Friday Chart Toppers - Breaking Up Is Hard To Do!
by Phil - March 12th, 2010 8:01 am
They say that breaking up is hard to do.
Well, not for this market it seems as we make new highs on ever decreasing volumes. While I have been very skeptical of this rally, at some point you have to give in and go with the flow. As I said at the end of yesterday’s post, "We still have a bearish short-term stance but we will continue to watch our technicals and play the hand that’s dealt" and that’s what we did as our 9:42 Alert to members contained 2 bullish was to cover our short plays with the TNA Apr $52/53 bull call spread at .45, which finished the day at .60 (up 33%) and the DIA Apr $106 calls at $1.08, which finished the day at $1.40 (up 29%) so not bad for scrambling for covers!
That’s how we can hold our bearish positions as the tide moves against us. As our final upside resistance levels begin to break, it may be time to break up, and not just cover, our short positions. BUT, not until next week, when we’ll know, we’ll know that it’s true and not just some pumped up reaction to this week’s $150Bn Jobs Bill, which is really a $150Bn debt bill with 1/2 the money going to benefits extensions and $25Bn just to offset rising Medicaid costs that our states can no longer afford. That leaves $50Bn for actual jobs or enough to put 1M people back to work at $50,000 for one year if it is used with 100% efficiency.
We have 25M unemployed, discouraged and underemployed workers and that’s a lot bigger of a hole than a $150Bn band-aid is likely to fill. Still, we missed the last 250 points of the run-up and we’re committed to miss 50 more (10,700) but, come next week we’ll have to follow Mr. Cramer’s advice, as he said yesterday: "Don’t be so skeptical that you write off very big, very real trends,” Cramer said, “that I still think, even from these levels, could make you a lot of money." Let’s take a look at "these" levels then:
We’re still following the uptrending channel I drew on Tuesday’s S&P chart with the MACD line up 50% in 3 days of trading - a difficult trick to keep up. Aside from the Jobs Bill, we’re getting a nice boost this morning from a "leak" that the supremely doveish Janet Yellen will be Obama’s pick for Vice Chairman of the Fed so yay for the markets but boy are we loving…
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Toppy Tuesday - Happy Anniversary Bull Market!
by Phil - March 9th, 2010 8:26 am
It’s hard to believe that just one year ago today investors thought the world was ending!
Well, not all investors - we were BUYBUYBUYing at the time, as I recapped back in September whan we did our "Market Crash - Year One Review." Click on Cramer’s picture for the Daily Show’s March 4th, 2009 review of the magical moments that led us down to the bottom and here’s another great video from the evening broadcast on March 9th and, of course, there is my own legendary appearance on LiveStock from March 6th, but that’s summarized in the crash link, so save yourself 3 hours, although the first 10 minutes are worth it for people who want to learn about our buy/write strategy as I explained the logic of it as I recommended FAS at $2.41 using those hedges.
And what a wild year it has been as we’ve made an epic recovery. The only question is - have we come too far too fast? Should we be up 75% from our March 9th lows? We are still down 25% from our highs but let’s keep in mind that we made those highs thinking AIG was MAKING money, that FNM and FRE were great stocks for your retirement portfolio, that Kirk Kirkorean was going to rescue GM, that BZH wasn’t some kind of scam, that BSC, LEH et al were "the smartest guys in the room." I urge you to click on Cramer and listen to the idiocy of the analysts who would tell you everything is all right even as it was all falling apart around them - why does everyone suddenly trust them again?
How could we not love this market? Markets do this sort of thing all the time don’t they? It’s all part of the "efficient pricing model" that always lets you know what a stock is truly worth like when GE was "worth" $30 in 2008 and "worth" $6 in 2009 and is now "worth" $16. This is not some biotech folks - this is GE, they’ve been around for 100 years and they have $170Bn in global sales. Did they really drop 80% in value in 2009? No. That’s why it was easy to pick a bottom - the valuations got ridiculous and, as fundamentalists, we siezed on the opportunity to BUYBUYBUY despite the negative sentiment.
Now, we are in a very different situation. Now we have the MSM telling us to BUYBUYBUY…
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Wrong Way Weekly Wrap-Up
by Phil - March 6th, 2010 8:34 am
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This whole week did not feel right to me.
We were too bearish as I had expected a bogus commodity rally in last weekend’s wrap-up but I didn’t expect it to persist for a week, even as the dollar held it’s ground above 80, a 10% pullback off the top, when oil was $40, copper was $1.50 and gold was $850. Now oil is $80 (up 100%), copper is $3.35 (up 123%) and gold is $1,135 (up 33%). Let’s say gold is a true indicator of dollar weakness - that means that only 33% of oil and copper’s move up can be attributed to the 10% drop in the dollar (not that even that makes sense but we’ll give it to them). Can the rest be attributed to demand?
Certainly not with copper. Global copper consumption was down 1.9% in 2009 and Q1 2010 is lower than any quarter since Q1 2009 and even Barclays’ very aggressive targets for China growth only bring global demand up 2.5% this year - whch would just about bring us back to 2007 levels of consumption. That, of course, also assumes a rebound in housing construction - something we are not seeing at the moment. Also, China spent $700Bn last year stimulating their economy and one of the ways they did this was to stockpile copper. As you can see from the chart - that too appears to be winding down and even Goldman Sachs has abandoned the bullish side of copper at this point.
Oil is just as silly. According to the EIA, global oil consumption is not expected to return to 2007 levels until late 2011 - and that is with some very rosey estimates of a global econonomic recovery - exactly the type of thing that can be derailed by high oil prices! Mighty China’s consumption is projected to go from 8.66Mbd this year to 9.13Mbd in 2011, a 500,000 barrel increase. Last week, the US had a build in inventories of 4Mb - we just send those over to China and everyone is happy! I’ve already had my say on oil demand this this weekend, so let’s just move on…
Let’s just say I’m a little skeptical about any market moves that are lead by commodity pushers at this very early stage in a recovery. Prices are not going up based on demand but on expectations of demand in the future and that’s a very dangerous game to play…
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Jobless Friday - US, Japan and Europe Add More Stimulus
by Phil - March 5th, 2010 7:43 am
Wheee - more free money!
The money train left the station just ahead of the US market close yesterday when the House passed a $15Bn Jobs Bill although it remains to be seen if Jim Bunning will pass it. China doesn’t need Bunning’s permission to hand out free money and they will be "allocating 63.2 Billion Yuan" to fight high housing prices by SUBSIDIZING low-cost housing. Come to think of it - I object to that! Someone in China needs a lesson in some basic economics…
The big boost this morning came from Japan, where bonds hit the highest level of the year after the Nikkei newspaper said the central bank at its March 16 meeting may discuss additional monetary easing steps. It doesn’t matter whether this report is true or not as it already did it’s job and shot the Nikkei up 223 points for the day, erasing two week’s worth of losses in a single session. It’s hard for the BOJ to get easier than our own Fed but Chicago Fed President Charles Evans said yesterday he needs evidence of “highly sustainable” growth before supporting tighter monetary policy, while James Bullard of the St. Louis Fed said the central bank should remain “accommodative” - these are, of course, the Fed’s code words for MORE FREE MONEY!
Of course, our Futures are up 1% from yesterday’s low and the commodity markets LOVE IT and oil is back at $80.65 with copper back at $3.40 despite "weak" demand in China, where stockpiles of copper are now at 7-year highs and even Goldman Sachs has withdrawn their buy recommendation on coppper because of concern that economic recovery in developed markets isn’t on “solid footing.” “About 60 percent of China’s copper is used in the power industry, and our sales to wire-and-cable users reflected that demand is rather weak,” Chairman Wei Jianghong said, while attending the National People’s Congress.
“The demand is not very strong in the first place,” Jiangxi Copper Chairman Li said in Beijing while at the congress. “But a lot of people have long positions in the market, so I think in the first half of this year, copper prices will be good.” Copper stockpiles in China jumped to 149,478 tons for the week ended Feb. 26, 28 percent more than the week ended Feb. 12, according to the Shanghai Futures Exchange. Demand from China for global supplies may weaken because prices on the Shanghai Futures Exchange are now close to those in London, discouraging arbitrage trading, Goldman Sachs analysts…
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Thrilling Thursday - Consumers Still Unemployed, but Shopping!
by Phil - March 4th, 2010 8:23 am
The MSM is so happy about the February Monster Employment Index!
They’ll tell you it’s up 10 points from January without mentioning that January was the worst month of the past 12 and, in reality, we are up just 2 points from last February when the shockingly poor data we were seeing sent the S&P all the way to 666 the next month. Today though, it is considered a reason to rally as people watching the MSM will believe anything the talking heads tell them because they don’t get shown the actual results and they trust their talking heads to have checked the facts carefully, rather than make them up, which is pretty much what they do.
We discussed the shenanigans of the ADP report in yesterday’s post and I did warn you that it was a fake rally based on happy headlines papering over poor data. As we expected, the market giddiness persisted until about 11:30 and then reality began to bite back. This was FANTASTIC for us as we were playing bearish into the rally but it’s very scary to hold bearish positions overnight but there’s no reason to hold options overnight when you pick up plays like our 9:54 Alert play on the DIA $103 puts, which averaged in at .77, hit $1 (up 30%) at 2:45 and finished the day at .94 (up 22%). You HAVE to learn to be satisfied with making 20% on day trades and cashing back out. Cash is flexible - overnight positions are not… In fact, since we did cash out yesterday, I was able to send out an overnight Alert to Members with a short on the oil Futures as they ran up to 80.50 which was good for a quick victory and then another this morning at $81, which is already up .30 with a .06 trailing stop (futures pay $10 per penny per contract so lots of fun for morning, pre-market trading!).
We went longer on our oil and gold shorts (in yesterday’s post it was GLL Apr $9 calls at .65) because we don’t expect them to resolve quickly but the chart on the left illustrates why we also firmly believe that this commodity rally is BS. This is a chart of the Employment to Population Ratio for Men 25-54 Years Old since WWII. Kind of puts a 2% year over year rise in the Monster Employment Index into perspective doesn’t it? 20% of the men in the United States of America between the ages…
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Which Way Wednesday - The Beige Book Boogie
by Phil - March 3rd, 2010 8:15 am
The last Beige Book report was on January 13th.
At the time the futures were flying and we were bullish but Dow was looking toppy and I thought we were going too far, too fast and called for caution - despite our "Meatball Market" at the time. Just like yesterday, I was not happy with the fundamentals to the point where I felt it necessary to keep pointing them out while the parade of analysts at CNBC et al told everyone to BUYBUYBUY at the 10,750 top. I don’t like to be Chicken Little but sometimes the sky is actually falling! The January book had very little "good" news to report (see my analysis for Members that day) and we took our money and ran on the long side. Although it wasn’t until the next Tuesday that we actually went down - it was a doozy and we fell over 500 points in 3 days, all the way to 10,165 (our 5% rule) and we continued weakly through 2/8, when we bottomed out at 9,900.
Whoever said this charting stuff was complicated? Just follow the 5% rule, draw some lines and PRESTO - we know what’s going to happen! Well, at least we hope we know what’s going to happen because I’ve spent a good portion of my week so far telling Members NOT to trust the rally we’ve been having and to expect a downturn with today’s Beige book a possible catalyst for a correction. From experience, we know there is not generally an immediate reaction to what is essentially a collection of anecdotal evidence about the state of the economy but it does give us an overview of the nation and I haven’t seen much news in the 6 weeks since the last report to make me think this one will be showing any great improvements.
It’s a tough call at the moment because there is clearly a determined effort to get the markets to move up but we are loaded up with bullish plays from our visit to 9,900 so it pays to be a bit more bearish with our short-term plays as we test the top of our MAYBE range. We have had some good news this morning with MBA Mortgage Applications up 14.6% as rates fell back under the magic 5% mark and, of course, that’s a rebound off of last week’s TERRIBLE showing, probably weather related.
69% of the activity was refinancing, which is nice but it doesn’t move homes or employ any construction…
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Weekly Wrap-Up - Buffett’s Daring Derivative Deal Does Well
by Phil - February 28th, 2010 9:30 am
I was going to talk about Buffett’s annual letter to investors.
Fortunately, I procrastinated and other people did some detailed reporting like Ravi Nagarajan, Andy Fry, Scott Patterson and Joe Del Bruno - who does a great job of pointing out that Berkshire’s 4th quarter results were propped up by Buffett’s $1.05Bn gains in derivatives betting (something Buffett himself once called "weapons of mass financial destruction" but, as we well know - if you can’t beat them…), which accounted for 1/3 of Berkshire’s $3.06Bn profits.
Buffett’s biggest bet was selling a put against the S&P 500 back in March - a move I said at the time was BRILLIANT and Buffett himself now says about his own options trading: "We are delighted that we hold the derivatives contracts that we do. To date, we have significantly profited from the float they provide. We expect also to earn further investment income over the life of our contracts."
What did Buffett do? Exactly what we teach you to do here at PSW - he took advantage of an irrational move in the markets and SOLD INTO THE EXCITEMENT, getting a fat premium from some sucker that bet the S&P would not hold 666 5 years from now. Buffett effectively sold $5Bn worth of puts that expires worthless at S&P 700 between 2019 and 2027, putting $5Bn in his pocket and holding aside $1Bn in margin, which is how much he’s already ahead on the bet. Like a good options trader, he has a plan and he’s trading his plan, making sure his investment is on track and patiently letting time do it’s work as it eats away at the put-holder’s premium.
What about the risk? Well I can’t speak for Buffett’s stop-loss technique but we’re talking about a company that has (had) $40Bn in cash using their excess margin to make a $5Bn bet that the S&P would not stay below 700 for 10 years. Buffett and I both tell people - NEVER buy a stock (or sell a put against one) that you are not willing to own for 10 years. The S&P was 5% below at the time and would have had to drop, perhaps, 20% more to cost him $1Bn so let’s call the stop 550 on the S&P where Buffett risked 2.5% of his cash against a posible 400% gain on his $1Bn risk allocation over 10+ years. While it is true that if the S&P dropped 50% in one day Buffett would be in deep trouble - sometimes you do have to play the odds…
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Weekend Trend Spotting and Portfolio Management
by Phil - February 20th, 2010 8:27 am
What a wild last 30 day’s we’ve had!
I’m going to do a little bit of charting today so we don’t miss out on the next potential Meatball Market (where bad news "just doesn’t matter") as we get past earnings season without any serious dings. Of course, like Icarus, they higher we go, the further we have to fall, especially when we’re getting there on wax wings but part of our fundamental outlook is looking at market sentiment along with the motives, means and opportunity of the manipulators.
The Fed threw a little monkey-wrench into the works Thursday with a surprise rate move but the market was amazingly unphased and, as you’ll notice on the chart below, we are neatly repeating the same move we saw in early November, when we waited 400 points for the correction that never came - until January 20th of course! This week, we took a few pokes at short plays and got burned and we went into the weekend a little bearish but mostly neutral. Our Buy List is off to the races, of course and only 2 of our 42 trade ideas there (AGNC and DF) are off course - I had meant to do an update this week but there’s no point!
We don’t pay much attention to the Buy List in our daily posts or even in chat because those trades do their job with very little fuss. Ideally, the bulk of your portfolio should be made up of boring, low-touch trades that make nice, consistent returns and THAT allows us to have fun with our more aggressive short-term plays that do demand our regular attention. Someone asked me about allocation the other day and I said that, generally, I feel 75% should be in long-term, well-hedged positions like the ones on our Buy List while the other 25% should be used for more opportunistic trading and, generally, we rarely stray from keeping 1/2 of that in cash to remain flexible.
Of our aggressive portfolio, we try to keep our allocations to no more than 10% of our cash on new positions (which means the more trades you make, the less you put into the next trade) and limit our losses to 20% of a full position or 2% of that portfolio MAX. 2% of 25% is 0.5% of the total portfolio. If our Buy/Write Portfolio is on track, then 75% of our capital is making at least 2% a month in a nice,…
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Federally Frightened Friday
by Phil - February 19th, 2010 7:56 am
The Fed raised the discount rate - Big Deal!
As I said in my Weekly Wrap-Up, recessions are for wimps and kudos to the Fed for finally pulling out the stick after all the soft talking they’ve been doing. Meanwhile, I do not see what all the fuss is about - I did the math for Members last night and banks borrow about $89Bn at the discount window on a good day and 0.25% of $87Bn is a grand total of $22M - this is NOT going cause the fall of Western Civilization people! What it does do is stop making the Fed the lender of first resort, which was never supposed to be their function in the first place.
The MSM should be more concerned with the end of the TALF, which is where the Fed buys up toxic assets from the banks at face value (we’ll all be paying for that later) and they just announced that the Fed’s holding of Mortgage-Backed Securities went over the $1Tn mark yesterday, bringing the Fed’s Balance Sheet to $2.25Tn of very questionable assets that they’ve bought for us from the banksters.
Speaking of banksters - Kudos to Matt Taibbi for his excellent Wall Street’s Bailout Hustle. As I said to Members, if it wasn’t for Matt and Dylan Ratigan, I would have to be writing about this stuff instead of following the markets. Thank goodness there are a few top-notch people investigating this nonsense with the ability to communicate their findings in a way that makes it interesting:
The nation’s six largest banks — all committed to this balls-out, I drink your milkshake! strategy of flagrantly gorging themselves as America goes hungry — set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007.
The question everyone should be asking, as one bailout recipient after another posts massive profits — Goldman reported $13.4 billion in profits last year, after paying out that $16.2 billion in bonuses and compensation — is this: In an economy as horrible as ours, with every factory town between New York and Los Angeles looking like those hollowed-out ghost ships we see on History Channel documentaries like Shipwrecks of the Great Lakes, where in the hell did Wall Street’s eye-popping profits come from, exactly? Did Goldman go from bailout city to $13.4 billion in the black because, as Blankfein suggests,…
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Prior Weekly Wrap-Up - February Expiration Day Special!
by Phil - February 19th, 2010 7:17 am
I didn’t get to do a wrap-up last week so we have a lot of trades to go over and, with expiration looming and the Fed tightening, I thought it would be good to just get the list out on Friday so we can adjust our rolls to March where neccessary (in bold under appropriate positions).
In our Feb 7th Wrap-Up, I was gung-ho bullish saying "It’s Only a 55-Point Drop You Wimps!" and we had been BUYBUYBUYing at the bottom all week, especially Wed-Fri as the market spiked through our projected support at Dow 10,000 but not enough to change our minds as we bottom-fished on AAPL (2 trades), ABX, ACOR, AKAM, AMED, BRK/B (2), C, CCJ (3), CSCO, DELL, FXI, GE, GOOG, IBM, LLY, LOW, NLY, TBT (5 times!), TM (3), TNA, USO (yep, we wen long oil) and UYG. To say we were weigting bullish by that Monday was an understatement as we has finished the weekend in a bullish stance and were relying on our disaster hedges to protect us.
Those disaster hedges are an interesting set to look at, especially now that we’ve recovered 400 points:
- DXD July $27/33 bull call spread at $2.50, now $2 - down 20%
- We can roll the $27 calls to the $25 calls for $5 to widen the spread and drop our b/e from $29.50 to $28.50
- EDZ July $3/8 bull call spread at $2.10, now $1.60 - down 23%
- EDZ Apr $10 calls sold for .70, now .15 - up 78% (pair trade)
- SDS 2011 $36/40 bull call spread at $1.30, now $1 - down 18%
- We can roll the $36 calls to the $33 calls for $1.10
- TBT Jan $35/45 bull call spread at $6.30, now $7.40 - up 17%
- TBT March $50s sold for .65, now $1.22 - down 87% (pair trade)
This is what is great about disaster hedges. The potential upside on these spreads, if the market headed south was up about 100% on the 4 trades so a commitment of 5% of your portfolio to each one (20%) would give you back 40% of your portfolio in cash if the markets tanked. Already, after 2 weeks, we have the markets heading in the opposite direction and what is the cost? Not even 20% of the 20% you may have allocated, a 4% insurance premium while the 80% of the portfolio that is bullish caught a huge rally up and this insurance is still good through July!
Monday (2/8) Market Movement
I pointed out how much chart people love…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(