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Saturday, April 20, 2024

Short Weekly Wrap-Up

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

Sky is fallingAll 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?

$70 OilMy 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.


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