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Weekend Wrap-Up

Another great week for our levels!

In last weekend’s wrap-up we were very pleased that the Dow stayed right in the lower end of our range, from 8,200 to 8,650.  This week we tested the upper end of the range from 8,650 to 9,100 and the two weeks, taken together make a great case for 8,650 being our mid-point and looking at the chart illustrates why the VIX is falling so fast – while it still may FEEL volatile during the day, we’re actually moving into a tighter range

Looking at a longer-range chart, we need to break over 9,100 early this week and get up to 9,500 to flatten the declining 50 dma so that’s what we’ll be looking for this expiration week.  It’s going to take some more stimulus to get there, we have a possible package for the auto industry and a Fed cut on Tuesday as well as possible action by global central banks.  There is an international fall-out to the Madoff scandal as EU banks have disclosed Billions in exposure to this ponzi scheme.  There are many articles on the scandal under "Phil’s Favorites" so I won’t go over it here but the repercussions are what we will be concerned about next week.

Monday started off with a bang as Obama discussed the New, New Deal – a $500Bn or so infrastructure project to keep Americans busy next year.  That was all the market needed to take off on Monday but we were more than a little skeptical as we’ve seen manic Monday’s before and they seldom follow through.  With all the stimulus flying around we discussed the need to learn the word "Quadrillion" as we’ll be using it soon enough the way the World governments are tossing money around.   We were totally incredulous that gold could still be under $750 so we kept on buying and that worked out very well this week!  As I said on Monday morning: "Trillion here, a Trillion there and before you know it we’re up to a thousand Trillion and you have to know what to call it" and THAT is why we like gold.

Nonetheless, I pointed out that the MSCI index was now trading at $1.17 per dollar in net assets, the lowest level since 1995 with 39% of the stocks trading below shareholder equity.  The economy may be really, really bad but we are starting to feel better about finding a bottom.  Since we had our morning stimulus we set high goals to get bullish for the day and the Dow failed to hold 9,000 while we hit the other levels I set (S&P 900, Nas 1,550, NYSE 5,600 and Russell 480) almost on the button at the day’s close.  It’s good to know where we’re going to close at the beginning of a day with 800 points of up and down market movement!

Monday night we did a Big Chart Review and I explained the fallacy of using low-volume moves as indicators of future direction.  We had gotten bearish into the close as I upped our target levles during the intra-day session to compensate for the rally in the energy sector, which I did not see as a positive for the broader market.  I pointed out that only the Dow was over the 40% line off it’s 2007 highs and that’s right about what it bounced off on Friday at 8,413.

You could tell I was bearish on Tuesday morning as my opening remark was "Can we hold our ill-gotten gains today?"  We’re getting very good at spotting BS rallies so Tuesday’s quick sell-off at the open didn’t surprise us one bit.  I called for that to reverse but we raised our levels even higher and quickly went negative when they weren’t made in the morning "rally."  I said in the morning post: "We get Pending Home Sales at 10 today, a shocking budget report tomorrow along with Wholesale Inventories at 10 and Thursday we have the PPI and Retail Sales Friday, so let’s try to get through that before we get all bullish."  That pretty much sums up the rest of the week…  I mentioned the DIA puts and the QID calls, both of which were huge winners from Tuesday through Friday mornings as I predicted we would test 850 on the S&P (Friday’s low was 853 and the S&P had closed at 907 on Monday).

After Tuesday was a little worse than we thought it would be, I called a "Which Way Wednesday," noting we had overshot our downside targets in Tuesday’s session.  I called for a move back up in the morning and the UWM $17s flew from $2 to $2.75 before we went bearish in the morning but the FXP Jan $30s from the prior day made a great new play for that morning but we barely got out even Friday from our entry on Tuesday as we were taken by surprise by the China rally.  Still, with the bailout turning questionable and growing concerns over Russia’s solvency, we went 60:40 bearish for the first time in ages with the Dow over 8,800 and that index missed my closing prediction by just 3 points.

Thursday morning we focused on our levels as I laid our my bearish technicals as there was a lot of bad news to chew on and clearly the auto makers were not going to get what they really wanted for Christmas ($34Bn) and once it became clear that they may not even get the $14Bn consellation prize – the markets went down fast, almost exactly hitting my 8,541 target on the Dow that I predicted in the morning.

Friday the Madoff scandal threw us, otherwise we would have come out of the gate buying, as we held all of our lower levels and quickly turned back up.  As I had said in the morning post "don’t forget we have the last Fed Statement of 2008 at 2:15 on Tuesday so it is VERY possible that we have a pre-cut rally starting with a check being written to the auto industry this morning – that would be our "best case…  as long as we confirm the bottom, this roller coaster is good for another run up the hill I think."  We came 250 points off that bottom and I called our levels on the turn at 9:44 as the Treasury and the White House quickly overrode the Senate, as I predicted they would, and indicated TARP money would be made available to the Big 3. 

So we got bullish but not too bullish on Friday morning and we didn’t have the time we would have liked to bottom fish before the market took off on us.  We are into the weekend 50:50 but with some ultra longs (UWM, QLD, UYG) as part of the bullish 50 – just in case things do take off into the anticipated Fed cut.  We’re looking for big things this week, 9,100 by Tuesday and 9,500 by the week’s end in order to get bullish, otherwise we’ll likely be riding this puppy back down into the holidays as the stimulus spigot begins to run dry and gravity takes its toll.


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  1. Test Comment

  2. Can’t seem to get access Phil; is this working ?

  3. Phil, I am new-so can’t comment on the changes-but I am trying to find the definition of "putters" and "callers".  I have looked through many of the articles without success. Thanks Greg

  4. Hi Phil:  I am new at this (hence, the handle).  Can you give me some suggestions for RSH?  (My basis is, sadly, 25.)  Thx

  5. Was having trouble posting comments last night…trying again.Greg, a caller is a call option that you have written. It usually has a short-term expiration (1-2 months). The goal is for the premium to evaporate on the caller, giving you some nice income, while you wait for the other longer term call option to appreciate. As you approach expiration of the caller, it will either expire worthless (that’s good, since you keep the premium), or you can roll it to the next month.

  6.  phil- per your request, posting a reply for test…what is exactly new about the site?

  7. sns1/ The login has changed slightly…that’s the only visible difference for now. The site appears the same, but under the hood they’ve switched to a new platform that will enable PSW to offer new features and functionality over time.

  8. Hi All – It may be possible to make comments on posts in the Favorites Section now.  Please, if you can think up a comment, try to post it so we can whether everyone or some people can leave comments.  Thanks!  Ilene

  9. Cap – Please let me know what that means as clearly you are in the post and commenting.

    Putters/Callers/Greg - Just a way of saying calls we sold and puts we sold to differentiate from puts we buy and calls we buy.  I always think of there being a person who bought my puts or calls like a guy I am playing chess against and think of the moves I need to make to "win" and keep positioning for the eventual checkmate (where he expires worthless).  

    RSH/NewCap – Wow, whatever possessed you?  Down at $11, they are a little more attractive but still not stellar.  Bottom line is you are in for $11 and lost $14 – can we make up $14 is the question.  Without putting much more money in, the first step would be to trade your $11 shares into 2 2011 $5 calls at $6.85, this costs you + 1.40 but gives you twice as many shares to sell against.  From there you can sell the Apr $12.50 calls for $1.57.  This nets out to collecting $3 per original share and, if it goes way up on you, you still have 2x $7.50 position advantage on your callers so you would net out $16.60 a share, vs. the $11 a share you have now – this is not a bad gain between now and April.  You can also double down by adding 2x the 2011 $12.50s for $3.40 and selling 2x more of the Apr $12.50s.  This only costs net $1.85 more time 2 ($3.70) and, if the stock gets away from you to the upside, you can spend another whatever for more 2011 $15s and roll all the callers up and still not have doubled down the full amount you are currently out.  That would be a long road towards getting you even.  On the downside, The 2011 $12.50s are $3.40 so even if RSH drops $7 from here, you can expect to keep 1/2 of your value – that’s a damn site better than you would do if you own the actual stock and, of couse, you are hedged out with the callers.

    As I was saying above, it’s just like chess – you have to plan a few moves ahead and have your various strategies depending on what your opponent does. 

    Comments/Ajay – Last night they were transferring stuff so I’m not worried about that trouble but today we should not be having problems.  Thanks for good answer to questions by the way! 

    SNS – Ajay is right on top of things.  Nothing very new but things that never worked are working and now we have a platform to build off.  As many of you know, I’ve gone through 3 sets of programmers trying to get changes made and Peter (Photo), who is overseeing the project now decided we were never going to get where we wanted to be with the mish-mosh we had so they decided to scrap all code and rewrite in something more streamlined and sensible.   In theory, we can now move forward on alerts and widgets that have been on hold for quite some time.

  10. Hi Cap and Phil,

    Earlier, Cap’s post required "approval" so  I approved it, i.e., it is now approved but was previously in moderation. – Ilene

  11. PHIL:yesterday you said you would comment on my stocks which have the jan hedge.Do you have the list I sent yesterday ?

  12. USO   Mauldin’s most recent commentary had an interesting piece about oil:The oil market is said to be in contango. The definition of contango is: "A condition in which distant delivery prices for futures exceed spot prices, often due to the costs of storing and insuring the underlying commodity. It is the opposite of backwardation."

    This morning West Texas Intermediate January oil futures prices were (courtesy of Dennis Gartman) $45.80. This rises to $52.28 by just April. A few day’s ago, Dennis reports, the spread between the first and fifth futures months had risen to $8.06, the highest ever. When oil was at $147, the spread was an average of $3.25, or about 2.5%. You can buy January 09 crude futures at a stunning 34.5% lower than January 2010.

    That means if you could find a place to store that oil, you could lock in a guaranteed 34% profit, less the cost of storage. Sounds like easy money. This is just something that shouldn’t be. But what this tells us is that storage for oil is very tight. Oil producers are leasing very large ships to store excess oil, as they cannot find places to store it on land. Storing oil on ships is expensive, so that cost of storage gets figured into the price of oil a year out.

    The OPEC nations are not cutting back by any significant amount. Oil is backing up in the system. It is quite possible that oil could go a lot lower in the next few months as the world reels from a global recession, and that means the demand for energy will be down. Oil below $30? Without production cuts that is certainly in the realm of possibility.

    As an example, let’s look at how shipping is holding up. The graphs below picture a rapidly deteriorating shipping business. Korean exports fell by 18% and Taiwan’s by 23% year-over-year ending in October. China’s shipping is rumored to be down by 3% on a valuation basis and by 7-8% on a volume basis. Prices in China are actually starting to fall, and Chinese authorities may soon have to deal with deflation.China is in a situation eerily reminiscent of the US in the very early 1930s. A large trade surplus, far too much production capacity, and falling exports with a whiff of deflation.

    Hopefully they have studied what we did wrong and will not copy it. But we should pay attention.This is not a world economic environment that is friendly to oil producers. Could oil fall below $30? It could if producing countries do not start to cut back on production. But many of the larger producers need as much money as they can to keep the lid on civil unrest.

    Deutsche Bank and a private consulting firm called PFC, based in Washington, have determined that Venezuela needs the price of oil to average $97 a barrel to balance its accounts, while in 2000 that South American country only required the price to be $34. Look at this chart, courtesy of Dennis Gartman. It shows the price of oil that various countries need to balance their budgets.Russia will need $70 oil.

    These countries are going to need to produce and sell what they can, which is in conflict with the need to control production and move prices higher.So far, the OPEC nations are not cutting back any significant amount of production compared with the destruction in demand. Oil is backing up in the system.

    Energy economist Philip Verleger suggests that OPEC should execute an "astounding 7.7 million barrels per day" just to restore market balance today. Global demand is down by over 5 million barrels a day to 81.6 million barrels a day. Non-OPEC countries produce almost 50 million barrels of oil. OPEC produces roughly 31 million, plus there are some other OPEC sources of about 5 million barrels equivalent in natural gas liquids. Thus, Verleger says OPEC oil production needs to drop by almost 25%, to somewhere under 24 million barrels a day. Think Iran or Venezuela will cut that much, given their need for cash to fund their regimes? Will Russia join OPEC and cut production?

    It will be interesting to watch Iran and Venezuela in the coming year scramble to maintain power.It is quite possible that oil could go a lot lower in the next few months. Demand could fall further. If we are truly producing an extra 5 million barrels a day, the excess supply could be at all-time highs within a few months. Longer term, I still think oil is going higher; but it could be wild ride, and the longer term is now a lot further off. I would not want to be long oil for the next few quarters, until there is some serious growth in demand and some cuts in production.

  13. Whoops.  I cut and pasted a section from his message, and I obvioulsy lost he chart and all the formatting, but it still an interesting read.

  14. Testing from the uk

  15. DB:how is the weather in my 3.home: Cobham ??

  16. RMM – I’ll try to get to it tomorrow, feel free to remind me in the morning.

    Oil/Eph – Contango is normal in a commodity downturn as long-term contract holders tend to think a dip is temporary.  Generally it costs .60 per barrel per month to store oil on land or in ships but then there’s the transport costs too so at least $1 per month is safe to figure.  That means that 5 months should be no less than $3 and closer to $5 to make it worthwile (assuming the whole thing wasn’t a big shell game) for the long contract seller to guarantee your oil for delivery in 5 months. 

    Pretty much, it’s all just what I’ve been saying for 2 years.  Running oil up to $100 a barrel initiated projects (PTR, PBR, CEO) that brought millions of barrels of new production on-line in non-OPEC countries and those projects aren’t going to stop just because oil went down in price as the money is already mainly spent and now they need to recoup it.  A private company doesn’t see oil the way a country does.   A private company invests $4Bn on the premise they will get 50,000 barrels a day out of the ground at $100 per barrel at a cost of $30 a barrel, making $1.2Bn a year in profit and paying back the investment in 4 years.  If oil goes to $40, they want to pump more oil, not less as they could give a damn about the oil in the ground – they need revenues. 

    If I’m into a field development for $4Bn and I’m only getting $40 a barrel at a cost of $40 a barrel.  I’ll sit down with my engineers and figure out how to get 100,000 barrels a day out for $25 a barrel, not cut my production back 20% and hole everyone else in the world does the same and that fixes my problem.  The bank wants payment on our notes every month and the only way an oil company is going to pay those bills is by selling oil.

    I wrote "OPEC: Lemonade Cartel" in Sept 2006.  I may have been a little early but read this now with good hindsight.

    Also, if you want to get a feel for what OPEC is going through, try the Lemonade Game!

  17. Phil, I have: DRYS Jun 12 1/2s and DRYS Dec 10 callers. Strike on the call is higher than strike on the caller, so I feel I am out of position. Does this matter? Will roll the caller to Jans on Wed, but not sure what strike yet. Probably Jan 10 if DRYS holds 9-10.Also, a related question…I have BGU April 40 calls with Dec 40 callers. Let’s say BGU is around 34 next week. Do I sell  Jan 35 or Jan 40 callers? If I sell Jan 35, then strike on call is higher than caller. Is that bad position? Thanks!

  18. What’s the trick to getting newlines in the new commenting system? I used to hit return twice, but that doesn’t seem to be working anymore.

  19. ajaytoo,
    Thanks for pointing that one out.  I believe it is fixed now, but let me know if you still have problems.

    Site looks the same, what changed  ?

  21. Phil:  Many thanks.

  22. RMM – Cobham weather has been b*****dy awful all weekend. Rain , rain and more rain. Have spent most of the weekend watching rugby on the tele.

  23. DRYS/Ajay – That was, of course, a slightly bearish bet on DRYS but you are right on target so far.  With a better than 3 month advantage, it is generally OK for a caller to be one strike below you as you can usually assume you can roll him up to a higher strike in the next month.  Clearly the Dec $7.50 at $2.22 can be rolled almost even to the Jan $10 at $2.17 so we can assume when Feb comes around you’ll get a 1 bracket cushion.  The trick is not to let the stock get so far away from you to the upside that you can no longer do the roll.  For example, the Dec $5 is $4.40 and rolling them up to the Jan $7.50s at $3.25 costs you $1.15 vs, the almost even roll from the $7.50s to the $10s.  There is an inflection point, around .50, where you NEED to make that roll before it gets away from you but that follows my general rule that if a caller goes half in the money on you, you need to start considering rolling him to more premium.  The worst thing about the June $12.50s is, of course, if DRYS flys up to $20, you will be screwed – keep that in mind…  At .70 for the $2.50 roll, I’d rather put the money in now to go to the June $10s or, better yet, spend $1.40 to roll to the Jan $7.50s

    BGU/Ajay – You’ll notice my spreads on Ultras, as a rule, are generally more like Apr $22.50s at $16, selling Jan $35s at $5.55 because it’s a net $10.45 entry on a $12.50 spread so you can’t get burned to the upside.  With a 3x ultra, a flat spread is just way too dangerous as it’s generally a bearish bet.  Effectively, you want the Dow to go up to 9,200 but not a penny more or your callers will gain dollar for dollar while you will not.  Notice that the Apr $30s are $12 but the Ap $15s are $20.  That means you will get about .50 on each $1 move up on the Aprils while a $15 move up would be $5 on the $40s and another $1 for each additional dollar.  As you are already in the $40s for $8.20, you could sell the Jan $40s for $3.55 and use that money to roll to the Apr $30s at $12.05.   To stay in a spread like this you want to keep rolling yourself down out of premium and into more intrinsic value.  Once you have less than 1/2 premium, it is probably time to consider cashing out or rolling to a longer strike if you are happy with the revenue stream.

    New lines seem to be working, I’m double spacing to get mine.

    Changes/QC – If nothing looks like it changed, that’s great!  We moved the whole system over to a more robust platform that will let us add a lot of features but the first order of business was to move the site over bug free.  Seems to be going pretty well so far.  Lots of changes ahead in the next couple of months now.

    Cobham – That’s a little outside of my usual rail-pass.  It rained all week in NY too and today we watch football on the tele so life is not so dissimilar across the Atlantic (except the beer isn’t as good!).

  24. Apparently, we no longer need to double space things – that is going to confuse me for quite a while!

    • Now I’m going to see if this makes bullets work properly.
    • It would be nice if these came out better but I think it’s a different problem

    We’ll see

  25. OK, so the indenting works but no actual bullet shows up and the spacing is wrong.  Also, there’s an issue with my comments bleeding together which is probably because my blue violates the usual white/grey alternating of everyone else. 

  26. What are they waiting for?!?
    Yahoo: Don’t expect an announcement Sunday or Monday from the White House on a possible plan to prevent the collapse of the troubled auto industry. That’s the latest word from White House officials.

  27. Phil/DRYS, thank you for the guidance. Just to make sure I understand the dynamics at play…if DRYS goes to 20, I’ll be screwed b/c the Jun 12 1/2 has higher lower delta than my caller. My caller will just overwhelm my long call, correct? So the trick is for the call and caller to have the same delta if you want to be protected on both the up and downside, and focus on earning returns through premium decay in the caller. I will roll the Jun 12 1/2 down to Jun 7 1/2 on Monday. This is good b/c I have another position at Jun 7 1/2 so will be nice to consolidate them.

  28. Wow, the new Search functionality appears to be a lot more useful than before. Although I hadn’t used it all that much before, so maybe it’s similar.
    Phil/BGU – You suggested the BGU Apr 40 / Dec 40 spread on Dec 2 (1:16 PM), which seems to be in violation of your general rule. So I should take out the Dec 40 caller and set up Apr 30s / Jan 40s? Once I have less than 1/2 premium in the call, why does that necessitate cashing out or rolling to longer strike?

  29. Phil;
    to remind you about those jan hedged stocks.

  30. bullets work
    am flying out of CA in3 hours
    will check at home tonight whether PHIL the MAN has commented on my jan stock hedges.
    what is new here besides bullet points
    no underlining possible
    all we want is good trading advice, that is #1.
    good luck this coming week
    are they providing money to the car industry ?
    did you see how in Bagdad, shoes were thrown at Bush, throwing shoes at you is the highest insult in the Arab world.

  31. Phil: bullets show up in the frame where one typis in but when you hit submit, they disappear.

  32. Phil, I don’t think your comments are showing up anymore ;)

  33. Matthew – bunch of broken links from the older articles. Any way to fix this? here’s one example: 

  34. testing

  35. Phil, you can ignore the DRYS question. I modeled out how the delta changes at different prices of the underlying and I think I got it now. I also see why there’s an inflection point when the caller delta overtakes my position’s delta. Rough rule of thumb in the types of spreads we’re doing gives rise to the less than 1/2 premium rule you mentioned.
    Still confused why you initially advocated the BGU Apr 40/Dec 40 position if it’s not a great position to be in?

  36. Good morning!


    RMM Jans:  GE, JAN 17.7, JPM JAN 30, PEP JAN 50, PFE JAN 16, EBAY JAN 13, SAP 32.5, WFT JAN 10, TAN jan 7.5 - All on target.  We still want conservative cover into the holidays.  UNH JAN 20 – They should hold $22.50 and it costs you $1 to roll them up.  VLO JAN 15 – Costs $1 to roll them up to the $17.50s, which seem safe enough now.


    BGU/Ajay – The original spread was short-term bearish.  That rule applies to something we are bullish on.  I should have been more clear on that.  We weren’t sure we found a bottom on 12/2 and, with the very high front-month premiums, it was a cheap entry to a volatile play.  Our goal was to enter the BGU Apr $40s at $6.20 and burn off a substantial portion of the premium by selling the Dec $40s for $2.50 or better on a move up.  The idea was that I was bullish but not so bullish that I thought we’d hit $40 by this Friday.  Now, with a net entry of $3.70, the Apr $40s are $8.20 and we are no longer playing with a "fun spread," as we have real money to protect.  Notice that even though BGU is at almost the same price it was at on 12/2, you can’t recreate that spread – A lot of times I pick something BECAUSE it seems mispriced to our advantage but never mistake that for being something you should generally apply as it always depends on the specific situation.  Having $6.20 at risk with 5 months to go burns $1.25 a month in premium but $8.20 with 4 months to go burns $2 per month for one thing so your options are deteriorating 50% faster.  Also, ahead of the Fed, it’s way to risky to short the  Dow. 


    Don’t forget on 12/4 you were going to cover with the $35s at $3 and my 10:15 answer there was pretty much the same: "BGU/Ajay – $35s too close, better to wait.  I was expecting them to retest $36 at least and if they fail there, then coveing may be a good plan but I hate, hate, HATE covering with a lower caller, especially on a 3x ETF!"  So pretty consistent overall….


    Nothing definite on auto bailout, that’s hurting the futures but the rest of the world is doing well this morning – either despite or because of $48 oil so I’m probably not going to like the rally if it’s energy based.




  37. Oops, forgot I don’t need to double space!

  38. Ajaytoo,

    Thanks for pointing that out about broken links.  The one you found is actually not because of the transition.  It was just one that didn’t line up, and I just fixed it.  There may be a few of broken links in older articles because of the transition, but they will only be for links that are internal to the site, and you should be able to find the article you want by the search engine.  Let us know if you have any further problems.


    • It seems to me that bullets work
    • RMM, do you want to try again?

  39. You all now have underlining capabilities.

  40. Matthew – not sure if you’re still reading this thread, but can you check out the other links here:
    I did notice that the calendar trade posting was just the wrong URL. But for some reason, none of the postings (May 3, May 6, May 7) that are linked to from the above post. It isn’t easy to find them using the search engine either. Thanks.