by phil - November 5th, 2012 7:56 am
Today doesn't matter.
Tomorrow won't matter either. Nothing will matter much, trading-wise, until we know what direction the US will be taking for the next 4 years. Not only do we not usually get such a stark contrast in political viewpoints to vote for but also this is such a critical (and precarious) time for our economy so it's not all that surprising that we've had some wild gyrations leading up to this event.
However, not that for all these ups and downs, we still haven't failed the September lows – other than the AppleDaq while the NYSE, our broadest index, has been making some good progress, matching the S&P and Russell to hold roughly 2.5% above the Must Hold line while the Dow and Nasdaq are below theirs but holding their 200 dmas – for now.
Notice how the indexes ran back to our bounce levels but were soundly rejected there on Friday, where I warned Members in our Morning Alert:
Let's keep those strong bounce lines in mind – we got 3 of 5 but not impressive until 5 of 5 as the goals were not very high-bar:
by phil - November 2nd, 2012 8:30 am
We got a good bounce yesterday – let's see if we can keep it going.
In yesterday's post, I listed the bounce levels we were looking for and the markets took off right at the open and held the day's highs into the close with the NYSE (8,311) and the Russell (827) both making it over their strong bounce targets of 8,280 and 826 and the S&P falling just 4 points shy at 1,427.
So our plan to flip bullish was well-timed but we need a third index over that strong bounce line and then we need to see those 50 dmas taken back to confirm a bullish move. They NYSE is leading us there, well above it's 50 dma of 8,042 but we'll want to see the Russell (832) and S&P (1,434) join it – hopefully on some strong jobs numbers but, with the storm, it's very hard to say how the data will play out.
Speaking of data – the GOP has certainly jumped the shark and thrown off the thin facade of legitimacy they used to have by turning into essentially a Roman Inquisition, of the kind that forced Galileo to recant his teachings that the Earth was not the center of the Universe by pulling their own "Nonpartisan Tax Report" after the study failed to find negative correlation between higher tax rates and economic growth. What whipped Conservatives into a frenzy of denial were the reports' conclusions, which clearly stated:
Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%.
There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income
by phil - November 1st, 2012 8:29 am
Is the Fed losing it's mojo?
Perhaps we are just impatient. We were discussing this topic in Member Chat yesterday as the so-far weak market action we're seeing since the announcement of QInfinity is beginning to make people wonder how we should position ourselves over the holidays.
Clearly, so far, QInfinity is having much less effect on the market than it's predecessors but, measured over the short amount of time it's been in place – you can see from this chart that it's really not that far off track – yet. Also, the Fed naysayers fail to take into account that QE1 ($1.25Tn) was much bigger than QE2 ($600Bn) and that Operation Twist ($400Bn) was barely a stimulus at all but more a move to shift the yield curve.
Now we have QInfinity, where the Fed has committed $240Bn in Q4 and another $480Bn in 2013 and another $480Bn in 2014 and probably another $480Bn in 2015 so it's a huge amount of QE but it's also stretched over a long period of time so we shouldn't expect the markets to rocket on this type of stimulus but we can assume there's a floor being put in somewhere.
As you can see from the Big Chart, we are putting in a bit of a floor around those 200 dmas – which is what we expected when this drop began back in September and we used the same logic to not be drawn into false hopes as the market "came back" in mid-October – even after QInfinity had been announced. In fact, the TZA Jan $12/15 bull call spread at $1.50 I had suggested for overall portfolio coverage in that last post, is now 124% in the money with TZA at $15.74, so in-line for a 100% gain if the Russell can't get back over 830,
But we have gotten a bit more bullish – even as we take quick profits on bear plays, like yesterday's DIA Nov $129 puts, which we picked up for $1.10 in our virtual $25,000 Portfolio and later sold at $1.28 (up 16%) at 2:08, when we decided the Dow had bottomed out at 13,050. The Dow finished the day at 13,096 and we'll short them again if they struggle but, for now, we're looking to see what kind of bounces we can get off our indices.
by phil - October 31st, 2012 8:32 am
Forget the insurance companies.
Yesterday they were saying $20Bn in damages but the NYC subway system alone may have more than $20Bn in damage. Who's insuring it, I have no idea, but things like that and the devastation along the Jersey shore, where single homes are worth well over $1M and 100 miles of home-filled coastline was hit with record flooding means we could, ultimately, be looking at $50-$100Bn worth of total (not all insured) damage from hurricane Sandy.
So we're not going to go bargain-hunting for insurance companies – it's a very hard group to pick winners and losers in but some segments, like title insurers, tend to sell off with the group – even though they don't even write that kind of insurance – and those can make for some good fishing once the dust settles.
At the moment, the futures are up slightly (8am), but only because the Dollar took a dive to 79.75 as the Euro broke over $1.30 but it remains to be seen if the Dollar will stay under 80 and the Euro will stay over $1.30 – otherwise we'll be back on the downward path very quickly. The oil inventory report has been postponed until tomorrow and oil is back up at $86.35 but, with 1/3 of the country not driving or flying for a few days – don't expect a lot of fuel to be used in the NEXT report – this one only covers through Saturday.
Over in Europe, Unemployment remains stubbornly high at 11.6% for September, up from 11.5% in August with both Spain and Greece topping 25% unemployment. Spain, for it's part, seems to have narrowed their deficit to 4.39% of GDP from 4.77% just a month ago, mainly on an increase in VAT taxes doing their trick and increasing revenues for the Government (but didn't Romney say that raising taxes would lower revenue – was he lying or just completely wrong?). The 5% drop in the deficit in the first month of a tax increase bodes very well for Spain and gives credibility to the Government's resistance to the EU bailouts and their draconian terms (ie. the Paul Ryan budget).
by phil - October 30th, 2012 8:32 am
Are we ready for the zombie apocalypse?
Maybe more than we think. I was very encouraged yesterday by how well my kids coped without their usual forms of entertainment as Sandy stripped away 100 years of technological progress in minutes – and we're still without power this morning in northern NJ.
While we have yet to be forced to hunt our own food, it's interesting to see how many things in our home become instantly useless without electricity. Even the design is poor as our heat, for example, relies on an electric control to turn on – so we all gathered by the fire, which we were lucky to have.
Overall, it looks like the storm did about $20Bn in damage and that may sound like a lot but there are a lot of insurers who were priced for worse, so well be looking at that space tomorrow, when the markets reopen and the 21st century is restored.
Asian markets pulled back a bit as stimulus out of Japan was less than hoped for and stimulus from China is also getting routine. Europe is turning up a bit this morning despite rising German Unemployment or, maybe, because of it because something has to convince them that austerity is not a solution.
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…