Weekly Wrap-Up

That was not a very good finish.

It was very hard to do the right thing and take out our callers as the market does not look like it will be turning around anytime soon, certainly it won't with oil at $138.54!  As we feared, payrolls actually fell by 49,000 and unemployment went up 10% in one month, from 5% to 5.5% but it remains to be seen whether ADP was way off of the government.  Knowing this government, I'm placing my bets that the unemployment data was wrong and we still maintain a long-term bullish outlook, difficult though it may be…

Dont' get me wrong, the economy sucks, but it's the same sucking we've had all year, not some new sucking we should suddenly be worried about.  The Dow was at 11,500 in Oct of 1999 and you can pretend that the 30 company Dow is worth no more now than it was then but I'd have to say we are just a tad under recognizing a decade of progress.  Not even George Bush can cause that kind of economic destruction (but he does have 7 more months!).

Our virtual portfolios held up very well for the week with the Long-Term Virtual Portfolio taking our only hit of the week, down 7% on the week's loss, which hurt our long positions while the rising VIX drove up the premiums on our callers.  Our Stock Club Virtual Portfolio also took a 7% hit on the week, as it's based on essentially the same strategy but, in both cases, this is a huge opportunity to reposition ourselves with relatively inexpensive leaps.

Other Virtual Portfolios had a fantastic week overall:

• The Short-Term Virtual Portfolio was, of course, our shining star as our DIA puts went through the roof, giving us a 33% gain on the week, up a total of 367% for the year so far.  Please check out the end of Friday's comments as we had an in-depth discussion of the index put strategy.  There are just 2 covered calls remaining in the STP and we covered our DIA puts and have 14 open calls so that's pretty bullish as we think/hope 12,200 will hold.  We also made money on both sides of our XOM play, that's very nice!
• Our Day Trade Virtual Portfolio took a big hit on Friday but still managed to post a 12% gain on the week, now up 23% in 3 weeks so nothing to really complain about.  BA is still killing us but at least it's covered now to stop the bleeding.
• The $10,000 Virtual Portfolio had an epic third week and we finished at $22,855 for a nice $128% gain in 21 days, up 89% this week alone.  We only have 2 calls left, BA and HOV,and not much of those at that,but $20,755 in cash puts us in really good shape for next week so congrats to the $10KP players!
• Our $25,000 Virtual Portfolio also hit the 100% mark this week but couldn't hold it and we've dropped back to a 96.7% gain, up just 12% for the week.  We are less than half cash here and I'm not as happy with this virtual portfolio as I am with the $10KP at the moment.
• Stocks Virtual Portfolio was dead dull, as usual and we actaully have 100% cash with just 2 sold puts (C and WFR) in the virtual portfolio.  This one is also 3 weeks old and up just 6.4% to date and up 4.4% from last week, about as good as  you expect with stocks…
• The Complex Spreads Virtual Portfolio is always a party but we barely touched it this week despite all the market gyrations.  Not touching was good as we gained 6% for the week, up 321% for the year so not losing money is very, very good in this environment!

Greg wrote in Friday's member chat (at 2:55): "Working remotely from home today and my phone and cable modem have been out until a few minutes ago.  Finally got logged into etrade (and PSW).   Phil thanks for suggesting the index puts yesterday afternoon.  They are more then holding up the rest of my bullish plays, in fact they are making me $."

Now isn't that the whole point of disaster protection?  We hedge our positions not just in case the market crashes but because sometimes our equipment or our life crashes and we are unable to trade for a day or two.  Unfortunately, Greg had both things happen to him on the same day but having hedges in place saved him, as it saved all of us from a very bad Friday.  We called for those covers on Thursday, as the Dow was getting over my 12,550 target and then, when it broke a little higher at the day's end, we had an opportunity to roll to even higher puts very cheaply.

The time to hedge is when things ARE going your way, not when they go against you.  We need to scale into our hedges the same way we scale into our longs when we are trying to pick a bottom but it's all about having realistic expectations and not being greedy.  When the Dow broke back towards 12,600 our logic was "that is a nice recovery and we'd hate to blow it into the weekend, so let's cover here just to be safe."   Only by being satisfied with the gains we have, are we able to take the steps that are NECESSARY to protect those gains.

Dr. Brett has a nice article called: "Why Traders Plan Trades But Don’t Trade Their Plans" which goes well with what I've already written on his "Three Vices of Trading," which are:  Ego, Perfectionism and Overconfidence.  In order to learn how to hedge and scale positions properly, you need to first let go of the idea that you will ever be able to call perfect tops and bottoms – this helps you to be satisfied with doing nicely on a trade, which is all we ever need to do!

Last week, if you'll remember, finished off with a bang but I called end-of-month shenanigans on the market as I was very suspicious of the 300-point gain we put on to close out the week.  As I said in the Wrap-Up "I’ll trust these gains only when we get to more cash…  We’ll see if the last two days were just window dressing or of a genuine rally is building.  We get a lot of data next week and I’m approaching it cautiously as there hasn’t been anything this week to turn me gung-ho bullish."

So we went into Monday thinking it wasn't just the price of oil that was being manipulated last week but the market as a whole and thank goodness for that attitude as it really kept us out of trouble!  First thing Monday Morning I likened the relentless oil pumping at CNBC to Hitler's orders to destroy Paris at the close of WWII but, unlike General von Choltitz, who refused to burn the city, the oil apologists at CNBC have no problem carrying out the orders of their masters and pumping up the hysteria for all it's worth, no matter how much destruction they do to the United States of America.

Nonetheless, we were still short on oil Monday and those bets paid off handsomely as we did get a drop to our target of $122.50 on Wednesday where, once again, we were very smart to take a non-greedy exit (and in fact went a bit bullish for the bounce).  Monday evening we were also sensible enough to realize we were lucky to be up 100% in our $10KP after just 11 days and we cashed out another $5K in positions rather than take on new chances in a very choppy week.

Tuesday morning we were right to be concerned about the stunning breakdown in the XLF and they spent Friday attempting to give up that final 10% gain that will bring the sector all the way back to 1998 levels.  Bernanke stepping in and saying nothing constructive was the last straw on Tuesday morning.   Tuesday evening I said "Not looking too good is it?" and although we were happy oil was going down, we didn't expect it to last below $122.50, but then again we didn't expect $138 either!

By Wednesday morning the market was as confused as we were as the ADP report showed us 40,000 jobs were ADDED at the same time as the OECD cut 2008 and 2009 global growth forecasts by 50%.  Wednesday did indeed go both ways but my morning advice that "This is definitely still a take the money and run market" served us well as we concentrated more on taking winners off the table and less on new positions.  Wednesday evening, with oil down at our $122.50 target we were just a little bit bullish but that soured the next day as a very strong retail sales report gave the oil bulls a chance to go back on the rampage, even though all the gains were in discount retailers.

Thursday evening I said "On the whole, I’d say this is a celebration that the stimulus checks are working…   I don’t want to be a downer but it all seemed a little too easy for me and I called for covers into the close so hopefully everyone is prepared just in case things don’t all come up roses tomorrow with the 8:30 jobs reports, which could reverse this whole thing "

Sadly Friday's action proved me dead on and it was a very sickening thud that ended the week as oil closed at record highs and another 50,000 people lost their jobs.  With a dip like that, it is very likely Asia will be hit hard on Monday so it's up to Europe to put the brakes on this downhill slide because I think our brakes failed when oil broke $130 and it won't take very much to push us back to January lows. 

We did end the week with a lot of open calls, but that was mainly a function of buying out decimated callers and not re-covering just in case things go well.  We'll have little tolerance for failure on Monday, other than an expected drop at the open.  Overall, we closed 78 positions on the week with a 22% average gain, not bad for such a nasty market: