Wheeeeeeekly Wrap-Up
by Phil - April 17th, 2010 8:22 am
Wheeee! That was fun – let’s do it again!
There is nothing more fun than a nice, big dip in the roller coaster that you are prepared for and nothing more terrifying than a sudden, unexpected drop you were not prepared for (think air pockets on planes). I know my incessant harping on fundamentals gets annoying and makes me somewhat of a party pooper at market tops but think of my commentary as that "clack, clack, clack" sound you hear when a roller coaster is climbing to the top of the tracks – the sound lets you know there’s a big drop coming and the more clacks you hear – the bigger the dip is likely to be.
In fact, much like a roller-coaster, most of our well-prepared members were disappointed that we didn’t get a BIGGER dip on Friday but we’ve learned not to be greedy on the bear side and to quickly take those profits on our short-term plays while we let our long-term disaster hedges run wild, waiting patiently for the big score. By the way, it’s not that we’re perma-bears – far from it, when Cramer, Adami, Finerman, John AND Peter Najarian were telling you to crawl into a bunker and hide your head in the sand a year ago – I was the one yelling BUYBUYBUY while our hugely successful Buy List, which is the bulk of our portfolios, has been all bullish since Feb 8th. Just because we think a rally is BS, doesn’t mean we don’t participate in it!
As a fundamentalist, I believe there is a market "truth" a real value that can be placed on stocks and indexes based on reality, not hype and, when the MSM hype stampedes the herd and takes the market (or an individual stock) too far one way or the other – we simply step in and take advantage of it. It’s not complicated but it takes a little bit more work than the average "Lightning Round" participant is used to so PSW is not for everybody – this is our JOB, not our hobby, but boy is it fun when we get it right!
Despite the sell-off this week, we still finished up over 11,000 on the Dow but poor 1,200 on the S&P couldn’t hold and Nas 2,500 was merely a brief flirtation. The NYSE fell all the way to 7,550, down 200 from Thursday’s high…
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Weekend Wipe Out – All the Way Back to Mid-November Lows!
by Phil - January 23rd, 2010 11:36 am
Well I hate to say I told you so but…
No wait, that’s nonsense – what market prognosticator doesn’t love to say "I told you so"? Actually, it’s kind of my job to tell you so and the reason I’m so popular is because, more often than not, when I tell you so, I tend to be right. I’m not right all the time and my single biggest flaw is I am often right but sometimes way too early and timing is EVERYTHING in the markets. It’s not good enough to tell you what is going to happen (give things enough time and everything happens eventually, right Cramer?) - I need to get the period right as well so we can turn it into an actionable trading idea that makes money.
As a fundamentalist, I didn’t like the entire last 500 points of the rally. I had predicted the market would finish the year at 10,200 way back when it was down at 8,650 when the idea was we’d have a Santa Clause rally to 20% (10,380) and then a 20% pullback of that run (346) into Jan earnings that would take us back to 10,034 so the entire run from 10,200 to 10,700 REALLY annoyed me. It didn’t annoy me just because it made me wrong – I’m wrong a lot and I’m old enough to have learned how to deal with it. What annoyed me was the manipulation as, clearly, the fundamentals in no way, shape or form justified the additional 5% move up.
I’ve gone on and on about how fake the move was and how manipulated the markets were and how artificial the support was and I think I’ve pulled out the Seinfeld "fake, Fake, FAKE" clip often enough now that I don’t even have to do a link (but I love it, so I do) or explain how it’s a metaphor for recent market activity so I’m not going to waste our valuable time here. Let’s just do a review of the recent action, which is my best way of preparing for the upcoming Members only post where I’ll be charting out new levels and coming up with action plans for the week ahead.
So don’t read this if you can’t stand to hear "I told you so" because this is the review post and I did tell you so!
When did things go wrong? Clearly they were wrong for ages but when…
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Capital One Bears Out in Full Force in Options Land
by Andrew Wilkinson - January 22nd, 2010 4:29 pm
Today’s tickers: COF, CAT, XRT, XLY, XLB, XLF, KRE, BRK.B, MCD & ISRG
COF – Capital One Financial Corp. – Better-than-expected fourth-quarter earnings of $0.83 per share, which blew straight past average analyst estimates of $0.45 a share, failed to shield the stock from the massive beating received during the trading session. Shares plummeted 11% to an intraday low of $38.18 after analysts at FBR Capital Markets slashed their forecast for COF’s earnings. FBR analysts cited “shrinking margins and new U.S. credit-card regulations” as reasons for the reducing earnings estimates according to one Bloomberg article released this morning. Bearish option traders are out in full force, populating both the call and put sides of the stock with pessimistic transactions. Investors purchased put options as low as the February $35 strike where 1,200 contracts were picked up for an average premium of $0.57 apiece. Traders long the puts are perhaps bracing for an additional 9.80% shift down in the price of the underlying to the breakeven point on the puts at $34.43 by expiration next month. Approximately 2,000 nearly in-the-money puts were purchased at the higher February $38 strike price at an average premium of $1.46 apiece. Call selling added to the bearish picture as some 2,100 contracts were shed at the out-of-the-money February $40 strike for a premium of $1.43 per contract. Finally, one trader initiated a pessimistic stance in the January 2012 contract. Perhaps this investor believes today’s turmoil is just the beginning of Capital One’s troubles, or, alternatively, the trader may simply be looking to keep the dollar credit on the following transaction. The trader purchased 1,500 puts at the January 2012 $30 strike for a premium of $4.36 each, spread against the sale of 3,000 puts at the lower January 2012 $25 strike for which he received $2.68 apiece. The investor pockets a net credit of $1.00 per contract on the spread, which he keeps if shares settle above $30.00 by expiration.
CAT – Caterpillar, Inc. – Surprisingly bullish trades befell machinery maker Caterpillar today. CAT’s shares commenced the trading day with higher shares, but slipped lower during the session, and currently reside 1.35% lower on the day at $56.09. Investors expecting shares to recover by expiration in March shed 5,000 in-the-money put options at the March $57.5 strike for an average premium of $3.76 apiece. Open interest at that strike of 5,169 lots suggests this transaction…
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PSW Rewind of 2009 – The First Quarter
by Phil - January 1st, 2010 2:42 pm
Thursday’s close was very exciting, wasn’t it?
Well it sure was for us as my 10:01 Alert to Members was a play on the DIA Jan $103 puts at .56. Thanks to the late afternoon dip, they finished the day at .90 (up 60%) after peaking out at .95, a very nice win to close off the year. That was the only Alert trade all week as this market has been too tough to call and we don’t make trades just for the hell of it. I had been sniping at DIA puts all week expecting a pay-off but Thursday it finally came together.
Of course, I also strongly advocated hedging on Thursday morning and listed 4 trade ideas in the morning post to hedge ourselves against the possibility of just such a drop so don’t say you haven’t been warned. Whether there will be follow-through on Monday or a full reversal remains to be seen and, even if I knew, I wouldn’t tell you here because this is a review – predictions are another article entirely.
We treaded very cautiously into last year because our PSW Holiday Retail Survey was not looking very pretty so it was no surprise to us, on Dec 26th, when we got some horrific retail reports. These are, of course, the same reports that we "beat" this year – but not by much. Dec 29th was Monday and Israeli jets attacked Hamas targets in the Gaza sending oil flying up to $48 a barrel. That gave us a nice commodity rally into the close of the year but January 2nd was a Friday and we decided (fortunately) to take the money and run on our long plays, holding open our main cover of SKF Jan $120s at $4.35, which hit $80 later in the month (up 1,732%) and USO Feb $32 puts at $3.40, which hit $10.50 in the Feb dip (up 208%) so, on the whole, not too differently positioned than we are now, coming into the new year. Visually 2009 looked a little like this:
January – Waiting for Obama, or Something, to Change
We began January much the same way we ended December with my Wed Jan 7th comment being: "We call it "Testy Tuesday" for a reason and our 5% rule was tested twice during the day but the market failed to…
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2010 Outlook – A Tale of Two Economies
by Phil - December 27th, 2009 6:54 am
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way--in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only." – Charles Dickens, 1859
Dickens famous novel (which was originally written as a weekly series in 31 installments) depicts life in the time of the French revolution but was also a parable, meant to warn the British aristocracy that they should not ingore the parallels to the social inequities that existed at the time in England. Dickens warned the nobles that the seeds of revolution were planted through unjust acts and surely there would be a time of reaping yet to come.
It is said that the French Revolution was sparked by outrage over a statement by the Queen Mary Antoinette who, when told that the peasants had no bread to eat, supposedly replied (she never actually said this) "Qu’ils mangent de la brioche" or "Then let them eat cake." It’s hard for us to imagine the impact of this statement in modern times but "peasants" were 90% of the population at the time and bread was 90% of what they ate, consuming 50% of the average family’s income (people weren’t silly enough to pay for housing back then – they just found a bit of land, bought some wood and nails and built their own homes). Brioche was a luxury combination of bread enriched with flour and butter so the statement "Qu’ils mangent de la brioche" implies both lack of caring and cluelessness on the part of the Queen.
The United States had what passes for a revolution between 2006 and 2008 as we threw out the Republicans and went with a Democrat-controlled government. While the Bush administration, the Republican Congress and Fox News may have been as clueless as a French Queen to the plight of the people – the fact of the matter is that the base pay…
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Merry Christmas Eve
by Phil - December 24th, 2009 8:28 am
First of all, what are you doing here?
Why it’s Christmas Eve, Mr. Scrooge – Most global markets are having a half day so, if you are waiting for a Santa Clause rally on a half-day’s trading, you are very likely to be disappointed.
Remember Marley, who cried: "Business! Mankind was my business. The common welfare was my business; charity, mercy, forbearance, and benevolence were all my business. The dealings of my trade were but a drop of water in the comprehensive ocean of my business!"
Marley was a man who worked and worked until the day he died and regretted it every day after. If you don’t believe in an afterlife and you don’t believe in leaving behind the World a better place than you found it, at least find some time for yourself so people don’t call you "a squeezing, wrenching, grasping, scraping, clutching, covetous old sinner!"
Those covetous old sinners in Congress passed the Health Care Bill in the Senate today with a 60-39 vote (Republican Jim Bunning did not vote against the bill but was too chicken to actually vote for it) so we can pretty much count on it moving through the House and on to Obama’s desk in the very near future. While it’s a total botch-job of a bill, at least America has taken the first civilized strep to recognizing that health care is a right and not a privilege – Tiny Tim would be very proud!
We were told by Fox that Health Care reform would destroy the universe but the market has taken the December passage of the bill very much in stride so maybe we should have just gone for it with Universal Health Care after all… Oh well, maybe next year! Meanwhile, we’ll be looking for good investing opportunities once we get a handle on the final bill but I still favor the device space (IHI, MDT, BSX, JNJ, GE, ISRG) as well as big pharma (MRK, PFE), who will be able to serve tens of millions of new customers. Hospitals (UHS, THC) should also start filling up and we always like our CELG as well as AMGN, who should also benefit from adding a population the size of England to the health care rolls right here in the USA. I’m waiting for the final bill but home health care providers (AMED,…
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Which Way Wednesday – The Beige Book Boogie
by Phil - October 21st, 2009 8:14 am
The last Beige Book report was on September 9th.
At the time the Dow was looking toppy at 9,650 and we had poor consumer confidence numbers (just like yesterday) and poor consumer credit number (no change) and the book had very little "good" news to report (see my analysis) - Yet the market broke over 9,600 again that day and then took off all the way to 9,900 a week later. At the time, we were looking for any excuse to go higher on the hopes that this earnings period will look like last one but have we now come too far, too fast?
It seems we are finally hitting the point of diminishing returns for earnings. Expectations have finally gotten so high that even big beats aren’t enough to keep the momentum going.
Last earnings Q, we were down from 8,900 in June to 8,100 on July 9th as companies began reporting and we had a nice, 1,000-point relief rally over the first two weeks of earnings. This time, we went up an additional 500 points in the past two weeks, over our 9,600 line and that has been in anticipation of a repeat of last earnings but the circumstances are very different this time and it takes a lot to justify a 20% run off the July lows.
Keep in mind that, looking at the sector charts, Energy, Materials and Tech are leading us. Since semiconductors are simply another form of commodity – this is almost entirely a commodity rally in the midst of a recession with Consumer Staples, Financials, Health Care, Industrials, Telcom, Utilities and Transports all underperforming the rest of the S&P. As I keep saying – if no one is shipping anything, how the hell can we be having a proper recovery?
The Beige book is an anecdotal view of the economy gathered roughly through the middle of October and we’ve seen no improvement in Jobs since the Sept 9th report, Cash for Clunkers ground to a halt and, just this morning, we got a horrific 13.7% decrease in the number of mortgage applications from the previous week. That number includes "seasonal adjustments," without adjustments, morgage apps plunged 22.4% despite record low rates as government assistance begins to peter out. The Refinance Index, also adjusted for the holiday, decreased 16.8 percent from the previous week and the seasonally adjusted Purchase Index decreased 7.6 percent from one week earlier. …
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Weekly Wrap-Up – 10,000 or Bust!
by Phil - October 17th, 2009 8:27 am
I think I was right on the money last week when I said:
The bar for corporate earnings is still set at very easy to beat levels yet, like this limbo-playing child, when they announce their beats of very low expectations we’re going to get all excited and tell them how great they are doing. The problem is, these are not kids who we hope may grow up one day to be President or CEOs of major companies. these ARE CEOs of major companies and they are being paid top salaries for top performance and we, the stock purchasing public, are paying top dollar for what should be SPECTACULAR performance, not beating 75% off last year’s earnings by a penny!
In that post, I rattled off a list of stocks that seemed overpriced to me: AMZN, BIDU, AM, PALM, NFLX, PCLN, URBN, UHS, CERN, CREE, GMCR, CY, SWM, TRLG, BKE and you would have had a fabulous week just shorting those stocks as only NFLX, URBN and CREE stayed positive. Now most newsletter writers would quit right there and make a giant ad saying they were 12 for 15 on the week but, as our members know, THAT’S NO BIG DEAL AT PSW! I’m just going to remind members that they can refer friends to FREE advice like that in our trial newsletter and earn 20% or more off their subscriptions for doing it.
Picking stocks is easy but a few percent here and a few percent there isn’t much fun is it? On that list, the two we attacked were AMZN and BIDU, both of which ran (in our opinion) way too high AND had very liquid and very overpriced call options that we could sell to collect premiums. AMZN is a staple short in our $100K Portfolio and we had set up BIDU the week before, selling Oct $420 calls for $8.30 and the Oct $430 calls for $7,20. While both went higher on Monday, the fact that we had a plan for managing the trade kept us from panicking and, thankfully, Monday was the only day those positions gave us trouble and both finished the week worthless (100% profit for us).
Adjusting our positions kept us busy this week as we STILL have a slightly bearish bias and I apologize for that but, as I said in Friday’s post: Every time I try to get a little more bullish, they pull me back…
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American Express Investor Trades Puts for Calls
by Phil - July 21st, 2009 5:42 pm
Today’s tickers: AXP, EFA, XL, LXK, AVP, WERN, ISRG & CHK
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Thursday Morning
by Phil - April 16th, 2009 8:23 am
Is today the day we break the pattern?
I predicted a wild week on Monday morning and we have been having a fabulous time as it only took me until 12:51 on Monday afternoon to point out to members that we were following a virtually identical pattern to the previous week. That enabled us to anticipate the gap down on Tuesday morning, as well as yesterday’s stick save. In fact, I predicted the Dow would close at 8,050 and missed it by 7 points. Our short plays that day were MA (which we cashed in yesterday with a huge gain), BIDU and FSLR. The last two are still trading up and I really like BIDU as a proxy for a possible disappointment from GOOG this evening. Also, we got a downward revision to China’s GDP today to "just" 6.1% growth.
I often say to members "We don’t care if the markets are fixed, as long as we know HOW they are fixed" and yesterday was a great example of that as we digested the Beige Book report and, at 2:53, with the S&P spiking down to 839, I was able to post a reminder "20 minutes until stick save" and put up a trade idea for the FAS $6 calls at $2.15 (because they had almost no premium), which closed out at $2.90 an hour later (up 34%).
We did not, however, change our overall cover stance at the close of 55% bearish. I would have been more bullish if we had NOT moved past 848 on the S&P, there was a sort of frenzied overkill to the "rally" that made me think we would not get the follow-through that we got last Thursday. Also, we had to take into consideration that last Thursday closed the week so we have an extra day (and it’s options expiration day!) to play with so, as I said to members in yesterday’s chat, it pays to error on the side of caution – just in case.
Today we have the usual 650,000 people losing their jobs (yawn) along with anemic Building Permits and Housing Starts (550K each expected) and the Philly Fed at 10 am. The Philly Fed is our biggest worry as it is almost certain to be worse than the -32 expected because it says right in yesterday’s Beige Book: "Third District manufacturers reported further declines in shipments and new orders, on balance, from…
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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
(