1,160 – That was the S&P close after yesterday’s wild action. A neat 160-point drop (12%) in 3 months for the World’s largest market kind of sucks, don’t you think? My commentary in June 30th’s "It’s the End of the Quarter as We Know It" post was:
We feel fine because we cashed out on the long side (shorter-term, unhedged positions) and we really don’t care what the market does today or tomorrow but we are betting this rally reverses and we will be taking some (more) short hedges today – hopefully selling into the last legs of this fairly fake-looking rally.
My top downside picks to play the sell-off were EDZ ($17.90 at the time, now $28, which is up 36% even without using options to make a spread) and TZA ($35.50 at the time, now $51.10 – up 44%). As I said in that morning post: "I didn’t think they could take the Dollar below 75 but they hit 74.54 last night and it remains to be seen if they can hold it down in real trading, especially with the Pound weakness (see this morning’s Alert) and the Yen’s unwanted strength. Something’s gotta give and we’re betting it’s this fake, Fake, FAKE rally…."
We were shorting oil futures (/CL) at $95 (now $80, up $15,000 per contract) as we thought the holiday weekend was the end of the run but we did keep heading up to $100 (down $5,000 per contract) before finally getting a drop to $75 (up $25,000 per contract) in early August.
One funny play from that June 30th Member Chat was the VIX Aug $15/17 bull call spread at $1.20, selling the $16 puts for .50 for net .70 on the $2 spread. That just seems so cute (and obvious) with the VIX at 38.84 now (it was 30 at the end of Aug for a full 185% gain on that hedge).
Other hedges we liked in that post were the TZA Oct $31/42 bull call spread at $3, selling RUT Aug $710 puts for $2.90. The RUT puts expired worthless so net .10 on the spread that is currently $20 in the money for pretty much the full 10,900% gain.…
Luxurious, avaricious, false, deceitful,
Sudden, malicious, smacking of every sin
That has a name; but there’s no bottom, none.
That’s the way the markets feel this week as we, like Henry V – head once more into the breach (or close the wall up with our EU dead!). I had said on Tuesday, that it was 1,200 or bust on the S&P (as usual) and we failed to hold 1,200 and we busted and then we failed to hold the bottom of the rising channel David Fry had drawn at the top of that post (117.5 on this chart) and so we tumble back down towards our much more reliable -5% line at 1,140, which I drew in red.
While tricky, it is not impossible to trade this kind of action. We are very fortunate to have been trading this exact range on our virtual $25,000 Portfolio and we just had our best 2 weeks of the year, despite the insanity, with a net $16,475 gain since 9/15. That’s 66% of $25,000 right there and we’re now at $97,400 and on track to hit our $100K goal for the year on Friday as long as the Russell doesn’t fail 645. If not, as with many trades this year – we’ll work it out!
That’s the whole point of this portfolio exercise – to illustrate the idea of balance, even in aggressive short-term trading. We are never all bullish or all bearish and sometimes we’re wrong but, generally, we simply do more shorting at the top of our range and more buying at the bottom of our range and then we simply sit back and wait for the winners to come in. Of course for almost every winner there’s a loser but then, a week later, the losers are winners too!
OK, so PATIENCE and BALANCE – that’s those are our two points! And taking profits off the table. Right, then our THREE points are patience and balance and taking profits off the table while not being greedy. So that’s FOUR points. Amongst our points are Patience and Balance, Taking Profits off the Table and Not Being Greedy.
As I often say to Members, if you wake up in the morning and you’re not sure if you want the markets to…
So, while we wait for those IPhone 5′s to roll off the assembly line, we’ll be keeping an eye on the Russell, which should benefit from the recent strength in the Dollar, which is is up over 5% in September – although probably topping out at 78 – which is good, as it will give the markets a nice boost on the way back down.
Don’t worry, no one will be arresting Rupert Murdoch because – well, he’s rich. Rich fixes everything, doesn’t it? Rupert’s pal, Chinese Premier Wen Jiabao (What? You didn’t think he only buys Western politicians, did you?), says no one should rely on China to bail out the world economy. "Countries must first put their own houses in order," Wen said today. Asian stocks dropped following his comments, but European markets and futures have shaken the news off after the bank downgrades in a classic example of selling the rumor and buying the news.
It’s very sad when you can get your best financial advice from cartoon characters.
I apologize for the language but this video pretty much says it all. As the man in green says: "Buy the f’ing dip, you f’ing idiot." That’s the entirety of the market strategy we are being trained like Pavlov’s dogs to follow. Also as the man says "Now, don’t forget this only works if you go out and tell all your friends and family to do the same. That way, when they are buying more expensively than you, you can sell back to them and collect your money."
Of course it’s a Ponzi scheme but it’s a gigantic, legal one and the best thing about it is that the Government FORCES everyone to play so you never run out of suckers. When there is a lack of actual new sucker/investors to put money in, the Government steps in with stimulus or buys equities (QE1) or buy Treasuries from the banks so they can have free capital to buy equities with (QE2). They debase the currency and drive inflation higher while talking it up even more so and virtually penalizing people for saving money and not shopping. In this way, the US Government places a tax on every single citizen through a systemic devaluation of their lifetime accumulation of wealth as well as unfavorable savings and inflation conditions that are aimed to force money into equities and commodities.
What is the logic to this? Well, none if you are a government that actually cares about the long-term benefit of 310M people but we haven’t had a government that was "for the people" since they put two in the back of Kennedy’s neck so why complain about it now? What we should be doing is celebrating the sheer stupidity of the situation and enjoying the ride as this stock market roller coaster clacks up the tracks – towards a drop that is certain to have investors screaming all the way down but, for now, let’s listen to what the Bernanke Bears have to say in their latest cartoon about the Bank America crisis with WikiLeaks as well as their advice on NFLX and CRM:
Now, what could be more simple than that? Just take all your money out of bank stocks and put it into NetFlix. Well, maybe not NFLX as we…
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…
Peter D has a long-running and very successful system of selling premiums on a regular basis that’s well worth learning.
Investors selling a short strangle are expecting the underlying stock to not move much in either direction. The strategy is accomplished by selling a call option at a higher price than the current stock or ETF price and by selling a put option at a lower price than the current stock or ETF price. Both of the options will have the same expiration month. The investor in a short strangle benefits from the underlying moving within the spread between the call strike and the put strike.
There are two reasons we like this strategy a lot at PSW:
1) It’s boring! Unless the market is MUCH more volatile than normal, taking sensible, NON-GREEDY, out-of-the-money short option positions is a fairly market-neutral way to place our bets. While the risk/reward ratio may seem inverted, statistically it’s a winning play over time.
2) It’s perfect for our "be the house, not the sucker" philosophy of trading. We are always looking to SELL volatility. The idea behind this trade is that front-month volatility is relatively expensive compared to historical long-term volatility and we take advantage of selling a very high cumulative volatility over the course of the year.
I keep a notebook (actually several) of all of my trading ideas including results from back testing from all of the various stocks, indexes, etf’s, futures, market statistics and yes, even planetary alignments, tides and lunar cycles. While reviewing all of my Blue Wave test results today, I stumbled upon a consistency heretofore completely unnoticed yet intriguing in it’s premise and applicability to trading, especially trend trading.
It appears from my testing that one particular trading vehicle consistently generated better results, sometimes much better results, then any other. What I found was that the Russell 2000 index (RUT) did better in my myriad of testing then any other index, including SPX, OEX, QQQQ, SPY and DIA.
Naturally, I Goggled this phenomenon and found a number of similar observations, best summed up here:
The Russell 2000, while not as popular as the S&P 500 or the Nasdaq, is actually much easier to trade. The broadness of the Russell’s index causes it to trend better than the Nasdaq and the S&P. The breadth of the 2000-stock-index tends to filter out the noise in the market, which makes it a more efficient market to trade. The brokerage houses tend to tout the S&P and Nasdaq markets because they are best know to the public. The Russell 2000, however, is utilized a great deal by institutional players because it trends so well.
And then this:
However, there is another market also catching the eye of many day traders — E-mini Russell futures. A quick glance at the top trading systems we ranked across seven different statistical measures at the end of 2004 showed something extraordinary — several E-mini Russell trading systems occupying spots at the top of the list.
So let’s take a look at the RUT, which coincidentally is the base index for four of the highest leveraged ETF’s: TNA, TZA, BGU and BGZ.
Above is our big picture Weekly chart of the Russell 2000 index. A week ago it flipped from LONG
The US and world economies are drifting inexorably into the next recession owing to the deflationary collapse of commodities, capital spending and world trade. These are the inevitable “morning after” consequence of the 20-year global credit binge which has now reached its apogee.
The apparent global boom during that period was actually a central bank driven excursion into the false economics of household borrowing to inflate consumption in the DM economies; and frenzied, uneconomic investing to inflate GDP in China and the EM.
The common denominator was falsification of financial prices. By destroying honest price discovery...
I’d like to address some aspects of the Greater Depression in this essay.
I’m here to tell you that the inevitable became reality in 2008. We’ve had an interlude over the last few years financed by trillions of new currency units.
However, the economic clock on the wall is reading the same time as it was in 2007, and the Black Horsemen of your worst financial nightmares are about to again crash through the doors and end the party. And this time, they won’t be riding children’s ponies, but armored Percherons.
Good stuff for bulls as resistance levels get ticked off on the advance. There breathing room for many indices and a chance for consolidation. Nit pickers could point to light volume, but it would be hard for buyers to be coming in here given the sequence of gains.
The Nasdaq 100 still remains tagged to resistance. Can it break tomorrow or will sellers make an appearance. All I know is yet another short trade of mine is stopped out. I should add, I haven't touched my investment account. I would be looking to buy if I had the funds available.
The S&P made a decisive push past its 50-day MA. Next resistance is up at 2,044. Tech...
1) The shares of one of my largest short positions (~3%), Exact Sciences, crashed by more than 46% yesterday. Below is the article I published this morning on SeekingAlpha, explaining why I think it’s still a great short and thus shorted more yesterday. Here’s a summary:
The U.S. Preventative Services Task Force’s Colorectal Cancer Screening Draft Recommendation issued yesterday is devastating for Exact Sciences’ only product, Cologuard.
I think this is the beginning of the end for the company.
My price target for the stock a year from now is $3, so I shorted more yes...
Uncertainty about the health of the global economy led investors to flee U.S. equities during Q3, primarily driven by worries about China's growth prospects and the Federal Reserve’s decision to not raise rates. Sure, there are plenty of real and perceived headwinds, but on balance it seems that a recession here at home is not in the cards. And when you consider sentiment and the technical picture, it appears that a continuation of Friday’s bounce is in store. The question remains as to whether the seasonally strong Q4 will be able to propel the bulls through levels of resistance that have built up.
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This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).
We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options.
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Reminder: Pharmboy and Ilene are available to chat with Members, comments are found below each post.
Baxter Int. (BAX) is splitting off its BioSciences division into a new company called Baxalta. Shares of Baxalta will be given as a tax-free dividend, in the ratio of one to one, to BAX holders on record on June 17, 2015. That means, if you want to receive the Baxalta dividend, you need to buy the stock this week (on or before June 12).
Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself.
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
Note: The material presented in this commentary is provided for
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considered to be reliable. However, neither PSW Investments, LLC d/b/a PhilStockWorld (PSW)
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