Wheeeee, the Nikkei is down 5% today.
That's now down 14% off the top but a 20% retrace of an 85% run is 17% so, ugly as it seems – so what? Wake us up when there's a real correction. Another 3% down from here (14,000) is 13,580 so THAT's the line we'll be interested in seeing and, guess what, that's right where the /NKD futures bounced last night – gotta love that 5% Rule!
That same 5% Rule told us yesterday that SPY would re-test the 165 line and, lo and behold, they finished the day at 165.22. It was RUT 975 of bust and 980 was the low of the day so we maintained a generally bullish attitude, despite the intra-day dip. This morning we remain nimble as we played Oil (/CL) and Gasoline (/RB) Futures from both sides of the line in early morning Member Chat and had small winners in both directions.
We don't have much of an inflection point until the Dow tests 15,200 again (the bottom of Dave Fry's rising channel and our perfectly predicted -5% line) and, anything below that is a strong signal to get your bear on.
We're already using DIA puts to protect our Income Portfolio (June $148 puts, now .60) and we also have a few June TZA $39 calls but those are trashed at .32 with TZA at $31.38 but we can pick up the October $30/37 bull call spread for $1.90 and, since we have the long $39 calls, we can sell some June $36 calls for .60 to lower our cost to net $1.30 on the new spread and we can't lose more than $3 to the upside and our long spread would be $7 in the money if that happens so a good adjustment to make in our Income Portfolio.
On the DIA puts, we "invest" another $10,000 in insurance and roll the puts (100) to the Aug $147 puts ($2.25), which is net $1.65 and we then need to find some DIA puts to sell for that .65 so it's the June $149 puts at .80, which means we're spending net .85 on the roll to the new spread.
A 500-point drop in the Dow (why not, the Nikkei did it 3x this month) would drop DIA to $148 and put our June short puts $1 in the money and let's say they go up to $2. Well, the Aug $147 puts are currently $2 and drop the strike 5 to match the 500-point Dow drop and we can assume we'll be able to roll the short June $149 puts to the Aug $142 puts and that would put us in a $6 bear call spread for net $2.85 (we originally paid $2 for our own June DIA puts). That sounds perfectly fine as the only reason we'd be doing that roll would be that our Aug $147 puts are in the money!
Option playing is like chess – you have to learn to look several moves ahead to know what the right current move should be. We had a lot of fun moving our TSLA positions around yesterday but, on the whole, we finished the day more bearish than we began – taking 1/2 of our $85 calls off the table when they spiked over $40 – also a play in our virtual Income Portfolio. One neat trick that may not have been necessary was my 12:45 adjustment in Member Chat:
TSLA back over $105. Our next logical move is to roll the 40 short $115 calls in the Income Portfolio to 40 $135s for $5 – not a penny more! That costs $20K but we sold that in short puts and it reduces our margin and widens the spread on the 20 $85/115 spreads by $20 so $40K more to make if TSLA hits $135.
Keep in mind we ended up with only 20 2015 $85 calls covering 40 2015 $115 longs and we had taken $84,000 in 20 other $85 calls off the board (in an earlier call and, as discussed in the morning post pre-market). We put $7,000 back into 20 $100/130 bull call spread that pays back $30,000 if TSLA takes off and then spent $20,000 to push the 40 $115 short calls up to the $135 short calls and, of course, we're still short the Jan $80 calls and the Jan $60 puts in a 2:1 ratio (bearish) but our long $85s now pay $100,000 if TSLA is over $135 (before our short call obligation kicks in) and the $100/130 spread pays another $60,000 and we have $57,000 in our pocket from the sale of the $85s net of the roll and purchase of the new spread. That's a lot of headroom for a bearish bet!
It's more of an indication of how crazy TSLA's moves have been than anything else. The stock peaked in anticipation of yet another "MAJOR" announcement by Musk and it turns out they will TRIPLE the number of charging stations…. from 6 to 18! Perhaps that number will be the cold slap in the face TSLA investors need to be reminded how small this company really is. With 20,000 cars on the road and a $12Bn market cap, each car is "worth" 3 times more in market cap than it sold for. If you did that with 100M Fords at $25,000 average, Ford would be worth $2.5 TRILLION yet, for some mysterious reason, it's only valued at $61Bn.
So, I suppose we should load up the truck on F as that stock should going from $15.60 to $640 as soon as TSLA buyers realize what a relative bargain it is! Now I'm not saying that TSLA should be 1/41 of where it is now, which would be $105/41 = $2.50. I'm just saying that maybe, somewhere between $2.50 (relative to F or any other car maker) and $105, TSLA will find reality at some point. Do you know why other automakers don't make electric cars? Because they aren't profitable. Teslas are not profitable, the company made $12M selling 5,000 cars last quarter – that's $2,400 per car and they only made that because they don't go through dealers (and they get $7,000 per car sold from the Government!).
Anyway, off that topic – we discussed it to death in chat and decided to go short – how's that for a summary? Moving on to the BIG picture: As we expected, GDP was revised down very slightly, to 2.4% from 2.5% in first estimate. Much more telling, Corporate Profits in Q1 fell $43.8Bn after rising $45.5Bn in Q3 so, essentially, we're back to where we were before the Thanksgiving rally began – about 20% ago on our indices. As with TLSA, somewhere between 1,400 and 1,650 on the S&P lies the true value of the market…
Mostly it was the rest of the World that dinged Corporate Profits, with a $33Bn decline. Don't blame taxes, Corporations paid $13.6Bn LESS in taxes in Q1 than Q4, which was already $4.4Bn less than Q3 – no wonder they have to have hearings!
Anyway, if our economy is slowing down – what's holding up the rest of the World?