We had a Hell of a start to the month.
As the market bottomed at the end of September, we had 59 trade ideas in two weeks and only 8 of them were misses for a very nice 86% success rate. That only took us through October 4th, when the S&P was at 1,675 and on the way down to 1,646 on the 9th so here comes a tricks couple of weeks (hopefully we get to 3) where we start on a downturn and finish making new highs. This is always exciting for me as these are our untracked trade ideas, so I always wonder how they turned out!
Keep in mind, these are fairly arbitrary snapshots and we make both bullish and bearish bets on a regular basis and the trick is to keep a generally balanced portfolio so you can take advantage of moves in either direction. When we are bearish, it's 60/40 bearish or 70/30 bearish but not 80/20 bearish! BALANCE is very important in trading, and in life…
Remember, our core philosophy is to BE THE HOUSE – Not the Gambler (which was, in fact, the subject of our October 6th post), so we sell premium on both sides and that means we will win some and we will lose some and then we try to work out of our losers while continuing to sell premium on the other side of them. Over time, that puts the odds well in our favor and USUALLY markets go up AND down, and we profit on both ends. This year's market has been a lot more up than down – so far.
October, however, was marred in the beginning by the Government shut-down.
Oct 7: Monday Market Meltdown
Sometimes, all it takes to end a wicked bull run in the markets is a nice, cold splash of reality and what can be more real than the idiocy of the US Government? This is a country where almost 25% of the World's GDP takes place! When you are pushing historically high forward market multiples, like our current indexes are - you have to BELIEVE things are going to go smoothly in the future – or, in the very least - not get worse.
Clearly we are already worse and getting "worser" as the the GOP dug in this weekend and came up with a new set of demands with House Speaker John Boehner saying he wouldn't bring up bills to fully reopen the government or raise the debt limit unless Democrats agree to broader talks aimed at trimming the deficit. "And your little dog too!" said Boehner as he cackled and flew away on his broomstick, leaving 800,000 Emerald City employees without pay for another week (but NOT, technically, unemployed) while millions people in the land of Oz suffer as vital Government Services contine to be withheld.
- TASR 2015 $12 puts sold for $2.10, now $1.50 - up 28%
- DDD 2015 $45 puts sold for $8.50, now $3.80 - up 55%
- LMT March $110 puts at $2.90, stopped out at $1.40 - down 52%
- AMZN Nov $280 puts at $3.90, out at $7.80 - up 100%
- NLY at $11.52, selling 2015 $10 puts and calls for $2.70 for net $8.82/9.41, now $9.94 - on track
All this bickering is quietly pushing our market indexes off a cliff with the Dow already failing the 50 dma at 15,200 and heading down to test the 200 dma at 14,800 (sorry, news from the Future again). The S&P is riding it's 50 dma at 1,680 but failed it into yesterday's close while the NYSE stopped just above the 9,575 line it needs to hold. This is, of course, no surprise to any of us devotees of the 5% Rule™, as we cashed out at the top but now we're in the zone (down 5%) where we can't be too sure which way things will go.
We're still a bit over the low re-tests we're looking for at Dow 14,950, S&P 1,670, Nasdaq 3,740, NYSE 9,500 and Russell 1,068, but not too bad for levels we predicted 3 weeks ago – before the market even topped. Keep in mind our 5% Rule™ is not TA, it's just math – we only use charts to illustrate the otherwise boring numbers but, if you look back in our archives, you'll see that for years I simply wrote down the numbers and it worked just as well.
- AA at $7.97, now $9.51 - up 19%
- YUM Jan $70/72.50 bull call spread at $1.30, selling $70 puts at $3 for net $1.70 credit, now .05 - up 103%
- AA 2016 $7/10 bull call spread at $1.15, selling Jan $8 calls for .42 for net .73, now .05 - down 93%
- Oil (/CL) Futures short at $103.50, out at $103 - up $500 per contact
- AAPL 2016 $350 puts sold for $34, now $16.70 - up 51%
These (McClellan Oscillators) indicate we could have quite a dip ahead of us but, short-term (this was as of yesterday) we've relieved a lot of the hard pressure pushing us down but, every time the GOP get on TV an whine about how no one will give in to any of their demands, it's another downside catalyst that pushes us a little further towards oversold. That's why I think we'll have a big pop when they do resolve it – but not likely to be before the weekend, best case.
Looks like Janet Yellen will be the next Fed Chair.
Meet the new boss, same as the old boss (well, maybe a bit more balls than Bernanke has). I love the timing, does the GOP have the energy to fight this nomination while keeping the Government shut down? This is going to be a toughie.
Today is a bounce day for the market but, as you can see from the Big Chart, Republican idiocy is taking it's toll with a MASSIVE drop in the Nasdaq yesterday as well as the Russell which, fortunately, was exactly what we told you to play for on Friday, with the TZA Nov $22/25 bull call spread at $1 along with the SPY Nov $163 puts at $2.
As of yesterday's close, the TZA spread was already $1.35 (up 35%) and the SPY puts hit $3 (up 50%). That's pretty good leveraged protection against a 3.2% drop in the RUT (11:1) & a 1.5% drop in the S&P (33:1). Having good risk/reward profiles and strong upside leverage is the key to good hedge selection (see early morning Member Chat for more conversation on this topic).
- Oil (/CL) Futures short at $103.50, out at $101.50 - up $2,000 per contract
- INTC 2016 $18/25 bull call spread at $3.30, selling $20 puts for $2.85 for net .45, now $2.05 - up 355%
- F 2015 10/15 bull call spread at $3.80, selling $15 puts for $1.65 and selling 1/2 Jan $16 calls for $1.33 for net 0.99, now .85 - down 14%
Technically, we're down from $104 to $101.50 in a quick move (1 day) so $2.50 means bounces of .50 to $102 (weak) and $102.50 – that's great for us as it lines up right where we want them anyway. Failing $102 will be a great sign that we'll follow-through below $101.50 and anything below makes $98.50 much more likely!
Oct 10: Thrilling Thursday – Deal or No Deal?
Our own Futures are up about 1% and, fortunately, we already made some bullish adjustments as I had interpreted yesterday's Fed Minutes as bullish in Our Member Chat (alsotweeted out in the afternoon), which led us to cash out some of our bearish winners (TSLA, NFLX).
We did, however, keep our oil shorts as it looks to me like $101.50 will break after that horrific inventory report that netted a 10 MILLION BARREL BUILD! As you can see from this Bespoke Chart, a build like this is almost unprecedented, representing 1.5 days of imports at our currently, ridiculously low rate of imports.
This Thursday I'm telling you we are playing short below the $101.50 line (tight stops above) with a target of $98.50 on the remaining 222,305 contracts for a potential, additional $666,915,000 gain. We'll check back next Thursday and see how it goes. We also maintain our short positions on oil using USO and SCO the virtual Short-Term Portfolio we track for our Members.
- 222,305 Oil (/CL) Futures short at $101.50, out at $98.50 - up $666,915,000
- VIX March $22/30 bull call spread at $1, selling Oct $18 calls for .75 for net .25, now net .71 - up 184%
- SPY Nov $165 puts at $2.15, expired worthless - down 100%
A lot of our trading may seem contrarian but all we are doing is ignoring the noise and focusing on the Fundamentals so, often, we end up buying when others are selling and selling when others are buying. On Wednesday, for example, we sold YUM 2015 $62.50 puts for $6.55 as the first entry in our new Long-Term Portfolio. Those puts are already down to 6.20 for a quick 5% gain in 2 days but we're in them for the long-haul, of course. All we did was follow-through with our original plan for YUM earnings, executing our strategy for the sell-off.
We also added INTC longs for our Income Portfolio and got aggressive on NFLX and TSLA, as mentioned, in our Short-Term Portfolio, got more bullish on AAPL in the STP, bought AMZN weekly $305 calls for $1.40 that hit $3 yesterday but we, unfortunately, let ourselves get stopped out at $1 on the flush into the close (can't win them all). We also set up a bullish trade idea for F and took the money and ran on our CZR short puts. In short, while the market was dropping and people were panicking (and the VIX was high) – we were going long.
We're not missing any opportunities – we're WAITING for them! When things are clearly ovesold, we buy and, when things are clearly overbought, we sell. When things are in-between – especially when the facts (earnings, debt ceiling, missing Government statistics) aren't clear, what's the sense of throwing money at things?
- Oil (/CL) Futures short at $101.50, out at $101 - up $500 per contract
Oct 14: Monday Market Meltdown – Again
This is how we began last Monday's post as the House failed to pass a debt deal and the markets begain to panic after having popped 100 points on Friday in anticipation of a revolution. Those who forget the past yadda, yadda, yadda - I suppose.
We could have yadda-yadda'd all of last week and wouldn't have missed much – except some fabulous gains in oil, of course, as we got all the way back to $100.50. This morning we caught a nice ride from $102.50 back to $101.25 for a $1,025 per contract gain from our entry in early morning Member Chat but, at this point, I certainly hope you don't need me to tell you what lines we're shorting oil at!
- Oil (/CL) Futures short at $102.50, out at $101.25 - up $1,025 per contract
- Oil (/CL) Futures long at $101.25, out at 102.50 - up $1,025 per contract
- Oil (/CL) Futures short at $102.50, out at $102 - up $500 per contract
What a rally!
Yes, we missed it. Though we've had plenty of long-term winners (see September Trade Review), we certainly weren't expecting this short-term pop in the face of all this uncertainty surrounding the debt ceiling. Our short-term portfolio lost $6,000 (down 20%) in the last week as we kept taking pokes at a possible sell-off that never (so far) came.
Bulls continue to hang their hat on continued Fed easing and there's the undercurrent of a celebration that uber-dove Janet Yellen will take the helm in January and, already, they are talking about MORE QE than the $85Bn a month that is currently being pumped in to support the markets.
- Oil (/CL) Futures short at $102.50, out at $101.50 – up $1,000 per contract
- Oil (/CL) Futures long at $101, out at $102 - up $1,000 per contract
- Oil (/CL) Futures short at $102, out at $101 - up $1,000 per contract
- CZR Dec $15 puts sold for $1.15, now .05 - up 95%
- CZR March $15 puts, sold for $2.20, now $1 - up 54%
- Dow (/YM) Futures short at 15,200, out at 15,100 - up $500 per contract
- DIA Nov $146 puts at $1.05, expired worthless - down 100%
Oil (/CL Futures) took another round trip from $102.50 to $101.50 this morning and we made some nice gains on yesterday's tumble as well. As I said to our Members in the morning Chat Room, it's not much of a range ($102.50-$101.25) but we play the cards we are dealt and yesterday we were able to make money on the up move, as well as the down move. As you can see from the chart – it's not very hard to play this channel.
This is why I like the Futures though, the Dow was good for $500 per contract and all you need is $3,000 of margin and $5 to buy them and $5 to sell each contract. That's a lot less friction cost than the options, which makes it well worth grabbing these quick little gains.
Global finance ministers are worried that the uncertainty surrounding a U.S. default "would mean massive disruption the world over, and we would be at risk of tipping yet again into a recession," Christine Lagarde, head of the IMF, told NBC's "Meet the Press." Most countries hold their foreign exchange reserves in U.S. dollars because the currency is viewed as the world's most stable. "The very fact that more than 60% of central banks' reserves are in dollars gives them every reason to be concerned," Barry Eichengreen, a professor of economics and political science at UC Berkeley and a former senior policy advisor at the IMF, said of foreign governments. "If the bank in which you held 60% of your savings was threatening to default, you'd be concerned too."
- Oil (/CL) Futures short at $102.50, out at $101 - up $1,500 per contract.
- AAPL 2015 $470/600 bull call spread at $45, selling 2016 $350 puts for $29 for net $16, now $45.30 - up 183%
We're getting a so what from the markets too (as we expected) with a 0.5% dip in our Futures and that's masked by a 1% drop in the Dollar, to 80 again as a new debt deal and a Yellen Fed means MORE FREE MONEY!!!! So, for a little while, we are once again expected to outprint our rivals.
Big Chart – Well, this is why we have to respect those strong bounces. Once you move over the 40% retrace, it generally means the machines have been switched back to "bull" mode. Now it goes the other way and we see what kind of retrace we get off the top (again). As usual, Nas breakout is impressive but, as usual, it's driven by AAPL. 1,100 on the RUT is the big Kahuna.
Speaking of Walking Dead, China is looking a little scary, especially after IBM earnings show a 22% sales drop in our reddest of states.
There are already China anomalies popping up in the results of some of the biggest U.S. tech names. At Cisco last quarter, sales in India and Mexico were up double digits, Russia and Brazil were flat, but China was down 6 percent. Apple's business in mainland China was up only 5 percent in the June quarter, a startlingly low number given that it had been up 8 percent and 67 percent in the previous two. Don't expect any signs of a China turnaround until July, when their next rounds of stimulus kick in. Meanwhile, we'll be looking for signs of China strain in Apple and Cisco's reports over the next couple of weeks.
- DIA Oct $152.50 puts at .55, out at .66 - up 20%
- Dow (/YM) Futures short at 15,200, out at 15,150 - up $250 per contract
- TZA Nov $22 calls at $1.07, out at .75 - down 30%
- Oil (/CL) Futures short at $102.50, out at $100.50 - up $2,000 per contract
- Oil (/CL) Futures long at $100.80, out at $101.50 - up $750 per contract
- NLY at $11.92, selling 2016 $12 calls for $1.05 and 2016 $10 puts for $2.05 for net $8.82/9.41, now $9.94 - on track
- LACO at $4.18, now $3.96 - down 5%
We are NOT long-term bearish on the market – inflation is likely to make that impossible. There are certain stocks we think will fail and we like to short certain indexes at certain inflection points but, long-term, we are still bullish, not bearish.
Right behind mighty PCLN, GOOG is closing in on the $1,000 per share club after earning $2.97Bn or $10.74 per $970 share. What? Oh sure, yes, $10.74 is just 1/90th of $970 BUT, keep in mind there are 4 (four)big quarter and 4 x $10.74 is $42.96 and GOOG was expected to earn $43.50 this year anyway and though they were SUPPOSED to make $10.34 so, of course a .40 beat means the stock should pop $10%, right?
Still, we have to give props to the move and, technically, they are busting out and a technical market is what we're in, so we're not going to get short on GOOG but we will keep tight stops on our 2015 $800 calls, which we paid a virtual $115.07 for in our Long-Term Portfolio and shame on us if we don't take what's likely to be a double off the table if it starts to fade on us. See last night's Member Chat for our thoughts on how to play that position, as well as ISRG and CMG – all very exciting today.
How can you be bearish when ANOTHER $85Bn will be pumped into the economy this month, and another next Month, and another in December? All those $85Bns have to find a home somewhere and IBM didn't make the Blue Chips look sexy so it's off to the Momentum Stocks like SBUX, TSLA, PCLN, etc. and big-cap techs like GOOG, AAPL, FB etc. and that's how we build a new bubble. God help us all if the Fed ever does withdraw this liquidity!
- Oil (/CL) short at $102.50, out at $101.50 - up $1,000 per contract
- ISRG 2016 $290 puts sold for $33, now $31.90 - up 3%
- TSLA 2015 $190 calls sold for $41.30, now $19 - up 54%
- EOG April $160 puts at $5.90, now $11.50 - up 94%
That's going to wrap up Part 2 and we'll finish the month out by the weekend and hopefully put a dent in November over the holidays. HOWEVER – as I said at Thanksgiving and strongly reiterated this weekend – CASH, CASH, CASH!!! We are done with our bullish positions, we have even closed out Income Portfolio leaving just our active (and short) Short-Term Portfolio and Long-Term Portfolio.
That means, of course, that these readings are very arbitrary as I don't go back to Thanksgiving to see where things were when they should have been cashed out. As with all options trades, once you make a 20% profit, you should be protecting it and not losing it and once you make a 20% loss, you are either stopping it out or adjusting it for a longer-term play. We track these trade ideas to give you an idea of where you'd be if you just left them alone (other than specific calls we make to change the positions, usually on day trades only).
Our streak continues, with 34 winners and 6 losers, for an 85% winning percentage but, as noted above, we were generally bullish with our longer-term picks while consistently shorting oil as it bounced around in it's range (a very good thing to do with sideline cash!) so it was like shooting fish in a barrel in early October.