Short (but Wild) Weekly Wrap-Up
by Phil - April 3rd, 2010 7:55 am
What a crazy week!
The markets were bucking like a bronco but were they trying to throw off the shorts prior to a move back down or trying to flush out the weak-handed longs prior to a big breakout to new levels? After gapping open to 10,900 on Monday morning we went up to 10,950, down to 10,830 and back to 10,950 – all to finish the week at 10,927, which is up 39 points since March 23rd so don’t tell me we’re wasting out time as that’s 5 points a day baby (if we round up).
We had the day off on Friday but we did get the critical Non-Farm Payroll data for March but, as noted in my report (and in the Member Chat), despite the very excited reaction from the futures, there is no clear indication there that either the Bulls or Bears have a lasting point. So perhaps the wild market action is nothing more than good old-fashioned indecision – the futures flew up but then Goldman said they saw "Little Underlying Improvement" in the data and that "Productivity Gains Have Diminished Sharply" - clearly mixed signals that may take some time to resolve.
Last weekend, I complained that it was a "6-Point Weekly Wrap-Up" as that’s all we got from the S&P, which finished at 1,166. This week I am happy to report that we gained 12 points – all the way to 1,178 and we are closing in on that 1,080 mark, which we did touch briefly at Thursday’s open (which gave us the great shorting opportunity we had looked for in Thursday morning’s post!). It’s not that I don’t respect the rally – technically, you have to respect the rally but that’s why we’re in cash: We can take advantage of these huge intra-day moves down (and sometimes up) - getting our 6-second bull rides and scoring as many points as we can before the rodeo clowns turn on the buy programs and stop the ride.
Overall, it’s a pretty mindless market. You can go long at about about 2pm and flip short about 10 am the next morning – in the futures that can add up to shocking amounts of money and it sure isn’t bad when you are using options for leverage either. We’re sure the game will collapse one day and hopefully we’ll be able to pull the rip cord without…
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Weekly Wrap Up – Cash Out Edition
by Phil - March 21st, 2010 5:20 pm
How did I reach my breaking point on Friday?
Well, I haven’t been happy about the action for the whole month of March and this week was simply the last straw, where I feel the risk of being long now outweighs the likely rewards. Even all the bullish analysts in 12 of 13 of our beloved IBanks are "only" projecting the S&P to gain another 7.5% for the year. That’s not even 1% a month so excuse me if I decide it’s time to take a 7th inning stretch after we’re already up 70% of 77.5% projected over 2 years. As I said when reviewing our Buy List, where we are closing out 22 of 37 stocks – you just aren’t supposed to make an average of 28% with 64 winners on 66 picks in 6 weeks – it gets to a point where it’s just foolish not to cash out and take a rest.
Make sure you check out our latest round of Disaster Hedges as well, "5 Plays that Make 500% if the Market Falls" is a good way to keep your toes in the water! In last Weekend’s Wrap-Up I was "Still Trying to Get Bullish" and I was wrestling with killing the Buy List then - doing the full review this week is what killed it for me because - if I go over the fundamentals of 37 of my favorite stocks and can’t see more than 15 plays I’m enthusiastic about keeping – then it’s a good bet I’m not going to be too wild about the rest of the market either.
If I were a real bear, this would be great and I’d just be running around yelling SELLSELLSELL but I am, believe it or not, a generally bullish guy who prefers to play an up market but I am also realistic enough not to fall so in love with my positions or bullish premise that I don’t know when it’s time to give things a rest. We haven’t had a proper pullback, we haven’t had good volume to the upside (Barron’s raised that concern this weekend) and we haven’t addressed many, many problems that are still out there.
Monday Morning – Moody’s Makes More Negative Noises
Moody’s got us off to a fun start on Monday morning, saying the US and UK are "substantially" closer to losing their AAA credit ratings as the cost of servicing their debt rose – a statement…
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Weekend Wrap-Up, Still Trying to Get Bullish
by Phil - March 14th, 2010 5:20 am
I’m having writer’s block this weekend.
Usually when I can’t think of what to write it helps me to go over our portfolios so I started this morning reviewing the Buy List but I didn’t get far because it was silly. Of 43 plays on the buy list, 39 are doing well – too well in fact to the point where it’s hard for me, in good conscience, not to say let’s kill the whole thing and get back to cash as we’re up about 20% in 2 months and that’s just ridiculous – most people would call that a good year and go on vacation.
The Buy List was 100% bullish and we did catch a good bottom on our early February entries. I was gung ho bullish then because I felt comfortable that the 10,000 line on the Dow would prevail and that we were good for a run back to the top (10,700), following, more or less, the pattern we had in 2004 (see original post for charts). Well that’s pretty much what’s happened since then but that’s not making me happy because I see no reason we won’t complete that pattern and begin falling off a cliff shortly.
As you all know, I’m not a big fan of TA, or patterns for that matter but the reason I started looking for patterns was to try to get a handle on how long market could really keep going up before falling victim to exhaustion. To me it seemed we weren’t at that point on Feb 6th but now that we’ve put in that big push back up – if we can’t punch up to new highs on all our indexes then I do think it’s time for the markets to take a break.
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Clearly I’ve been too bearish for the past couple of weeks and we are now 224 points over 10,400 on the Dow which is where I turned bearish as the January data made me lose faith in our ability to get back to 10,700. I should have stuck to the TA because we’re a lot closer to 10,700 than we are to 10,400. With the Russell and Nasdaq exploding to their own new highs. You can see though, from the above chart, why I do want to wait to see the NYSE, Dow and S&P confirm this move up – it’s not far now!
We’re…
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Wrong Way Weekly Wrap-Up
by Phil - March 6th, 2010 8:34 am
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This whole week did not feel right to me.
We were too bearish as I had expected a bogus commodity rally in last weekend’s wrap-up but I didn’t expect it to persist for a week, even as the dollar held it’s ground above 80, a 10% pullback off the top, when oil was $40, copper was $1.50 and gold was $850. Now oil is $80 (up 100%), copper is $3.35 (up 123%) and gold is $1,135 (up 33%). Let’s say gold is a true indicator of dollar weakness – that means that only 33% of oil and copper’s move up can be attributed to the 10% drop in the dollar (not that even that makes sense but we’ll give it to them). Can the rest be attributed to demand?
Certainly not with copper. Global copper consumption was down 1.9% in 2009 and Q1 2010 is lower than any quarter since Q1 2009 and even Barclays’ very aggressive targets for China growth only bring global demand up 2.5% this year – whch would just about bring us back to 2007 levels of consumption. That, of course, also assumes a rebound in housing construction – something we are not seeing at the moment. Also, China spent $700Bn last year stimulating their economy and one of the ways they did this was to stockpile copper. As you can see from the chart – that too appears to be winding down and even Goldman Sachs has abandoned the bullish side of copper at this point.
Oil is just as silly. According to the EIA, global oil consumption is not expected to return to 2007 levels until late 2011 – and that is with some very rosey estimates of a global econonomic recovery – exactly the type of thing that can be derailed by high oil prices! Mighty China’s consumption is projected to go from 8.66Mbd this year to 9.13Mbd in 2011, a 500,000 barrel increase. Last week, the US had a build in inventories of 4Mb – we just send those over to China and everyone is happy! I’ve already had my say on oil demand this this weekend, so let’s just move on…
Let’s just say I’m a little skeptical about any market moves that are lead by commodity pushers at this very early stage in a recovery. Prices are not going up based on demand but…
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Thrilling Thursday – Consumers Still Unemployed, but Shopping!
by Phil - March 4th, 2010 8:23 am
The MSM is so happy about the February Monster Employment Index!
They’ll tell you it’s up 10 points from January without mentioning that January was the worst month of the past 12 and, in reality, we are up just 2 points from last February when the shockingly poor data we were seeing sent the S&P all the way to 666 the next month. Today though, it is considered a reason to rally as people watching the MSM will believe anything the talking heads tell them because they don’t get shown the actual results and they trust their talking heads to have checked the facts carefully, rather than make them up, which is pretty much what they do.
We discussed the shenanigans of the ADP report in yesterday’s post and I did warn you that it was a fake rally based on happy headlines papering over poor data. As we expected, the market giddiness persisted until about 11:30 and then reality began to bite back. This was FANTASTIC for us as we were playing bearish into the rally but it’s very scary to hold bearish positions overnight but there’s no reason to hold options overnight when you pick up plays like our 9:54 Alert play on the DIA $103 puts, which averaged in at .77, hit $1 (up 30%) at 2:45 and finished the day at .94 (up 22%). You HAVE to learn to be satisfied with making 20% on day trades and cashing back out. Cash is flexible – overnight positions are not… In fact, since we did cash out yesterday, I was able to send out an overnight Alert to Members with a short on the oil Futures as they ran up to 80.50 which was good for a quick victory and then another this morning at $81, which is already up .30 with a .06 trailing stop (futures pay $10 per penny per contract so lots of fun for morning, pre-market trading!).
We went longer on our oil and gold shorts (in yesterday’s post it was GLL Apr $9 calls at .65) because we don’t expect them to resolve quickly but the chart on the left illustrates why we also firmly believe that this commodity rally is BS. This is a chart of the Employment to Population Ratio for Men 25-54 Years Old since WWII. Kind of puts a 2% year over year rise in the Monster Employment Index into perspective doesn’t it? 20% of the men in the United…
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Which Way Wednesday – The Beige Book Boogie
by Phil - March 3rd, 2010 8:15 am
The last Beige Book report was on January 13th.
At the time the futures were flying and we were bullish but Dow was looking toppy and I thought we were going too far, too fast and called for caution – despite our "Meatball Market" at the time. Just like yesterday, I was not happy with the fundamentals to the point where I felt it necessary to keep pointing them out while the parade of analysts at CNBC et al told everyone to BUYBUYBUY at the 10,750 top. I don’t like to be Chicken Little but sometimes the sky is actually falling! The January book had very little "good" news to report (see my analysis for Members that day) and we took our money and ran on the long side. Although it wasn’t until the next Tuesday that we actually went down – it was a doozy and we fell over 500 points in 3 days, all the way to 10,165 (our 5% rule) and we continued weakly through 2/8, when we bottomed out at 9,900.
Whoever said this charting stuff was complicated? Just follow the 5% rule, draw some lines and PRESTO – we know what’s going to happen! Well, at least we hope we know what’s going to happen because I’ve spent a good portion of my week so far telling Members NOT to trust the rally we’ve been having and to expect a downturn with today’s Beige book a possible catalyst for a correction. From experience, we know there is not generally an immediate reaction to what is essentially a collection of anecdotal evidence about the state of the economy but it does give us an overview of the nation and I haven’t seen much news in the 6 weeks since the last report to make me think this one will be showing any great improvements.
It’s a tough call at the moment because there is clearly a determined effort to get the markets to move up but we are loaded up with bullish plays from our visit to 9,900 so it pays to be a bit more bearish with our short-term plays as we test the top of our MAYBE range. We have had some good news this morning with MBA Mortgage Applications up 14.6% as rates fell back under the magic 5% mark and, of course, that’s a rebound off of last week’s TERRIBLE showing, probably weather related.
69% of the activity was…
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Weekly Wrap-Up – Buffett’s Daring Derivative Deal Does Well
by Phil - February 28th, 2010 9:30 am
I was going to talk about Buffett’s annual letter to investors.
Fortunately, I procrastinated and other people did some detailed reporting like Ravi Nagarajan, Andy Fry, Scott Patterson and Joe Del Bruno – who does a great job of pointing out that Berkshire’s 4th quarter results were propped up by Buffett’s $1.05Bn gains in derivatives betting (something Buffett himself once called "weapons of mass financial destruction" but, as we well know – if you can’t beat them…), which accounted for 1/3 of Berkshire’s $3.06Bn profits.
Buffett’s biggest bet was selling a put against the S&P 500 back in March – a move I said at the time was BRILLIANT and Buffett himself now says about his own options trading: "We are delighted that we hold the derivatives contracts that we do. To date, we have significantly profited from the float they provide. We expect also to earn further investment income over the life of our contracts."
What did Buffett do? Exactly what we teach you to do here at PSW - he took advantage of an irrational move in the markets and SOLD INTO THE EXCITEMENT, getting a fat premium from some sucker that bet the S&P would not hold 666 5 years from now. Buffett effectively sold $5Bn worth of puts that expires worthless at S&P 700 between 2019 and 2027, putting $5Bn in his pocket and holding aside $1Bn in margin, which is how much he’s already ahead on the bet. Like a good options trader, he has a plan and he’s trading his plan, making sure his investment is on track and patiently letting time do it’s work as it eats away at the put-holder’s premium.
What about the risk? Well I can’t speak for Buffett’s stop-loss technique but we’re talking about a company that has (had) $40Bn in cash using their excess margin to make a $5Bn bet that the S&P would not stay below 700 for 10 years. Buffett and I both tell people – NEVER buy a stock (or sell a put against one) that you are not willing to own for 10 years. The S&P was 5% below at the time and would have had to drop, perhaps, 20% more to cost him $1Bn so let’s call the stop 550 on the S&P where Buffett risked 2.5% of his cash against a posible 400% gain on his $1Bn risk allocation over 10+ years. While it is true that if the S&P dropped 50% in one day Buffett would be…
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Weekly Wrap-Up, it’s Only a 55-Point Drop You Wimps!
by Phil - February 7th, 2010 12:19 pm
That’s right, I said WIMPS!
I have never heard so much whining and crying and complaining about a market drop as I have the past few weeks. Last week, I pointed out that we had only fallen 105 points from the prior week (10,172 to 10,067) and this week we fell ALL THE WAY to 10,012 to finish the week and you would think the world was ending (again) from the way the MSM has been acting.
By Friday the panic was palpable as we gave up Monday and Tuesday’s bogus gains to test new lows for the year – testing, in fact, the lowest levels the market has hit since last November and I pointed out in Friday’s post that it reminded me of when BSC and LEH went under and everyone panicked and sold Financials off to the point where Warren Buffet was willing to give GS $5Bn AFTER they bounced 50% – THAT’s how undervalued the financials were in November of 2008.
What do we do while people are panicking? We BUY! We don’t BUYBUYBUY like Cramer’s Pavlovian Peons but we sure do BUY and take some nice entry positions with sensible hedges. I was finally motivated to finish updating our Buy List on Friday and 18 of our 38 positions were highlighted (immediately actionable) on Friday. Sure they may go lower, but we’re buying them with 20% buffers built into the positions and then we can double down if they drop 40% (back to Nov 2008 lows) and then we’ll have our entries down 10% from the lowest levels of the past decade or so that we can hold until the next decade – what’s there to panic over?
If I wanted to buy IBM in January but thought it was a little pricey at $134, why would I not be HAPPY to have the opportunity to make an enty at $122, back at where they were pre FABULOUS October earnings? I can buy IBM for $122 and take advantage of the panic-induced VIX at 26 to sell July $125 calls for $6.60 and the July $120 puts for $6.65 for a net entry of $108.75 with a call away at $125 for a $16.25 profit (15%) in 5 months. If IBM should fall below $120, we will have a second round of the stock put to us as $120 for an average entry of $114.38, another 6.2% lower than it is…
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Wednesday Rejection Weakness
by Phil - February 3rd, 2010 8:21 am
So close but yet so far!
We set our bounce levels way back on Jan 25th and just yesterday I posted up the WEAK BOUNCE levels we need to see before taking our bullish betting to the next level but we have only skimmed along our lines, finishing yesterday at Dow 10,296 (down by 2), S&P 1,103 (down by 2), Nasdaq 2,190 (down by 10), NYSE 7,001 (up by 1) and RUT 614 (down by 6). This may be seem like some pretty amazing targeting 10 days in advance but, actually, we could have predicted this move last year as it’s nothing more than the same 5% Rule levels we’ve been using since the middle of last year.
That is why, we are not in the least bit impressed by close. Close, as they say, is no cigar! Don’t forget those are the natrural dead-cat type bounce levels off the drop from the top that we are trained to IGNORE as they are meaningless in the grand scheme of things. What is meaningful is when they we retake those levels and that means we found a true floor at 5% (see weekend chart) NOT taking back AND holding our retrace levels means we are very likely to see phase 2 of our leg down and hit 10% drop levels of Dow 9,630, S&P 1,035, Nasdaq 2,088, NYSE 6,660 and Russell 585 so we will now become much more concerned by failure or those lower levels (10,058 on the Dow etc) which MUST HOLD.
We’re not there yet, we MAY be consolidating along the 5% lines and that would be good, but unnerving. We have our disaster hedges in place and we got our commodity rally so we can on some oil puts (what a joke at $77.50 already with yet another inventory build to be announced today) and perhaps even some gold puts as we test $1,130 (GLL $9 puts have very little premium at .90). Our favorite hedge of the moment is once again EDZ, who are back to $5.50 thanks to a nice move up in Asia today. March $5 puts can be sold for .45 and that’s a very nice way to collect premium as EDZ has to fall 20% before you even owe the putter a nickel but the July $4/6 bull call spread at .85 pays $2 (up 135%) should emerging markets falter…
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Which Way Wednesday?
by Phil - December 2nd, 2009 8:23 am
Are we at the top of our range or about to break higher?
Our lower breakout on the Dow has been 10,250 and that has held up very well for the past few weeks so we have to respect that but, at the same time, we seem very overbought and just needing some sort of correction to help us confirm the bottom of the channel is still supporting us (see Fallond chart). The other levels we were looking for in Monday’s post were: S&P 1,100 (check), Nasdaq 2,187 (2,175), NYSE 7,200 (7,212) and Russell 600 (589).
As I said on Monday: "If we don’t get 3 of 5 of our indexes over, then there’s not going to be anything to get bullish about." Unfortunately, we didn’t like the way we got there yesterday so we stayed bearish (60%) into the close but we sure are ready to run with the bulls by slapping on a couple of DIA covers and using 10,500 as our on/off switch to play the upside (which should coincide with the Nas and Rut breakouts).
As I noted to Members in yesterday’s 9:43 Alert, our prior market tops were Dow 10,495, S&P 1,113, Nas 2,205, NYSE 7,266 and Russell 605 so there is no excuse for any of our indexes not to make the grade if we’re really heading higher. Today’s fly in the ointment may be oil inventories at 10:30, as holiday driving and flying numbers were not that great so the anticipated drawdown of about 2M barrels may turn out to be a build, especially in gasoline as many families had subdued Thanksgivings at home this year (thankful to be employed, thankful to have 70% of their IRA left, thankful their house only lost 20% of it’s value, thankful gas is still under $3…), which does not bode well for Christmas either.
Fundamentally, we think the economy still has serious issues and that the market is delusional at these levels but we don’t fight the Fed or the big technicals so IF we do make our levels, THEN we will be some very reluctant bulls but bulls we will be.
I have, for quite some time, been saying this is very much like 1999 and we do expect a big sell-off in the near future as reality begins to take it’s toll on the market but, in December of 1999, the Dow went…
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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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