You may have heard that the Chinese word for "crisis" is also the word for "opportunity".
While it makes a nice catch phrase for bored business writers it is not actually correct. The Chinese word for crisis is composed of 2 elements that signify DANGER and CHANGE. You will hear many pundits today telling you how real men buy on the dips or some such nonsense and you must ignore them! These people are up to their eyeballs in positions and they want you to come in and save them.
Today I would like you to take a post-it and put it up in the corner of your monitor, where you can’t ignore it and write in a nice, thick marker: It is NOT my Job to Save the Market! Opportunity, yes but DANGER!!! Real men (and women) protect their families (and their assets), not their egos. If we are having a real recovery than we have a 400 point gain ahead of us – you will not miss anything by sitting out the first 100!
A 20% retracement of yesterday’s losses will put the Dow up 83 and the Nasdaq up 24 and the S&P up 12. If you drop a ball from 5 feet and it bounces 1 foot do you bet 10% of your virtual portfolio that the next bounce will be 2 feet? No – you get the air pump! If that doesn’t work, it’s time to get a new ball…
Is the air coming out of the global economy or did China just spring a small leak?
The Shanghai Composite recovered 3.9% today and that is the headline of every section of the on-line WSJ as they and CNBC put on their cutest cheerleader outfits but Europe is off 1.25% this morning and Asian markets, led by a Nikkei 500 point, 3% drop had a terrible morning!
Let’s not forget that a 4% gain off a 10% loss is really only a 3.6% retracement at best, the math trick is that you are starting from a lower point. This is like buying IBM at $100, having it drop to $50 and, when it bounces back to $75, raving about your 50% gain…
What’s great about the WSJ though, it the amazing charts they do. I’m not sure if this link will work but it’s called:
I’m finally seeing stocks at prices I may want to enter and we used the 5% rule to take some off the table and pick up a few positive postions at the close (just in case).
Even after removing these superstar positions, our short-term virtual portfolio still finished up 28% in total (not bad after a 600 point drop in 5 days).
I was starting to feel silly sitting on all those puts and writing every other day that there were terrible things wrong with the economy and people were starting to laugh at me when I said that commodities (which includes housing, of course) are still in a bubble.
Today justified a lot of those fears… As Option Sage said in our very first educational post: "The next rule we should be equally cognizant of is The Cardinal Sin of Investing which is to ignore risk management – Don’t every do it!!! Simply put “Don’t ever put all your eggs in one basket” otherwise Murphy’s Law kicks in and no matter how confident you were in the position you might quickly find it moves against your initial expectations!"
My initial expectations of this drop began on Jan 10th when I said: " Are you prepared for a down 295 point day? Let’s remember I am a bull with a short-term target of Dow 11,500! I would like to say I would be pleasantly surprised to be wrong but I will not be able to really enjoy additional advances unless we get a long-overdue correction out of the way. I’m saying this today as I see several disturbing market trends while I also see a lot of irrational exuberance on our member site and like Uncle Greenspan, I may feel the need to take away the punch bowl if the party starts getting out of hand!"
While many of you may have forgotten my cautionary words, the virtual portfolio didn’t as we tracked progressively more bearish over the next 45 days. Our weekly short-term profits slipped from 100%+ to 42% as I hedged like crazy but, at the same time, we let the long-term virtual portfolio run and gained a ridiculous 100% there. We suffered for our bullishness in the long-term virtual portfolio yesterday as they dropped back almost 10% (to a 97% gain) but they’ve got all year (at least) to recover and we gained…
We’re having a China Syndrome type melt-down this morning!
The Shanghai stock exchange dropped 9%. Yesterday morning I said "his (Greenspan’s) most interesting statement is that investor appetite for risk has led to risk premiums on financial assets being "extraordinarily low," which could pose problems in the future." While the US traders may have generally ignored Greenspan’s comments yesterday, Asian investors took it as a sign to take a little off the table and did so with a vengeance early today.
"Investors are choosing to cut their positions to avoid the fluctuations in the market, but it’s still too early to say the market has reached its peak," said Chen Huiqin, an analyst at Huatai Securities.
A 9% drop is VERY bad over there as they have a 10% limit down on Individual securities so that indicates a pretty broad and nasty sell-off. All of Asia was down 1-2% in sympathy except Taiwan, who somehow managed to gain a point. Airlines got clobbered and we need a clobbering to save our BAB puts – I’ll be taking a very non-greedy exit there if I can!
Let’s keep some perspective as this is a 9% pullback off a 183% 18-month run and this drop was so widespread that it very well may have been program trading catching up after a week-long holiday. We’ll have to wait an see how our markets react (like scared rabbits so far this morning) and what kind of follow through Asia has tomorrow before we throw in the towel over here.
Europe is a nice, mature market and is taking a nice, wait-and-see attitude this morning with only a slight sell-off but our futures are looking terrible (7 am). In a move that may finally goose our AIG leaps, French reinsurer SCO is attempting a hostile takeover for Swiss reinsurer Converium. "The unsolicited proposal fundamentally fails to recognize the value of Converium’s franchise and growth prospects, and is, therefore, not in the interest of Converium, its shareholders and its customers," it said in a statement.
Any time something like this goes on it draws analysts attention to industry fundamentals and I’m be adding to our AIG Jan ’09 $70s at $8.50 or lower, hoping for a move here, still a light position until we’re ready to sell against it!
Combine all that with a gain in commodity prices and that was one crummy day!
Oil was up .25, not impressive enough to chase us out of our puts (in fact I added in the morning) and the new contract was saved at the last second from a very nasty plunge to $60.50 to finish at $61.14 so we’ll try again tomorrow.
Gold tested $690 again but could not break it, finishing the day at $689. The dollar broke below 84 but I said at 10 am: "Oil – I’m just not seeing real strength on a weak dollar. Things are just not what they seem here. I’m getting the feeling that big boys are taking this opportunity to dump like crazy." We’ll see how this pans out…
On the whole, nothing to celebrate. Al Gore won an Oscar and in his film he said Antarctica was "a canary in the coal mine" - I wonder what he would think of today’s market?
We didn’t make too many moves as I said early in the morning, despite the good open: "Markets are not looking that good – still on my IWM puts – way too dangerous looking. That was a terrible pullback off the morning open on the Dow and Nas! I was looking for oil to buy and I ended up adding to my puts… "
It was a good day to initiate our weekend set-up of CY as we sold the Apr $20s for our $1 target and bought the Jan ’09 $22.50s for just $2.70 – a better spread than we thought! The stock was kind enough to go down for us yesterday too!
GOOG Apr $530s were bought back for $2.90 (up 42%) but I applied .70 of it to DD on the $530s and $520s just for fun!
GOOG Mar $480 puts were exited at $19 (up 30%) as it was simply too…
Hmm, Greenspan calls for a recession and the markets fly up in the futures…
No wonder we have half puts and half calls!
I’m in a bad mood this morning because I sold my Dow $45 calls on Friday. I’m not even going to discuss how awful that timing was! Oil heading higher is also annoying me so keep that in mind if I come across a little grumpy.
Hong Kong was grumpy today too, down 203 points, and most of Asia was off a bit in sympathy but Japan held up and we can excuse the activity as a little bit of catch-up (down) as China was closed all of last week. Miners continued higher as gold broke $690 as Cheney continues his war of terror (a Freudian typo that I’m leaving in!) by visiting Pakistan to make sure that at least those nukes are pointed in the right direction…
Sanyo had a 4% bounce back, which should be a relief to poor GS but the big story there, like it is here, is M&A mania with deals involving Coles, PKX, BEN, MITSY and Consolidated Minerals adding to our own TXU, HBG, DCX and DOW (possible)deals as well as ERIC over in Europe to push today’s total to well over $100Bn.
With all that money pouring into the markets you would think we should be heading up from here but let’s make sure we are really breaking up before we all go and drink the Kool Aid:
If oil stays over $61 it will be time to quickly revalue those positions but we can certainly expect a test of $62 before we get a turn down. $60.50 needs to hold as a floor and we still have our oil calls from Friday’s list if it really breaks out. I’ll be…
This is not something you want to hear to start the week but the markets are probably more comfortable hearing him get back to his usual "doom and gloom" prognosis than they have been with his recent "housing may be bottoming " BS that he’s rolled out as his last few appearances.
Greenspan getting optimistic about housing is sort of like Darth Vader asking you over for tea – you’d like to think he’s really changed but you still have trouble really getting comfortable with the situation.
We like our bad guys to be bad and our bears to act bearish – then we all know our place in the world and can act accordingly – it’s way too confusing when people start switching sides!
It’s a very busy data week so we’ll see how sharp Mr. G’s forecasting skills are as we get some biggies. Here’s the list from Briefing.com:
Despite the drop in the market our bearish attitude about builders and oil companies netted us an average 84% gain on 23 positions closed with an average hold time of 19 days.
Our open short-term virtual portfolio actually improved a little this week, with a 35% average gain on 93 open positions (23 average days old) but the big jump in open positions is due to our new virtual portfolio tracker which now treats our 13 short-term spreads as two transactions.
The long-term virtual portfolio has an average gain of 92% on 42 positions (same spread issue) that have been held for a whopping 47 average days (seems like forever doesn’t it?) but, now that we have our new system we’re going to start tracking the cash gain, which is $156,091 or 104.27%. There is a lot of noise in the average position gain since we buy and sell puts and calls against our positions constantly and, as we wear down the basis of plays like TIE (now down to .20) we have nowhere left to credit the money!
In the short-term virtual portfolio, the balance (up 37%) is meaningless as the holdings change daily so I still prefer to look at the average gain there for a true performance picture. In a choppy market like this our strategy is to have a diversified mix of puts and calls, keeping the bulk of the virtual portfolio fairly even as we cherry pick the winners and sell them in a nice non-greedy fashion.
We only had to close 5 losers this week:
BAC Jan $55s were just too tedious to hold and was banished from the LTP at $2.55 (down 12%).
BTU Mar $40 puts stopped us out at .75 (down 21%) on Wednesday’s run as they were the naked side of the calls we sold last week (too early it seems!).
DIA Mar $127 puts were last weekend’s insurance play and came off Tuesday at $1.20 (down a nickel) and I WISH I had those back (now $1.60). This weekend we have the IWM’s…
GOOG Mar $470 puts (out at $5.50 for a 53% loss) are another one we could have hung on to, I guess I am too much of a Google optimist but doubling down on the $480 puts at $8.60 was a good trade-off.
Well I spent the whole day messing around with ETrade trying to get it the way I like it.
I’m still using OXPS for my main account but I’m working on a project that’s using ETrade and I liked the way you could configure it. This "should" save me a ton of time from now on but let me know if the new format bothers you too much.
The biggest downside is that I have to book spreads as two different transactions, which I don’t like from a cash management perspective but that’s about the only thing I really don’t like about it.
On the very bright side, we can now track positions sizes without killing me and I can now include symbols, current stock price, and daily price changes. I’m not promising I will do it daily but down the road it’s a step!
The other system was burying me as I had way to much entering and formatting but if everyone can get comfortable with this way of virtual portfolio tracking, we’re on the way to a more robust tracking system.
As I want to get much more into talking about postion management, I think it will be good to start talking about the size of positions and how we move in and out of them. Hopefully this will work well for all and believe me, I can spend a lot more time picking stocks now, rather than tallying results!
- Phil
LOL – I spoke to soon. For some reason the spreadsheet came out to be 50Mb – not terribly useful…
We’re going to work on it and hopefully have it up tomorrow but if anyone knows a stupid excel trick to figure out whats eating up all the space – please make a comment here. All I did was have Etrade create an export spreadsheet which I then cut and pasted into my regular stuff… Then I reformatted it but it looks normal to me.
[UPDATE] The newly formatted spreadsheet is available on our Virtual Portfolio page. As usual, it is viewable right in your browser but you can also download for offline viewing and sorting. -Jared
Monday morning’s big fall in Facebook’s stock hardly came as a shocker. It was clear on Friday that, at the offering price of $38 a share, there were more sellers than buyers. The only reason the stock held up was that Morgan Stanley, the lead underwriter on the initial public offering, stepped in and supported it. At the opening of trading this morning, the stock fell $5, to $33, before rebounding ...
The full set of DTCC data is in (that is the repository for reporting CDS data) and reading between the lines provides us with some significant color on what was occurring at JPM's CIO office. For the Cliff Notes' version - see the summary at the bottom...
First things first, the position does not appear to have any HY9 tranche involvement at all, but a modest short HY credit index position was unwound in mid-Feb (we suspect related to the IG9 tranche unwind - since the d...
The following are the M&A deals, rumors and chatter circulating on Wall Street for Tuesday May 22, 2012:
SAP to Expand Cloud Presence with Acquisition of Ariba
The Deal: SAP AG (NYSE: SAP) and Ariba (NASDAQ: ARBA) announced that SAP's subsidiary, SAP America, has entered into an agreement to acquire Ariba, the leading cloud-based business commerce network, for $45.00 per share, representing an enterprise value of approximately $4.3 billion. The acquisition will combine Ariba's successful buyer-seller collaboration network with SAP's broad customer base and deep business process expertise to create new models for business-to-business collaboration in the cloud.
ETFs flatten after slight correction yesterday and continued Facebook face-plants.
US indexes and ETFs finished mixed and flat today, as investors continue to scratch their heads regarding a possible China stimulus, European Armageddon, and Facebook face-plant. Today’s flatness comes on the heals of a correction yesterday, and the outlook still looks grim so long as Europe continues to smolder.
The SPDR S&P 500 ETF (NYSEARCA:SPY) gained .17% while the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) gained .02%; the PowerShares ...
The carryover from yesterday's rally in the S&P 500 dove for cover in the final hour of trading on news that Greece's former prime minister mentioned contingency planning for a Greek exit from the Euro. The index had reached an intraday high, up 0.95% during the late morning, faded through the afternoon, and sold off during the final hour when the Greek news began circulating. A rally during the last 10 minutes of trading lifted the index out of the red to a 0.05% gain at the close.
The index is now up 4.69% for 2012, which is 7.22% off the interim closing high on April 2nd.
From an intermediate perspective, the S&P 500 is 94.6% above the March 2009 closing low and 15.9% below the nominal all-time high of October 2007...
EXPR - Express, Inc. – Shares in apparel retailer, Express, Inc., dropped nearly 30.0% today to a new 52-week low of $16.38 after the company projected full-year earnings below those expected by analysts. Options on EXPR are far more active than usual today, with overall volume on the stock currently at 4,460 lots, up nearly 2,000% over the stock&rsq...
To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...
It is still very early in the conversation but the fact some European leaders are seriously considering a region wide bond is definitely a sea change. This news came out yesterday and while Germany will resist, it will be interesting to see if over the next 6-12 months the idea of a "eurobond" gains momentum. The bond would obviously help protect the weaker countries in the region (letting them borrow at rates they otherwise would not) and be a penalty for the stronger countries (namely Germany). So Germany has to consider if its worth the cost and/or if this is a cheaper way to maintain a flawed system in a current form R...
Top 5 RisersStockRatingAnalysisAIGBUYAn increasingly positive growth rate of past earnings, along with improving expectations for long term growth, make AIG a good prospect for high returns.KROSTRONGBUYKronos Worldwide has been gaining recognition from analysts as a good canditate for achieving higher than expected earnings along with higher overall projected valuation.WDCSTRONGBUYWestern Digital is one of the top candidates projected to achieve both higher than previously projected earnings in the short run and a higher earnings growth rate in the long run.NCSBUYNCI Building Systems has s...
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This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).
We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options.
Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.
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NEW: Ilene is available to chat with Members regarding topics presented in SWW, comments are found below each post.
Here is this week's test version of the latest newsletter. We apologize for some formatting issues that need to be worked out. Please tell us what you think.
Reminder: Pharmboy is available to chat with Members, comments are found below each post.
In this article, please revisit an article written two years ago titled, "The Calm Before the Storm." This article focused on the patent cliff that was looming in the pharmaceutical industry, that was later picked up by the New York Times and several other bloggers! Subsequent articles were written about big pharma company's revenue streams, and the pros and cons of of their later stage pipelines. Other articles have also attempted to identify smaller biotechs with the potential to reap big reward...
My last weekend update is dated from January 30 so after a long hiatus, here is an update of our virtual portfolio. Since the last update, we have closed the AA Money portfolio due to a lack of enthusiasm (and activity) and I have stopped tracking the FAS strangle as the low VIX makes it hard to get rewarded for the risk! But we have added a small $5KP virtual portfolio which does not use any margin.
FAS Money
We have had to recover from a big move up by FAS and a low VIX which keeps option prices low. But the portfolio has gaine about 10% since the last update.
Last update P&L - $5499.00
IWM Money
Not a lot of activity in this portfolio where the main focus is on the large IWM BCS. But the portfolio has grown over 20% since the last update.
Last update P&L - $1998.00
$5KP Portfolio
This is the virtual portfolio that replaced the AA Money portfolio. It does not use margin and we will keep holdings under $5K.
AAPL $50K P...
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...
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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
(