Weekend Wrap-Up, Still Trying to Get Bullish
by Phil - March 14th, 2010 5:20 am
I’m having writer’s block this weekend.
Usually when I can’t think of what to write it helps me to go over our portfolios so I started this morning reviewing the Buy List but I didn’t get far because it was silly. Of 43 plays on the buy list, 39 are doing well - too well in fact to the point where it’s hard for me, in good conscience, not to say let’s kill the whole thing and get back to cash as we’re up about 20% in 2 months and that’s just ridiculous - most people would call that a good year and go on vacation.
The Buy List was 100% bullish and we did catch a good bottom on our early February entries. I was gung ho bullish then because I felt comfortable that the 10,000 line on the Dow would prevail and that we were good for a run back to the top (10,700), following, more or less, the pattern we had in 2004 (see original post for charts). Well that’s pretty much what’s happened since then but that’s not making me happy because I see no reason we won’t complete that pattern and begin falling off a cliff shortly.
As you all know, I’m not a big fan of TA, or patterns for that matter but the reason I started looking for patterns was to try to get a handle on how long market could really keep going up before falling victim to exhaustion. To me it seemed we weren’t at that point on Feb 6th but now that we’ve put in that big push back up - if we can’t punch up to new highs on all our indexes then I do think it’s time for the markets to take a break.
.jpg)
Clearly I’ve been too bearish for the past couple of weeks and we are now 224 points over 10,400 on the Dow which is where I turned bearish as the January data made me lose faith in our ability to get back to 10,700. I should have stuck to the TA because we’re a lot closer to 10,700 than we are to 10,400. With the Russell and Nasdaq exploding to their own new highs. You can see though, from the above chart, why I do want to wait to see the NYSE, Dow and S&P confirm this move up - it’s not far now!
We’re finally getting the hang of the Wonderland Market though it’s actually quite simple…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Wrong Way Weekly Wrap-Up
by Phil - March 6th, 2010 8:34 am
.jpg)
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…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
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…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Thrill Ride Thursday - CRE Crash?
by Phil - November 19th, 2009 8:12 am
What a nice day we had yesterday!
I led off my morning post saying it was time to short the Dow, Copper, Oil and the Euro and anyone playing those futures bets off my 8:27 post made out like a bandit. I even posted a nice little DIA play FOR FREE (for those of you who can’t be bothered to subscribe yet), picking the DIA $104 puts at .55. It only took 45 minutes for those puts to shoot up to .85 and I warned our Members to take it off the table on the way up and, since it was my free trade of the week, I also posted it over at Stock Talk on Seeking Alpha. This is a great way to follow-up on some of our trades and is also the back-up for our member chat whenever we have server issues so do make sure you are signed up to follow me there (just click on my picture).
Yes, I know that so many newsletter writers give you free trade ideas that make 54% in 45 minutes that it’s hard to keep track so only do it if you REALLY want to. The futures, of course, make TONS more than that as they are heavily leveraged, As I said in yesterday’s post, we have been trying to get more bullish but sometimes we just have to put our bearish foot down. In Member Chat we also took bullish pokes at EDZ, SRS, DIA $103 puts and ERY early in the morning and then we were able to just sit back and watch the dip. I was a penny early calling a bottom on copper at $3.12 but .05 on the futures contracts is a huge win and we are very nervous bears, especially on low volume days, and we take our profits quickly.
At 1:40, I said to members: "DIA - Well mission accomplished on the $103 puts and now we see what Mr. Stick can accomplish for the day. Without the RUT over 600 I have no desire to cover the March puts" and we even decided to go with the DIA $104 CALLS at 3:20 to protect us against the anticipated stick save. Those went from .65 to to .80 into the close, another very quick 20%. We don’t do this all the time, these plays are fun to make during expiration week as the premiums are low and there are huge short-term rewards for good market timing. Our longer-term short play for…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Wild Weekly Wrap-Up, Topping or Popping?
by Phil - November 14th, 2009 12:02 pm
This was an annoying week for bulls and bears alike.
We had a very exciting day on Monday, topping out at 10,248 but I didn’t like the way we got there (low-volume, commodity rally, as noted in David Fry’s chart) and, when pressed for a prediction on TV that evening, I had to say that I felt that we were more likely to be down by Thanksgiving than up with a possible Santa Claus bounce into Christmas. What we did get for the remainder of the week was very choppy action on even lower volume.
I had mentioned in last week’s "Wrong-Way Weekly Wrap-Up" that we were partying like it’s 1999 as we broke through Dow 10,000 and S&P 1,080, despite rapidly deteriorating fundamentals. Stocks are being bought because they are going up in price (much like commodities), not because there is any actual demand for them and that is very clear from the rapidly declining index volume as we run back into resistance at S&P 1,100.
Since early September our upside targets for the indexes have been: Dow 10,087, S&P 1,096, Nasdaq 2,173, NYSE 7,204 and Russell 623 and nothing has happened to change our fundamental outlook for the better so the closer we get to those levels, the LESS comfortable we are taking bullish positions. In fact, yesterday as we got our mid-day spike to 10,300, I told members that it was sorely tempting to just cash out all bullish positions and take 20% of the portfolio 100% bearish with a 10% stop. Rather than mess around with a mix of positions, going fully bearish can allow for some spectacular gains if we crash and stopping out with a 50% loss would suck - but a breakout like that, well above Dow 11,000 and S&P 1,200 would certainly give us reason to be more bullish.
As I concluded last week: "We’re generally not happy until we see Russell 600 and the Dow Transports over 4,000 (now 3,852) and we took a 55% bearish stance into the weekend because we’ll feel a lot less silly being burned by a move up than we would if we weren’t bearish enough for a move down. It would be nice to be able to make more of a commitment but the bulls clearly have the bears cowering in fear so we’ll just patiently wait and see how far they can play things out." Not much has changed since then and we are still waiting to confirm…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Friday - Will We Finish the Week Over Our Target Levels?
by Phil - November 13th, 2009 8:23 am
Here is a great metaphor for the emptiness of the global recovery:
An entire city in China, tens of billions of dollars in construction, sits empty. They also built the World’s biggest shopping mall, also empty. As they say in the video, people can’t move in because there is no economy. Yet the building of the city of Ordos and the Utopia mall have allowed China to hit their 8% GDP growth target because it doesn’t matter whether you build something worthwhile - as long as you build SOMETHING, it’s going to count as part of your GDP. It’s ironic that this country still hasn’t bothered rebuilding New Orleans, which was once a healthy, vibrant city and we are letting Detroit die a little more every day when it’s ideally situated to attract (comparatively) wealthy Canadian tourists but China is willing to build entire cities from scratch.
Ironically, Louisiana is one of 8 US states that export more than $2Bn worth of goods to China, who is, by far, our fastest growing trading partner. We get trade data later today and hopefully, at least one benefit of the week dollar will be to help boost our balance of trade but we’re a very, very long way away from balance and, as I pointed out last month, almost all of our gains are coming from lowered US consumption, not a real increase in exports.
Speaking of lowered US consumption, just as we predicted, crude oil fell to the lowest in a month yesterday as the inventory report showed inventories in the
“The
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Thrill-Ride Thursday: Jobs, What Jobs?
by Phil - October 15th, 2009 8:12 am
Yesterday was very hard for us.
Our theoretically conservative $100,000 Portfolio dropped 6% in one day as we had a farily bearish position into options expiration that I stubbornly refused to adjust this week. Surely, I thought, after running up 250 Dow points from Thursday, 10,000 would act as some kind of resistance? We’re also up a neat 500 points for the month of October so that’s our 5% rule and to not get a 1% pullback, even in the most bullish of markets, is very rare indeed.
So we stayed bearish yesterday and got crushed by the AMZN $90 calls we sold as well as UYG calls we sold and our PSQ calls we bought for protection got slaughtered as the Nasdaq flew up not 5% but 5.5% for the month and up 6.2% from it’s October 2nd low. While we are disappointed, we’re not terribly concerned as we’re only going to roll the calls to November anyway and I did promise the members that, if we hold our breakout levels for 2 closes, then I’ll be shifting more bullish. I’ve been trying to identify more bullish positions this week but our mix has still tended bearish as I’m just having so much trouble buying into this rally.
In yesterday’s Member Chat, my comments on the current situation was:
I do wish we were more bullish, this is a very smart group of people and we’re pretty bearish but so is the general investing public or there’d be volume to this rally. I have a hard time ignoring the fact that 600,000 more people lost their jobs this week and, even if it’s "only" 500,000, I still think that’s not really a sign of a healty economy. I think the REITs are off in fantasy land and I think so is the government, who cannot keep borrowing money at these low rates. The dollar has dropped 25% of it’s value since March so the market is only 25% ahead of the currency fall which means a flight back to the dollar, which could happen very suddenly if an EU nation like Spain collapses, could send our market down as fast a 9/11.
That being said, we have no choice but to follow the technicals and now that we can look at nice, easy support levels like Dow 10,000, S&P 1,100, NYSE 7.200, Nas, 2,200 and RUT 620 and simply call that the mark at which we’re 60% bullish. I’ve…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Wednesday Rally - INTC and JPM’s Piles of Chips
by Phil - October 14th, 2009 8:26 am
That is a crushing beat of the 51 cents expected by analysts, who have been playing expectations catch-up for over a month, trying to get a handle on this quarter’s earnings. JPM’s earnings are more exciting than GS’s earnings as JPM were supposed to be "dragged down" by Chase Banking. With $2Tn under management, the company put up $3.6Bn in quarterly profit, almost 10 times what they made last quarter (.09). "These results included the negative impact of the tightening of the firm’s credit spread, offset by the positive impact of counterparty spread tightening and gains on legacy leveraged lending and mortgage-related positions," the firm said.
Of course we could nitpick and point out that last year they had competition from LEH and BSC and last year they didn’t have $25Bn in bailout money to play with and they didn’t have a Fed Discount window feeding them countless other Billions every month at 0.25% interest but we won’t, because we are trying to get more bullish! Not wanting the Government to get the idea that they don’t need any more free money, CEO Dimon said: "While we are seeing some initial signs of consumer credit stability, we are not yet certain that this trend will continue." Frankly, I think the company sandbagged the earnings as they put $4.967Bn aside as a provision for credit card losses against $5.159Bn in total sales so either their clients are MAJOR dead-beats, or there will be some more profits recognized down the road (assuming all this recovery stuff is real).
INTC also beat earnings expectations last night but they are underperforming last year by a wide margin so not in any way as exciting as JPM’s results. Our strategy for INTC yesterday was to short sell the Nov $20 puts and calls for a total of $1.95 so our upside break/even on INTC is $21.95 but even last night, on the announcement, I still said to members I thought they were a short at $22 but we’re not going to fight the market, not now that we’re over our breakout levels.
The levels we’ve been watching (Dow 9,829, S&P 1,071, Nas 2,146, NYSE 7,047 and Russell 620), should be crushed this morning and, hopefully, will hold up through the end of day. If this is a real rally then we should have no trouble and the last thing the bulls want to see is volume selling at this…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Testy Tuesday - Topping or Popping?
by Phil - October 13th, 2009 8:15 am
I told you yesterday would be fun!
Will today be funner? Is funner a word? As you know, I have been determined to get more bullish and our Watch List is growing every day as I add more and more undervalued companies that still have room to fly if we are truly going to run the S&P back over 1,100 this year. We remain skeptical but you can be skeptical and still make money, as you can see from Corey’s (Afraid to Trade) very nice S&P Chart, you can do very well in this market buying the dips OR selling the tops - we kind of like to do both…
Despite the low volumes, buyers are clearly in control of this market and, in Member Chat yesterday, I compared the situation to having a bet on the Raiders, who lost 44 to 7 on Sunday. You can start out with a bet on the Raiders (in this case, the Bears) but there’s a certain point, perhaps when the 3rd consecutive possession by the Giants (Bulls) ends in a TD, that you have tgo admit you aren’t going to win.
You have a few choices at that point: You can be a perma-Raider and keep betting more and more on your team (not smart); You can swallow your losses and leave the stadium; You can swallow your losses and stay on the sidelines and watch the game; Or you can switch sides and start betting on the Giants, maybe even recovering some of what you lost. You can keep some of your useless-looking Raiders bets, just in case a miracle occurs but what’s the sense of not betting on a clear winner when it’s right in front of you? Even if you are skeptical, that can be useful as it keeps you out of trouble as you should be wise enough to take your profits off the table.
I never understand the "fan" behavior of market players. If you see the market going up and up and up and up - perhaps it’s time to make a few up bets. Bears don’t earn loyalty rewards or get frequent-complainer points from the market so, if your "team" is getting trampled, it’s OK to switch sides - at least for a while - no one will think any less of you. In the case of our bull-market bets, we have a great opportunity to switch sides at a very significant line this week, the 2009 highs of Dow…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Weekly Wrap-Up, How to Make Money in a Down Market
by Phil - October 3rd, 2009 8:27 am
Wow. what a fantastic week!
Well, not for the markets but for us as we totally nailed it. It’s hard to believe that it was just two weeks ago, on Monday, the 21st, after I posted the "Wrong Way Weekly Wrap-Up" as the Dow rose from 9,600 to 9,800, that I had to apologize to members, saying: "I’m sorry because I don’t like being bearish - I’m an optimistic guy usually but I can’t just sit here and tell people what they want to hear. It’s just too irresponsible not to be cautious here. We make plenty of bullish picks but I maintain a very wary outlook until we get some real fundamental improvements."
That’s the funny thing about fundamentals, they don’t matter until they do - and then they matter a lot. It’s funny how I get labeled a perma bear when I’m shorting the market at the top and a perma bull when I’m buying the maket at the bottom. Gee, I always thought that’s what you’re supposed to do but it turns out that few people have the patience to work a market trading range and I don’t blame them, I blame the mainstream media, who encourage this destructive herd mentality to investing that culminates in Jim Cramer and his sound-board, where all the complexities of the market are supposed to boil down to either BUYBUYBUY or SELLSELLSELL.
It makes me seem downright wishy-washy when I said to members on the 21st: "I don’t have all the answers, but I do have a lot of questions - too many to get comfortable buying at these levels." On the whole, as I explained in detail way back in late July, I am neither bullish nor bearish, I am Rangeish. Yes, it’s a made-up word and I have to make it up because no other analysts these days seem to believe the market can go up AND down, everyone seems compelled to stick to one or the other AND THEY DO IT TO THE DETRIMENT OF THEIR READERS - I WILL NOT DO IT!
There are strong stocks and there are weak stocks and I can’t believe I even have to write this out but the best strategy is to short weak stocks and ETFs that have gone too high and buy strong stocks and ETFs that have gone too low. As I explained in my LiveStock appearance back on March 6th (when I was called a "perma-bull" for calling a bottom), the market is like a huge tanker being pulled by individual stocks that are like tugboats. If all the…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
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
(