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Saturday, April 20, 2024

Weekly Wrap Up

Another week, another 5% gain – isn't the stock market easy?

We've gained 1,400 points in 4 weeks from our March 9th low of 6,600 – pretty impressive on the whole – but we have suffered a serious decrease in upward momentum since March 23rd, when we finished at 7,775.  That's 1,175 points in 10 sessions followed by just 225 over the next 9.  It's a little hard to reconcile this very toppy sort of action with the "bull market" mania that has swept the media this past week.  We've been bracing ourselves for a slap of cold water all week that never really came although this weekend the WSJ ran this nasty unemployment graph along with an article titled: "Time to Brace for Trouple as Profits Debacle Starts" which reminds us why we went into the weekend 55% bearish.

In last weekend's post I warned: "Don’t forget I was looking for something like a 5% pullback and "all" we got was 2.5% so far" and it only took minutes out of the gate on Monday morning to give us the rest of that 5%.  I reposted our target levels on Monday morning of Dow 7,636, S&P 805, Nas 1,525, NYSE 5,075 and Russell 420, which were well tested Monday and Tuesday until we got a proper breakout on Wednesday morning

I was actually more optimistic on Monday than I am today as Monday our plan was we were hoping to hold our pullback levels and form a base we could build off.  The problem was the way we did rally made no sense – we didn't climb a wall of worry – we climbed a wall of ACTUAL bad news that gave us brand new reasons to worry.  While the difference may sound subtle – it's actually a big deal!  As a UBS economist I quoted in Monday's post said:  "he housing market isn’t about to start booming, but the intensity of the pain will probably recede."  This is the result of our abusive relationship with the markets as they declined over 50% in 6 months – the mere absence of pain is treated as pleasure.

We had 4 new trade ideas from the Weekend Reading post in HIG, ING, FXE and BLK with all but HIG solidly performing already.  As with most of our stock entries, we have been hedging with puts and calls sold against to insulate us from another downturn – just in case…   Monday we got our usual reload of FAS at our $5 buy point – that made a quick 40% and selling the naked FAS $5 puts for $1 went well too as they finished up the week at .43 (up 57%).  Timing was everything as we were in and out of DIA put sales all week and my 9:56 comment on Monday morning of "Good time to buy back FAZ $20 puts for $3 (40% gain) unless you REALLY did want to possibly own them" turned out to be great non-greedy advice along the lines of taking profits early and often as FAZ fell from $24 to $16 over the next 5 days.

Monday was a busy, busy morning as we also sold X $19 puts for $1.10 (now .25) and we picked C $2.50 for .49 (now .60) with the goal of covering with the June $4s, which peaked at .35 on Thursday but we're hoping to do better.   Some things are easy to do in the market, like picking GM $3 calls for .29 ahead of Obama's speech on Monday morning, those gave back a very quick .43 but finished the week at 0.07 – another example of how greed kills!  That was it for our day as we didn't like the action into the afternoon and we didn't think too much of the stick save that took us right back to our target levels at the close.

The picture on the right summed up our view of Tuesday, much as the elevator picture neatly covered Monday's action.  We expected to head up but – so what?  Still, I had the worst pick of the week looking at the FAZ Oct $24s at $11 for downside protection.  They already dropped in half to $5.80.  From a scaling in standpoint it's not bad as you can roll down to the Oct $10s at $9.20 (+$3.40) and double down there for a net entry of ($11 + $3.40 + $9.20)/2 =$11.80, which is not much less than what we were going to spend on the $24s in the first place.  The practical upshot of this is, for example – had we put $5,000 into FAS at $5 and covered with $2,200 (2 contracts) of the FAZ October $24 puts then the FAS would now be worth $7,200 and the FAZ puts would have dropped to $1,160.  That's a total of $8,360 from a start of $7,200 – not too bad for a week's work.  

As that point, we rebalance our play by doing the roll and DD of FAZ which costs $2,520, dropping FAS to 650 shares ($4,680) and putting us in with the 4 FAZ Oct $10s at $9.20 ($3,680), perhaps a little more bearish than we want to be so perhaps not sell so many FAS.  Rather than sell the 350 FAS calls for $7.20, we could have covered 1/2 the FAS calls with 5 May $7 calls at $1.75 ($875) to take some off the table.  If FAS goes down on Monday, then we're well positioned but, if it heads higher, we can buy back the calls or layer on some longer calls – lots of flexibility if you keep a general balance…  We'll follow up from this position next week to see how it plays out over time.

Tuesday morning the big news was Russia's energy minister supporting "coordinated actions" with OPEC, causing me to predict "That should give a nice pop to the OIH and XLE and XLF ought to retest $8.50, which will be a major pass/fail for the morning rally."  Clearly we passed with a very quick test of $8.50 in the morning and never looked back but we did also expect the planned protest of the G20 to hold everything in check until the next morning – it really pays to keep up with these events (see poster we also used in Monday's post).  Generally Tuesday was a watch and wait day, we did a fun spread on the DIA puts and calls that were expiring that day which were huge winners but we simply didn't like the day's move and flipped 60% bearish in our 3:15 Alert, just a few points shy of the high of the day and catching the top of a 200-point drop into the next morning's open.

So thanks to punctual protests for providing us with a promising premise (don't you just love alliteration?) and, in Wednesday morning's post, I laid out my concerns about the overall global economy – especially after getting hit with ADP's 742,000 lost jobs report.   Since that panic gave us the retest of our lows we were looking for, we were able to flip back to bullish almost right out of the gate in our 9:42 Alert to members, using 7,550 as our target level to stay bullish – a level we never came back to once we crossed it and we hit the Buy List in full force after patiently waiting for two weeks.

Amazingly we got another whack at FAS at 10 am, both the stock at $5 and selling the naked $4 puts for $1 and I did call the FAZ trade dead in that same comment so really you could have done much better than our above example if you were able to day-trade the positions rather than just stick them out for the longer term, an unfortunate fact in this very choppy market.  At the close of that comment, with the Dow at 7,548 and challenging our target I said to members: "To a large extent I see this as just the bear attack we expected as Obama headed to Europe.  Really nothing much has changed and much ado is being made about nothing so I’m pretty comfortable taking a bullish chance down here as we have near and clearly defined failure points."

That put us in a frisky buying mood and we jumped on CAT and X right away (10:29) as we quickly moved over our watch levels from the week before (listed above).  We did a fun momentum play on FAZ that put us in the vertical of the March $17.50s and $19s for free, currently up .42 but remaining nice, cheap additional protection for our financial longs since they still could triple from here.  TXT was added at $6.28 and an ABX spread we took is right on schedule as we played for the pullback and already have a better than 50% gain on the callers.  I closed that day's comments with a warning for our bears that was right on the money: "Be careful bears – We are in a very good spot for FASB and the G20 to both make nice noises and then the 650,000 jobs lost in the morning can be spun as a good thing because it’s much better than that silly old ADP report and we could gap up 100 easy."

Thursday moring we did, in fact, gap up 140 points and kept going from there.  I warned that the pattern had the hallmarks of a "False Break" as the volume wasn't really supporting the move but we were determined to go with the flow as our levels haven't misled us in weeks.  As I said in that morning post: "Let’s enjoy our market roller coaster today but let’s remember the harsh reality behind those jobs numbers.  People are losing their jobs, they can’t pay their mortgage, they get foreclosed on, they leave the community and there is less business so companies cut back and more people lose their jobs…  It’s the leaking pipe in the basement and we still haven’t done anything to fix the actual source of the problem.  At best, you can argue that more stimulus from the G20 and a change in mark to market regulations is like going to Home Depot and buying a pipe wrench – we’re still a long way from actually stopping the leak!"

So a lot of fundamental concerns on our part but I did the math and we ended up with an 8,218 target for this leg of the move.  Anything below that will keep us fairly unimpressed (and cautious!).  The downside levels we looked to hold were: Dow 7,900, S&P 833, Nasdaq 1,580, NYSE 5,225 and Russell 444 – all of which did quite well Thursday and Friday.  It's also important to keep in mind our EU watch levels of FTSE 4,000, DAX 4,250 and CAC 2,900 for tomorrow morning but only the FTSE seems in danger of failing so far.  We did go into the weekend with our FXP calls (ultra short China) – just in case ($23s are $1.50, now $1.55)! 

We did the usual messing around with DIA – too many in and outs to mention – as well as FAZ as looked for nice entry points to play a turn.  AUY was taken as a hedged entry at $6.88/7.44 and AA looks good at net hedged at $5.95/6.93 but we'll see what happens on Tuesday (earnings).  ZION turned out to be a good play hedged at $8.50/$8.75 and we were too conservative on M with a net hedged entry at $7.11/8.06 (so far).  Things were looking so good in financial land that we even picked up a hedged play on UYG at $1.88/2.04 and it's been a while since we bothered with them but this is better than 50% in 45 days if they hold $3 so how could we resist?  QID $45s are disappointing so far at $2.10 (now $1.52) but you have to take some sort of protection against all those bull plays.  DOW was yet another bull play at $9.82 (now $11), which we hedged to a very conservative net $6.95/7.98.

I made another very well-timed call to flip bearish at 2:59 on Thursday and that saved us the bother of being annoyed by yet another almost 100-point drop into the next day.  That did not stop us from grabbing hedged entries on GE, TXT and CAL 20 minutes later as I picked over our watch list looking for ones that haven't gotten away yet.   

As I mentioned in Friday's Morning Post, David Fry totally nailed our mood on the market by saying: "Is this rally based on good economic data; earnings news; the G-20; more regulation; higher taxes; more debt and bailouts? Hell no! This is about the FASB caving to political pressure to allow financial institutions to mark their toxic waste to a model fantasy. It’s plain for all to see so please put the BS aside.  Now, I’m just a technician (no doubt with an attitude) and my job is to follow the dictates of the tape as best as I see it. Therefore, we’re long but, like I said yesterday, holding our nose all the way."

We're holding our noses too but we did finish the week 55% bearish and worried that may not be enough (but also worrying it may be too much, hence – 55% bearish).  We did add OIH puts as that run-up seemed a little much but we took a positive BTU hedge at 10:21, mainly because the premiums were so good though.  We also got a good deal on a very long HOV spread and DNDN and MGM made for fun plays which were perfect for messing around with on a choppy day.  After being short on gold since initiating our March 21st spread (see "Spinning Straw Trades Into Gold"), we were finally ready to pick up a bull leg as GLD touched $88 but it's a very cautious entry so far.

Friday afternoon we went with additional hedged plays on COF, STX, TOL as we dipped but held our 7,900 target just after 1pm but that was it for the day.  We didn't think much of the low volume rally and went well covered into the weekend.   There hasn't been any real market-moving news so far this weekend so a lot is going to depend on what sort of mood Asia is in this weekend and what the FTSE does with that 4,000 mark about 12 hours from now. 

Japan should be happy as the dollar is nice and strong this weekend, perhaps we'll see 100 Yen to the Dollar again, something we have only very briefly spiked down to since last October.  The Nikkei fell from 12,000 to 7,000 as the dollar dropped 15% to the Yen so there's good reason for them to sustain some euphoria IN THEORY and we should be fairly disappointed with them if they don't as they're not even back to 9,000 yet.

As I mentioned during the week, we had a 50% rally in the Dow from Nov 11th 1929 (about 3 months into the crash) through April 12th, 1930 AFTER which the market fell back from 300 to 42 on July 7th 1932 so 27 months of pure hell following a relief rally JUST LIKE OURS!  I don't think this is 1930, I don't think we're heading into a depression but I certainly don't think everything is all better this easily.

So let's have fun but continue to be careful out there – just in case…




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