

Dow's eclipse of 11,000 in a month is fastest move past 1,000-point marker

NEW YORK (CNNfn) - It took just five weeks for the Dow Jones industrial average to get from 10,000 to 11,000 -- the fastest assault on a 1,000-point milestone so far by the world's most widely watched stock index.

The 115-year-old index, with a history that spans 20 U.S. presidents, six wars and 21 recessions, has now crossed nine 1,000-point milestones during this decade's bull market stampede and shows few signs of slowing down.

After making history by closing above 10,000 on March 29, the Dow raced past 11,000 on Monday. By contrast, it took the Dow a year to climb past the 10,000 mark after it first closed above 9,000 on April 6, 1998.

The fastest eclipse of a 1,000-point milestone before 11,000 was when the 30-share index topped 7,000 on Feb. 13, 1997, just four months after blowing past 6,000 on Oct. 14, 1996.

With the Dow's swift ascent, strategists and historians are debating whether the market has gone too far, too fast as they glance back at the ups and downs of the widely watched average.
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Bubble? No... It’s Different This Time

The stock market continued its rise to greatness today, with all major indexes hitting all-time records. With each passing day more investors are converted into believers that this is an unstoppable bull market.

I mean…

Who cares that the Shiller P/E hit 29 today? It’s only the third highest ever, preceded by the Great Depression and Tech Bubble.

Who cares that the Federal Funds rate has been flatlined the past 8 years, and cannot be lowered any further to stimulate the economy? Mama Yellen will take care of us.

Who cares that the Federal Reserve quintupled its Treasury bond holdings over the past 8 years to $4.4 trillion dollars, which it still holds today and eventually will need to be sold?

Who cares that the market is trading at 129% of GDP, second only to the Tech Bubble? This time it’s different.

Who cares that even if the U.S. GDP growth rate doubled, and the market stopped rising completely, it would still be considered overvalued all the way to the year 2024 according to Buffett’s favorite indicator?

The rebuttal to all of these points has simply been, “The chains are coming off the U.S. economy.”

So I must assume, the release of these chains is going to double the entire U.S. GDP right? Meaning instead of growing 2-5% per year, it will begin growing 50-100% per year? That’s the only quantifiable method of justifying the current market valuation.

Invest wisely
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