Love Letters (Weekend Reading on Valentine’s Day)
by Phil - February 14th, 2010 8:25 am
Happy Valentine’s Day!
Last Valentine’s Day was as Saturday, following a frightening Friday the 13th, where we had fallen through the 8,000 line on the Dow. I wrote a very interesting post that morning discussing how I came about my political views, which is good for new Members to check out. We also flipped short that day on SKF, too early at $130 but that ended well as we kept after them and it was our biggest bet by March 6th, which eventually returned over 1,000%. We also stopped shorting GOOG at $350 (it did keep going to $300 but the upside was nice too). I closed the morning post with:
For us, it’s all about the levels as we try to remain unbiased as investors, no matter how voraciously we defend our political views. Dow 7,800, S&P 820, Nas 1,460, NYSE 5,100, Russell 437 and SOX 203 all better continue to hold today but, even if they do, we’re nowhere near where we want to be and we’re going to take some bearish covers into the weekend – just in case. So whether you are a witch celebrating the horrors of the 13th or waiting for a rose from your true love the next day, remember to be careful out there – we are certainly still deep, deep in the woods!
That Tuesday (Monday was President’s day) we fell 300 points and another 300 points by the end of the week! That was a fitting way to mark the 80th anniversary of the St. Valentine’s Day Massacre when Al Capone’s "South Side" gang, dressed as cops, rousted a garage run by Bugs Moran’s "North Side" gang and had them stand against the wall and then executed all 7 men. They shot them 70 times with machine guns and made their escape by using the Capone men dressed as cops to "arrest" the other Capone men and drive them away from the scene in broad daylight. Now that’s what I call a good plan!
Here’s a great chart that summarizes our year to date. Someone else found this, I wish I knew how to use StockCharts this well, they have tons of good things in there:
It’s a bit worrying that XLU is doing so poorly – so much for diversification keeping you safe… It’s going to be worth rummaging through the utility companies looking for good dividend payers who are on sale. SO…
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Which Way Wednesday – Hedging for Disaster
by Phil - December 9th, 2009 8:06 am
We got our sell-off, now what?
Despite generally failing our levels yesterday (see Fibozachi review), the Dow held 10,250 and the SOX were green so we wrangled ourselves back to neutral into the close. Over and over again my best advice to bears in this rally has been to take profits off the table quickly as we rarely string more than 2 days in a row together of downward movement. With that in mind, we moved to lock in our bearish profits ahead of the 3pm stick save which, though disappointing yesterday, at least was predictable as ever.
We even went long on oil futures at $72.50 (after a failed attempt to go long at $73) and we came just short of our goal of $74 this morning at $73.88, which is close enough to take the money and run in the futures (pays $10 per penny per contract). So we’re looking for a small retrace today (up about 0.5%) to retest our levels and then we’ll see how we’re going to play into the afternoon depending on what holds up.
Meanwhile, I think it’s time to revisit the concept of hedging for disaster, something I advocated during another "recovery," in October of last year, where we made our cover plays to carry us through a worrisome holiday season and into Q1 earnings – "just in case." The idea of disaster hedges high return ETFs that will give you 3-5x returns in a major downturn. That way, 10% allocated of your portfolio to protection can turn into 30-50% on a dip, giving you some much-needed cash right when there is a buying opportunity.
At the time, I advocated SKF Jan $100s at $19. SKF hit $300 around Thanksgiving and those calls made a profit of over $280 (1,400%), so putting just 5% of your portfolio into that financial hedge would give you back 90% of your portfolio when you cash out. Keep in mind these are INSURANCE plays – you expect to LOSE, not win but if you need to ride out a lot of bullish positions through an uncertain period, this is a pretty good way to go.
Another play we picked at the time was DXD Apr $55s at $14.20. DXD doubled that same month, went back down to $50 and was back at $90 in March. The nice thing about playing options rather than the stock is the Apr…
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Will We Hold It Wednesday?
by Phil - October 7th, 2009 7:53 am
When your first trade of the day is a cover, you know you are too bearish!
That’s what happened to us yesterday when I sent out a 9:47 Trade Alert to Members for the QQQQ $41/42 bull call spread at .57 to cover the too bearish stance I was worried about in the morning post. We exited that trade at .70 (up 22%) and that served it’s purpose of giving us some cash to put into rolling up our puts, following through on the strategy laid out in the morning post. As I said at the time, these are the moves we’re making BEFORE we capitulate and our short plays will form a base from which we can aggressively go long once we clear our targets.
I called off that QQQQ trade at 11:32, about 9 cents off the high of the day as they looked about to fail our 42 target which, as you can see from David Fry’s chart, is right about the middle of the weekly range so it’s a level we have to respect on multiple fronts. We’re still waiting for a proper test of that 40 line, a 5% drop from here and PSQ (short QQQQ) calls are the main protection in our $100K Portfolio at the moment. Any move below 40 on the Qs can re-shape the chart to a much more bearish formation long-term.
We also covered up our long DIA puts, which flipped us more bullish overall and ended the day half-covered – neutral and confused but with more aggressive puts than we had on Monday so some small progress was made. In addition to rolling up our bear plays like GLD puts, we added hedged January bullish plays on EDZ and TZA, went bullish on RIMM as they sold off to $65, bearish on MOS as they ran up to $49, bullish on WFR at $16, bearish on FCX at $70, April bullish and hedged on SKF, bearish on OIH at $118.50, Jan bearish and hedged on TIF at $40.75, bullish and hedged on April SCO and bullish on FXP at $9.45. Overall a pretty busy and bearish day of trading.
As I said to members in my closing comments, the XLF couldn’t hold $15 and the Qs couldn’t hold 42, which were both watch levels for us during the day. The index levels we were targeting were a mixed bag as we were looking for upside…
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Weekly Wrap-Up, How to Make Money in a Down Market
by Phil - October 3rd, 2009 8:27 am
Wow. what a fantastic week!
Well, not for the markets but for us as we totally nailed it. It’s hard to believe that it was just two weeks ago, on Monday, the 21st, after I posted the "Wrong Way Weekly Wrap-Up" as the Dow rose from 9,600 to 9,800, that I had to apologize to members, saying: "I’m sorry because I don’t like being bearish – I’m an optimistic guy usually but I can’t just sit here and tell people what they want to hear. It’s just too irresponsible not to be cautious here. We make plenty of bullish picks but I maintain a very wary outlook until we get some real fundamental improvements."
That’s the funny thing about fundamentals, they don’t matter until they do – and then they matter a lot. It’s funny how I get labeled a perma bear when I’m shorting the market at the top and a perma bull when I’m buying the maket at the bottom. Gee, I always thought that’s what you’re supposed to do but it turns out that few people have the patience to work a market trading range and I don’t blame them, I blame the mainstream media, who encourage this destructive herd mentality to investing that culminates in Jim Cramer and his sound-board, where all the complexities of the market are supposed to boil down to either BUYBUYBUY or SELLSELLSELL.
It makes me seem downright wishy-washy when I said to members on the 21st: "I don’t have all the answers, but I do have a lot of questions – too many to get comfortable buying at these levels." On the whole, as I explained in detail way back in late July, I am neither bullish nor bearish, I am Rangeish. Yes, it’s a made-up word and I have to make it up because no other analysts these days seem to believe the market can go up AND down, everyone seems compelled to stick to one or the other AND THEY DO IT TO THE DETRIMENT OF THEIR READERS – I WILL NOT DO IT!
There are strong stocks and there are weak stocks and I can’t believe I even have to write this out but the best strategy is to short weak stocks and ETFs that have gone too high and buy strong stocks and ETFs that have gone too low. As I explained in my LiveStock appearance back on March 6th (when I was called a "perma-bull" for calling a bottom), the market is like a huge tanker being pulled by individual stocks…
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Friday – Is Anybody Working For the Weekend?
by Phil - October 2nd, 2009 8:28 am
Wheeee, what a ride!
Just like any good roller coaster, market plunges can be fun when you are strapped in safely and prepared for them. Our members have been so prepared we’ll have to hand our Eagle Scout badges (we don’t need no stinkin’ badges) for riding out a toppy market for two tedious weeks, which I won’t rehash here but you can go back to my Sept 19th "Wrong Way Weekly Wrap-Up" to see how hard it was to stay bearish in the face of all that "great" news that the media kept throwing at us. Nonetheless, had you followed our trading ideas in that post, you’d be a VERY happy camper right now!
Now we are down 300 points from that Friday’s finish, about halfway to our 9,100 target, which is the top 5% of our original trading range around Dow 8,650. We’d love to see 9,100 hold, especially on a nice volume sell-off so we can move our range up 5% and make 9,100 our new mid-point, putting the 33% (off the top) lines withing striking distance of a proper breakout but suddenly the news-flow has turned sharply negative. This is something I warned members about way back on August 11th, the last time I thought we were getting toppy (and we were) at Dow 9,400 when I said: "Watch the newsflow in the MSM. If it starts to get negative, look out below."
Yesterday we talked about GS’s about-face on the REIT sector and, later that day, we noted during Member chat that JPM had decided to downgrade SKS, hitting the retail sector hard in the afternoon. I called a slightly early top on Retail on 9/16, when I said to Members: "Right now all retail is being played like a huge winner, as if no segment will lose market share to another. This is amazingly stupid in a declining wages and declining consumer credit environment." RTH was $88.76 that day after running up just about 20% from July 7th so we were looking for a pullback at least to $85, but I think worse as I see nothing in the data that makes me believe in Santa Clause this year or the rally he often brings.
As you can see from David Fry’s chart of the XLY (another Retail tracker) we topped out at technical resistance and are now looking for a completion of a 5%…
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Stock Market Crash – Year One Review III – March Madness!
by Phil - September 10th, 2009 5:51 pm
We left off in Part II with our Feb 23rd Big Chart Review.
Even though I said: "Once again we are in a market that environment that reminds me of the Simpsons episode where Homer jumps over a gorge, crashes, is taken up by a helicopter (Ben) smashing against the wall along the way only to fall all the way from the top again. Pain, pain and more pain every time we try to get long" – we still weren’t fully prepared for the devastation that was to follow as the Dow fell from 7,500 to 6,500 in the next 10 days. My commentary on the environment the next day was:
According to Cap, someone on the YHOO message board was counting the number of times CNBC talking heads said "nationalization" this morning and, as of 8:15, they were up to 300 times. Sadly, this is the fear-mongering that is driving the markets to new lows while Cramer continues to keep his sheeple out of protective ETFs like SKF. So you have the man’s network telling you financials are going to zero while dog and pony boy tells his minions to sell ALL the financials, causing them to go to zero - even though they could hold on and protect themselves with conta-funds, if Cramer didn’t spend 3 days a week convincing his viewers contra-funds are poison. I’ve never seen anything like this outside of a racketerring investigation. Speaking of racketeering - Dennis Kucinich nailed it when he pinned that charge on Paulson and company back in November.
Our wall of worry continues to be a steep one. After yesterday’s failure we do not expect too much out of today, we’ll be happy to just see a bottom at this point but it’s looking a little more likely that we’re heading into a capitulation event that can take us down to frightening levels. The 60% line is a line the markets dare not cross but, as I pointed out yesterday, we already lost the SOX and the Nikkei, with the Hang Seng and the BSE hanging on by a thread. Let’s take these levels very seriously, if the administration can’t turn it around this week – the downward momentum can easily pick up steam.
I’ll spare you the details other than to say we DIDN’T turn it around that week and the downward momentum DID pick up steam. I was at war with…
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Stock Market Crash – Year One Review II – The Next 30% Down
by Phil - September 7th, 2009 5:39 pm
The nice thing about decimation is it’s a fractional way to die.
The word decimation is derived from Latin and means "removal of a tenth." The Romans would "decimate" their deserters as well as soldiers who performed poorly in battle by dividing the men up into groups of 10 and having them draw lots. The losing group was then killed by the winners, who were still punished only they felt like winners by virtue of still being alive. As I said, the system has it’s advantages as a General who has to decimate 1,000 men must put 100 to death but a General with less to work with, say 100 men, only needs to mark 10 to die.
Does this system leave the remaining 90% healthier? Well, it certainly means there’s more food left, more medicine, more weapons, more supplies for the remainder. Decimation is exactly what happened to the Financial Sector as 119 Financial Institutions have failed and dozens of others merged out of existence since NetBank kicked off our current crisis on Sept 28th, 2007. There are currently another 416 "troubled" banks as of Aug 27th and that number was revised up from a count of 305 given in May. Sill, there are over 8,246 Financial Institutions remaining with $13.5Tn in cash assets and the FDIC has a $500Bn line of credit to draw on should the need arise. So, to put things in perspective – we haven’t even lost one in 10 and almost all that we’ve lost has been absorbed by another functioning institution. I wanted to put this up front on this section because this is the fulcrum of the misconception that started this crisis.
$1,000,000,000,000 is a lot of money. It’s very hard for a person who has worked their whole lives to save $100,000 to wrap their heads around a number that is 10,000,000 times bigger than that and seeing our government talk about bailouts that START at $700Bn and grow to, arguably, $7,000,000,0000,000 in a matter of months is certain to push some emotional buttons. As a fundamentalist, I try to give our members perspective on the markets and perhaps the best way to view what happened to the economy is to think about an accident victim.
The GDP of the United States is roughly $14Tn a year. Usually, that money cycles around through the body of the…
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Stock Market Crash – Year One in Review – The Gathering Storm
by Phil - September 7th, 2009 7:13 am
Happy anniversary market crash!
One year ago, in September, the market started falling in earnest. A lot of people were caught by surprise by that drop as many thought we had just had a major correction and the worst was over. We had bounced off 10,800 on July 14th and had made it all the way back to touch 12,000 on August 14th but that day I warned my members in the morning post:
We’re really through the looking glass when you see investors stampede right back into oil and other commodity stocks at the first sign of a bounce off a 20% drop. I guess they’ve never seen a pullback off 20% before so it makes sense that Cramer would hit the BUYBUYBUY button on anything that smells like crude. I wish I had access to the tapes of all these same idiots telling you to BUYBUYBUY housing stocks and mortgage companies when they made their first bounce on the way to 80% losses.
It’s not just oil that is expensive, now it has to compete for consumer dollars with food and airline fares and tobacco prices and consumer goods etc. Oil was able to bubble up because people were enjoying a robust economy and it was the ONLY thing that was rising out of control. Metals began to follow it as that didn’t affect the average person but then companies had to start passing on the increased costs and the banks stopped lending money and the consumers were forced to stop using their home’s equity (if there was any left) like a piggy bank and *poof,* suddenly there isn’t enough money for oil. This isn’t going to change because there’ s a hurricane or a shut down pipeline or anything else.
Oil was trading at a still ridiculous $115 a barrel that day, down from $147 on July 1st but still choking the life out of the economy. We were very bearish on oil and natural gas ($14 at the time) as the fundamentals simply didn’t support the price of oil at $115 as much as they didn’t support $147 a month earlier. I had gone negative on oil too early though, as we thought $120 was surely the top back in May. Sometimes fundamentals can get you too ahead of the market. Our man Ben was between a rock and a hard place as he HAD to do something to…
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Friday Morning – Goldman’s Global Goose!
by Phil - August 21st, 2009 8:27 am
We have talked about manipulation all week but this takes the cake!
The Nikkei was plunging 250 points this morning as the dollar collapsed (in a move to boost commodities and the US markets – more on that later) below the critical 94 Yen mark and, EXACTLY AT THE MOMENT the Nikkei crossed the critical 10,200 line we’ve been watching all week (11 am, just as they were closing for lunch), Kathy Matsui, chief equity strategist at Goldman Sachs, jumped on the phone and literally stopped the presses by calling for a 73% increase in Japan’s corporate profits next year buoyed by cost cuts, a weaker yen and rising demand. “People are going to be surprised at how sharp the recovery will be,” Matsui said in a phone interview.
Goldman’s estimates equate to 48.9 yen in earnings per share for the Topix in the financial year ending March 2011, placing the benchmark at 19.4 times estimated earnings. The brokerage also reversed its forecast among all industries to a 23.3 percent increase in pretax profits this year from a 15 percent decline. “Our forecasts for both the March 2010 and March 2011 financial years exceed consensus estimates largely due to our expectations of stronger global growth, continued restructuring benefits, and a weaker yen,” Matsui wrote in a report titled “Back in Black.”
Note that Ms. Matsui is the only analyst who sees this Asian miracle occurring this year as Global emerging-market equity funds posted their biggest weekly outflows of 2009 as investors pulled money out of China on concern banks expanded credit too rapidly, EPFR Global said. Funds that invest in emerging-market stocks worldwide lost $946 million, while China funds had their worst week since the first quarter of 2008, according to the Cambridge, Massachusetts-based research company. Investors pulled $810 million from Asia excluding-Japan funds, the most in 24 weeks, while Latin America and Europe, Middle East and Africa funds had “modest inflows,” said EPFR, which tracks funds with $10 trillion worldwide.
This amazing 200% reversal of forecast timed at 10pm on option expiration eve East Coast time, took the S&P futures from 996 all the way back to 1,010 and took the Dow futures from 9,250 (down 100 from Thursday’s close) all the way to 9,375. The Nikkei managed a "stick save" and finished the day down "just" 1.4% at 10,250 and the Hang Seng was able to rally back 300 points…
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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
(