I mean wow! Will this market ever go down? My mother called me this morning and she’s raising her GDP outlook for 2011 too – that’s how crazy things have gotten out there. I’m just waiting for the Pope to come out and tell us to buy CMG and Netflix and THEN we’ll know it’s a sign. I called it wrong on Friday morning as I thought we were fading out for the week but instead the Russell flew up for a 1.2% gain on the day while the Nas gained 0.8% and the rest put up between 0.3 and 0.5% (check out David Fry’s charts as well as Market Tamer for the whole story) – on the whole, a bullish day – especially when we are starting to look strong above our breakout levels.
That’s the key now, we’ve been watching Dow 11,500, S&P 1,220, Nasdaq 2,600, NYSE 7,750 and Russell 725 for a very long time and, other than the Dow, our indexes have now smashed through that upside resistance and look like they are heading to the moon – especially the Russell 2000, which is up 25% for the year! Small-caps may not be hiring or making a lot of profit and they may not have the ability to get loans from the bank and their customer base may be hurting but BOY, just look at that performance!
And, as I’ve said before, once you break the orbit of a fundamental market, then "Stock Market Physics" no longer apply and there is no limit to the madness that lies ahead of us when (and if) the Dow breaks that 11,500 line. With the Russell up 25% and the Nasdaq up 17%, the Dow, NYSE and the S&P are looking kind of pokey hanging around the 10% lines, aren’t they?
As we can see from the multi-chart, we’re right about 5% over the April highs and, if you play with the time-frames on the multi-chart (see, interactive fun!), you’ll notice that we are up 30% on the Dow on the 2-year, 40% on the S&P and NYSE and a whopping 65% on the Russell and Nasdaq. So, either the Dow has plenty of room to run or the Russell and the Nasdaq are going to fall so fast your head will spin. Not only that, but if you flip to the 5-year view, we’re still over 20% off our all-time highs and, according to the MSM and the Gang of 12 – why shouldn’t we be there?
Really, have you heard a single word as to why it may seem strange to retake the highs that were achieved in a drastically different global economy at a time when, just last week, we didn’t know if the whole European Union was going to collapse or not? I have a theory that all the lithium from all the rechargeable batteries has seeped into the water supply and made it impossible for investors to worry about things – which would explain the VIX plunging back to 17.61, not even 1/2 of the average of the past 3 years! Heck, in July of 2007, when things still looked good, the VIX was at 23. Gosh-darn life must be great now – congratulations America, you’ve never looked better!
We’ve been betting on the fall and not getting it so it’s time to look up, not matter how silly that may seem. Our breakout levels are now our support levels and, while I still hesitate to draw new upside levels for fear we will get nose-bleeds just thinking about them – we can certainly come up with a few plays that will make us money if S&P 1,350 and Dow 12,000 is going to be a reality.
Last Friday, we had two high-reward trade ideas featured in the main post. The first one was the FAS April $20/25 bull call spread at $2.70 (now $3.20), selling the April $21 puts for $2.55 (now $1.75) and that net .15 spread is already net $1.45 so a pretty good gain (833%) for a week there. Our other upside hedge was DBC and again I liked April for a simple play to just buy the $27 calls for $1 (now $1.10) as well as the more complex spread of the short 2012 $22 puts at $1.10 (now $1) to offset the cost of the 2012 $26/30 bull call spread at $1.40 (now $1.50). That one is, obviously, still playable if you need an inflation hedge and the LACK of commodity performance during this week-long stock mania is what still gives me pause so please keep in mind that I do think this is all BS but now we have support lines to play off and, as you know, losing 3 of 5 is a signal to flip bearish again for sure!
The out of the money spread did worse because the VIX fell 8% since last week and that crushed the premiums of our callers. That’s why I usually prefer in-the-money calls for the ones we buy, they get play off the actual movement of the stock and generally, we do expect the VIX to fall while the market rises so, the closer the trade (in time) the more I want my strike to be in the money. That’s also why, for our downside plays, we’ve been buying straight puts lately. With the low VIX, they get a huge kick if the market starts dropping and our target stocks or ETFs fall while the VIX rises although – nothing has really fallen on the Nasdaq since Nov 16th and the Russell is up over 10% in the 17 days since then with barely a twitch down the whole time – AMAZING!
Since there is APPARENTLY no risk in owning equities, then there should be no risk in owning ultra equity ETFs either and I think we can start with a play on SSO, which is a 2x track of the S&P that is surprisingly reliable over medium amounts of time (12 months). I like the 2012 $30 calls at $18, covered with the June $42 calls at $7.60 for net $10.40 on the $12 spread (and, of course, you can roll the caller if things go well) that can be offset by selling an SPX Jan 1185 put for $10, which has a high premium of about $20K (to get $1,000) but it’s offset by the fact that your margin is released on Jan 21st if things go well and that leaves you in a net .40 2012 bullish play on the S&P that has an easy 1,000% upside if things go just a little well.
The SPX is currently at 1,240 so the S&P would have to fall 4.5% to put the puts in the money. If that should happen, it would, of course, be a good idea to slap on a downside cover if you don’t already have them. Hopefully, with the new market breakers, we aren’t likely to drop 5% in a day and, for example, SPY March $115 puts are just $2 so 10 of those slapped on real quick would take a lot of the sting out, as would rolling. Keep in mind, these are upside HEDGES at the moment, we go bullish on stocks, not 10:1 paying ETF plays! These are for protection on bearish positions as well as for small bets so you don’t feel like you’ll miss out on the rally. As I pointed out last Friday, if we have a FAS play that makes 3,233% by April and we commit just 1% of our virtual portfolio to it, that’s 32% gained on the whole virtual portfolio on that one play – that should keep you up with even The Bernank’s wettest dreams of hyper-inflation without over-committing your cash!
Taking a fresh look at DBC, I still like them as a hedge against inflation long-term. If we buy the 2012 $22/27 bull call spread for $2.90, we can also think out of the box and say how low can oil go? USO hasn’t been much below $32 since the crash and you can sell the 2013 $30 puts for $3.30, which is pretty much betting that oil will hold $65 over the next two years. If you are comfortable with that, then you can sell just 3 of those contracts for $990 and buy 4 of the bull call spreads for $1,160 and that puts you in the 4 $5 spreads for net $170 with an upside of $2,000, which is a very nice 1,076% profit – especially when you consider that DBC is at $26.24 today so you are just .76 away from goal with 25 months to get there!
Isn’t hedging fun?
Now, I am working you slowly, but surely outside of your normal trading box so let’s think about something a little more radical. These are bullish investments but IF the market starts to FALL – what do you want to buy? I always like to buy BA, GE, VLO, XOM, MO, WFR, UNG, PFE, MCD, KO, JPM, FDX, HPQ, GS, GOOG, AAPL, DIS, T, VZ and AA when they are on sale and those are just off the top of my head. At the moment, BA, for example, is a big underperformer, about 10% behind the Dow.
So let’s say, I’m willing to buy 500 shares of BA at $45 (it’s $65 now) EVEN if the market crashes. So I just sell the 2012 $45 puts for $2.50, which puts $1,250 in my pocket (just for being willing to buy BA for $45 next year) with about $3,500 in margin used. As long as I REALLY want to own $22,500 worth of BA, AFTER they drop 30%, this is just free money. Now we can use that $1,500 to buy 5 of those FAS spreads or whatever other upside plays I want. You don’t have to be limited to trading the same groupings as long as you are comfortable with the downside. The downside to this is you are less closely correlated in your offsets and that makes it trickier to see if you are doing well or not by quickly looking at the markets but it solves margin issues for a lot of people.
Did you know that, right now, there is a man that will pay you $1.10 NOT to buy GE for $12.50 in 2013? That’s right, you can sell the 2013 $12.50 puts for $1.10! Net margin on that spread is $1,240 according to TOS and, frankly, by itself is a nice way to make $1,100 but We think GE is better than that yet the guy selling the 2012 $17.50/20 bull call spread only want’s .95 for that. So a .15 credit on a $2.50 spread that’s on the money now is essentially a free look at GE through next Jan, as long as you REALLY have no fear of owning it at net $12.35 in 2013 if they are below that line. I’ve been noticing from the questions on this post that a lot of people aren’t COMMITTED to ownership down the line. DON’T EVER sell a put in a position you are not Ready, Willing AND Able to own at the strike price and hold long-term. These are aggressive trades, they are not for everybody.
How about HOV? They have about $1Bn of land inventory, $531M in cash and $1.6Bn in debts so they are valued at $340M. If we’re going to have hyper-inflation, nothing is better than real estate and the builders have been turning around to profits. If you want to be paid not to buy HOV for $5 in Jan 2012, you can collect $1.60 today (net $3.40) and the 2013 $5/7.50 bull call spread is .45 so you can collect $1,600 for agreeing to own 1,000 shares of HOV at $5 (10 contracts) and use that to buy 50 of the spreads for $2,250, which is a grand total of $650 cash spent to gain $12,500 of potential upside – that’s a nice 1,823% upside if housing takes off – and isn’t that kind of the whole point to what the government is trying to do?
I’ll add a few more of these during the week but this set is a good start for us to add some upside as we break over our breakout levels.