Which Way Wednesday – Topping or Popping?
by Phil - January 19th, 2011 8:30 am
When we first began following the Alpha 2 TradeBot pattern on Jan 3rd (see Stock World Weekly for current chart) back on Jan 3rd, I said: "Let’s assume we get that extra 2.5% between Friday’s close and expiration day – that’s going to take us to Dow 11,850 and S&P 1,285." Yesterday the Dow hit our 11,850 mark, 2 days ahead of schedule! If we break higher here (and the S&P is already at 1,295 – see David Fry’s chart) then we are "off the charts" and possibly running a whole new series – which is very possible as last year the IBanks didn’t have $25Bn worth of POMO a week to feed into their machines – that has to be worth something right? At least 10 S&P points…
If, on the other hand, S&P 1,300 becomes a hard stop and the Dow can’t hold 11,850, let alone break up over 12,000 – then the second part of my prediction was that we would pull back to Dow 10,900 and S&P 1,188 – a test of the 200 day moving averages. If we get that pullback and those levels hold, THEN we will be happy to get on the bullish bandwagon – we just want a test!
Not, of course, that we are waiting around doing nothing. We already had our "Secret Santa Inflation Hedges" and, at this point, you either have them or you shouldn’t even look as they are up well over 200% already and the market is "only" up 2.5% since then. We were waiting patiently for Russell 800 to confirm our Breakout 2 levels and we not only got that but we got several nice tests since then so we’ll have to put that one in the "win" column as well for the bulls.
While I don’t like chasing the MoMo stocks higher, AAPL and IBM show us that there are some solid fundamentals underlying the big boys and I mentioned in the Morning Post of the 6th that I did like CSCO ($20.77 at the time) and GLW ($18.98 that day) as solid, go-forward positions. Even without our option plays, they are both up nicely in less than two weeks – certainly a higher percentage (5% for GLW, 2.5% for CSCO) than AMZN, which is up $3.50 (1.8%) or NFLX, which is up $6 (3.2%), who I cautioned…
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13% Thursday – When Will You Capitulate?
by Phil - January 13th, 2011 8:16 am
It’s starting!
The last of the bears are now capitulating. We’re hearing it in Member Chat and we’re reading it in analyst reports and we’re seeing the fund managers on TV – it is very out vogue to be a bear.
Just a few weeks ago, I pointed out to Members how few bears remained by saying "Look to your left, look to your right, look in front of you and look behind you – you would be the only bear." That was way back when "only" 20% of investors were bearish – as of yesterday, we lost 1/3 of those poor creatures and now only 13% of the market is bearish. Now you can look diagonally as well and you’ll STILL be the only bear!
Certainly the market seems to be proving the primary axiom of "You can’t fight the Fed." Pretty much no matter what happens, the market goes up. Bryan Leighton from Traddr! Makes a good point saying: "It’s a neutral to positive market and the only thing that can change that is some sort of surprise event out of Europe or out of Asia or something major out of the US that the Fed is not ready for or prepared for. If they are prepared for it – it will not happen – it will not have a major effect on the markets."
That’s the reality we’re dealing with out there. As long as the Fed and their pet IBanks are running the markets and as long as volume is at 3-year lows, allowing the TradeBots to control each move – then it is wrong to be a bear. But, is it 87% wrong? 87% bullish sentiment isn’t just "very" bullish – it’s a new, historic high. It’s like going to a fight where the entire crowd only cheers for one guy which, like professional wrestling, would be an automatic indication that the game must be fake, Fake, FAKE!
As you can see from this longer-term chart, we are as extremely bullish now as we were extremely bearish in the two worst market events of the past quarter-century. Much the way that Black Monday of 1987 and the Crashes of 2008/9 were unique buying opportunities at 15% bullish, this may be a unique shorting opportunity at 15% bearish that you are not likely to see again for…
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Take-Off Tuesday – Playing the One-Way Market
by Phil - January 11th, 2011 8:28 am
Up, up and away!
It’s Super Market! Strange index from another reality, who ignores bad news and achieves p/e multiples far beyond those of rational markets. Super Market, who can break resistance on low volume, move higher without consolidation and who – disguised as a genuine Price Discovery Mechanism, an actual indicator of the true-value of listed companies – Instead fights a never-ending battle with rational thinking and negative data because, in America, the market is only allowed to go one way!
OK, I got that sarcasm off my chest, now we can cheer-lead. Go Russell 800 go! Is today finally the day? After a rational-looking sell-off yesterday on very legitimate concerns over the fact that Portugal is now borrowing money at over 7% interest (a rate that would cost the US over $1Tn in interest annually), we had essentially a "Free Money Day," where the market goes up and up and now we have even better futures, where another 0.5% is being tacked on in early trading (7:30).
Let’s embrace the positives first and foremost. Both Japan and China have now stepped up to assist the 17-member EU to beat back high rates by pledging to actively participate in this week’s bond auctions, the first of the new year. The IMF (mostly the US) has also pledged to backstop loans – all this is giving the Euro a nice 0.5% bounce that has knocked the dollar down to 81, which is down 0.6% from yesterday’s open so of course our markets are up 0.6% – THATS WHAT ALWAYS HAPPENS!
What doesn’t always happen is the Nasdaq punching through the 2,700 mark on the back of AAPL’s run to $345 as the expected announcement of the Verizon IPhone is pushing Apple’s expected 2011 earnings past the $20 per share mark so $340 (p/e 17) sounds almost conservative compared to BIDU (p/e 87), AMZN (p/e 74) or NFLX (p/e 71) and, if you think about it, Apple has a search engine, sells things on-line and has Apple TV, which does Netflix’s job so if Goldman Sachs can call Netflix the "killer app" for tablet computers – what does that make Apple TV, which is designed to run off the IPad and includes Netflix as just one of its offerings?
The Wednesday before last, we made shorting the AAPL 2013 $175 puts at $8 the base for buying…
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Weekend Reading – Reviewing the Reviews
by Phil - January 1st, 2011 8:28 am
I am still trying to get more bullish.
I was thinking about writing something cute like I resolve to get more bullish but that would be wrong. I try, in my own humble way, to "get" the market right. That means I am not bullish or bearish but Truthish (to further botch Stephen Colbert’s use of the word) and, as Buddah says: "There are only two mistakes one can make along the road to truth; not going all the way, and not starting." Confucious reminds us that there are three methods by which we may learn wisdom: "First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest."
In that spirit, we will spend the day in reflection so that we are better able to start on that long road to the truth so that we will be better able to imitate the things that will work in the year to come while trying to avoid making mistakes that will give us bitter experiences.
This post is not about me – We had a fantastic year and I’ve already given some outlook for 2011 back on the 19th in that weekend’s "It’s Never too Early to Predict the Future" and our current position is short-term bearish in the Jan-April time-frame, looking for a pullback to at least 1,200 on the S&P and possibly back to 1,150.
After that, we are expecting a return to steady gains but without the irrational exuberance we’re currently experiencing. So no, I am not bearish – I simply think we’ve gotten ahead of ourselves. Since we don’t know where the rally train will stop, we have our "Breakout Defense – 5,000% in 5 Trades or Less" from Dec 11th, which were a set of very bullish, highly levered plays where a little bet can pay off a lot if we simply hold our long-established breakout levels.
How much is "a lot"? Well my GE trade idea, for example, was to sell the 2013 $12.50 puts for $1.10 (net $1.15 in ordinary margin according to TOS) and to use that money to buy the 2012 $17.50/20 bull call spread for .95, which was a net .15 credit on a $2.50 spread that was on the money at the time. GE has gained about .75 since the 11th and…
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Monday Market Movement – “Like Moths to a Flame!”
by Phil - November 29th, 2010 8:01 am
"Investors are drawn to China like moths to a flame." – Neil Woodford
That’s a great quote. Neil is the head of investments at Invesco, running the UK’s largest investment fund with a decade of 15% average returns under his belt so let’s take the man seriously for starters. Mr Woodford’s concerns coincide with figures showing that food prices in China were 10.1pc higher in October than in the same month last year – a level of inflation not seen since mid-2007. This is deepening concern that China’s economy is now starting to overheat.
"I do not deny that in the long term an economy like China will grow much more rapidly than the West. But I think one has to be very careful about correlating growth necessarily with economic opportunity, and opportunity to make money," said Mr. Woodford.
And so it is that the moths are all drawn to the light, even as it burns them. For they are blindly drawn to its grace, hitting their heads about the light, destroying their senses, going without food, and becoming easy prey to those that hunt them. Even those few moths that will get within the embrase of the light will burn unable to escape, ever.
There was no escape for Ireland this weekend as the IMF and EU pinned the country down and forced them to swallow a $130Bn aid package at (get this!) 6.7%. $17.5Bn of this money is to come out of Irish pension funds all just to make sure Bill Gross doesn’t lose any of the money he lent to Ireland! I honestly cannot tell you who is the more vile, despicable villain in this debacle. Is it the banks, who started this mess with their idiotic lending practices? Is it the lobbyists and lawmakers, who turned Ireland into a tax haven for EU Corporations and destroyed the economy by funneling tax breaks to the wealthy? Is it the Irish Government, who stupidly bailed out the failing banks with guarantees that put the nation on the hook for more money than their entire GDP. Is it the bondholders, who drove up the cost of financing Ireland’s newfound debt to levels that threatened to break the National Bank or is it the EU & IMF, who are effectively playing the role of loan sharks, borrowing $100Bn at…
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Tempting Tuesday – Getting in the Zone
by Phil - November 16th, 2010 8:29 am
It’s hard to be in cash, isn’t it?
I’ve been calling for cash for weeks and now I’m starting to feel like Braveheart, trying to get anxious Members to hold, Hold, HOLD in chat every day as traders, by nature, like to trade and sitting in cash waiting for market certainty is pretty boring. Of course it’s a lot less boring than riding the market down all tied up in positions, isn’t it? As you can see from David Fry’s TLT chart, we did get it right when I called a top on Treasuries at $105 (Sept 24th) but it did take it a little while before it really began breaking down – better early than late in your market timing!
I was early with "October’s Overbought Eight" on the 3rd although, obviously, we had a few huge winners on our short-term plays as we caught that first dip on NFLX, PCLN, BIDU and FSLR while AMZN is looking good as is TLT (Dec $102 puts now $8.50 from net .35 entry, up 2,328% and done, of course). MOS, on the other hand, went up and up but is finally backing off it’s run. Dec $62.50 puts at $2.10 should do quite well if they fail to hold the $65 line.
CMG, on the other hand, has become our white whale, now up 27% from where we first looked at them. The original play was a ratio backspread of 4 March $190 calls at $10.75 ($4,300), selling 5 Nov $175 calls for $8.75 ($4,375) which was a net credit of $75 on the spread. The good news is the March $190 calls are now $51 ($20,400) but the very bad news is the Nov $175s are now $56 ($28,000). We have, of course adjusted this trade several times but it is still very painful to wait out.
An example of a simple adjustment on a trade like this is to roll the calls to 10 Jan $210 calls at $28 ($28,000) and rolling the March calls to 8 June $230 calls at $29 ($23,200) so an extra $2,800 put into the trade to buy a more manageable 6-month spread. When you do this, you have to keep in mind that your net entry has gone up from a $75 credit to a $2,725 debit and killing the trade now would cost $4,800 more so the…
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Herbalife Optimist Secures Insurance Policy Ahead of Earnings
by Andrew Wilkinson - October 21st, 2010 4:04 pm
Today’s tickers: HLF, REE, XLB, BIDU, DAL, RSH & MOT
HLF - Herbalife, Ltd. – It looks like one cautiously optimistic options trader initiated a delta neutral hedge on the maker of weight management, nutritional supplement and personal care products this afternoon ahead of the firm’s third-quarter earnings announcement scheduled for release after the close on November 1, 2010. Herbalife’s shares are currently down 1.25% to stand at $63.20 as of 3:45 p.m. in New York trading. The investor appears to have picked up 58,000 Herbalife shares at a price of $63.76 each as well as 2,000 calls on a 0.29 delta for a premium of $1.45 per contract. The long stance taken in HLF shares suggests the trader is bullish on the stock and expecting shares to climb higher. But, the put options serve as downside protection in case the investor’s inclinations fail to align with the performance of the stock going forward. The put options will be well worth the added premium if earnings are disappointing and shares head lower ahead of November expiration day.
REE - Rare Element Resources, Ltd. – The Canada-based company that was the target of bullish options trading just 24 hours ago has transformed into a hub of bearish activity. Shares in Rare Element Resources, which own the Bear Lodge mine in Wyoming, fell as much as 27.05% from yesterday’s high of $13.71 to an intraday low of $10.00. Despite the substantial decline today the current price of the stock is still up roughly 260% since August 20, 2010, when shares were around $2.80 each. Pessimistic players took to the options field on REE to place bearish bets on the stock. Investors expecting shares to continue lower picked up put options and sold call options in the November and December contracts. Traders picked up…
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Trade War Tuesday – China, Japan and US at Odds
by Phil - September 28th, 2010 8:20 am
War does not determine who is right, only who is left. – Bertrand Russell
Just when you thought it was safe to go back in the water, Japan and China are at it again. We discussed the "fishing’ incident last week and Japan has released the Chinese captain who rammed one of their Coast Guard vessels. Now shippers in several Chinese cities said customs officers have stepped up spot inspections of goods being loaded onto ships bound for Japan and being imported from the country. Traders said officers in some cases were taking the highly unusual step of looking at every item in a container instead of following normal practice of examining a small sample. The heavy searches, which can add costly delays to shipments. For it’s part, Tokyo wants China to pay restitution and now China’s navy is moving into disputed waters.
China is fighting a trade war on two fronts as they are threatening to retaliate against US businesses operating in China if Congress passes legislation intended to force a revaluation of the Yuan. The House of Representatives is set to consider legislation this week that would let companies petition for higher duties on imports from China to compensate for the effects of a weak yuan. Forcing China to raise the value of its currency may create 500,000 jobs in the U.S., most in manufacturing at above-average wages, according to C. Fred Bergsten, director of the Peterson Institute for International Economics in Washington. China’s currency, which is undervalued by as much as 25 percent, is the most important trade issue facing the U.S., he said in testimony last week.
So we are pressuring China to strengthen their currency, which would make our currency relatively weaker. One would think the dollar couldn’t get much weaker than it is now (see Dave Fry’s chart). We’ve been shorting GLD (buying GLL) and TLT, expecting a dollar bounce off these levels but if we fail here – we’re going to have one very ugly chart.
Of course a 10% drop on the dollar could be just the ticket for the markets – since our stocks are priced in dollars. That makes them look pretty good compared to cash that’s sitting on the sidelines (or tied up in notes) that’s lost over 10% of it’s buying power since June.
That’s right, JUNE! As people who travel to…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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