We knew yesterday was going to be tough.
As expected, we touched the 7.5% levels I laid out in the morning post almost to the penny and, despite strong volume, we could not close the deal and I nailed it at 10:11 with my alert to members which said: "XLE and OIH cautious into oil report and now I REALLY don’t like the rejection off the 7.5% rule so 1/2 covers on rolled up long DIA puts with stops on the other 1/2 putters at 6,950 on the Dow." Note how the Dow dipped to 6,947 on that drop, rose back to 6,983, which was 4 points shy of our Dow watch level, and then began falling in earnest. Despite the "save" in the afternoon, we went into the close fairly neutral to the 5% line but very deflated as we lost the momentum from Tuesday entirely.
Today we'll see if those 5% lines can hold up in what's looking to be a rough morning and we are only 1/2 covered on our long puts so it will be very easy to flip back to 60% bearish if we don't. For those of you too lazy to click on the link, we'll be watching Dow 6,825, S&P 706, Nasdaq 1,344, NYSE 4,410 and Russell 362. From a technical standpoint, holding up there will still be bullish but it won't feel bullish if that's all we can pull off for the week will it?
I pointed out to members yesterday that with AA at $6, C at $1.50, GM at $2 and GE at $8.50 – the Dow's price weighting means that entire group could double and add just 150 points to the Dow. With a relationship of about 8 Dow points to each $1 in component stock price, AXP would have to double to get 80 Dow points and doubles from PFE, MSFT, KFT, JPM, INTC, HD, DIS or DD would have little impact as well as all are under $20 so they could all double along with our 4 micro-Dow components and we'd still be under 9,000. Just like UYG, XLF and XHB – is the Dow now a broken index? I've been saying so since 2006. When the value of a number of components in an index slips below a certain level, the index begins to lose it's value as a reliable indicator as it is no longer capable of climbing without some spectacular internal gains. This feeds a cycle of negative sentiment as "nothing seems to help" the index get back on track.
We're playing RIMM off this (hopefully) bottom but, as David Fry notes in his chart, perhaps it's time to switch horsemen as we are not getting much gas from the usual suspects. To some extent, GOOG, AAPL, RIMM and AMZN are attacked by hedge funds looking to keep the Nasdaq down while they accumulate shares in the broader index without triggering larger sell programs. That's why, on a blah-looking day like yesterday, you can still have Up Volume at 4.2Bn shares with Down Volume at 2.5Bn shares. You would think an imbalance like that would cause a major rally right? Not if you don't buy the big boys… As I said above, you can double up 15% of the Dow and you would barely move the index 1%. By not letting the index move while they accumulate, hedge funds keep out mutual funds and other index buyers that would compete for shares if the broader indexes took off.
Speaking of taking off, it's 8:30 now and we got the expected 654,000 job losses for the week but Retail Sales, ex-auto, were WAY better than expected with a 0.7% gain vs. the 0.1% drop that was expected by "experts." Clearly they didn't ask me because we have been playing retail up throught the CC companies and just yesterday morning, we discussed today's report and I said to members: "We already got reports from individual retailers and it’s my bad for not repeating this every time (but I get so bored). WMT was up and other stores were down but WMT is like 20 times the total volume of the other stores so their up 2% wipes out the down 10% of everybody else from a total spending standpoint. Also, the consumer credit report showed a lot more than expected activity which is a couple of indicators that consumers are still out there." Why are "experts" unable to read this data and draw a proper conclusion? That I do not know…
The shoppers have certainly dropped in Asia with a sharp downturn in Chinese exports and Japan's Q4 GDP fell -12.1%, which spooked the pre-markets and sent the Nikkei down 2.5% this morning. Of course this is silly as the preliminary GDP was -12.7% so this is old news and not even as bad as expected. Even in Japan, consumer spending was off 0.4%, it was corporate spending that shrank 5.4% that killed the economy, a combination of fear and lack of credit – both things that can be reversed a lot faster than a major downturn in consumer spending. Both the Hang Seng and Shanghai were flat in today's trading with the Hang Seng working very hard to hold that 12,000 line.
Europe is off about a point, which an improvement off the open but we need them to hold their lines as well, which is FTSE 3,733, CAC 2,500 and DAX 3,900 – only the CAC is holding the line (well above at 2,670) and it's going to be hard to motivate investors while the EU debates further stimulus (not looking good) and we await the G20 meeting on April 2nd but the Treasurers are getting together this weekend though it's doubtful any policy statements will come out of that.
There's enough positives on the table to hope for another green day but we'll have our technical hat on and let our levels be our guide. We're still not going to be making many bullish plays into the weekend but we'll be happy to flip a little more bullish as we hold the 5% levels and take another run at the 7.5% lines.
Be careful out there!
Wow, what a rally! Sorry I didn’t buy into the last 1/3 of it but it’s just too far, too fast I think..
SPY/Eph – No, you hedge with the Dow because, as you see, it has a hard time going up relative to the other indexes so you can have a very good runnning bullish side of your portfolio but hardly get hurt on your DIA puts, On the other hand, the DIA is rarely the stand-out in a big sell-off.
Bro – Nice!!
TIE/Eph – Don’t worry, I’m sure they’ll make lower strikes next month.
LOL Oh yeah, THAT’s how I want to make sure I always have good position!
XLF/Eph – They still have premium and they are protecting you – nothhing wrong with that.
What a week!
This is a general rule, to be at least two strikes higher than your putters?
and you MUST have a 2 strike advantage over your putters!
Obama giving a very good speech to businessmen. Finally hammering home the point that tax code doesn’t change until 2010 and, even then, taxes are lower than under Clinton.
DIA/Chaps – You always want some position advantage because your time advantage lowers your delta so the putter can run away from you to the downside. June $72 puts have a .49 delta (our long puts, by nature of rolling up, always have a .49 or better delta) while the Apr $70s have a .40 Delta but I did do a 1/2 sell of the Apr $72s as I was a little bullish but with the half cover – not so much. Had I sold the Apr $70 puts, they have a .40 delta and 4 positions higher ($74s) they would have a .61 delta while 4 positions up, the June $76s have a .62 delta so I have a reasonable certainty that I will outgain my putter on the way down while he will lose his premium faster than I will.
Wow! What ANOTHER day. Didn’t see this one coming. Got clubbed a couple times and sat the rest of the day out. Too much work to trade (right) these days!
Cap, you were right. I think you said yesterday that it looked like consolidation. Boy, they did a good job!
Phil, you were right. It looks like a repeat of November’s low and not the low in January that I was looking for a repeat.
It was another FMD. Wish I got some 🙁
matt1966, I am in your shoes. I tried a couple of times to get on the FAS bandwaggon with a stop and kept getting knocked out. Then, I gave up and decided to sit it out. About 15 minutes later it just took off and never looked back. So typical. Maybe I should invest into a paper account and see when I give up there so that is exactly the time not to give up in thwe real one? So frustrating!
Phil, I am probably 80% cash, aside from a very safely in the money AAPL covered call. What do you recommend? I am so frustrated for missing this rally. Then again, I am so doubtful of it, and think we may get a rough reversal next week (wouldn’t this all fit into the scheme of "pump the price the week before opex so big boys can sell OTM calls"?
So what is your advice to get on this bandwaggon? Maybe a review of the buy list is in order?
Eph – SLG – a little bit (playing the swings). However, most of the stock I have now has calls sold against.
Still can move up another 50% or so (not saying it will … but it could).
That was a FMD grind. Of course, I just sat and watched it mostly, even though I saw it and posted it here earlier today. (12:43 pm). Just a slow, grinding, relentless move higher.
I think "they" are squeezing some shorts and trying to get folks excited about the market again. That’s gonna be tough to do.
I’m surprised to see S&P at 750. Would have thought 725 or so would have been about it.
I’m a noob around here, and this approach to trading is novel for me. I have specialized for years selling credit spreads on the SPX, with reasonable success. In choppy markets, I sell tight puts on stocks or ETFs , and let them come to roost if they will, then I sell calls against the new position. If you notice, both strats work really well in directionless markets. I can’t play a trend to save my life, which is why i am here.
What are the odds we see SPX800 before expiration? Will we see 768 before 700? If we SET at 750, I’m a rich man….. Can someone explain "rolls" with an example. My idea of a roll is to a more distant strike in the next month, which this isnt.
Berkshire Unsecured Rating Cut By Fitch To AA, Outlook Negative
Buy America, Warren?
How’s that workin out for ya kid?
Anton, I think Warren will be just fine …. he’s made his money.
This is not a comment on the BRK rating cut …. just not sure you should be dissing the 2nd richest man in the world, ya know ? What’ll happen, he’ll be 5th richest ?
barfinger, roll is selling one option you own and buying another. It could be a vertical roll (e.g. sell one strike buy another of the same expiration) or roll from one month to the next.
Example: If someone has AAPL Mar $90 put and that person says "I rolled up one strike", this means they sold that put and bought the AAPL Mar put at the $95 strike.
Phil, thanks for the advice in my XOM trade from last night. I’m 1x in all the positions (long Mar 75 put, w/ Mar 70 and 80 putters). Why would I roll the entire thing to April? Shouldn’t I close out the Mar 75 put w/ Mar 80 putter? These positions cancel each other out and can’t get any wider than the 5 spread. And just roll the Mar 70 putter to a naked Apr 70 putter?
If you remember, the whole goal of this trade was to get me to even for a trade that went bad on me (Mar 75 puts covered w/ Feb 80 putters). I bought back the Feb 80 putter and sold the Mar 70/80 puts instead, and was supposed to stop out of Mar 70 at 3, leaving me no worse off than I was. If XOM held 70, then I’d be close to getting back to even and be in good shape.
Since XOM is below 70, I’m not proposing closing out of the Mar 75 puts and Mar 80 putters and rolling Mar 70 to Apr 70. Does this work?
China Worried over US Treasuries!
"Chinese Premier Wen Jiabao expressed concern over the outlook for the U.S. government debt China holds, urging Washington to take effective policies to restore the American economy to health. He said market expectations last week of another stimulus package were based on "rumors and misunderstandings," and that China’s existing four trillion yuan investment program addresses "both short term and long term needs."
But he noted that the U.S. remains the world’s largest economy, and said that China is closely watching the effects of policies taken by U.S. President Barack Obama. "We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets. I do in fact have some worries," Mr. Wen said in response to a question. He called on the U.S. to "maintain its credibility, honor its commitments and guarantee the safety of Chinese assets."
"The generally mild-mannered Mr. Wen, who holds a press conference every year at the close of the National People’s Congress, China’s legislative session, spoke in an unusually forceful tone in addressing concerns about the effect of China’s own policies on the global economy."
Well, this was bound to happen at some point but the timing sure is interesting. It’s possible that this is a prelude to China cashing a portion of their $1.5Tn in Tresuries but, even worse, what if they stop buying?
Asian markets up. Looks like another bullish surge for today. Any suggestions for today ahead of open?
I can’t believe the pre-markets are up after that and that gold is not flying. We’ll see what happens when people wake up but he got the job done in Asia and sent the Hang Seng and Nikkei up 5% and the dollar is way off highs, erasing about 2% of our market gains since Tuesday.
Welcome Barfinger! S&P 800 by next Friday? Doubtful. We have a Fed meeting on Wednesday and the Philly Fed Thursday, that’s always depressing… Tuesday is PPI and Building Permits and Wed is CPI and Housing Starts – it’s not that the data is likely to be bad per se but will it be enough to give us another 7.5% on the S&P from here? 775 should get tested next week on momentum alone as long as we don’t blow it today but I think we need something positive to get to 800 again. On the other hand, if what Wen said this morning doesn’t bother people – what will?
Actually, Berkshire’s up over 20% this week – nice recovery! Too bad they don’t have options…
XOM/Ajay – I didn’t know if you’d want to take the naked risk, the roll doesn’t cost you anything, gives you the same upside gain and gives you $1.50 in premium, you can just keep doing that every month until you win. If you don’t mind the naked put, it’s no different really. If the market holds up, XOM could be back at $70 next week (depends on OPEC meetting too).
Well this is strange, gold is DOWN to $920 after Wen’s statement. I cannot connect those dots but I can buy 15 gold futures which pay $50 per 0.1 move and see what happens…
By the way, my gold logic is that there are at least $11Tn physical dollars in circulation alone (probably $100Tn in dollar-denominated assets) yet there is only 158,000 tons of gold in the world, about $6Tn worth. Then there’s $300Tn worth of things denominated in other worthless currencies that are backed by nothing other than something like Tim Geithner’s signature (you probably have Paulson dollars on you right now).
So in Timmy we trust until someone like Wen calls this into question and says to the US: "Hey, you know that $1.5Tn I lent you for 3%? What exactly are you guaranteeing that with?" If you think about it, the question doesn’t even make sense because we all know it’s total BS but he pulled the trigger today so the genie is out of the bottle.
What if Wen dumps 10% of his holdings? Well that’s $150Bn and the US already auctions off $100Bn a month so he’s putting 2 moths of heavy selling pressure on Treasuries so woo hoo to those who went with TBT. It is possible that this is some grand political theater where they are going to go through some nonsense thing where the administration will meet with Wen and he will say (as the US’s largest creditor) that he is "satisfied" that his money is secure, allowing the US to keep the treadmill running while Wen quietly reduces his holdings (at $10Bn a month it would take a year to sell 10%). So games within games is my theory on this as it would be the most likely reason our largest creditor questions the value of his $1.5Tn in Treasuries out loud.
Meanwhile, gold up a quick buck!
Phil, how is the risk of the naked XOM Apr 70 putter greater than the risk of the Apr 75 put w/ Apr 70 and 80 putters? Maybe I need to think about this more (and get more sleep!). The Apr 75/Apr 80 cannot increase in value so it isn’t offering any more protection? The naked position is a short put, not a long.
I agree with you on the Wen statement being "political", for internal consumption, you remember the issue with the US surveying ship in or near chinese waters on Monday and then yesterday the US announced that it would send a destroyer to guard the ship against the chinese. Wen is just playing to the home crowd and reminding the US but as far as doing anything with the debt they bought, I don’t think so, they would hurt themselves just as much, if not more. doesn’t mean it won’t bounce gold, TLT and TBT around some.
Phil, what’s the best way to play oil and gold? I wanted to get into oil at $35 b/c I figured it would rebound to at least $50 by the summer. How can I play that move?
I bought WFC and EWZ last week and sold WFC 7.5 april Calls and puts and EWZ 33 april calls and 31 puts. both trades are close to topped out, can you suggest what I can do to let these run some more?
Phil, I’ve got 20 short puts for C Mar $5. Trying to figure out if I should just cover (at a loss of $1) or roll to 2x Apr $3 (currently at $1.53). Any thoughts?
No, you’re right Ajay – No difference, I keep thinking of a 1:2:1 spread!
Oil/Japarikh – Best oil is USL, not USO as they buy more intelligently. GLD is fine for gold but I’m lobing those futures contracts at the moment! This is just what I was warning about in the above comments, you have to be very careful selling covers on GLD because there are so many ways you can get jammed up overnight.
On the trade adjustments, please repost in today’s comments and I’ll get to them when I’m done with the post.