Weekly Wrap-Up

Turn those machines back on!

Wow, what a week that was – we can't wait for Monday, maybe we can do the whole thing again.  While Don Ameche is an irate loser in this clip (and the full clip here is my all-time favorite), we winners can identify with the desire to keep those markets open, especially when they are in blow-out bull mode like they were at the end of this week.

While we are, of course thrilled, let's take a moment to remember that this is, in fact, a zero sum game and our great fortune was someone else's misfortune.  In this case, it seems to be hedge funds, who were reported on Wednesday to be $45Bn on the short side of the S&P, the highest short level since the index started measuring it in 1995.  Short interest was low on the Russell and that index finished flat for the week…

Dr. Brett Steenbarger has several concerns about the market that should be taken seriously:

• Weighted stocks are leading the rally.
  • Mega-Cap stocks benefit from a weak dollar and strong overseas sales and also exert undue influence on the broader markets.
• Small caps are lagging.
  • I mentioned the Russell but NYSE TICK readings were less than sexy with advancers outpacing decliners by just 179 (.15%).  The A/D line on the Nasdaq was -217 (-.62%).  We discussed the poor general participation in the Nasdaq earlier in the month.
• Uneven sector participation.
  • It's my least favorite kind of rally with inflation causing energy (XLE) and materials (XLB) leading the way while consumer sectors (XLY, XLP), healthcare (XLV) and even the financials (XLF) fall behind.
• New highs are tapering off.

Dr. Brett is also seeing a divergence in the money flows going into the Dow but I could be persuaded to look at that as some rational profit taking with 8 of 30 industrials posting new highs on Friday.

Happy and I can see the Dow making a run at 14,200 with a nominal peak at about 14,350 if we get continued strength in the week ahead but, on the whole, a failure to consolidate between 13,500 and 13,600 only increases the chances for a painful correction (13,500?) ahead.  That's going to put the DIA September $142s in play at $2.10 as a fun momentum play IF the market flies on Monday as we can sell the July calls into the rally against them while it also make a nice hedge against our mattress plays as well as making a nice pre-roll for our August calls.  As it runs up we will, of course, tighten up on the short side.

We closed 86 positions with a 48% average gain this week as I struggled to keep our swelling Short-Term Virtual Portfolio at 60% cash.  There are worst problems to have than your runaway positions dwarfing your cash balance but it was the purge to cash we did last month that left us in such a good position to take advantage of this rally.  Had we held on to older contracts, we may have done well (the Free Picks Virtual Portfolio certainly did) but this was much less stressful and let us take advantage of some new leaps before they got away from us.  Think about it as planning for the future!  Our 86 remaining open positions have a 64% average gain and the virtual portfolio is now up 228% for the year – by far our best performance ever. 

We still have a pretty large downside oil bet that has, so far, been our primary cause of pain but they balance out 34 naked calls, 8 of which are commodity plays.

I did a major review of the Free Picks Virtual Portfolio on (of course) the free site and I am proud to say "Mission Accomplished" over there as we hit our $100,000 goal (up 310%) with style this week.  That virtual portfolio is just 35% cash.  The 15 open positions remaining are up an average gain of just 11% as we hedged heavily to protect our gains but have worked into the GOOG spread we always wanted with the Sept $550 calls and the Aug $530 puts making up 1/2 the open total.

Our Long-Term Virtual Portfolio held up well despite a lot of our callers heading into the money.  37 open positions have a 372% average gain (due to very low basis on many positions) but the more reliable gain for the year is 139% with the virtual portfolio just under 60% cash.  All that goes out the window in the next 2 weeks as we get ready to roll many of our '08 leaps over to '09 and '10.

The $10,000 Virtual Portfolio remains the black sheep of the family with a 30% loss to date.  I called for an additional short on FWLT on Friday as a chancy way to get a little back so we hope the Gods are kind to us over the weekend and cast FWLT back into the pit from whence it came.  This over-hyped Cramer darling now has a p/e of 24 after riding a 3 month pump-a-thon up from $54 on March 12th.  Their reaction to BHi's severe profit warning was exactly the opposite of what you would expect from rational people but normal for a momo stock gone wild.  While revenues have been up, they will have a hard time beating the $1.33 the street is looking for and we can attribute last weeks $9 run to the company joining the Nasdaq 100, a move experienced traders were not surprised by, hence the very heavy selling into the all-time high.  Anyway, that's our make or break position next week so wish us luck.

Our boring old Stock Portfoilo has just 8 positions that are up an average of 7% with a protfolio gain of 36% for the year.  My goal here is to hit 50% for the year as we have taken very few chances with it and played as conservatively as I can in defference to our members who like to play it very safe with "normal" positions.

The Complex Spreads Virtual Portfolio has been active as it holds most of our GOOG and all of our AAPL positions but we went back to a much more conservative cover mix as we near earnings.  34 open positions there have an average gain of just 8% but the virtual portfolio, which was started on 5/1, is already up 79%, so I'm very pleased, but we do literally owe it all to Apple and Google (and CROX on that big pop).