Dear Reader,
Rachel Bodden, Jeff Clark’s senior managing editor here…
The trial run of our podcast last month was a success – thank you to all who wrote in to tell us that you wanted more.
Today, Jeff tells us his thoughts on the markets, what strategies he’s looking at, and answers some subscriber questions.
And remember, let us know your thoughts, or send us questions at [email protected].
Check out the video below, or scroll down to read the transcript.
Transcript
Rachel Bodden: Hello everyone. Welcome back to another podcast edition of content with master trader Jeff Clark. Last month when we ran this for our trial podcast, we asked whether or not you liked it and wanted to hear more of it. And the response was overwhelmingly in favor of yes, you do like this style of content, you want to hear more from Jeff and we are happy to oblige you guys.
In fact, the only slightly negative pieces of feedback were that A) I had to speak louder, so I’m happy to do that for you, and B) that people wanted a transcript.
And I’m happy to inform you that every single piece of video content that we publish, we do in fact have a transcript on the website and the Jeff Clark Trader app on the Google Play Store or the App Store. So if you don’t have the Jeff Clark Trader app, I definitely recommend you download it because that is the fastest and most reliable way to get your content.
So without further ado, let’s just get into it.
So Jeff, I wanted to start with today’s Market Minute talking about the CPC and that ratio of bearish to bullish. And I mean, we are at all-time highs in so many averages and indexes and you are telling traders to look over their shoulders. So tell us a little more about that.
Jeff Clark: Well, I have to tell you, I’m a little bit flabbergasted. I’m happy to admit I’m wrong. I thought when we went through that whole correction in April, and then we bounced off the bottom there, I thought that it was basically an oversold bounce in a bear market. And I thought we’d seen the highs in February. Obviously, I’ve been wrong since we made new all-time highs. And I’m OK with that, because as traders, we adjust. So we take a fresh look at things and try to figure out where we’re going next.
And I’m going to sound like a broken record because I say this all the time or I have over the past couple of weeks, things are stretched. You know, the market is very overbought, very overextended to the upside. We are, I think yesterday, the S &P 500 at 5204 is 100 points above its nine-day exponential moving average. It’s 400 points above its 50-day exponential moving average. To put those figures in context, usually if you get 30 points above the nine-day EMA, you’re considered overbought.
So we’re 100 points. If you get 200 points above the 50-day moving average, you’re overbought. We’re 200. We’re 400 points. So we’re basically double to triple as overbought as would be normal overbought conditions. But this goes to a bigger concept in that in this particular type of market, as things go back and forth and they get stretched and as indicators get stretched, what we’ve done as investors and as traders is we’ve evolved. We need more of a stretch to justify a movement in the opposite direction. What I mean by that is where it used to be a 30 point move above the exponential, nine-day exponential moving average was enough to get us to look for a snap back.
We can’t do that anymore because 100-point moves are becoming commonplace or 400 points away from the 50-day moving average. And just think about where it was in April, where the market just, I don’t want to say collapsed, but it cascaded all the way down and we were, think 700 points below the 50-day moving average. That rubber band just got super, super stretched. All we’ve done now is reverse it. So now we’re overbought on the upside.
Valuations are expensive. You know, the S&P 500 is trading what 23, 24 times forward earnings. That’s expensive no matter what market conditions are, no matter what economic conditions are. We rarely see valuations that are that stretched. So you’ve got that fundamental problem. Technically, there’s all sorts of warning signs out there, but they’ve been out there since we hit 5,800. So, you know, we’ve managed to add on
300, 400 points almost to the S &P 500 since being overbought from a technical perspective. So all we’ve done is stretch that rubber band further, further out. I don’t want to come across as a permabear. don’t ever want to be perma anything. I’m not permabull, not permabear. But it’s usually a poor idea to be buying stocks when you have extremely rich valuations and extremely stretched technicals. There has to be one of two things has to happen.
Either the market needs to just sort of mark time for a while and allow all the other indicators to play catch up. The moving averages can come together to something a little bit more reasonable where the put call ratio can come back to a more reasonable figure. To where all these other indicators that are flashing caution signs can come back to neutral. That would be the most bullish of situations where we just sort of mark time for a couple of weeks and allow everything to catch up.
The bearish side of that is we get a real quick three to five to seven percent drawdown and you know, some of the bullish enthusiasm out of the way. That is my preference. I’d rather see a more significant type of a drawdown to allow us to take a look at the new parameters of the market. What I mean by that is, you know, clearly my thesis of this being a bear market bounce has been ruled out.
So now what I want to try to figure out is this a sustainable move higher that’s going to lead to even higher prices as we go through the year or is this going to be or is it a bluff you know is it really this what I thought was the start of a bear market in April maybe it’s July that brings us into a bear market and I’m not predicting one way or the other what I’m saying is I want to see how the market behaves in a correction phase to determine where we might be headed from there that doesn’t mean there are stocks to buy there’s plenty of stocks to buy we had a couple trades we made yesterday that worked out really well, even though the market is floundering just a little bit today. your, that was a very long-winded to your question, answer to your question about the CPC indicator.
Basically, everybody was running to buy calls last week. CPC is the put/call ratio. Anytime it gets down below 0.8, it means people are buying a lot more calls than they are puts. Anytime it’s above 1.2, they’re buying a lot more puts than they are calls. And so, it’s a contrary indicator.
So really, what I talked about in Market Minute this morning, is just basically anytime you get into this situation where the CPC is down below 0.8, you typically get a two- or three-day pullback.
Rachel: So what do you recommend your readers do right now? Do you recommend they just kind of sit in cash? What do you recommend they do?
Jeff: Well, since we crossed 5,800, I’ve been very, very conservative. I’ve been suggesting sidelines, cash, all that sort of stuff. And what’s happened is a lot of the stocks that have been moving higher, they’re the tech names that were moving higher in January and February. But there’s still a lot of stocks that haven’t participated in that. You have about half the S &P 500 that’s still trading well below its 200-day moving average. So you still have some opportunities.
What I think is going to happen if we continue to move in a bullish pattern throughout the rest of the year is a lot of these beaten down value-oriented stocks are going to have to start playing catch up. So you’re going to see things like Constellation Brands that we talked about yesterday or some of the healthcare stocks that we traded in Delta Report start to play catch up. They’re going to act a little bit more bullish. What happened yesterday also was the last day of the quarter. So money managers and portfolio managers have to basically show what they own at the end of the quarter.
So everybody was rushing to buy the top performing names. Everybody wanted to buy Oracle. They wanted to buy Nvidia. wanted to buy, I don’t know, just throw any other names out there. Broadcom, all the stocks that have done really, really well, and they didn’t want to own any of the stocks that haven’t done well.
Well, like the healthcare stocks that we just talked about, like some of the energy stocks. So I think what’s going to happen as we get into this third quarter is you’re going to start to see some rotation out of some of the higher performing names into some of the lagging stocks. That would be the most bullish of circumstances.
So I am trying to focus on that. I’m focusing on finding those value-oriented bargain stocks that are showing technical bottoming patterns. And a lot of that is in the healthcare sector. And when we talk about buying healthcare stocks, they can’t believe I’m recommending healthcare stocks, but they’re the cheapest in the group and they look like they’re bottoming.
And you look at something like Constellation Brands, which has been a horrible performer for the two quarters of the year so far. But it’s one of the strongest stocks in the market today. So that helps prove my thesis that I think a lot of the laggers are going to play catch up. So if you want to put money to work, look at buying into the lagging stocks for last quarter. I wouldn’t chase any of the high-flyers. I can’t buy a Palantir at 160 times revenue. just, it doesn’t make any sense to me. Yeah, maybe it goes even higher from here, but it’s just, you typically don’t do well buying the most expensive stocks.
Rachel: I just read that we wrapped up the best quarter since December 2023 and, you know, living through it, it hasn’t felt like the best quarter, but I guess that’s what the statistics say.
Jeff: Well, have, mean, the statistics, there’s a lot of stuff that hasn’t happened in decades. You know, that whole decline in April we hadn’t seen since what, 1924, I think somebody was telling me. A lot of the things that are happening now with a lot of the indicators that I follow, I’ve never seen before. You know, we’re hitting extremes that haven’t registered before. We’re getting false signals on indicators that I haven’t seen occur very often. I talked about last week, we talked about the summation indexes for the New York Stock Exchange and the Nasdaq.
Rachel: I know.
Jeff: They had a sell signal in mid-May. That was negated. Then they had a secondary sell signal, what I call a double sell signal, in the middle of June. And that was just negated. It’s never happened, or at least not in my lifetime when I’ve been following these signals, where we’ve had two back-to-back sell signals for the summation indexes. Both of them failed. So I’m imagining when we get the third one, third time’s the charm, and maybe it’s going to be a bit bigger, but yeah, we’ll see.
Rachel: And just really quickly, Jeff is talking about the summation indexes that he spoke about in his monthly live Alliance call for his Jeff Clark Alliance subscribers. And he does it once a month and it is the best thing that I’ve seen. We have hundreds of subscribers join us to hear what Jeff has to say for the rest of the month.
Jeff: It’s, you know, the fun part about that though is because we do it every single month, you can tell if I was right or if I was wrong. can tell if I get bragging rights or if I’ve got to look at it go, okay, I missed this particular call. So, know, I address a lot of these things in Market Minute as well, but being able to access the live calls are kind of a fun little benefit.
Rachel: And if you’re a Jeff Clark Alliance subscriber, let us know if you like those. You know, it helps us to know what you like, what you don’t like, what you want to hear more of. And just before we get into our subscriber questions, we don’t have any questions to answer if you don’t write them in.
So please keep writing to us, keep asking questions at [email protected]. And since we’re going to keep doing these podcasts, we will address them in a future call.
Do you want to get into some of those questions, Jeff?
Jeff: Sure, sure, I’m done talking.
Rachel: Alright, this is a question from Raymond. Jeff, for those that like to trade weekly to bi-weekly and not risk the more expensive trades, could you discuss put credit spreads?
Jeff: Okay, I’m going to assume this is in regards to selling uncovered puts, probably in Jeff Clark Trader. The strategy is to generate income by selling uncovered puts. And we do that in a lot of the services, Jeff Clark Trader, we call it a bill payer strategy where we’re collecting income for doing that.
The two of the three recommendations I’ve made so far in that service have been stocks that are above 100 bucks a share. Some people are uncomfortable selling uncovered puts on stocks that are above $100 a share because it commits them to buying 100 shares of stock. So 100 shares of $100 stock is a $10,000 commitment. People are, know, sometimes the accounts aren’t large enough to do that. So what you can do alternatively is you can do what’s called a credit spread. What that means, all it means, spreads are what we call BS, where you buy something and you sell something.
In a credit spread, the main position is the sell of it. So you’re selling an uncovered put option, and then what you’re doing is you’re buying a lower strike price put option, which essentially covers it. So for example, the trade that we just wrapped up in Jeff Clark Trader was Constellation Brands. So we sold an uncovered put option at $155. So if you were to sell that undercover put, you’re committing yourself to buying the stock at $155.
So that’s a $15,500 purchase commitment. If you didn’t like that idea, what you can do is sell the $155 put, I think we got two bucks for it, and then the $150 put, you could buy that, so you’re covered. So basically you’ve sold the $155 put, collected two bucks, and the $150 put, when I checked out the prices yesterday, you could have purchased that for about a buck. So essentially what you’re doing is you are obligating yourself to buy the stock at $155, and then having the right to sell it at $150.
So your maximum risk is, or your maximum spread is those five points. So instead of having a $15,500 commitment, you have a $500 commitment. Instead of collecting 200 bucks in income, you collected 200 and then you spent 100 to cover yourself, so you collect $100 in income. So your profit potential on one contract is less because you’ve lowered the spread, but instead of a $15,500 commitment, you only have a $500 commitment.
If you take it a step further, one of the things you can do, let’s say you normally trade 100 shares at a time. You sell the uncovered put at 155, and then you think, well, I need to limit my downside a little bit, so I want to buy that other put. Well, sell two puts, sell two puts at 155, and then buy two of the 150 puts, and that way you’re collecting, you’ll still collect the 200 bucks.
I’m talking over myself here and I know it might get little bit scrambled, but essentially you’ve got two options that you sold for two bucks, you collected 400, and then you buy two options for one buck each, you spend 200 bucks. So you still collect your 200 bucks, you just have a $1,000 commitment now instead of $15,500. I hope that was accurate. If you’re confused on it, next time we get together, I’ll work it out on a spreadsheet and show it to you.
Rachel: Let us know if you want to hear more about credit spreads, because that seems like good option for people.
Jeff: But credit spreads, not to talk over you, but credit spreads are definitely, if you have a small account size and you’re looking at selling uncovered puts on stocks that are maybe outside of your comfort level, it’s a very, very good way of reducing your risk and reducing your commitment to that. The one thing I will say, though, is it works best on the weekly options. If you do it on a monthly basis, the problem with that is
If you’re right on the stock right away, if you’re right on the direction, you sell an uncovered put, the stock goes up, the uncovered put loses value. But the put that you also purchased loses value. So it doesn’t matter that much if you have an option that expires in three or four days, you just run it out and they both expire worthless and you make the maximum profit. But if you have a month to go, it’s possible you’re right on the stock right away, the stock moves up, and then over the next 25, 24, or 23 days, the stock comes back down and now you have what used to be a profitable situation turns into a losing situation because you’ve committed for too long. So spreads tend to work best on short-term options and when I say short-term I mean the weeklies.
Rachel: I think that would be a really cool thing to cover maybe in our next podcast.
Jeff: I think that is just the biggest, most worthwhile comment for today.
Rachel: Good. Next question comes from Gary. What do you expect long-term treasuries to do in the next two months considering the world and the economic situation?
Jeff: Okay, see that the Treasury market I think we’re in a very complicated place or a very I Can’t even think of the word for it, but it’s not good the US Treasury we have a $37 trillion deficit in the United States $9 trillion of that comes due in the next several months So that has to be rolled over it has to be refinanced typically what they do is they issue new bonds pay off the old bonds
The problem is, is a lot of those old bonds were issued at much lower interest rates. We now have on the 30-year treasury, we have in the 10-year treasury, we have the highest interest rates we’ve had in 18, 19, 20 years. So we’re refinancing at a higher rate. I’m certain the fed would love to have a situation where they can do it, or the treasury would love to have a situation where they could refinance these bonds at lower rates. I just don’t see how that’s going to happen. And so if I’m a treasury bond trader, I’m fading any rallies in the treasury bond market. We’ve had a good one week rally, I think, in TLT, which is the exchange rate of fund for 20-year treasury bonds. Pretty good rally with that. But I think that’s something I would fade. I would look to sell and to shrink on that. So if you look at resistance lines on TLT or I don’t want to get too complicated here, but somewhere around 89, 90 bucks a share on TLT looks to me like a good place where I would take a short position.
If I was inclined to do that. I think the treasury bond market is going to have some difficulty because we’ve got to borrow a lot of money and this one Big Beautiful Bill they keep trying to pass through is going to require borrowing a lot more. So the more money we borrow, the more is required for foreign investors to step up. And right now, another problem is you see the dollar just getting trashed. The dollar’s fallen out of bed the past couple of months.
So foreign investors, you know, they’re getting a double whammy. The bond prices are falling and the dollar is falling against their currencies. So that’s not an attractive situation for most foreign investors to step up and buy treasury bonds. So I think that if the market is going to have a shakeout move, it’s almost always inspired by poor action in the treasury market. And I think that’s where the biggest risk the stock market exists at the moment.
I know that doesn’t sound exciting.
Rachel: No, it’s a huge deal, clearly. And I just am so interested to see how it all shakes out because, like you said, there’s a lot of things that you’ve never seen before. So means I definitely have never seen them before.
Jeff: No, the fascinating part is when you go back to like last September when the Fed first lowered interest rates, everybody was talking about, we need lower interest rates, we need lower interest So the Fed says, okay, fine, we’re going to lower interest rates half a percent, 50 basis points. And I said at the time before it happened, I said, when the Fed does that, the odds are pretty high that the long-term rates will actually go up because of the way that that works. And that’s exactly what happened. So now you have all this pressure on Mr. Too-Late Powell to lower interest rates.
And I’m saying he’s a little bit handcuffed because if he lowers the short-term rates, he’s going to push long-term rates higher at a time where they need to refinance $9 trillion in refundable bonds. That’s a difficult situation to be in. I don’t envy him.
Rachel: Me either. Let’s hit our last question for today. And it might actually be a longer question to answer than I kind of initially thought. So…
How does Jeff Clark determine risk versus reward for a given trade? This is from subscriber Bruce.
Jeff: Okay, that’s not that hard to understand. When I buy an option, I’m putting up, let’s say I pay a dollar for an option. I’m willing to risk 100 % of that because my risk parameters, I look at a situation where I think the stock might do something. So rather than risking money in the stock, I’m going to take a very small amount of the money that I would risk in the stock and trade an option with it.
So I’m willing to risk 100 % in any option that I purchase. But in order to put the risk reward on my side, I also in that situation need to be able to make at least 100 % on that option. So if I’ve a stock at 20 bucks a share and I think it could go to 25, the most I would pay for an option with a strike price of 20 would be like two and a half bucks because I can put up two and a half. If I’m right here, it goes to 25. That call option would be worth five. So I’ve doubled my money. That would be the minimum that I would expect in a risk/reward situation.
If I have to pay more than two and a half, or if I don’t think the stock can go past 23 or 24, I don’t take the trade because I’m not being rewarded commensurate with the risk that I’m taking. Ideally, I like to be able to make twice as much as what I’m risking. So would buy an option for two, thinking that at some point I might be able to sell it for six. So I could make four bucks while I’m risking two.
Obviously, the higher the potential reward, the better the setup for that. There’s situations where I’ve gone and I’ve bought 10 cent options because I thought, gosh, if at the end of the day, if the market does this, this thing could be trading for a buck. And so I’m willing to take a little bit of money and risk it on that, but that’s where probability now enters the fray because now you have to look at what is the probability that a stock will do what you think it’s going to do over the time frame you hold that option.
So there’s a handful of factors that come into that, but really the bottom line is, when I look at a stock situation, I project where I think the stock could move. And oftentimes it’s usually back to the 50-day moving average. If we’re stretched way below, I’m looking for a move back up, if we’re stretched way above, I’m looking for a move lower. I want to know that I can make enough on the option to at least double my money because I’m willing to risk 100%.
Rachel: Okay, so the way that you find those is by looking at the 50-day moving average and saying, I think it’s going to go back up or meet it back down. That’s sort of where you go.
Jeff: Well, yeah, I look at a stock and I try to figure out where I think the stock is going to go. And if I can make reasonable estimates where that stock is going to go, then I go to the option market and I see what they’re priced like. A good example is one that I didn’t take. know, Bitcoin, I talked to Barish about Bitcoin a couple of weeks ago. I think it was trading around $108,000 a point. It’s still about $107,000 or $108,000. But I looked at BITO. I think it was trading around $21 something.
And I was thinking about buying put options or recommending put options on BITO. And when I looked at the chart of BITO, I thought, okay, the best-case scenario for a downside move, maybe the stock gets to 18. So I was looking for August puts that would allow me to be profitable on move down to 18. The stock was trading around 21. The 21 puts were priced at three or 270, something like that. I couldn’t make that recommendation because my target price on BITO was 18.
So if we buy the puts with the strike price of 21 and we actually get to 18 and it takes a little while to do that, then those puts are going to be worth about three. The intrinsic value is three. I’m not going to pay 270 for a put option that I think if it hits my target is going to get to three. That’s a very poor risk reward situation because I’m risking $2.70 to make 30 cents. That’s a poor risk reward situation.
I would take the opposite if I had to pay 30 cents for it thinking it could be three, that would be wonderful. But that didn’t exist.
Rachel: Makes sense. And if you are a Delta Report subscriber or a Jeff Clark Alliance subscriber and wondering where to kind of start your search for stocks that fit those parameters, we have a new widget through TradeSmith that every single day puts out the top five bullish and top five bearish stocks. And it’s a really good place for you to start your research. So maybe in one of these podcasts we’ll go through that widget and see how you would trade those. What do you think?
Jeff: Yeah, I think that’s actually a really good idea. Let’s do that on the next one.
Rachel: Sounds great. Well, that’s all we have time for today. I hope that you enjoyed our second official podcast with Jeff Clark. And again, let us know if you enjoyed it. If you have any questions that you want answered, write in, tell us, and we’ll see you next month.
Jeff: Thanks everyone.