Weekend Wrap-Up, Still Trying to Get Bullish

March 14, 2010

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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 virtual 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.

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 finally getting the hang of the Wonderland Market though it’s actually quite simple because, as Alice once said: "If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?" We’ve done considerably better just going with the flow – riding along on the crest of this market wave and taking plays in both directions.

Nonetheless, Friday’s extreme nonsense looked like as good a time as any to cash out our long, unhedged positions (directional plays) and I called for a cash out in my 9:38 Alert to Members. Alice also said: "I’ve often seen a cat without a grin; but a grin without a cat! It’s the most curious thing I ever saw in my life!" That describes this rally very welll – it’s a grin without a cat and an illusion without substance can only go on so long before the house of cards comes crashing down.

Monday Market Movement

I was still cynical about the market movement of the previous week and I thought it was very suspicious that the Hang Seng rocketed up 2% to kick off the week, especially in light of new that China moved to nullify all guarantees local governments have provided for loans taken by their financing vehicles – something that would ordinarily send investors flying out of a market. The Hang Seng had gapped open 300 points and added another 100 during the session and that did turn out to be it for the week as China completely flatlined for days. To see how unusual this is, click on the 3-month of 6-month view of the chart.

Not to be cynical (of course) but the Chinese market is up 100% off the bottom and down just 15% from the all-time highs, which seems perhaps a little much. Who benefits from flatlining the market in China? Well, flatlining the market lowers the VIX and lowers the price of puts and it just so happens to have been been about 6 weeks since China opened up their markets for short-selling and margin trading BUT – they have only allowed it for securities firms with at least 5 Billion Yuan in net assets and very high net-worth traders.

So what would happen if the top 0.1% of China loaded up on short positions that no one else could take and then they crashed the market? Why they would get super amazingly rich while putting everyone else in the poor house. It’s the same play that worked just 18 months ago and all those guys seem to have gotten off scott free – is it really such a stretch to imagine one or two of the 1,011 Billionaires who walk among us might want to move up the list a little? Still, as I said on Monday: "If "THEY" are "faking it" then they are very good at it and we may as well go with the flow." I also said: "I am trying very hard NOT to have an opinion on the markets as we’re already above where I though we should be" and we shifted to a more opportunistic series of trades to reflect our more neutral attitude:

USO March $41/42 bull call spread sold at .20, now .07 – up 65%
DBA artificial buy/write – on target
T July $25 puts sold for $1.45, out at $1.20 – up 17%
T Oct $24/25 bull call spread at .55, now .57 – up 3.6%
EDZ complex spread – on target
FAZ complex spread – down enough for 2nd round entry
EWP July $45 calls sold for $2.20, still $2.20 – even
BA Apr $62.50 puts sold for .78, out at .40 – up 48%
BA Jan $55/65 bull call spread at $6.50, now $7.15 – up 10%
BA Jan $55 puts sold for $3.20, now $2.70 – up 16% (pair trade)

Toppy Tuesday – Happy Anniversary Bull Market!

I drew a very nice S&P chart that neatly pointed to the uptrending channel we were in with our expected top at 1,150. That means next week we’ll be looking to either break out and establish a floor at 1,150 or we’ll be watching a breakdown of the channel in the low 1,130s. I raised my major concerns about how the Mainstream Media is once again cheerleading a rally back to levels that were, at the time, based on profits that never existed as they themselves were based on a great Fraud and actually led to Trillions of dollars in losses.

We are not only attempting to regain our past market glory but we are doing so while making the same mistakes – shipping barrels full of dollars out of the country to pay for both commodities and cheap labor while emptying the pockets of the bottom 90% of the American working public. While (as I said in "A Tale of Two Economies") this is a recipe for success for the top 10% and the companies that serve them, this is a recipe for disaster for the people of the United States of America, which is why we at PSW are island shopping – adios suckers! I wish I was kidding but, really, it’s time to look for the exits…

Oil futures, short at $82, out at $81 – up $10 per penny per contract!
GLL at $9.55, now $9.92 – up 3.8%
TXN Apr $24 puts sold for .70, now .77 – down 10%
CSCO March $25 puts at .12, out at .15 – up 33%
SPWRA Apr $19 puts sold for $1.05, now .70 – up 33%
TZA complex spread – on target
AAPL July $240/Apr $230 diagonal spread at $3.75, now $4.60 – up 23%
USO March $40 calls sold for .65, now .35 – up 46%
USO Apr/March ratio backspread – on target
USO Apr $38 puts at .82, still .82 – even
VNO Apr $75/70 bear put spread at $2.60, now $2.20 – down 15%

My closing comment to Members for the day was: "Well yet another fun day where it looks like they are going to break out but we end up going nowhere. Bottom line is we are still down for the week and this is a hell of a lot of top churning, albeit on low volume." That summed up the day very nicely. Notice we are shorting commodities and emerging markets and the commodities are working and, if they keep working – emerging markets will follow.

Which Way Wednesday – World of Worries Weighs on Wall Street

My opening comment to Members on Wednesday came in our after-hours discussion at the end of Tuesday’s post at 6:23 am before I got to work on Wednesday’s article. I said at the time: "We’re still in the kind of market where you may wake up one day and find your stocks are cut down 20% and they could be 1/2 in a jiffy. It is not a good idea to make big commitments on stocks you don’t mind putting under your pillow for a year or so while another wave of crisis sorts itself out."

Yes, I am aware of the fact that if I want to stop being viewed as a stock market Cassandra I should stop writing headlines like this and stop pointing out all the bad stuff I see. My consulting company is called Delphi consulting for the same reason – I don’t always tell people what they want to hear. Market forecasting is not astrology – we should not be here to "entertain you" or to "get ratings" by telling you what you want to hear. I’m not even saying I’m right, this is simply what I see going on and I STRONGLY ENCOURAGE you to read people who totally disagree with me as well – I sure do.

GLW complex spread – on target (good opportunity for new entry)
BTU artificial buy/write – on target
BIDU Apr $540/March $540 calendar spread at net $11.80, now $14.30 – up 21%
Oil futures, short at $82, out at $81 – up $10 per penny per contract!
USO Apr $38 puts at .77, now .80 – up 3.8%
ERY Apr $9 puts sold for .30, still .30 – even
AIG March $37 calls sold for $1.60, now .49 – up 69%
AIG March $40/36 bear put spread at $2.90, now $3.60 – up 24%
BAC complex spread – on target
KEY Jan buy/write at net $5.14/6.32 – on target
POT Apr $110 puts at $2.65, out at $3.25 – up 22% (now $1.50!)

Several fundamental things caused us to get more bearish on Wednesday: Commodities were looking toppy; We recorded a record budget deficit of $221Bn in February with $328Bn in outlays (up 17% from the last year) against just $107Bn in collections; We had a weak day despite the Senate approving a $149Bn job stimulus package. When $149Bn worth of stimulus spending gets a big yawn from the market and the government is already burning $221Bn a month – it does tend to sour your long-term outlook…

218 New Billionaires Averaged $500M in Gains Last Year – How Are You Doing?

It turns out our PSW Members Chat is the wrong place to ask this question as many are doing very, very well from all this stimulus and government and private manipulation of the markets and they are not looking to change things (other than, perhaps, the guy who has been in charge during the recovery for some reason). Needless to say, we had some very spirited debates on the subject so I’m not going to rehash it here – we are moving on now as we have no time for socio-political discussion in the upcoming expiration week but it is a lot of fun having spirited debates with so many well-represented viewpoints in the same virtual room.

Once I was done with my rant on the pitfalls of Capitalism my closing comments on the market that morning were: "It looks like we have a bit of a sell-off this morning and I predicted yesterday in Member Chat that we’d hit 10,400 by tomorrow so I hope I’m right as we still have a bearish short-term stance but we will continue to watch our technicals and play the hand that’s dealt." It didn’t take long for Mr. Market to show us his bullish cards so my 9:42 Alert has 2 bullish plays to offset our losses in the bearish positions we kept without forcing us to abandon them. Those were the DIA Apr $106 calls and the TNA bull call spread but, as I did earlier in the week, I had already called for a BA bull spread and the old reliable Oil Futures short in our early morning Chat:

BA 2012 complex spread – on target
Oil futures, short at $82, out at $81 – up $10 per penny per contract!
TNA Apr $52/53 bull call spread at .45, out at .60 – up 33%
DIA Apr $106 calls at $1.08, out at $1.40 – up 29%
AMLN double diagonal – on target
C complex spread – on target
WMT artificial buy/write – on target
SONC Sept $10 calls at $1, now $1.20 – up 20%
SONC Sept $10 puts sold for .90, now .85 – up 5.5% (pair trade)

Notice we are still taking many bullish positions to offset our bearish betting but we are taking quick profits and setting up a lot of complex, well-headed spreads to guard against a possible downturn. The whole week has been all about staying nimble and just cherry-picking the easy opportunities to set up plays we can make 20% on and get done with them along with some cautious entries on stocks like C, BA and SONC, that we still feel have room to run in a hot market.

Friday Chart Toppers – Breaking Up Is Hard To Do!

Despite all our bullish bets for the week I was sad to see us breaking up on Friday. Perhaps that’s where the writer’s block is coming from (this, by the way, is me with writer’s block – 4 pages later!) – we don’t mind BS manipulated market moves as long as we understand the motivation behind them and the likely next move. If the red card is never going to be the card the con man flips over, we are NOT ashamed to bet that the next card will not be the red card. Sure we feel bad for the guy playing the game but if he insists on going for his "sure thing" then we’re happy to make a little cash making side bets against him!

As I noted earlier, I did get disgusted by the 50-point gap up at the open and decided it was a good time to take the money and run on unhedged long positions. We were only 50 points from 10,700 where we either pull back or break out in some spectacular fashion and the same goes for S&P 1,150 is we make them… Well, I already indicated my enthusiasm at the close of Friday’s commentary: "So rah, rah markets – what an amazing rally, woo-hoo – everything must be great because the markets are making new highs. At least for now…"

IYT complex spread – on target
FXP Apr $75 puts at $1.50, now $1.72 – up 14%
GMXR May $10 puts sold for $1.20, now $1.30 – up 8%
TBT Apr $48 calls at $1.07, still $1.07 – even
OIH March $125 puts at $1.10, now .90 – down 18%
OIH March $125 calls sold for $2.88, now $3.05 – down 6%
C Jan $4/5 bull call spread at .30, still .30 – even

I’m TRYING to get more bullish, really I am. I’d love to buy on every dip and cheer at each end of day rally but I just can’t get myself to believe it. It’s kind of like going through the motions on December 24th – you can lay out the milk and cookies and hang the stockings but are you really going to stay up all night listening for the sound of hooves on your roof? That’s how I feel about the market rally and economic recovery – it’s a nice story that we tell the proletariat so they don’t realize that yes, Virginia (and every other state), there is no safety net.