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Thursday, March 30, 2023


Friday – Stop the Week We Want to Get Off!

They say any crash you can walk away from is a good one but this sure doesn't feel like it.

Let's not forget, it's been a short week.  Last Friday moring I had said: "Dow 7,800, S&P 820, Nas 1,460, NYSE 5,100, Russell 437 and SOX 203 all better continue to hold today but, even if they do, we’re nowhere near where we want to be and we’re going to take some bearish covers into the weekend – just in case" and our cover play for members, at 3:47, was the naked DIA $81 puts.  Those puts were $2.75 at the time and they opened on Monday over $5.  Even if you were only 30% bearish in your virtual portfolio – that kind of cover play helps a lot.

On the weekend I discussed my continuing concern that the XLE and OIH could still drag down the markets and those indexes have plunged 6% this week and, of course the Financials are even worse, with a 14% drop in 3 days.  Is this then simply more rotation or are these sectors leading us down to the end days for the markets?  The energy sector is 20% of the S&P and the Financials are amazingly still 10% so they account for 2.6% of the drop this week.  The overall index is down 6% (so far), with 783 being the 5% rule off 825 that we hope (and it's a slim hope) to get back to today after the morning panic. 

I called Tuesday "Terrible Tuesday Morning" and I said in that post: "Hopefully 7,650 (-2.5%) holds up on the downside and we can get back to 7,785.  Of course 800 is the critical line for the S&P although 788 is the official 50% off mark for a spike down.  On the Nasdaq it’s 1,431, 5,194 on the NYSE and 428 on the Russell – all may be tested today so let’s be careful out there but we’re already bearish and holding those levels (NYSE will be hardest) by the day’s end could actually be encouraging.  We’ll have to play it by ear and, of course, have our Mattress Plays ready – just in case!"  On the whole, the levels did not hold up and we mainly sold naked puts, generally with a 20% downside cushion as bullish plays to offset the generally bearish stance we had taken.  Still I was forced to close Tuesday saying: "This is so not good enough!  Be careful if this is all we’re going to see – it’s a huge disappointment on the bill being signed."

Tuesday night we got the bad news from GM and Wednesday morning we got a surprise "homeowner stability initiative" but it didn't help.  I mentioned yesterday morning that I was happy with our new bottom fishing plays and they took a hell of a beating yesterday but last night in member chat I found out that some have been losing the context of these plays as they are not being taken within the context of a generally bearish bias.  I make the mistake of assuming people read me consistently and I get tired of rehashing old articles on virtual portfolio balancing but I will be changing that by archiving some reference articles and the relevant one for this discussion is "Hedging for Disaster," which explains the covered call strategy and the general concept of virtual portfolio balancing.

As I said at the time (Oct. 17th, and now we are finally up to what is relevant today): "You can bargain hunt in this market if you pursue a hedged strategy and you can "buy and hold" if you are also buying and holding ETFs like the DXD or SDS, which will make you 200%+ returns when the market drops 10% (an almost daily occurrence lately).  Of course there are more complex strategies to wring a little more out of each side but those are the basics and I think it’s just a shame to see people not willing to put a little money to work out of fear of an additional downside that may never materialize.  We discussed using ultra ETFs way back on October 1st, in my original "Hedging For Disaster" post (although we started with the SKFs way back in early September) and boy did those ultras take off since then!  Again, I’m not saying the market will not go down, but I am saying there are ways to guard against it and still participate in the upside when it comes, rather than after the fact!"

We tried a little bottom fishing yesterday but by 11:11 we saw there was no bottom as we set XLF $8 and S&P 795 as our critical levels.  I made a terrible call to try SKF $160 puts for $1.75 at 11:46 and they were a train wreck, never getting higher than $1.95 before collapsing around 1:30.  By 3:13 I was on the other side of the table, pointing out to members: "Last time we had an insane spike in the SKF was last expiration day so I think we misplayed this one.  Maybe tomorrow they get it to $200 and we can go short then for March but this is just relentless pounding of the financials."  So it's expiration day once again but the BIG spike actually came the day after and we will not be so quick on the trigger today.  We expect a terrible open and, if the administration doesn't say something magical – we may get a terrible close so we remain bearishly biased, as tempting as the upside is becoming and I will be talking much more about virtual portfolio balancing over the weekend.

Our last play of the day was a cover with the FXPs.  That ultra-short China ETF tends to lag downward moves in the Dow and, while a down move today was baked in the cake, a major down day again today can lead to a major pullback in Asia as well.  Asian markets were actually muted this morning after our poor showing with the Hang Seng dropping exactly to the 2.5% rule and the Nikkei falling 1.87%.  The Shanghai actually gained 2.12% but they were the exception (more government aid) as India fell 2.21% and Seoul fell 3.72%.  Not that anyone cares but the Baltic Dry Index, which doesn't get emotional, went up yet another 3.3%, breaking the recent high – somebody, somewhere is buying something – we just need to figure out what!

The big news out of Asia this morning that is hammering the SOX this morning is a report from the Taiwan Semiconductor Manufacturing Co, which says the global semiconductor industry has yet to hit bottom and likely won't recover fully from the current downturn for another three years. In an interview Friday COE Chang said the industry, which has been hard hit by the global economic slowdown, was "pretty close" to the bottom. But he said that a return to the sales volumes that the industry had before the current slump would be extremely slow. "You get a precipitous drop and a very slow rise," he said. "I think it will be 2012 before the total revenue of the semiconductor industry gets back to the '08 level," said Mr. Chang, who founded Taiwan Semiconductor in 1987.  The SOX are still well of their November low of 167 and we'll be watching them closely to see if 195 can hold or if we are likely to revisit those lows.

EU markets fell over 2.5% across the board, with the FTSE just 300 points above the 2003 lows, back to 1996 levels.  The DAX is 1,600 points (40%) above their 2003 drop and I'd have to say it is life or death that they hold 4.000 (now 4,062).  The CAC is also 300 points above their 2003 lows and this will all be reviewed over the weekend as the US markets are testing similar levels.  Is Germany right and the rest of the Western world wrong or is the DAX in for a major tumble?  EWG is the ETF for Germany and could make a good addition to the disaster protection side of our virtual portfolios, just in case it turns our the whole world IS collapsing and Germany is just slow to follow.

Gold is touching $1,000 this morning and oil broke through our $37.50 target yesterday but is pulling back to that level this morning.  Today is contract rollover day so anything can happen and the same can be said for this expiration day although it's looking pretty bad at 9am.   741 is the magic number on the S&P as a spike low and if we hold that we may actually get a bounce.  The Nov closing low was 752 and the Dow is already looking like it will open below 7,449 while the Nasdaq has a long way to go to get back to 1,295 so another possible short play if we're breaking down.   QID gapped up yesterday and we hate to chase but if they break $60, then the March $65s at $3.10 make a nice momentum play as the QID was up at 88 in November.

We're going to open low and we'll be hoping to hold our levels but it's not looking good and we will have a wave of margin selling as stops get triggered on this massive 2-week sell-off.  It will take intervention of some sort to stop this market slide and we have heard nothing at all from our "leaders."  At this point, we are sadly tranistioning this economic mess from "Bush's fault" to "Obama's fault."  It may be early, but clearly the administration has already dropped the ball.



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Bottom Fishing

Phil – Here is the result of my bottom fishing – all suggestions appreciated…..

I only have short puts in some of my positions because I closed the short calls at 50% profit.

Obviously I need the most help on the big losers.

C  net profit on position -22539

2000 C basis 6.78 now 1.85

-20 Mar5 P basis 1.50 now 3.15

GE  net profit -7886

1500 GE basis 14.65 now 9.38

-5 Mar12.50P basis 1.13 now 3.22

-5 Mar11P basis .98 now 2.06

UYG  net profit -7615

-20 June5P basis 2.40 now 2.9

LDK  net profit -1546

400 LDK basis 10.02 now 6.12

-2 Mar10P basis 0.90 now 3.84

-2 Mar7.5P basis 1.02 now 1.80

MGM  net profit -1060

1000 MGM basis 5.33 now 4.10

TXT  net profit -290

500 TXT basis 6.80 now 6.25

-5 Mar7.5C basis 1.12 now .65

-5 Mar7.5P basis 1.73 now 1.99

WFR  net profit +184

200 WFR basis 14.54 now13.75

-2 Mar12.50C basis 1.61 now 1.85

YRCW  net profit +266

1500 YRCW basis 2.90 now 2.76

DRYS  net profit +11398

-3 Mar5P basis 0.77 now 1.80

Phil, regarding the trades: 
"Buy IWM $40 calls for $3.05 and Buy IWM $43 puts for $3.30 – costs $6.35 and you end up with $3.
Sell $RUT $460s for $3.95 and Sell $RUT $330 puts for $3.45 – net credit $1.05. 

RUT at 410 means 12% rise to 460 and 20% dip to 330 puts.  IWM moves dime per dollar so at 460, $40 calls are $6 in the money, at $330 $43 puts are $10.  There’s always room to roll to April too…  What do you think?  Too complex and margin intensive to bother with? "
The conclusion is that we are better off without the first IWM spread.  To simulate it in ToS, I use IWM and have 10x more IWM contracts on the second spread.  The first spread increases the profit range by only $0.5, but reduces the profit by 40% inside this range.  It does decrease the loss outside the profit range, but by only 5%.

Mattresses, hedges and DIA puts

Phil – over the years you have advocated at least 4 kinds of hedges:

1. Matress plays which are unhedged DIA puts

2. Hedged DIA puts with the strategy of rolling the shorts down and the using the money to roll the longs up and/or out.

3. Ultrashort ETFs – which we discussed in length and decided they were NOT good long term hedges

4. Daytrading DIA puts and shorts.

I am sure I am not alone in being confused because you seem to switch between these hedges several times a day and seem surprised when we cannot follow you let alone be in the "correct" position.

Perhaps I am looking at this wrongly – perhaps the DIA put strategy is a "UNIFIED" strategy, we hedge when the premiums are high and we daytrade to increase profits.

Anyhow, my current positions are:

34 APR80P basis 5.56 now 8.10

52 APR78P basis 6.00 now 6.90

24 June77P basis 6.55 now 8.15

1/2 covered with

-58 Mar74P basis 3.40 now 3.55

These are essentially protecting the positions in my bottom fishing post plus 14 1/2 covered AAPLs and few more positions.


 Phil, Regarding Mauldin’s comment about foreign currency mortgages and the potential ticking financial bomb.  I lived in Iceland during the mid 90’s and it was common to have credit cards, car loans, even savings accounts in foreign currency (in addition to mortgages).   Obviously, most of these folks had no idea of the risks of such currency arbitrage.   Very scary, especially since there was a lot of European business M&A activity, commercial mortgages, etc funded by similarly based commercial loans. 
FYI, Icelanders love hopped up 4WD’s serious off road equipment, Land Rovers are now called ‘Game Overs’.

I’m in the QQQQ March 30 put which is up 49% in 3 trading days.  How much more upside do you see
in this play?  Run with this any longer than another week?

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