Technical Thursday – The Needle and the Damage Done
by Phil - February 24th, 2011 6:33 am
I’ve seen the needle
and the damage done
A little part of it in everyone
But every junkie’s
like a settin’ sun. - Neil Young
Come on Bennie, give us another hit!
We’re hurting man, we need the good stuff. The markets love to get high and, just when we thought the trip was never going to end – we crash hard! Big Ben and his Central Banking buddies fed our commodity addiction with a flow of easy money and the speculators got so hooked that they have now overdosed and the price of commodities is now killing the host (the Global Economy).
Gee, who could have ever seen that coming?
Oh yeah, right, it was me. Well, very good then… I guess. There’s nothing like a good correction to make some fast money. In yesterday’s post (and Tuesday’s) I mentioned our TZA and EDZ hedges and thank goodness we dumped XLE as they flew back to $78 on the oil madness (more on that later). In yesterday morning’s Alert to Members we added IWM $83 puts at $3 and they finished the day at $3.93 (up 31%) but we were done with them earlier as we flipped bullish when they pulled back to $3.75 and grabbed the IWM weekly $80 calls at 1:03 at .66 and we flipped out of those at .93 (up 40%) for a nice, quick gain.
We also lost .20 on an SSO trade, trying to catch one more bear wave that didn’t come but, on the whole – Wheeeeeeeeeeeeeee! This is the best ride EVER!!! We love a volatile market, especially when it gooses the VIX (something we were also long on) as that gives us better and better prices for the options we sell to suckers who think they are smarter than the market. Yes, we buy them too – but look how fast we dump them. Options are great for momentum trading and for controlled leverage but the REAL MONEY is made BEING THE HOUSE – not the gambler and what we really love to do is SELL options, not buy them.
When the VIX is low, selling options is much less fun but, when the VIX goes up, so does the amount of money people will pay us…
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Will We Hold It Wednesday – Doubles in Trouble
by Phil - February 23rd, 2011 8:29 am
We’re watching our 100% lines.
While we did follow our plan and bought the F’ing dips yesterday – we did so cautiously as 3 of our 5 100% lines fell during the worst one-day drop since August 11th of last year. Not shown on this chart, the NYSE fell 2.1% to 8,325 and the Russell landed down 1.9% at 812. That means, other than the Nas – all of our indices bounced off and held their 2.5% lines and we can forgive the Nas because it was dragged down by AAPL, who was a BUYBUYBUY for us on the $340 line.
The 100% (off the March 9 lows) levels were discussed, along with the chart for the S&P showing our critical ranges, in this weekend’s "Fibonacci Rules – Sometimes, the Old Ways Are the Best!" so I’m not going to waste any time going over that but, for a quick reference, our 100% levels are: Dow 12,938, S&P 1,332, Nasdaq 2,530, NYSE 8,362 and Russell 800 (100% was 685). With the RUT so far over their 100% line, we used them as a key index hedge and the TZA’s banged right up to our target $13.50 into yesterday’s close and we took that money and ran ahead of the reverse split in our favorite Ultra-ETF this evening.
Clearly from the above chart, you can see how our logic pays off. Also, we chose the Dow for our long index for the same reason as they were lagging the others by a wide margin so we played the pair of Dow up and Russell down to cover some of our trades. Another place we took the money and ran was XLE, which was a $25,000 Portfolio trade in yesterday’s morning Alert to Members. We added 10 of the XLE March $75 puts at .85 and that could not have gone better as they ran straight up to $1.30, where we got out of dodge (you can see our volume enter and exit below) as it was enough to get us out of a previous XLE position that had hurt us all even, leaving our virtual $25,000 Portfolio nicely balanced at $27,511, up just over 10% in 15 trading days and on track for our goal of $100,000 by the year’s end. We just need to make more trades like this and we’ll be…
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Monday – Mubarak’s Mood May Move Morning Markets
by Phil - January 31st, 2011 8:21 am
Is it safe?
I asked that question at the end of November in "Timid Tuesday – Is It Safe" and here we are, 60 days later and up 7.5% and, on the whole, feeling less safe than we did back then, when the Market Oracle and I seemed to be the only people concerned global inflation and sovereign default risks rising rapidly. Although we were playing the market bullishly, with our aggressive $10,000 Portfolio (and make sure you check out our brand new $25,000 Virtual Portfolio that begins today with a $100,000 goal by December 31st) we decided to try to take from $26,000 to $50,000 by Jan 21st (we only made $35,000), our Breakout Defense Plays (5,000% in 5 Trades or Less) and our Secret Santa’s Inflation Hedges – it was with one hand on the exit door at all times. As I said at the close of Timid Tuesday’s article: "This house of cards is teetering folks – please be careful out there!"
That was 60 days ago. We’re a lot older now and have learned a lot about the World since then. We learned that China, Japan and the IMF are all ready, willing and able to buy the bonds of various EU nations. We learned that the Dollar can still fall 5% (was 81.44 on November 30th) further down despite Europe’s very obvious problems and Japan’s MASSIVE 200% Debt to GDP ratio. We learned that Uncle Ben will never stop printing money (until forced) and we learned that commodities can rise much faster than even our aggressive "Secret Santa" plays anticipated, with every one of our hedges (XHB, XLE, DBA and XLF) already over our year-end targets, all on track for gains well over 100%.
After watching our Alpha 2 pattern break (as I predicted it would on Monday morning) for the week, we went a lot more bearish on Thursday when I said in that morning post:
Keep in mind that gold and silver are our defensive plays. In Member Chat yesterday, Jromeha mentioned he’s 80% in cash and 85% short the market on the 20% in play and I said I thought that was an excellent way to play what I felt was a blow-off top after the Fed. We added 2 disaster hedges yesterday, a TZA spread that pays 500% if we get to $17 by April and
…
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Wednesday’s Worry – ETF Madness hits $1,000,000,000,000
by Phil - December 22nd, 2010 7:46 am
A Trillion Dollars – Muhaha!
After adding $209Bn (26.3%) in total assets so far this year, the US ETF industry has passed the Trillion Dollar mark led by $31Bn of inflows into fixed income ETFs, of all things as well as $29Bn of inflows into emerging markets, and $21Bn into domestic. Recent outflows have knocked commodity ETFs down to $11.4Bn, miles down from last year’s $32.6Bn inflow – rats leaving a sinking ship, perhaps? That would be very bad news for the firm that bought up 90% of the LME copper supply recently. Do ETF traders really know something or are they a lagging indicator?
“There is little doubt that money chases performance, so the bedrock for significant (ETF asset) growth is clearly a continuing move higher for risk assets,” said Nicholas Colas, chief market strategist at ConvergEx Group. He added that growth for ETF assets would essentially be a “tug of war” between hedge funds and retail investors. “As retail investors grow more confident in a continued rally in risk assets, they will shift capital from cash to equity ETFs,” said Mr Colas, who described growth for equity focused hedge funds as the “other side of the growth coin” for ETFs.
Mr Colas noted that hedge funds tended to use ETFs on the short side which was negative for asset growth. He said that as hedge funds expanded their equity trading books, a growing portion would come from from ETF short sales. “This will come through as ‘supply’, dampening demand for new shares.” Barry Ritholtz ponders the end game of the ETF madness and concludes that soon there will be more ETFs than ever:
There is growing speculation surrounding what is believed to be the next breakthrough product in the ETF marketplace: Single stock tracking ETFs. Unlike their index-based cousins, these new single stock trackers would, as the name implies, track only a single stock, trade at exactly the same price as the stock to which they’re linked and consequently eliminate the need for single stock ownership. A top executive with a money management firm who is familiar with his company’s plans to launch such a product and was granted anonymity so he could speak freely, put it this way: “Think about the prospect of, say, a GE tracking ETF — an investor could capture over 99% of the movement of GE
…
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Flip, Flop Friday – This Week It’s Europe!
by Phil - November 26th, 2010 8:11 am
Ah, you guys fall for it every time, don’t you?
They take it up for BS reason, they take it down for BS reasons and, somehow, they get you to commit to some thing or another that goes the wrong way within a day or two. And you guys wonder why I like cash… You can’t leave anything on the table in this market! Today’s reason du jure for the markets pulling back is Europe again and, as we laid out for you weeks ago – it’s now on to Portugal as the next "crisis" in the making.
It looks like almost all of Wednesday’s gains will be wiped out by the time we open but let’s keep in mind all this EU nonsense is nothing but hyena attacks as most of these countries are not in that bad shape overall – certainly no worse than we are (maybe we’re next!). Anyone can be next. If you want to attack a country, you can attack any country where you can get traction on rumors that POTENTIAL bank losses exceed GDP – that’s a banking failure.
Once you get just a small amount of people to believe the banks may fail, then the rates start going up (and big investors can give them a little push artificially, of course, to get the ball rolling). Once the banks have to borrow at higher rates, then they need more capital reserves and then you can scream that they were lying about their capital requirements and call for "investigations" and that will convince more people they are hiding something and then the rates go higher and they need more capital and the bears can then parade on TV saying that they knew all along and that the banks are insolvent and they can EXTRAPOLATE that, at the rate things are going – the whole country will be bust in X amount of time…
You can do this to anyone, anytime. Only if we stop the speculators from profiting from this game will it ever end. The reason that there are no runs on banks in China and Russia isn’t because their banks are more solid – I’ll bet there are Chinese banks who have nothing but a fortune cookie in their vault – but the difference is in Russia or China they will cut your head off if you…
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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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Thank G20 It’s Friday – Yet Another Global Cluster F*ck
by Phil - November 12th, 2010 8:09 am
Why should we be surprised?
The last G20 meeting ended in chaos, the same nonsense that triggered a flight into commodities in Q3 as Global investors lost faith in ALL of the World leaders to be able to solve ANY of the many problems that face the Global Economy. Why should this time be different as the current conference broke up with NOTHING accomplished other than to promise to get right on these issues at next year’s meeting. REALLY? Do we look like a planet that has another 6 months to wait for you to do something???
The delay by the Group of 20 industrial and developing powers in defining the external imbalances they had vowed to address represents a blurring of what at first had appeared to be clear goals designed to counter the growing threat of trade and currency wars, in which countries seek competitive advantage by weakening their currencies. The U.S. and G-20 host South Korea ran into strong opposition from such exporting powers as China and Germany to a proposal to quantify limits on current-account surpluses and deficits. Without cooperation, the IMF warns, not only will the G-20 fail to achieve a much-needed boost to growth, but it could tip the scales on the European sovereign-debt crisis and fuel capital flows into emerging countries that overheats their economies.
China is already overheating, with a 4.4% inflation rate but that’s much worse when you consider that Food Inflation was 10.1% in October from the previous year. With average family incomes of less than $2,000 – food is pretty much all these poor people can afford! The other thing people MUST buy in China (because they can do without furniture, manufactured clothing and power) is housing, and that rose 4.9% in the past year despite the BOC’s aggressive tightening measures. A lot of this is due to the Yuan’s peg to the dollar as Bernanke’s mad plan to devalue the Dollar is dropping China’s currency as well and that’s good for the manufacturers, who benefit from competitive export prices, but bad for their workers, who need to eat.
"Dollar issuance by the United States is out of control, leading to an inflation assault on China," the Chinese commerce minister said in comments reported on Tuesday. Chen Deming, speaking at a trade fair in southern China, said that exporters…
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Thrill-Ride Thursday – Can the Dollar Drop Fast Enough to Keep the Markets Up?
by Phil - October 14th, 2010 8:27 am
Wheeee – this is fun!
The dollar dropped to 76.5 this morning and that gave us a nice pop in the futures which is fading now (8am) as we move towards our 8:30 Trade Report along with the PPI and, of course, the usual 450,000 weekly pink slips handed out to the few remaining US workers (135M and dropping almost as fast as the value of the dollar).
As you can see from Pharmboy’s excellent chart, our market "rally" is ALL about the declining dollar. We are not used to inflation in this country – it hasn’t been much of an issue for the past generation but that’s what we’re seeing here as we are experiencing lower wages, lower demand and flat prices – THAT IS INFLATION or, as we used to say in the 70s – STAGFLATION. A stagnant (or declining) economy plus inflation is a disaster for the people, even while it may be a boon for Big Business as they squeeze whatever dollars are left from the pockets of the consumers while paying their workforce less and, through the benefit of worthless currency, cleaning up on foreign sales as it’s much easier to sell an IPhone at $199 when $199 was 167 Euros in May and is 142 Euros in October – a nice 15% discount (for foreign buyers) heading into the holidays!
Since AAPL makes their IPhones in China – using the remaining FoxConn employees who haven’t killed themselves to escape their torturous working conditions (one improvement that’s been made is they now have bars on the windows to stop the workers from escaping by leaping to their deaths) and, since China’s currency is pegged to ours, their production costs stay flat and net profits (when priced in dollars) look pretty good.
In fact, I had been getting bearish because I thought corporate profits weren’t going to be so good this quarter, what with the lack of sales and all, but I was wrong. I was wrong because corporate profits are priced in dollars and dollars are worth 10% less than they were the last time corporations reported.
So silly me – all profits are inflated by 10% and that 10% is the E that gets divided from the P and gives us a much better price/multiple to hang our hats on and that gets investors to BUYBUYBUY…
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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
(