Friday Morning - Google, GE and Citi Oh My!
by Phil - April 17th, 2009 8:02 am
Never before have such important earnings moved the market so little!
Last night we heard from GOOG who once again pulled a rabbit out of the hat with an 10% increase in revenues as there was a huge surge in searches relating to unemployment, bankruptcy, foreclosures, loans, alcohol and gambling proving that there is always someone who can fiddle while Rome burns. We are thrilled, of course, as we played GOOG to flatline and it looks like we’ll get our wish as my trade idea on Google in yesterday’s Member Chat was: "May $400 calls for $17.25, selling Apr $400s for $9 and May $370 puts for $15.55, selling Apr $370 puts for $7.15." We’ll see how it actually performs but anything between $370 and $400 should be a very nice win on this trade!
As David Fry’s chart indicates, GOOG was already driven hard to fill it’s October gap and faced significant resistance at $390. Also facing significant resistance at Google is their market share, which was 79.9% in October of 2008 and is 81.39% as of March. Another negative that came out of the CC was that the company is getting lower click conversion rates, possibly indicating that this form of advertising is being ignored more often by the users. In fact, AdSense revenue was down (3%) for the first time ever. As GOOG is still very much a one-trick pony, the analysts on the line pressed management hard about how they could monetize other products and what new revenue streams they would be developing. To Google’s credit, people have been worried about this for 2 years yet, despite the recession, the company did post their best quarterly profit ever and they did it the way well-managed companies do - by watching the bottom line.
GE handily beat low expectations of .21 per share earning .26 despite revenues being down 9% from last year. "Only" a 36% drop in quarterly profit is good enough for the bulls and GE is up 5% pre-market. Don’t get me wrong, I love GE and we’ve been playing them positive for quite some time but this is the BEST company in the market. GE barely scraping by is no reason to stage a broad market rally! Another best of breed is CitiGroup and they also were "less worse" than expected with losses of just .18 per $4 share for the quarter but analysts had projected a .34 loss so yay, I guess… Investment…
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Testy Tuesday
by Phil - April 7th, 2009 8:07 am
Wheee - Down we go again!
We held our levels yesterday and we dared to remain bullish into the close and we’re going to be punished for it this morning as the IMF tells us there may be $4Tn in toxic bank debts out there, only $1.3Tn of which have been written off to date. That knocked 100 points off the pre-markets as of 7am and we’ll see where we actually open as the rumor of a statement from the IMF that won’t be released until the 21st is, so far, the only bearish news we have this morning… .
Our plan was to stay bullish this morning and move more bearish ahead of tonight’s earnings release. Yesterday’s close was so strong (fake, but strong) that we expected some follow-through back to test last week’s highs, less than a point away from yesterday’s close. Fortunately, we went bullish in my 2:52 Alert, 50 points below the close and I laid our a mattress plan for members in comments so, hopefully we can ride out this storm without too much damage. I will remind everyone here and now that FXP calls are a great play if the US markets pull back as the Hang Seng barely budged this morning but was rejected at 15,000 into the close so a big US sell-off will almost certainly spark one in Asia tonight.
Now we’ll be watching yesterday’s lows of Dow 7,870, S&P 822, Nasdaq 1,580, NYSE 5,175 and Russell 440 but there is no change in our expectations of the inevitable retest of last week’s support levels of Dow 7,636, S&P 805, Nas 1,525, NYSE 5,075 and Russell 420 once earnings get started. Our QIDs should serve us well today as should our short sale of FAZ puts as the financials pull back (sending FAZ higher) - all these were mentioned as the plays we were making in yesterday’s morning post, so don’t act all surprised today that they’re paying off. Hedging with ultras is great fun when you use them sparingly but our bread and butter protection remains the DIA puts (also discussed yesterday morning). We covered those to go bullish into the close but it was by selling DIA $80 puts for $2.37 as we really felt 7,750 would hold at any rate and we wanted to collect the premiums while we can with just 8 trading days left to expiration. See comments for our adjustment strategy on this one!
We’ll be watching for that breakout…
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Weekly Wrap Up
by Phil - April 5th, 2009 7:32 pm
Another week, another 5% gain - isn’t the stock market easy?
We’ve gained 1,400 points in 4 weeks from our March 9th low of 6,600 - pretty impressive on the whole - but we have suffered a serious decrease in upward momentum since March 23rd, when we finished at 7,775. That’s 1,175 points in 10 sessions followed by just 225 over the next 9. It’s a little hard to reconcile this very toppy sort of action with the "bull market" mania that has swept the media this past week. We’ve been bracing ourselves for a slap of cold water all week that never really came although this weekend the WSJ ran this nasty unemployment graph along with an article titled: "Time to Brace for Trouple as Profits Debacle Starts" which reminds us why we went into the weekend 55% bearish.
In last weekend’s post I warned: "Don’t forget I was looking for something like a 5% pullback and "all" we got was 2.5% so far" and it only took minutes out of the gate on Monday morning to give us the rest of that 5%. I reposted our target levels on Monday morning of Dow 7,636, S&P 805, Nas 1,525, NYSE 5,075 and Russell 420, which were well tested Monday and Tuesday until we got a proper breakout on Wednesday morning.
I was actually more optimistic on Monday than I am today as Monday our plan was we were hoping to hold our pullback levels and form a base we could build off. The problem was the way we did rally made no sense - we didn’t climb a wall of worry - we climbed a wall of ACTUAL bad news that gave us brand new reasons to worry. While the difference may sound subtle - it’s actually a big deal! As a UBS economist I quoted in Monday’s post said: "he housing market isn’t about to start booming, but the intensity of the pain will probably recede." This is the result of our abusive relationship with the markets as they declined over 50% in 6 months - the mere absence of pain is treated as pleasure.
We had 4 new trade ideas from the Weekend Reading post in HIG, ING, FXE and BLK with all but HIG solidly performing already. As with most of our stock entries, we have been hedging with puts and calls sold against to insulate us from another downturn - just in case… Monday we got…
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Testy Tuesday Morning
by Phil - March 24th, 2009 8:00 am
Wheee, that was great fun!
Well we certainly needed that but what was it? I was really happy until 7,685 at 3:33 when I made a call to short the Dow as the run was looking kind of excessive. That was 90 points too early but we went into the close 60% bearish, with no covers on our long DIA puts. I would be thrilled to see us keep going but 7% in one day is not normal.
Of course, what also wasn’t normal was the forced sell-off on Friday, that took us down from a nice consolidation at around 7,450 and 7,775 is just a bit shy of a 5% move off that line, which would be 7,822. That puts things in a bit better perspective and 2.5% over 7,450 is 7,636 so let’s watch that line and see if we can hold it this morning on a pullback (call it 7,650).
Remember last week I went bullish at 7,400, looking for a breakup and we ended up 55% bearish on Friday as we had that disappointing loss of our levels in the afternoon. That was easy to remedy yesterday as we quickly covered our long DIA puts right out of the box (a call that was so obvious I sent out the alert at 6:49 am) and those puts got spanked so badly that we were able buy them back cheap and roll up our longs and then sell a whole new set of puts (who also got spanked) mid-day. So when I say we went naked on our long puts - they are much better puts than we half-covered with on Friday. In that same alert we tried to to buy the RUT 398 futures but, sadly, they gapped away from us before we could get in and the Russell zoomed up to 430 - at $10 per tenth of a point per contract, that’s 420 ticks!
In the morning post (and remember, you MUST register for a Free Sample Membership to keep getting these) I mentioned we had picked up FAS at $5 and sold the naked $5 puts for $1.20 on Friday. FAS finished at $7.07 (up 41%) and the $5 puts finished at .65 (up 45%) so nice gains all around. Of course we flipped on those now and are playing FAZ off these lows ($19.20 now) with a long spread as an entry we like. Other than having fun with our ultra financials, there wasn’t…
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Weekend Wrap-Up - Dynamic Portfolio Adjustments!
by Phil - March 14th, 2009 11:40 am
Was that a great week or what?
No really, I’m asking as I’m not sure yet… We had a great rally once we got Monday out of the way but, all in all, it was a hell of a lot of work to get back to where we were last options expiration day (Feb 20th). We nailed the market turn to a tee, beginning with my calls to go long on QLD, HOV and FAS while shorting the SKF at $250 (now $138) in last Friday’s appearance on LiveStock. In fact, my closing comment in Friday morning’s post was: "We EXPECT a 400-point BOUNCE along this downtrend so we’re not even impressed with anything less than 7,000 next week."
We did a little further investigation in member chat yesterday and decided that we need to break 7,450 on the Dow to actually be impressed next week. Our main concern is we get a quick spike up to that level and then a rejection that sends us racing down to the bottom so we will be positioning to guard against that next week. At the moment, we ended the day slightly bullish but would not be surprised by a drop back to the 7,000 line and we’re positioned for that, as we sold the 3/31 $72 puts against our longer puts. The $2.25 we collected from those pays for us to roll up our long protection 400 Dow points but, to the downside, put a break on our insurance at the 7,000 line (the point at which they go in the money).
By contrast, last Friday, my advice to members was to cover the long DIA puts with $70 puts at $4.32. Those are now .61 and the profits from that already paid for more than half the cost of our long June puts. This is very important to understand as we often talk about being 50/50 or 60/40 bearish but when you can offset 1/2 the cost of your 60% bearish side like this, it makes it very easy to go with the flow on a market rally. The only other stock I picked on Friday was AMZN as $62.50 for reasons I elaborated in the live show, they finished up near the highs at $68.63 but the FAS as $2.85 was a real winner, finishing up at $5.15 yesterday - not bad for a week’s work.
Of course nothing says lovin’ like a $110 dive…
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Another Weak Weekly Wrap-Up
by Phil - March 1st, 2009 2:24 am
This is getting tedious!
We were bearish going into the week but not this bearish. It is unusual though that we have a weekly wrap-up with nothing but negative plays as we did last week but there was nothing very positive in the outlook after the action of the week of the 16th through the 20th, pictured here on this chart.
As I said in the last Weekly Wrap-Up: "Of course nothing beats sector specific covers against your own mix of positions but we like using the DIA puts as general portfolio coverage although, as I mentioned last week, both the DAX and the Qs may now have farther to fall." The Qs ended up dropping 8.5% for the week while the DAX tumbled 6%, underperforming other global indexes as we had expected it would. Our hedge play , the DIA June $77 puts, which we went with at $8.22 on Friday and half covered with March $75 puts at $3.85 ended up at $9.85 and $5.40, not much improvement but accomplishing it’s goal of converting a net $6.29 entry into puts that are now 100% in the money to our net entry. At this point, every point down on the Dow is a penny we realize in intrinsic value. Per our original plan, the $75 puts can still be rolled to 2x the Apr $66 puts, now $2.32, allowing for our long puts to be $11 in the money against the puts we sold. The reality is more complex than that as we day-traded the covers around and rolled up the longer puts but we went into this weekend with the same bearish half-cover, not wanting to take chances after Friday’s poor performance.
On Monday morning, I was not at all enthusiastic about our prospects for the week as we had the Bernanke testimony Tuesday and Wednesday and Trichet started us off with a thud by stating: ""In recent weeks we have seen the first signs of falling credit flows. An important part of this fall is demand-driven. However…there are indications that falling credit flows reflect also supply-side factors and tight financing conditions associated with a phenomenon of deleveraging. If such a behavior became widespread across the banking system, it would undermine the raison d’etre of the system as a whole." Perhaps he was channeling Nouriel Roubini, who on Saturday had told the Wall Street Journal: "J.P. Morgan took over Bear Stearns and WaMu.…
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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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