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Thursday, March 28, 2024

Terrific Tuesday – Our Webinar Play Makes Members $3,000

Wheeee!  

I love a nice pullback.  Lord Trump knows we waited long enough but our decision to stick with our Dow Futures (/YM) shorts over the weekend was a good one.  Even if you aren't a Member and didn't get to see our weekly Live Trading Webinar, we still gave that trade idea away FOR FREE in Thursday morning's post – so don't complain if you missed it.  

We also had our Oil Short (/CL) at $53.50 and those were good for $1,000 per contract as oil hit $52.50 in yesterday's dip.  This morning, we flipped long on Natural Gas (/NG) as the Dollar fell below 100 to prop up the markets, which might give a boost to commodities and the Northeast will be cooling off for the next two weeks but it's just a quick trade as global warming continues to spoil Winter, overall.

By the way, we don't only trade Futures at Phil's Stock World or the name wouldn't make any sense.  We trade stocks and options but those are more conservative and relatively boring – so they don't make the headlines on a daily basis.  In fact, our Long-Term Portfolio, despite yesterday's pullback, has 54 stock and option positions and is up over 145% in 3 years and we just added 2 positions yesterday as a few bargains presented themselves (see our Top Trade Alert).  

This morning, we are looking to add to our Teva (TEVA) position, as we feel the sell-off is overdone (see notes in Member Chat).  We will probably add it to our Options Opportunity Portfolio as well and that's a much more aggressive portfolio that has gained almost 150% since it's inception on 8/8/15 and, in fact, GAINED yesterday as our hedged kicked in to offset the drop. 

So let's talk about hedging.  It's one thing to get trade ideas from this service or that but if you don't incorporate those trades into a BALANCED and HEDGED portfolio, your fate is tied to the market.  For the last 8 years (the Obama years), that has been a good thing but now it's the Trump Error and your investments are very much at risk!  

Our Long-Term Portfolio is all bullish, we keep our hedges in a separate Short-Term Portfolio, whose main purpose is to protect the LTP but it's also where we do our fun, short-term trading.  Our primary hedges are longs on the Ultra-Short ETFs for the Nasdaq (SQQQ) and the Russell (TZA) but we also have a big short on the Financials (FAS) as well as a long on the VIX by shorting it's Ultra-Long (SVXY).

Needless to say, all those popped yesterday, offsetting the sell-off against our long positions.  In our Options Opportunity Portfolio, which we run separately over at Seeking Alpha as well as for our PSW Members, it's a self-hedging portfolio that's also using SQQQ and TZA but we also have an Oil short (SCO) to help us on the downside.  In fact, we just added a $12,000 SQQQ hedge on Jan 18th as follows:

You can make an options play on the Nasdaq using the Ultra-ETF (NASDAQ:SQQQ), which is currently at $46.85 and it's a 3x ETF so a 5% drop in the Nasdaq would cause a 15% rise in SQQQ to about $54 so let's use that for our March goal.

  • Buy 20 SQQQ March $44 calls for $4.40 ($8,800)
  • Sell 20 SQQQ March $50 calls for $2.30 ($4,600)
  • Sell 5 AAPL 2019 $95 puts for $7.40 ($3,700)

The net on this spread is just $500 in cash but keep in mind you are promising to buy 500 shares of Apple (NASDAQ:AAPL) for $95 if it goes lower (now $120) and that's $47,500 so pick a different offset if you don't REALLY want to own a bunch of AAPL (we do). The margin requirement on the short puts is $4,763. Meanwhile, if the Nasdaq even twitches lower, our spread goes $12,000 in the money at $50 for a profit of $11,500 (if the short puts go worthless) or, even if we buy them back for $4,000, we still clear $7,500, which would be up 1,500% – not a bad hedge! We will also add this one to our Options Opportunity Portfolio to lock in our recent gains.

As a rule of thumb, when a market is toppy (like this one certainly is), you should use about 1/3 of your ongoing gains to hedge – just in case.  In this case, we had just made about $9,000 for the month so we're risking losing $3-4,000 on this hedge as it will, in turn, protect us from waking up one morning to find the whole $9,000 has evaporated due to a Trump tweet.  

Apple (AAPL) reports earnings tonight and, if they miss, they could take down the whole Nasdaq (good for SQQQ, though) and we're already long on AAPL so it's a perfect hedge for our portfolio.  You might have noticed, SQQQ has gone down in the past two weeks and those $44 calls are now $2.55 ($5,100) and the $50 calls are now $1.14 ($2,280) and the AAPL puts are $6.50 ($3,250) so closing this trade now would cost us net $430 plus the $500 we put in is a $930 loss, which is down 186%!

He who lives by the leverage will die by the leverage but, as I said, it's INSURANCE and, like life insurance, you don't really want to collect it.  At the time, our Options Opportunity Portfolio was at $246,577 and now, 13 days later, it's at $249,237 – including that loss.  We gained net $2,638 (2.6%) even though the S&P has been flat since.   

Well, flat like a roller coaster that goes back to the station or, more accurately, like a Helter Skelter – action we noted way back in October, before the election gave us rocket action to Dow 20,000.  Hey – remember when the Dow was at 20,000 – ah, good times…

Even with the administration talking down the Dollar to prop up the markets this morning, the Dow can't hide the drop-off in revenues we're seeing for the second year in a row.  In fact, if you were to strip out Apple's (AAPL) earnings you get a real picture of how far we've fallen in the past 5 years:

Not a pretty picture, is it?  Keep in mind the Dow was at 12,500 in 2011, when revenues were over 10% HIGHER than they are now.  The "earnings" we're seeing (and the p/e is 50% higher now anyway) are a result of belt-tightening and INCREDIBLE AMOUNTS OF BUYBACKS – $3Tn worth in the past 5 years on the S&P 500 – about 15% of the market cap, which is enough to make earnings look like they have improved – even after a 10% decline in revenues.  See how the game is played?

This is starting to matter as it now costs almost double to buy the same amount of over-inflated stock as it did in 2011 and though the EPS LOOKS good because you are dividing it by more shares, the actual AMOUNT of profits isn't rising that much and that means using that profit to buy back expensive shares gets less attractive and rising rates make borrowing a worse and worse idea.  Anyway, S&P 500 companies have already borrowed $2Tn to finance all this financial engineering AND they've depleted their cash reserves – making them far less attractive than they were in 2011.  In fact, earnings net of debt have dropped LOWER than they were in the crisis of 2009:

Image result for S&P 500 debt 2016

 So we are going to remain cautious but, so far, this is only a minor correction and you can see how fast this administration steps in to prop up the market.  That's because President Trump took full credit for Dow 20,000 and now he's tied his performance to that number – which was idiotic but, well, you know…

 

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