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Remortgage The House And Sell Puts

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As Seen On
margin debt June 2014

I’ve decided to re-mortgage my house and put the proceeds towards selling put options. With markets continuing to make new highs and volatility at yearly lows this definitely seems like a safe bet.

Markets are safer than they have ever been thanks to government intervention and now is the time to get heavily leveraged and ride the market to new highs. I doubt we will see another bear market in my lifetime.

This time, it’s different……

The current RUT chart continues to look eerily similar to July 2011 where a breach of the uptrend line was quickly followed by a retracement to test the trendline from below. When that failed RUT dropped from 860.37 to 639.85, a decline of 25.63%.

RUT 2011

RUT 2011

RUT 2014

RUT 2014

You can’t tell me the previous charts don’t look similar. The main difference I guess is that the 2014 rally has lasted longer.

RUT Rallies

The 2011 rally lasted 316 days and was 11% above the 50 week moving average and 21% above the 200 week when the rally ended.  The current rally has last 598 days, is 8.8% above the 50 and 30% above the 200.We are also much further above the 200 week moving average this time. Mean reversion anyone?

That being said, we could be in the midst of a late 90’s style rally. Although that rally was fueled by the internet revolution; I’m not really sure what is driving this rally other than the Fed. Social media maybe??

Taking a longer term view, the monthly chart of the RUT looks downright scary. Notice the clear trend channel from 2013 has been broken and we are now testing that from the lower side. Prices need to break back in to the channel to have any hope of higher prices. If the lower trend line holds as resistance, look out below….

RUT Monthly

INTEREST RATES

TLT looks somewhat similar to the current RUT chart. Notice the long term up trendline was broken, then tested from below before selling off over the last 3-4 days. Perhaps a similar thing will occur in RUT?  The 200 EMA for TLT is at 100, if that level breaks, it’s a straight shot down to 105.

TLT

MARGIN DEBT

Each of the past two stock market crashes have been preceded by a huge run up in margin debt. A small decline in margin debt occurred before the real selling started in stocks. Check out the below chart. Looks eerily similar to March 2000 and July 2007.

margin debt June 2014

QE3

If everything is now rosy and the economy is on stronger footing, surely that means an end to QE will be on the cards by September. Remember the last 2 times the Fed stopped QE? Bespoke posted  this chart to remind us.

QE Bespoke

WHERE IS THE REVENUE?

One major concern I have is that revenue growth has not been the primary driver of this bull market, it has been monetary stimulus and improving margins due to lower labor and interest costs. Looking at the chart below there has been very little revenue growth since 2012. Compare that to the 2 prior bull markets. If this rally is to continue, revenue growth needs to pick up from here.

revenue

BULLISH EXUBERANCE

Anecdotal evidence seems to be that most investors still do not trust the stock market and that the general public is not yet fully invested. However, the following chart seems to indicate otherwise. Assets invested in Rydex bear market funds is at the lowest level since the peak in 2000 and the amount of funds in money market funds is at the lowest levels for 15 years. Taking this and the high level of margin debt it seems like there is a lot of money riding this five and a half year rally.

bulls bears cash

Looking again at the RUT, you can see that RSI has entered overbought territory 3 times since the beginning of June. Every time RUT has hit these levels, the index has traded sideways to lower over the next 4-6 weeks.

RUT Overbought

FEAR GAUGE

VIX is at the lowest level we have seen in a long time. As you can see from the second chart, VIX can stay low for a long time, so it doesn’t necessarily mean we will see a huge spike in the next week, but I guarantee we will sometime in the next couple of years. As options traders, we will certainly relish a return to a high volatility environment.

VIX

VIX2

There are positives to the market at the moment and bullish momentum is certainly the strongest it has been in recent memory, however there are a lot of red flags screaming out at me. The number of people calling for a correction have completely dried up and it seems like every one has given up on there being any sort of pullback. If history has taught us anything it is that big corrections come out of the blue when complacency is at high levels. Now is definitely a time for caution and not a time to remortgage the house and sell puts.

13 Comments
  1. Stephen H. says:

    Headline attention grabber for sure. I just hope no one has actually ever done that. A screaming blow off to would be nice to get short into.

    1. Yeah we might have one final “F-U Bears” type rally before a big selloff

  2. jay says:

    Good headline. I did this in 2010 and it allowed me to retire in 2012 before I turned 50. Certainly wouldn’t do it now.

  3. Chris R. says:

    Excellent information on point with graphs. The time is now to be cautious. Bull market looks over extended. Need to see growth in revenues and earnings, and not just earnings. Have a great quarter.

    1. Thanks Chris, you too!

  4. Hans says:

    Love it Gavin. The Rydex Chart is surprising for all the talk of money on the sidelines that you hear.

    1. Yes it was surprising. The summer should be interesting, no doubt about it.

  5. Andrew Vitesser says:

    nice nice nice article!!! +++

  6. Tailgun says:

    Gavin, on your RUT RSI, what are your values?

  7. Gavin says:

    Thanks Andrew

  8. Bill says:

    I like your article . not sure where the market is going, just following the trends

  9. Steven says:

    Your headline scared me

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