Weekend Wrap-Up

That was much better!

We noted the other day that, while this was a "nice" recovery from our perspective, it was a spectacular recovery from an international perspective as the rising dollar coinciding with rising US equities gives our markets a very nice, booming V bottom from our July 15th low.  The S&P priced in Euros is up 15% from the bottom in less than a month yet remains 25% off it's highs of last May, where the market peaked on a currency-adjusted basis (see lower, weekly chart).

It's good to review my Weekly Wrap-Up of July 13th, where I did, in fact call the bottom and gave an extensive overview of my reasons for doing so.  At the time I said (as we had moved to 70% invested, trying to pick a bottom): "I wish there were a more painless way to pick a bottom but the only way to get ahead of the curve is to take a little damage at the bottom.  We need to be very realistic about what happens next week and fall back to a more conservative strategy if we break below 11,000 but I’m really hoping something comes out by pre-market Monday to let us put the GSE issue behind us so we can get back to focusing on a very busy earnings week."

As I had said that weekend, just because you call a bottom doesn't mean you get it and that Monday we discussed the manic-depressive nature of the markets as we were cynical of the sudden recovery, even though we were playing for it.  That morning I said "Here’s my problem – I’m a fundamentalist, so I believe a company has value and an economy will do X and not Y and I don’t believe that changes from day to day to any great degree.  Our basic investing strategy is that, when we see a stock deviating from our percieved "value" of a company and we feel the risk/reward is justified over the time frame – we buy some options looking for a return to the norms.  So it disturbs me when, for example, a massive financial institution like FRE or FNM can, through the wisdom of Wall Street and the "efficient market," lose 1/2 it’s value at 9:30 and then get it all back at the end of the day.  When the Dow goes up and down 200 points 6 times in one week and makes 20 100-point reversals in 5 days, then we know fundamentals have simply been thrown out the window and we are now playing stock market roulette." 

Although we have made a very nice recovery from that point, it's still a very choppy, very crazy market and I will repeat the warning I gave that Monday, when it looked like we were heading up fast: "We have a long road to recovery so let’s not get overly excited.  If today’s rally gets you even on a position you were worried about, then lighten up.  Cash is still a very good thing to have, if it’s a real recovery, we’ll be led up by XLF and BKX and we have a long, long, long way to go before we are in anything like a recovery mode."

Tuesday the 15th was our big crash day and I urged members to "calm down" in the morning as I maintained my premise that the market was down on $148 oil and for no other good reason.  The real turning point came that morning when BOE Governor King issued a statement that the BOE would be NOT be cutting rates as that would be inflationary and they would rather have slower growth than fuel further commodity inflation.  That sentiment spread to Europe and finally to the US and some of the Central Banks of smaller nations have already raised rates, making tiny pricks in the commodity bubble.

This has helped the dollar to finally come off the floor as less of them are required to pay for our daily allotment of oil and more money is staying in US consumers' pockets as the CRB (that non-core part of the CPI that had risen 70% since Jan '07 but wasn't counted as inflationary by the government) tumbled 20% since July 1st – still a very long way to ge but getting there fast.  In the "Tuesday Tear-Down" of July 15th we kept after the NYMEX crooks and Congress finally got a clue to the NYMEX Tea Party scam they were running down there.  My closing prediction of July 15th is a pretty good summary of this week, 28 days later:

"Best case scenario:  Lots of earnings beats, oil falls and money rotates out of the sector back into Tech and Transports, which retested the 2,300 mark yesterday for the 3rd time since March.   We came off the March lows to jump 20% in the transports and the Dow gained 1,200 points (10%) DESPITE oil rising from $100 to $135 over the same period.  If we can get oil from $135 back to $100 – we can expect a very, very nice recovery."

If oil keeps going down, the transports (and we play the long IYTs) should be a very good case to park some cash while the QQQQs have already broken off a very good month-long consolidation around 45 and, barring any major reversals in the dollar, commodities etc., we should be heading back to a retest of 50.  While my macro calls were, on the whole, dead on target, I'm not happy with what I saw going on with our member investing – as many have become so used to a steady bull market with quickly reversed bottoms, that they no longer have the patience to ride out a downturn or positon themselves for protracted consolidations.

This led me to decide to throw out our old virtual portfolios, leaving only the Long-Term Virtual Portfolio (now up 205% for the year) and the always conservative $25,000 Virtual Portfolio (up 29% since it's 2/19 re-launch after our 1/1 virtual portfolio more than doubled in a month) intact while creating 4 new virtual portfolios based on trading style and risk tolerance: 

• Our Butterfly Collection follows our safest strategy, more double diagonal plays than straight butterflies.  Unfortunately, one butterfly we aimed to leg into was ELN, which crashed the next day and cost us $7K before we could cover it.  Nonetheless, the virtual portfolio is down just 2.7% since its 7/21 start. 
• The Stocks Virtual Portfolio is up 2.4% over the same period, also hamstrung by a $15,000 loss in ELN (we liked that stock!).  Given we shook off that loss and held up for the first three weeks makes me very enthusiastic about the strategy that we featured in June's article: "Can You Be Satisfied Making 20% Returns Each Year?" 
• Day tading remains very profitable in this market and after just one week our Day Trade Virtual Portfolio is up 5.2% on 5 closed trades so far. 
• The $10KXtreme Virtual Portfolio is designed to make as much money as possible with just $10,000 in capital and is up 29% since its 7/21 start.  Like the Day Trading Virtual Portfolio, this is a high-risk virtual portfolio with the notable exception that we can't actually day-trade with a now $12,900 balance but we hope to get there ($50K) very soon!

Oh the whole, it was a very good market week despite the little dip we had on Thursday.  We were well prepared for bad news on Monday morning as we had already discussed the finanical issues that were raised over the weekend so it was no surprise when Whitney and her pack of hyenas popped up on CNBC (and the cover of Fortune) Monday morning.  They say you know a fad is over when you see it on the cover of a national magazine so adios Meredith, your 15 minutes seems to be winding down. 

Tuesday I was out but we held the levels I set Monday night and got the turnaround we were looking for on a Fed day.  By Wednesday morning I decided I was not happy that Bernanke wimped out.  We played the spread in the morning post of the USO Sept $94s at $7, selling the Aug $94s for $4.  That $3 spread is now $3.42, up 14% in 3 days and is a great example of the kind of quick trades you can make in a choppy market with not too much risk.

Luckily we were able to see Thursday's Thump coming and I posted a special warning to members Wednesday Night as well as the first comment on Thursday's post.  Since we were heavily exposed to a financial slide, our protection of choice was the SKF Sept $125s, which opened at $10 and finished the day at $14.50 – now that's good protection!  For those too greedy to take the money and run, I reminded them to on Friday morning to kill the SKF's as it's good to take ridiculous one-day profits off the table and we are practicing safe investing techniques this quarter!

Also in Friday's morning post we took the $RUT Sept $740s, which opened better than we thought at $11 and hit $19 by 2pm, which I decided was way too much to leave on the table over the weekend.  C was, as expected, yet another good opportunity in the morning and WMT March $57.50s opened at $4.85 and we were able to get $1 for the current $57.50s, a very nice way to start a leap spread.  I must have said the right things about BA because EVERYBODY bought them in the morning on the dip and our FRE came in at $5.50 (did we set the bottom?) and we picked up .65 for the $6 calls, which is not a bad 10%+ return for a week if it works out.

These morning picks are, for the most part, the simplest trades we make and, when I make a lot of them like this week, it's because I'm feeling more confident in the market's direction.  Of course it's always important to follow the rules and use good cash management techniques and I want people to keep in mind that this is why we use stops and get back to cash when a position moves against us – there's always another trade to make tomorrow as long as we are able to take advantage of changing market conditions.  We no longer track them as they are my STP-type trades but I'll try to keep up in the wrap-ups when time permits.

For the week we closed just 13 positions as I was out for part of the week and the ones we did close were big winners, giving us a 104% average gain while our virtual portfolios pretty much took care of themselves.  We set up the new virtual portfolios to demonstrate how you can stablize your positions and allow yourself to take a vacation without worrying about the markets every day and I'd say the mission was accomplised as we made good progress during this crazy up and down week in which I missed two days of action: