Wheee, what a great way to end the week!
As I mentioned in yesterday's post, we had gone into the day flipping our short firepower to BG $60 puts at $1.30 and TOT $55 puts at $1.20 as well as our remaining DIA $84 puts at .84. We went back to cash for the weekend but consider that the DIA $84 puts finished at $2.04 (up 142%), BG $60 puts finished at $2.10 (up 61%) and TOT $55 puts finished at $2.83 (135%) and you can see how even small allocations out of cash yield very nice one-day returns on put options. You do not have to take big risks to make big rewards, playing put options allows us to stay flexible and mainly in cash without "missing" too many market market moves.
We blew right through the upper targets I set in the morning and the Dow flew right down near enough our 8,250 (June lows) target that it looked bounceable, as the other indexes were holding up better than the Dow we felt we could play it for a small recovery over the weekend. We picked up some DIA $85 calls for .76 but elected not to DD at our scale-in target of .64 into the close as we already had bullish plays on ZION as well as Dow components AA, BA, GE and PFE, all longer-term plays that we are looking forward to adding to cheaper if they keep heading down. VLO and SNY were added in the afternoon as well as a UNG spread since they decided to just give it away at $13 again.
While we are just dipping our toes into some long posItions, it is the first time in a month we've been happy enough with the pricing to even take a chance. Of course we maintain our long put covers (just in case) but what's the point of having protection if you have nothing to protect? On the whole, the volume simply wasn't that impressive and we attribute much of this drop to people who were "shocked" that the economy isn't as good as they thought it was (cough, Cramer fans, cough, cough) but it's EXACTLY as weak as we thought it was and that means there are certain price points we are willing to hit long-term. Kudos to all who patiently waited with us for pretty much the whole month of June – now comes earnings, where we will really separate the men from the boys!
Keep in mind we are not bullish, this is a shift to neutral from 100% bearish in our unhedged positions (as opposed to the $100K Virtual Portfolio) but nothing has happened to change our mid-range target of Dow 8,650, where our trading range is expected to be 5% down (8,217) and 5% up (9,082) as we consolidate and build a proper base. These low volume "rallies" have simply not been enough to justify a move outside of the range and I've been saying that since Labor Day and it's really kept us out of trouble but let's not confuse my bearish attitude at 9,100 with a bearish stance 10% lower than that. While we may overshoot the range to the downside, unless something gets fundamentally worse, we will continue to to bargain hunt at what we hope is going to be an established bottom through earnings.
All we ever wanted was a proper bottom retest, something the pump-monkeys were afraid to give us in June. Just last Friday, as we came off Thursday's massive stick save, I said "Just Stop the Madness Already" where I pointed out: "The media can do their sunshine and lollipops dance all day long and I guess that’s one of the reasons I start turning negative – just trying to balance out the nonsense. I am optimistic that, long-term, we can work our way out of this crisis but we need to do it through hard work, not make-believe games that everything got magically better with no pain at all and, until the market begins to embrace that reality, I will continue to watch the sky for signs of cracks, just in case." So THIS is what we want to see, media sentiment has turned sharply negative in just 7 days, forcing Cramer to flip-flop like a goldfish that jumped out of his bowl and NOW we can see what levels hold up.
In the weekend wrap-up I noted that our best plays of the month had been our premium-burning plays, where we sell options to suckers who think they are going to get rich off a market move that never comes. What moved us off the sidelines to make our own bearish bets this week was a combination of Monday's overly exuberant rise baack to 8,550 on what we thought was poor data as well as the crash of the VIX which made the puts we wanted to buy much cheaper than they had been. It's simple logic – when the options get so cheap that we no longer want to sell them, then it's time to buy them. When the options seem too pricey to buy, then it's time to sell them. Monday the VIX hit 25, a level we haven't seen since last September – gosh, that seemed like a pretty obvious place to call a bottom, right?
My job is not really that hard, I just pay attention to stuff and try to make connections so we can build our investing premises on something more logical than a sound effects board. Monday morning I noted that oil was being irrationally jammed back over $70, despite the FACT of the EIA forecast that CUT demand estimates by 3.5%. We have been patiently shorting oil since it first hit $70 and congrats to all who stuck with the program as we got a huge pay-off this week but we also got a very good example of the old Keynesian chestnut that "the market can remain irrational longer than you can remain solvent" as it was a frustrating trade to ride out for the month of June.
We remained cautiously in cash on Monday, DIA $86 puts for $1 were huge winners and a long-term TNK spread seems like we hit it right at the bottom while PGH ($5.30/6.40 hedge) is still looking weak. I mentioned to members in comments at 1:50 on Monday as we watched the action: "If all that energy excitement couldn’t get our other indexes over the hump, I’m felling pretty good about the DIA puts." At 2:49 I put up a chart of year-to-date Dow performance and that's where our GE and PFE picks came from on Thursday as they are 2 of the 4 worst performers for the year and we think they've suffered enough.
Tuesday morning I was already predicting that Q2 would be ending "with a whimper" and that pretty much sums up the action for that day although it wasn't an obvious call as the pre-markets were up and I had to work very hard to talk members out of BUYBUYBUYing, as they were being told to do by the MSM. As I said in the morning post: "It’s dull to stay in cash, it’s like going to the track and not betting on any races." I also pointed out that: "Commodities are trading like .com stocks, where no business plan is required as long as you sell something that can be traded on the ICE or the CME, where EVERYTHING is valuable to somebody. Not since YHOO was priced at $300 a share has the greater fool theory been more evident with more and more investors chasing fewer and fewer commodities as the reality of production shutdowns due to low demand meets the unreality of a speculative bubble that is fueled by wave after wave of new buyers, who can’t find anything else to put their money into so they chase the only "performing" sector and that’s commodities." Amazingly, just 3 days later, suddenly my viewpoint has gone mainstream and now the press is full of articles that are down on commodities, even oil…
Our first trade of the day on Tuesday was GS $140 puts at $2.13, those finished the week at $3.40 (up 60%). That was a 9:53 play, notice we like to buy things that are going the "wrong" way – it's cheaper that way! My bearish stance was confirmed just 7 minutes later when we got a huge drop in Consumer Confidence and my alert to members was: "Consumer confidence 49.3, down from 54.8 and CNBC trying to confuse people and making it sound good! This is just stupid! IT’S A 10% DROP YOU MORONS!" Hopefully it was understood that I was calling CNBC morons, not our very intelligent Alert Subscribers – in an effort to get things out quickly I do sometimes end up regretting my syntax… I'm sure I will be forgiven either way as our DIA puts just went up and up and up during the day as the Dow moved straight down without triggering our trailing stops. I even called the end of day action at 10:36 as I predicted we'd get an afternoon market pump if we could hold 8,400 – and that's exactly what happened.
At 2:17 on Tuesday afternoon I decided we were going to get that afternoon pump and called us back to cash saying to members: "I’m thrilled to get the short plays off the table and get back to cash into the uncertainty." That was fortunate as we got our EOD "stick save" and then a huge pre-market rally that took the indexes all the way back to the week's highs – giving us a great opportunity to short them again. Wednesday morning I was downright incensed at the pre-market move and I pointed out that the whole pre-market move looked like manipulated BS, saying: "The window dressing has been accomplished for Q2 and now we’ll see if all the lipstick they put on this pig will attract any buyers as we begin Q3. We’d love to see earnings reports catch up to the massive increases in valuations but please, show us the money first – we’ve had enough happy talk for now."
LCC got cheap enough for us to go for a leap spread but that was for fun, By 10:35 we got the energy report we expected and, as many of us were already short USO, we went with the OIH $95 puts at $1.58, followed by the DIA $84 puts at .84 which were, as I said on our 10:43 entry: "a really easy inflection point to play off." I liked those DIA puts so much that I reminded members at 11:08 saying: "Speaking of gambling – Very little movement on the DIA $84 puts so far, still .87 but now we are clearly below all our watch levels." At 11:52 I set the target for oil saying: "hopefully they capitulate a little here and we fall back to $68.50, maybe a bit lower than $37 on USO." That was dead on for the day but we got a really nice bonus follow-through on Thursday.
As I mentioned above, we added the very rewarding TOT and BG puts Wednesday afternoon and, after hitting our bearish targets, we were willing to take a few bullish pot-shots ahead of the holdiday weekend. In this morning's action, the Nikkei gapped lower but recovered 100 points to finish at 9,800 (down 0.6%) while the Hang Seng also recovered all of a 250-point drop and finished the day up 25 points at 18,203 while the Shanghai continues to march higher, adding yet another point. As commodity stocks led the declines, I do not consider this bad market action – the healthiest thing that can happen is for us to rotate out of commodity stocks and into the earnings winners so we can build a functional base.
Europe is flat this morning but not so bad considering retail sales for May were down 0.4%, reversing the 0.1% gain last month. Banks were leading to the upside as UK homeowners paid down mortgage debt according to the BOE. As with Asia, Europe is overcoming a poor open to struggle back to flat so we'll be likely heading into this weekend in pretty much the same place we started the week internationally but, hopefully, just a little bit wiser as we head into earnings.
Phil,
Time to dust off your crystal ball.
What is you best guess on crude oil pricing over the next 30 days or so.
The fundamentals say down but lots of folks have been buying into recovery.
What’s your take?
Phil:
I’ve been studying selling put/call LEAPs naked for low-priced stocks and then covering by buying the stock if it rises. With individual companies, one generally looks to be covered all the way to BK. So I started thinking about "broken" leveraged indexes like UYG (currently $3.65). Since you don’t have to worry about bankruptcy, that potentially gives you more flexibility in covering your downside. So the question becomes: where’s your downside comfort level with something like UYG? For instance, you can sell $4 Jan 11 puts/calls currently for about $2.80 net, and cover around $4. Your break-even on the downside is $1.20, while your theoretical upside is about 230% over 18 months. Is there some knowledge/common wisdom about how low these "broken" leveraged indexes can go from a practical (versus theoretical) perspective? In theory, they can go to zero, but that’s not going to happen in 18 months.
Phil
I have AMZN Jan 60 calls, and with the drop am out of my july callers. What adjustment would you suggest here or sit tight and wait to sell for a comeback? Thanks and happy 4th!
Interesting reading
China Bull Market: http://www.elliottwave.com/features/default.aspx?cat=gw
TIme article on RS v GS: http://www.time.com/time/business/article/0,8599,1908562,00.html
rogue trader in the oil markets=$10M Loss?: http://www.marketwatch.com/story/rogue-oil-trader-blaimed-for-tuesday-spike
Oil/Pstas – I think they are going to work hard to defend $60 so, short-term, it would be surprising if they blow that. Overall I think $50 is supportable long-term and $60 is even a fair price assuming the recession doesn’t get much worse. So maybe 10% down would be my target and if they fall below $50 I’ll be a buyer long-term (through DBC), oil isn’t worthless, it’s just that people who think we can sustain $70+ are wrong in the currenct economy and, even worse, $70 oil causes the economy to get worse, which makes $70 oil all the more unsustainable…
UYG/Chaps – I would never say anything is not going to happen in 18 months, that’s a long time in the markets… You have to assume that they could go back to $1.50, they were just there in March and all it takes is a run on the banks again and there we are. Still, the point is, even with UYG at .75, you have a reasonable expectation of selling $1 calls at .10 per month, which is a huge return. That means your upside is getting out with a 200% profit and your downside is a DD at .75 (.98 avg) and grinding out the sales until you get even or a bit ahead. That’s a pretty good risk/reward! Of course it’s not guaranteed but it does seem to be a reasonably conservative outlook and that’s all you can really do in the markets – try to come up with investment ideas that have a low probability of failure and have a good chance of being long-term income producers.
We had the same logic with our FAZ and FAS plays when they were $4, our attitude is that, even at $2, we can certainly get more than .10 a month for the the $4 calls (even with the low VIX the FAZ Aug $7 calls are .32) and that’s $1.20 a year back on $4 (30%). WHO CARES what the current "value" of your stock is if it’s returning 30% off your original investment? That is the key to long-term options selling – as long as you can see your way clear to enough sales to cover a downturn, you can happily scale in (providing the fundamentals don’t change).
It’s like owning a house that you rent out – if you paid $250,000 for it and the mortgage and taxes are $3,000 a month and you rent it for $3,000 a month, what difference does it make to you if it’s "worth" $350,000 or $150,000 as long as the rents are covering your investment? If I buy FAZ at $5.13 and sell the Aug $5 puts and calls for $1.55, that’s net $3.55/4.28. If FAZ drops all the way to $3 and I’m prepared to add another round, let’s suppose I could then sell the Sept $3 puts and calls for .75, that would mean if I started with 100 FAZ at net $3.55, I would have been forced to buy 100 more at $5 for a $4.28 entry and then sell the $3 puts and calls for .75 for net $3.53/3.27. So, if FAZ is put to me at $3, I would have 400 shares at avg cost basis of $3.27.
THAT is my target price. So as I make the play today, I’m ready, willing and ABLE to own 400 at an average entry of $3.27. The question of that play is, of course, do I think that’s a good long-term target and, most importantly, can I generate a reasonable return off that entry. Since FAZ is very volatile, we expect it to maintain decent premiums for call selling. So, when I am done risking taking on more stock by selling puts, what am I left with? At $3.27, I only have to sell about .80 a year in calls to generate a 25% annual return – that’s not a terribel fallback plan is it?
That’s the kind of long-range planning that should go into your positions. Don’t be afraid to explore the "worst case" – find the worst case investments you can live with and make those the plays you go for. Like AA at $10 and GE at $11.50 and PFE at $14.50 yesterday, there has to be a certain price at which you are HAPPY to own something, even if it heads further down because you will be happy to add more. Companies do have some real value and INVESTING is about discovering that value and taking a long-term stand. Just make sure you scale into your positions so you can take advantage of better deals if they are offered. If not, we always seem to find something fun to do with our cash!
AMZN/Deano – I don’t like the $60 calls, too much delta and there is a risk to their model if the states keep hitting them for taxes. Also, the Nas is way high and if we start blowing technichals then AMZN is not going to be able to fight the tide. Jan $60s are $22.75 and have a .80 downside delta while the Jan $85s are $8.12 with a .40 downside that can be covered by selling 1/2 July $80s at $2.20. That’s collecting $1.10 per contract (13.5% over 2 weeks) and you are left with lots of money on the side to DD or roll if they head up on you. If AMZN keeps heading lower, your roll (currently $2.26 for $5) will get cheaper and you can re-establish yourself at the $60s for (about) $10 more (rolling $2 per $5), which puts you back in the same position 25% cheaper than you are now. If AMZN goes up, you have the same number of calls as you have now and will capture about 1/2 the gains, which you can add to but you’ve cut your downside risk considerably lower than half.
OK – off to the movies with the kids – see you all later!
Phil:
Thanks for the time and insight. Have a good weekend.
Yes, Phil, some great thinking points in the comments above. Thanks
Phil, don’t know if you’ve seen it but the Business News Network (BNN) that you have guest judged on before did an interview with Matt Taibbi about his GS article. The article is facinating and infuriating at the same time. It’s time to write some more useless letters to my congressmen..
http://watch.bnn.ca/#clip189690
Is the end game near for the dollar? http://www.bloomberg.com/apps/news?pid=20601087&sid=aR7yfqUwTb4M.
Seems like more news articles are pitching the idea these days.
Nice articles Chuck! On the Elliot waves (and this goes for our markets too) I’m always very cautious calling a breakout when the top of the channel is still over 2/3 off the highs, this is like various "bounce" calls on GM or (UYG or SKF or FAZ or FAS) for that matter – sometimes indexes can seem to breakout while still in the midst of a prolonged downtrend. As I often say, if it’s a real breakout rally, you won’t miss much by having a little patience at the bottom.
I’m loving this bandwagon thing with GS – all of a sudden, everyone is blaming them!
I like that PVM story, just goes to show you how one guy willing to lose $10M can shoot oil up $2 in pre-markets, enabling other guys to make a Billion (just the global oil sold that day alone at $86M nets $172M on a $2 gain and, since the boost lasts more than one day, think how many motivated people there must be)….
BNN/Matt – Hey that’s great!
Dollar/Thatway – I have noticed it’s another "jump on the dollar" weekend. Maybe commodity bulls looking for the exits and hoping to prop up prices for one more week. If the dollar starts going up at the same time the commodity bubble deflates, it can get out of control pretty quickly!
I’m wondering if it’s time to short Russia again? RSX already had a big fall from 26 back to 20 but sub-$60 oil could put them back in the low teens…
I suppose everyone heard Sarah Palin resigned – talk about a bad 12 months!
What a dull weekend so far, haven’t read anything worth mentioning. I guess everyone is taking this weekend off very seriously…
I’m going to do an experiment over earnings using TOS’s "My Trade" system, which supposedly lets me link trades I’m making somehow. I thought it would be a good idea to take a smallish amount, like $5,000 and see what series of earnings play hedges we can make to maximize our returns as it will give us a chance to look at some more complex plays without all the "how do you execute this" back and forth that usually plagues these exercises.
So, if anyone wants to follow this. Set up a practice account on Think or Swim and we’ll have to figure out how to link to "My Trade" to make the rest work. It seems easy on my end, I just have to remember to click the box that publishes the trade but I have no idea how it works on the other end.
I’ll be sending out trade alerts to all paying members as well so make sure you go here and you are signed up for my Alerts: https://www.philstockworld.com/membership/member.php
Another experiment we will be doing in July is seeing if we get any repsonse to a contest. I’m very happy that we ended up getting 4,100 PSW Report Subscribers in Q2 but surprised that, in reality, less than 1/2 of the members actually signed people up, despite the huge discount incentives, so I’m going to try a $1,000 cash incentive this month to see if that helps.
Using the same link as above – you can sign up friends using just their name and Email address. They must be new (never before) subscribers. At the end of July, we will randomly pick one winning "entry" (the referring member and the referral they made) and we will give the referring member $1,000 and the person the referred (who has to opt in, of course) an additional $500.
So each person you refer to the FREE trial of the PSW report is eligible (if they opt in) to win $500 and you are eligible to win $1,000. We’re going to try different contests each month and experiment with acquisition cost modeling. If anyone has any ideas, feel free to let us know but we’ve signed up an average of 1,500 people per month so far and if that holds steady for July then you have a 1/1,500 chance of winning $1,000 for you and $500 for your friend. If you sign up 150 people and the total is 1,500 entries for the month, then you would have a 1/10 chance of winning.
Hopefully, it won’t just be the same 100 people who did most of the sign-ups last time but, on the other hand, they did such a great job I’ll be very pleased if we just keep hitting the same numbers on a monthly basis. Thanks to all who’ve referred people so far – as you can see, our increased "clout" allows us to cultivate more writers and more features but we do need to keep growing if we’re going to make our readership goals.
Thanks to all – hope you are having a really great weekend,
– Phil
How do you set up the My Trade via TOS?
Good Morning Phil & all
Asia/Pacific Markets Monday, July 06, 2009
(The following is from Yahoo, please confirm with other sources)
Australia All Ordinaries* 3784.20 -42.40 -1.11%
Nikkei Average* 9680.87 -135.20 -1.38%
Shanghai Composite* 3124.67 36.30 1.18%
Hang Seng* 17979.41 -223.99 -1.23%
Seoul Composite* 1428.94 8.90 0.63%
Singapore Straits Times* 2266.09 -33.66 -1.46%
Bombay Sensex 13986.71 -926.34 -6.21%
Baltic Dry Index 3520.00 -152.00 -4.14%
* at Close
Asian Markets Are Cautious Ahead of G8 Meeting
Asian markets got off to a hesitant start Monday as investor doubts on the staying power of a global recovery kept Asian stocks soggy and currencies subdued ahead of a much-expanded Group of Eight meeting this week.
Investors were also wary ahead of the Group of Eight summit in L’Aquila, Italy on July 8-10, which has been expanded to include China and a host of developing nations. China last week floated the idea of discussing the U.S. dollar’s place as the sole international reserve currency, causing a brief dip in the currency.
Japan’s Nikkei osed down 1.4 percent as hopes of an economic recovery were dented in the wake of last week’s downbeat U.S. employment data, dampening investor sentiment. Concerns about the prospects for an early global economic recovery hit resource-linked shares.
Seoul shares ended 0.6 percent higher in volatile trade.
Australian shares fell 1.2 percent to their lowest close since May 28, led down by miners on weak metal prices and doubts over the prospects for an economic recovery. Major banks also fell as investors turned cautious ahead of the upcoming company earnings reporting season.
Hong Kong shares ended 1.2 percent in the red, hit by lower energy prices and lack of fresh cues on the state of the global economy.
Singapore’s Straits Times Index was down 1.4 percent.
China’s Shanghai Composite Index continued its upward march, rising 1.2 percent, despite news of Shanghai’s first major IPO since last September.
Bombay Sensex fell by almost 6%. The market was disappointed with budget presented by the government.
Euro Stocks Fall; Banks, Oils Slip
European shares fell to a seven-week low on Monday, on worries that economic recovery may still be some way off, with energy companies and banks leading the fallers, and ahead of the start of second-quarter earnings. The FTSEurofirst 300 index of top European shares was down 1.8 percent at 827.58 points, after falling as far as 827.00, its lowest level since May 14.
The heavyweight banking sector took most points off the index. BNP Paribas, Banco Santander, Credit Suisse and HSBC were down between 0.9 and 1 percent.
Worries on lower demand pushed commodity prices lower. Crude prices fell more than 4 percent to below $64 a barrel. Total, ENI, BP and Royal Dutch Shell dropped between 2.5 and 3 percent.
Copper and other metals also fell. Anglo American, Antofagasta, BHP Billiton, Lonmin, Rio Tinto, Vedanta Resources, Xstrata fell between 2 and 4.7 percent.
In an otherwise thin corporate and economic calendar on Monday, investors will focus on services U.S. PMI data for June, expected to show further contraction, but at a slower rate than before.
Around Europe:
FTSE 4,179.93 – 56.35 – 1.33%
DAX 4,631.00 – 77.21 – 1.64%
CAC 3,068.37 – 51.14 – 1.64%
SMI 5,305.04 – 33.47 – 0.63%
Oil Falls to $64 on Firmer Dollar
Oil fell to a five-week low of $64 a barrel on Monday, pressured by doubts over the prospects of an early global economic recovery and a firmer dollar.
U.S. light, sweet crude [ 63.99 -2.74 (-4.11%)] fell. It traded as low as $63.85, the lowest intraday price since May 28.
London Brent crude [ 63.9 -1.71 (-2.61%)] traded lower.
Attacks on oil installations in Nigeria, traditionally Africa’s top oil producer, could limit losses.
Chevron, Shell and Italian energy firm Agip have cut oil output by around 273,000 barrels per day in the last six weeks following the latest campaign of militant violence.
Yen, Dollar Gain on Economy Woes, Stock Losses
The yen and the dollar gained on Monday as last week’s grim U.S. jobs data continued to foster doubts about the prospects for a quick global economic recovery. The dollar was also lent support by reassurances from China that the U.S. currency would remain dominant for "many years to come." Investors were cautious ahead of the G8 meeting on July 8-10, which may provoke further debate on possible central bank reserve diversification.
The euro [1.3903 -0.0074 (-0.53%) ] fell against the dollar to just above an earlier 11-day low of $1.3914.
Most of the dollar’s gains came against currencies seen as higher risk, however, with sterling [1.6103 -0.0227 (-1.39%)] falling more than 1 percent to a one-month low around $1.6134, while the Australian dollar [ 0.7897 -0.0071 (-0.89%)] fell against the greenback.
The yen gained sharply, helped by falling equities, with the euro [132.49 -1.74 (-1.3%) ] losing to a near two-week low versus the Japanese currency and the dollar [ 95.26 -0.75 (-0.78%) ] also down against the yen.
Traders in Tokyo said they expected dollar support at 94.88 yen, a low hit on June 23, as the Bank of Japan’s latest survey of Japanese companies showed the exchange rate that big manufacturers were using in their plans for the financial year to next March averaged 94.85 yen, lower than 97.18 previously. A fall in the dollar below 94.85 could further stoke concerns over Japanese exporters’ profits overseas, sparking more Tokyo share selling, they said.
Good morning!
My Trade/XLF – I have no clue, hopefully one of the members will know and can enlighten us.
Oil is a train wreck this morning, down below $64 this morning and energy and miners are leading the way down – not bad on the whole as long as they don’t drag the broader markets down with them.