by phil - October 29th, 2012 8:32 am
Hurricane Sandy has cancelled the markets today.
Perhaps tomorrow as well as the storm, as you can see from the map, doesn't really hit us until Tuesday morning. So, unless it veers further south than projected, NYC and the exchanges will be smack in the middle of the storm tomorrow morning.
This estimated $11-18Bn storm (in damages) is hitting insurance companies hard and that's dropping exchanges across the globe – even the Futures are shutting down at 9am this morning and we won't know until 4pm whether or not they will even open for overnight trading.
What a great time to point out why we have disaster hedges. Aside from riding out the obvious potential dips in the market, having a few disaster hedges protects us from unexpected and unknowable events like natural and man-made disasters. Just last weekend we got nervous enough about a market drop to put up a special post suggesting "5 Plays that Make 500% if the Market Falls" and we're off to a great start on those, with the market giving up 250 Dow points last week and we're down another 90 in the Futures this morning. The DXD Jan $49/55 bull call spread jumped from net .85 to $1.40 – up 65% already on just a 2% drop in the Dow.
That means, if you had $100,000 worth of long trades that were well-indexed to the Dow, you'd be down about 2% and all you would need to be totally even would be a $3,000 hedge – which would have been 35 contracts for $2,975, now worth $4,900 and right on the money with DXD at $48.90 and still with room to pay out in full up to $21,000 (up 600%) if DXD hits $21 and holds it through January expirations.
That's not a bad way to have piece of mind over the Holidays, is it? Also, if played well, against a position you have also hedged, it can be a powerful combination. For example, lets say you have 500 shares of GE at $21.10 ($10,550) and you have sold the Jan $21 puts and calls for $1.80 ($900) – that right these pays for almost 1/3 of the hedge on your whole portfolio and, of course, when we get to January, we have an excellent chance of rolling those short positions out to 2014 and collecting even more money…
by phil - October 26th, 2012 8:30 am
Finally all that silliness is over!
After falling from $705 all the way to $585 on the initial announcement last night, common sense was re-established and AAPL floated back to $610 after hours – down a nasty 13.4% from the top (see Dave Fry's chart) but still up 50% for the year and, since we began the year at $400, ran up to $700 (+300) and then did a nice 33% retrace to $600 – we're not at all uncomfortable loading up on AAPL here.
Sure people were disappointed that they "only" made $8.67Bn this quarter and that they project to "only" earn $11.7Bn next quarter but their market cap is down to "just" $571Bn but that includes $121Bn in cash and marketable securities so really they are being valued at $450Bn, which makes the projected $45Bn worth of income for 2012 a 10% return on your AAPL investment while next year's projected $52Bn (15% bottom-line growth) will drop the p/e to 8.65 after taking that cash hoard into account.
Maybe I'm old-fashioned but that seems kind of cheap – especially when compared to something like AMZN's generous p/e estimate (because they are actually losing money at the moment) of 271. In fact, AAPL lost AMZN's ENTIRE market cap in this drop, which is really amazing because AAPL makes more in profits than AMZN ha in total sales last year ($48Bn) yet AMZN is priced at over 30 times AAPL's value. I'm not going to badmouth AMZN (because we sold short puts on them!) but I will just put it to you that you might want to consider that AAPL may be slightly under-priced at $600 (we're long on them too).
To that end, at PSW we have decided to initial and AAPL Money Portfolio. Much like our very successful and very popular FAS Money Portfolio, we'll be setting up a virtual portfolio aimed at taking a long-term bullish position on AAPL and then collecting a weekly income by selling front-month (or front-week) puts and calls as we move up and down in the channel, which should stabilize a bit now that we've finally had some earnings.
Speaking of channels – I mentioned on Wednesday morning that we had no reason to turn bullish until and unless our weak bounce levels held and we made if over our strong bounce levels and yesterday, despite…
by phil - October 25th, 2012 8:29 am
Good golly what a mess!
As you can see from the big chart, it's been 4 days of Hell for the markets, which is why, this weekend we had our "5 Plays that Make 500% if the Market Falls", which followed Friday and Wednesday's TZA hedge (now 100% in the money) and followed-up with Monday's DIA $135-131 bear put spread which is also 100% in the money and up 47% in 3 days already.
If you want to get fancy, the DIA $135 puts are $5.20, which is more than their max pay-off so it can be turned bullish on a bounce by pulling some or all of the long puts and leaving some of the short puts naked (tight stops, of course). The same goes for the TZA Jan $12 calls, which are $4.10 and the spread was only $3 max at close and we paid $1.90 so up over 100% if the short puts expire worthless.
Again, don't think of these as all or nothing moves, you can exercise a lot of control by buying back a few and selling a few more as the market gyrates – just as we work our AAPL position in the $25KPs. We gave up on AAPL short-term (too risky with earnings) but remain long-term bullish and will buy more if they fall this evening (and BBY and CROX should be good entries as well when they're done falling from poor reports today). I mentioned our bottom fishing expeditions in yesterday's post and, in yesterday's Member Chat – we drew a bit of a line in the sand as the Transports tested 5,000, which is nicely coinciding with the 200 dmas on the Nasdaq (2,972) and the Russell (805) although we might see Dow 13,000 before we're done – we would hate to see S&P 1,375 and NYSE 7,968, which is still far away.
As you can see from Dave Fry's SPY Chart, The S&P had a rotten day yesterday as it plowed towards our 2.5% line at 1,400 but look at that MACD line at the bottom – if that's not oversold, I don't know what is. While we've had some very poor earnings reports this week and we continue to get a lot of negative guidance, the fact is that 69% of the S&P companies that have reported so…
by phil - October 24th, 2012 8:32 am
AAPL is a total disaster.
There's no denying it now, they had their IPad Mini event yesterday and investors charged out of the stock, dropping it from a high of $633 (which is already 10% off the Sept highs) to close at $613 and that was finally weak enough to get us to capitulate and roll back our AAPL positions to longer-term trades that have less upside but, more importantly, less downside as we are no longer confident they'll be able to turn it around on Friday.
Notice how silly it seems to talk about how poorly AAPL is performing when the chart on the right pretty clearly indicates it's the greatest stock on Earth but that would be the logical conclusion for a company that's on track to earnings $43Bn this year, which is $81,811 a minute – more even than what they were tracking to make last month, when I set out bottom target at $600 (and that spread is an even better buy now) AND, only 68% of what they are projected to make next year!
We didn't really think it would hit $600 – that was our worst-case but here we are – at the worst case and, since we are no longer able to say with conviction that it can't get any worse, we had to back our short-term plays to something that buys us more time. In that same post we liked HPQ at $14.30 and at least they are holding that line and we also had a nice spread on that stock in the same post, which is still holding up as a new spread.
In that post I mentioned (as usual) our primary hedge being TZA and the straight-up April $15 calls mentioned there have gone up another .40, from $2.50 to $2.90 off our $2.10 entry (up 38%) – not bad against just a 15-point drop in the Russell (down 2%).
Yesterday, with our hedges already in place (see last Wednesday's TZA hedge and this Monday's DIA hedge) we had the luxury of doing some bottom-fishing yesterday with long trade ideas on TIVO at $9.78, USO at $31.75, AAPL at $623, CMG at $238 and our last trade idea for the day was SQQQ at $41.20 (that one, of course, is another hedge – always look for BALANCE!) – just…
by phil - October 23rd, 2012 8:42 am
The Futures have given back all of yesterday's last-minute gains and then some.
After hours last night, Moody's downgraded 5 Spanish regions "driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves … and their significant reliance on short-term credit lines."
While Asia shrugged it off and finished more or less flat, Europe is freaking out – about that and the continued terrible earnings reports that are hammering the point home that the economy is certainly worse than it was last year. Why then, are the markets up over 10% from last year – well, since there's no easy answer to that – down they go!
The Euro fell down to the $1.30 line (where we went long in early morning Member Chat) and oil futures fell to $87.28 (and make a good buy over $87.50 on /CL) and gold took a pounding to $1,710 while gasoline fell below the $2.60 line, where it's also a good long play on /RB as it's unlikely the Euro fails $1.30 for very long or the Yen goes above (weaker) 80 to the Dollar (now at $79.85) and it's also not likely the Dollar breaks 80 today (now 79.93) – so, overall, this is a nice spot to go long in the Futures.
It's over an hour to the open but let's call it Dow 13,200, S&P 1,416, Nasdaq 2,980, NYSE 8,250 and Russell 810 and, as you can see from our Big Chart – we're barely holding our Must Hold levels with the Nasdaq crashing us below and we can't even blame AAPL today, which is holding up pretty well so far at $630 – after putting up a $15 gain yesterday (2%).
As we expected yesterday morning, the Nasdaq held 3,000 like a champ and rallied 20 points off that line into the close before dropping back a few but today will be harder with the Nas gapping well below 3K – painting a terrible technical picture before most people have a chance to make their first trade.
Has anything changed since yesterday? Not really – we knew Spain was a mess, we knew Q3 earnings would suck but, apparently, seeing the actual numbers is really spooking investors. In reality, only 10 of 40 companies missed yesterday but 5 of those guided down and only two companies (HSTM…
by phil - October 22nd, 2012 8:11 am
We're crashing! Just look at this chart:
See – over there at the right, on top, at the end – do you see it? We're totally crashing. It's all over and it's OBAMA's FAULT!
That's what I learned this weekend from the Financial Media. While it's true that we did fail to break out over the top of the uptrending channel we've been in since early 2009, I'm sure you can see that all the forecasts for doom and gloom are nothing more than noise.
Yes, we may drop back to 1,200 on the S&P because that's the range we are currently in but there won't really be any reason to worry unless we fall MORE THAN 20% – the trick is to simply be prepared for the possible drop and to be ready to do a little bottom-fishing while everyone else is losing their heads.
If, on the other hand, the S&P bounces off of 1,400 or even our Must Hold line at 1,360 – then we still have the possibility of breaking UP – out of that long-term channel and back over 1,500 – maybe even to 1,600.
As you can see from the chart on the left, Corporate Profits as a percentage of GDP are taking a dip this Q but HAVE SOME PERSPECTIVE PEOPLE – they have never been stronger – EVER – the only thing that is weak is confidence and that's no surprise given this incredibly depressing election season, where we're being offered a choice between sticking with the slow progress we're making or going back to the failed policies that destroyed the economy in the first place.
People look at this chart and think the dip that occurred in 2008 can happen again but that was a fairly unique situation, mainly of massive writedowns in real estate holdings and bank earnings that is very unlikely to happen again. Companies like AIG and FRE and FNM lost hundreds of Billions and that dragged down overall Corporate Profits but that doesn't make it "normal" and we have no reason to expect it to happen again. The current market panic that is saturating the US media is, so far, confined to the US – the rest of the World is doing just fine:
by phil - October 20th, 2012 8:00 am
It's been a long time since we were worried about a steep drop.
We have some very successful hedges already as I've been pounding the table on TZA since $13.50 and, since you know I am a big fan of taking cash off the table in either direction, let's not be greedy and look at ways to "roll" our existing downside protection into new downside plays so we can set SENSIBLE stops on our now deep in the money short plays (very similar to our Mattress Strategy).
Keep in mind that Friday was the biggest market decline we've had since May, so adding a layer of protection here doubles our returns if this is the first leg of a major sell-off, or it gives us a smaller hedge that we can roll up later while we take our bigger hedges off the table. As I have to say WAY too often to Members – It's not a profit until you cash it in!
Hedging for disaster is a concept I advocated during another "recovery," in October of 2008, where we made our cover plays to carry us through a worrisome holiday season and into Q1 earnings – "just in case." That "just in case" saved a lot of portfolios! The idea is to take disaster hedges using high-return ETFs that will give you 3-5x returns in a major downturn. That way, 10% allocated of your virtual portfolio to protection can turn into 30-50% on a dip, giving you some much-needed cash right when there is a good buying opportunity. At the time, I advocated SKF Jan $100s at $19. SKF hit $300 around Thanksgiving and those calls made a profit of over $280 (1,400%), so putting even just 5% of your virtual portfolio into that financial hedge would give you back 75% of your portfolio when you cash out.
Keep in mind these are INSURANCE plays – you expect to LOSE, not win but, if you need to ride out a lot of bullish positions through an uncertain period, this is a pretty good way to go. I have long wanted top put up a Buy List but it's still too risky as the Dow has been unable to break our 13,600 target and the S&P has failed to hold 1,440 and, as I warned just yesterday morning, ahead of a 200-point drop, the Dow has no real…
by phil - October 19th, 2012 8:30 am
25 years ago today, the market fell 22%.
You never know what's going to panic the markets – since then we've had many other sudden corrections like Black Friday just 2 years later and Black Wednesday in September 1992, we've had the dot.com collapse and 9/11 and whatever you call 2008 and recently we had Dubai and Greece leading to sudden crashes and the ubiquitous flash crash and whatever happened last August (Europe again).
So stock markets are dangerous places to keep your money, on the whole. That's why TZA (ultra-short Russell) is our primary hedge in the Income Portfolio and, as I mentioned in last Wednesday's post, should the S&P fail to hold 1,440, then the Dow has little support all the way down to 13,295 as well. Just this Tuesday, I reiterated a TZA spread Members could use for general portfolio coverage:
Ultra hedges/Bdon – You just can't beat TZA at $15. The Jan $12/15 bull call spread is $1.50 so 100% upside if TZA simply doesn't go any lower. If they do go lower, you can sell the April $11 puts, now .50 for $1 (the Apr $12 puts are .92) before your $1.50 is even out of the money and then you'd be in the Jan $12s at net .50 and worst case is you get assigned at net $11.50 in April but, of course, you can roll or simply accept the assignment and cover and then you have more long-term protection.
We like to buy our protection when the market is going up – it's cheaper that way! TZA was at $14.75 at yesterday's close and the Jan spread was still about the same $1.50 but it's $2.75 in the money – all we need is for TZA to not go down (Russsell not to go up) and we make a tidy profit. That's a good way to hedge because the only way that hedge loses money is if the market breaks higher.
We're not turning bearish yet but, as we're seeing some pretty serious misses (GOOG and CMG yesterday, for example) and some pretty strong reactions to those misses – it is a good time to make sure people do remember the value of hedging. If nothing else, it's a piece of mind that lets us ride out these dips without worry. Also, of course, it's good to…
by phil - October 18th, 2012 8:03 am
EU leaders are meeting in Brussels today and tomorrow.
For anyone who's been paying attention for the last two years – that's usually not a good thing and, as we noted yesterday, it was a strong Euro and a weak Dollar that was driving our little rally. The Dollar bottomed out at 79 and the Euro topped out at $1.314 and the Euro's strength sent the Yen back up to 79.30 to the Dollar (weaker) and that led to a 2% Nikkei rally last night. As you can see from the chart on the right, the S&P for the week is 1% behind UK and Germany and 2.5% behind France and Italy (+4%) and Spain (+7%) – so we have a lot of catching up to do if this rally is real and sustainable.
Still, I sent out an Alert to Members early this morning noting that the Global Markets were holding up well as of 6am and that was encouraging. Yesterday we discussed taking advantage of the run-up in the Russell to make a TZA hedge to lock in some of our gains (see main post) but we still haven't covered XLF (target $16.50 – see Dave Fry's chart) and we're still bullish on AAPL as well. We cashed that ISRG play, as planned for $9 on the spreads (200x = $1,800), spending .30 x 200 ($60) to buy back the callers so that, with the $200 we were paid to take the position is just short of our $2,000 goal at net $1,960 – not bad for a day's "work".
In Member Chat this morning, we discussed GOOG's outlook for earnings this evening and decided they were more likely topping than popping so we have that risk to the Nasdaq for tomorrow. IBM was an 80-point drag on the Dow yesterday but it did manage to finish flat and advancers led decliners on the NYSE by 2:1 so the conditions are still there for a rally and hopefully what we have here a a pause that refreshes and not a triple top from the mid-September highs.
The Nasdaq and the Russell are, in fact, in downtrending channels and, for the Nasdaq, their fate rests on GOOG tonight and AAPL next Thursday – but it's still a long way back to the highs at 3,200.
by phil - October 17th, 2012 7:31 am
Let's not make this more complicated than it needs to be.
A weak Dollar lifts the markets and, this morning, the Dollar fell from 79.50 at yesterday's close to 79 at 6:45 and that's why, despite earnings disappointments from both INTC and IBM, the Futures are up slightly 3 hours before the open. As you can see from the chart on the right, to say there's a strong inverse correlation between the Dollar and the S&P is quite the understatement. Over the longer run – the effect tends to wash out but, over the short run, it's an almost perfect match.
Of course, this also has a very direct effect on commodity pricing and part of the reason for the Dollar's big sell-off last night was the much-better-than-last-time performance of Barack Obama in the second Presidential Debate as the future of the Fed and all that free money hangs in the balance.
After the first debate, two weeks ago, Romney clearly won and has made it known that he will kick both Big Bird and Big Ben to the curb as soon as he gets in office – that sent the Dollar up from 79.10 to 80.21 (up 1.4%) last week and dropped the S&P from 1,460 to 1,430 (2%). After last night, Romney looks to be back off the table and that leaves the Dollar to resume it's downward slope – giving another lift to the markets.
At the same time, Moody's left Spain's credit rating above junk this morning and that's lifting the Euro to $1.31 and the Pound is moving in lock-step at $1.61 BUT the Yen dropped 0.5% to 78.63 and it's not likely the BOJ will let the Dollar slip below 79 as that makes Toyotas and Sonys more expensive just ahead of the holidays. Also, the Nikkei finally got back to 8,850 last night and you know they hate to lose that line.
So get set for some heavy-duty Global Market Manipulation by our Central Banksters as everyone but Europe tries to race for the bottom. Europe, interestingly enough, doesn't mind a strong currency as they are fuel and goods importers and most of the goods they export are "luxury" class and less susceptible to currency fluctuations. With strong intra-zone trading the backbone of the EU economy, it doesn't matter where the Euro is trading from that perspective either and, of…