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Saturday, June 15, 2024

Weekend Wrap-Up, Ripping Through the Top or Topping and About to Tip?

What a week this has been!

In last week's 600-Point Weekly Wrap-UP, I said it would take some spectacular earnings results next week to keep the rally going and it seems like we got them this week as roughly 85% of the companies reporting this week beat expectations with 42 of this week's reporting companies guiding up and only 18 guiding down.  While people like Richard Bernstein may make very good arguments for why we shouldn't focus too much on quarterly earnings surprises, I have to say I am somewhat swayed by the preponderance of evidence we've gotten this week that, by and large, the vast majority of our companies are weathering the storm far better than analysts have expected.  

"It's pretty amazing what passes for good news these days," remarks Barry Ritholtz on his blog, The Big Picture (www.ritholtz.com.) "Beating dramatically lowered earnings forecasts on cost-cutting and layoffs — rather than top-line growth — seems to be the order of the day.  The irony is that the Wall Street analyst community overestimated earnings at the top of the cycle — pure extrapolation of trend to infinity. They seem to be doing the same thing now, only extrapolating falling earnings to zero. What that produces is not true upside surprises, but merely jumping over a dramatically lowered bar," he says. 

It's interesting Barry says this now because it sounded familiar and I went back to my May 2nd Weekly Wrap-Up, where the sentiment was very similar and I said at the time: "With 2/3 of the S&P 500 weighing in, earnings have been 70% positive.  I had warned earlier in the week that we are only beating a very low bar but we are beating nonetheless.  As you can see from the above chart, even if we do keep moving up, we are heading into some very serious overhead resistance that may not prove futile this time.  With the added pressure of the old "sell in May, go away" adage – there will be a lot of obstacles to overcome this week and next so we will remain on guard but we have also trained ourselves not to think and simply go with the flow, letting our levels guide us and, so far, our levels keep saying yes – despite our common sense saying no."

More importantly, with the Dow right at 8,200 that Friday and the S&P at 875, was my call that we had then broken into the bottom of our "new" trading range, the one I had predicted we'd recover to way back in October.  In that post I said: "What we’re looking for is a new range that confirms the 5% levels around 8,650, which is, as a floor, 8,200 (8,217 to be exact) and, at the top of the range, 9,100 (9,082).  The closer we get to 9,100 before pulling back, the more likely 8,200 firms up as a floor.  Volatility is certainly washing out of the market slowly but surely as the VIX finishes the week at 35.30, down 20% for the month against an 8% gain in the S&P – a complacency that indicates that up, as we like to say, is the new down."

Well up has certainly been the new down the past two weeks and you can see on David Fry's S&P chart that we did run right up to the top of our zone in June, testing Dow 9,100, then fell back to our breakout point two weeks ago where holding that level allowed us to go bullish and bet against the head and shoulders crowd when we went "Digging in the Mud for Green Shoots" and made 18 bullish plays (all big winners now) during the week as we finally moved our cash off the sidelines.  We went a little more bearish the next week (expiration week) as we needed to cover those gains and 600 points did seem like a lot to add in one week, no matter how bullish you feel.  Like David and Barry, I was also concerned about all the blatant manipulation in the markets but, as I often say: "We don't really care IF the game is rigged, as long as we can figure out which way it's rigged and bet accordingly."

While our famous monkey with a dartboard could have picked winners this week, we still like to see how we did on a week that began with GS raising their S&P target to 1,080 to get the ball rolling on Monday morning, which I called "The Goldman Goose."  While we know better than to bet against GS when they want to move the market (at least until all the suckers are holding their bags), CIT was a different story entirely and I called for a straight stock short on them at Monday's open.  Those fell nicely from $1.40 to .70 this week but we took $1 and ran on day one (up 28%).  It's not often I make a pick in the second paragraph of the morning post but that was just sooooo obvious! 

I was worried we were going to get blown out of the water on our short cover plays saying: "We have committed the great sin of being skeptical based on fundamentals and we may have cashed out too early by taking things off the table on Friday and, judging by the pre-market (8am), it looks like we were also wrong not to fully cover our long DIA puts, leaving us with a slightly bearish bias over the weekend."  Fortunately, the open wasn't too bad and we were able to get more bullish as we watched for our target breakouts of NYSE 6,232 (about 200 points away) and S&P 946 (we were at that line).  Looking back today, I think we should have had more faith once the S&P broke over, it would have given us a bit more upside to play with but we had taken so many positions 10% lower, that it was very hard to see "bargains" in the prices that were being offered this week.   

My comment in the morning post was a fortunate strategy for the week: "With MS and GS initiating a global market putsch this morning, all we can do is stand back and see how far they can push things.  One would expect with a 13% upgrade in S&P outlook by GS that we should be able to take out the highs we made Mid-June, when GS’s S&P target was 15% lower."  Everything is indeed relative in a market that is ignoring fundamentals.  A stock is worth what the small number of players buying and selling against the machines THINK it's worth, not what the 95% of the people sitting on the sidelines may think.  Anyone who didn't buy a condo for $200,000 in 1995 and then refused to pay $400,000 for the same condo in 1999 and then laughed at the people who said it was worth $600,000 in 2004 and regretted not buying it when he heard they were going for $750,000 in 2006 knows what I mean.  The fact that that condo dropped back to $500,000 in 2009 is small consolation for the guy who missed out on the whole thing… 

Our first play of Monday, sent out as an Alert to Members, was to go full cover on our long DIA covers (effectively flipping overall bullish), selling the DIA $87 puts for $1.80, now .52 (up 71%).  This is part of the leap-frogging cover strategy we use in our Mattress Plays.  June Leading Economic Indicators were good and we flipped to Sept $80 SPXU as a speculative cover at $3.35 and we did, as I predicted, lose 1/2 at the market headed higher on good earnings.  We may consider rolling them down to the Sept $70s for $1 next week as SPXU only fell $7 to $59 and they still make a good 2-month cover. 

MTXX was a bullish vertical, entering the Aug $5s at net $1.30 and we'll be taking out the $7.50 calls for .20 (up 70%) since we have a month left for MTXX to reassert itself (break-even will be $6.50).  PGF, on the other hand, was an easy winner as we took the Jan $14s at $1.15 (now $1.40, up 21%) and we hit our target to half-cover with the Aug $15s at .50 (still there) – that's pretty good targeting since the Aug $15s were just .28 on Monday!  PGH was another dividend player we love to own and we did a new buy/write on them at $5.85/6.68.  The stock ran up to $8.25 already and all we need is $7.50 to make our 28% on that one.  We were did a complex spread on VNO buying Sept $50s for $2.05 (now $3.35) and selling the Sept $45 puts and calls for $7.70, now $8.40 so we're a little ahead there and we'll put a $2.50 stop on the Sept puts as we either get pullback or consider a roll

Tuesday morning I said it was "8,900 or Bust" for the Dow and we opened there, then fell 200 points and then gained 200 points to finish almost exactly at that spot!  As we had closed at 8,848 on Monday and we were opening the morning with good numbers from CAT, KO, DD, MRK and UTX, I said that morning: "That’s 5 Dow beats in one day and yesterday we finished at 8,848 which is why I’m saying 8,900 or bust today.  If we can’t add 52 little points on these earnings, then surely the rally into these earnings was overdone.  If, on the other hand, we can hold 8,900 and build from there – then perhaps we are ready to move 8,650 to the bottom of our range and look to make a 10% move over that to 9,500, a mere 32% off the highs."  I was harangued by the bears at the time but now nobody's laughing as the Dow jumped right up to our 9,100 mark to end the week. 

While I did point out there is still plenty of bearish news out there, what made me more bullish was the blatant manipulation that seemed certain to keep the market up at all costs – something I compared to plate spinning as GS, MS and CS took turns upgrading various global outlooks and then upgrading various sectors and even upgrading each other as they worked to keep the momentum going in the global bull market.  Will there be hell to pay later on?  Oh yes!  But we're not investing later on, we're investing now and the little man is running around and the plates are still fighting gravity – when they start wobbling, I'll be the first to let you know!  

As always, it's high oil prices that are most likely to derail us but we'll worry about that later.  On Tuesday morning we saw our friends ZION back at $10.70 and that has been our buy point all month with a sell zone around $11.25 and it was mission accomplished once again at the 5% rule on Thursday.  Aside from the day-trade (ok, 3-day trade), we did a buy/write on ZION at $9.32/10.16 and we're feeling good about that 18% target with the stock at $11.20 again.  IWM $54 calls at $1.04 were brilliant at 10:36 on Tuesday and the finished the week at $2.20 (up 115%) but, sadly, we stopped out at .90 (down 15%)!  Once again we took the fabulous C Jan vertical but it worked perfectly this time as we were able to buy the $5s for .10 and sell the $7.50s for .05.  If, for some reason, C does go up and finishes at $7.50 or higher in January (they were there in November!), that's a nice 4,900% return to look forward to!  A few fun plays like that are always worthwhile, if you just allocate $20 out of a $10,000 virtual portfolio (0.2%) to a trade like that and it hits, that's an extra 9.8% added for the year's returns.  I'm not saying to make stupid gambles but it's not out of the question that C could run back up over the next 6 months

By the way, I'm not including our fabulous $5,000 Virtual Portfolio plays here or the $100,000 Virtual Portfolio plays as they both have their own dedicated posts…  CAL was our first afternoon trade on Tuesday, also a buy/write hedge at $7.58/7.54  – an entry so low, we weren't even concerned when they touched $9 (our 19% call-away target) the next day.  Also, a shout out to David at The Oxen Group for checking in with a buy call on STJ as they bottomed out near $36 on Tuesday, that stock is now looking good back at $37.90.  That was all our Tuesday trades as the crazy up and down action did not give us the warm-fuzzies at the time.  Yes, all our additional bets were bullish but none were naked (except the one we stopped out!).

Historic Dow Jones Chart 

Wednesday I gave my "Rangeish Outlook" and put up the above historical Dow chart to illustrate that we were, even at 9,100, firmly in the bottom of the longer-term predicted range while the floor we hit in November and March was pretty clearly a major, major floor.  While the bears may again have their day before the market makes it's next major move higher, the odds very much favor the long-term investor in this market and our buy/write strategy along with virtual portfolio management techniques like scaling in allow us to begin building for the long-haul without front-loading too much risk.   We may be stuck in this range for many years but we also know we can sell options in up and down cycles to turn those long-term holds into income-producing properties! 

In Wednesday's post I featured a report about China's "Golden Sun" project and, if you weren't already in our solar plays, it sure was a perfect time to start as that sector caught fire on Thursday, as the rest of the world caught onto what we saw happening in China almost 2 full days ahead of the curve.  We also had a good report from LG Electronics and it was no surprise to see the tech rally take off again on all that good news.   BA Jan $40 calls for $5.50 (now $5.20) were my pick in the morning post along with short-selling the Jan $40 puts for $3.40, now $3.50.  Only time will tell on this play but boy do I love this company! 

We did a twist on Oxen's ERY pick, selling the $19 puts for $1.40, now 2.40 (down 71%) and we'll have to deal with them next week if oil breaks $70 but they are an easy roll to the Sept $18 puts, now $2.40 or the Sept $17 puts, now $1.80 so we're not too worried just yet.  Always remember, NEVER sell a naked put in a stock you're not willing to own.  If ERY is put to us at net $17.60, we know we can turn around and sell the Jan $12.50s for $7 and, if ERY does fall another $5 to put those in danger, we can then sell the Jan $12.50 puts for $5, putting us in 2x (if put to us again) at net $9.05 so, the question really is – Were we willing, with ERY trading at $20 on Wednesday, to commit to buying it at $9.05 in January?  Even for an ultra, that would be a neat trick and would require crude to be up around $80. 

At 12:21, I put out an Alert to Members to 1/2 cover GLD, selling the Aug $93 calls for $2.  They are still $1.90 so no big deal there but look at this GLD chart – how's that for seeing a top forming ahead of time?  In the same Alert, we looked at a long WFC $20 put sell as well as a 2011 covered call spread.  A bullish GS calendar put spread of the 2011 $125 puts at $15.30 (now $13.75) and the Sept $150 puts at $5 (now $3.50) is even so far but the idea is to sell premium for 18 months, not get a quick fix.  SNDK was a great backspread, also in that same Alert, selling 3 Aug $19s at $1.35 ($405) to buy 2 Oct $20s for $1.77 ($354).  The Aug $19s dropped to .40 (up $285) and the Oct $20s are .85 (down $184) for a net $101 gain – about what we aim for on those plays (of course you can do 30 and 20 or 300 and 200 but we like to deal in base units!).  Never one to leave well enough alone, we also took a bearish .45 spread of the $19 puts and the $18 puts, now .72 (up 60%). 

At 2:05, Matt asked me where the NYSE and RUT would have to be to take out the Head and Shoulders pattern and rout the bears and I said: "6,232 would do it.  Once you are over the "head" any technician would have to throw in the towel.  The RUT needs that 535 move."  They both crossed at the same time (10:15) the next morning and rallied the markets straight up!  In that same response we went bullish, but covered on AMZN with a Sept $75/$85 spread for net $7 that looks good so far, though still net $7 if we chicken out (which is why we love those spreads ahead of earnings – low-risk).  Right into the close we picked up the QID $29s for $1.20 on the possibility that we may not have 12 consecutive up days on the Nasdaq.  That was a silly thing to think but, fortunately, we got out even in the morning.

At 7:03 the next morning we already had two buys tee'd up.  SO was a buy/write at $24.73/27.37 with a call away at $30 as a long dividend play but less patient members liked the 2011 $25s at $6.85 (now 7.60) 1/2 covered with the Aug $32s at .50 (now .85) and we look forward to a long and happy relationship with that one!  PEP was chosen over KO ahead of the open and that was a great call as PEP bounced back better.  Again though, it was a 2011 buy/write for dividends at $42.64/46.32 and a $50 call away – not something we expect to lose sleep over…  In the morning post I wondered if it would finally be "Through the Roof Thursday" and we didn't have to wonder for long as our target levels were shattered by 10:15.

We had been looking for less than 500,000 jobs lost and the number came in at 554,000 or we were looking for a pace of 5M home sales and those came in at 4.89M and that was close enough to push us "up and out" to new highs.  We added a hedged position on LYG at $3.20/4.10 with a nice 60% call-away if they hold $5 and I warned the bears in our 12:08 Alert: "Do not mistake a pause at the 2.5% rule for a pullback!!!!  If we don’t violate 20% pullbacks then it’s just a pause and, since we really have a 5% week’s move, even pulling back past 2% up (for the day) won’t mean much until the indexes go below + 1.5%."  Watching those levels and sticking to our rules kept us from entering any hopeless bear plays – tempting though they were! 

We did take a bearish long spread on AMZN in the afternoon, because it simply went up too far that day,  We were able to sell 2 Sept $100 calls for $3.90 against 1 Jan $95 call at $10.60 and that net $2.80 spread has already jumped to $4.46 (up 59%) as it's great to take advantage of irrational exuberance ahead of earnings, even in this market!  We scanned the S&P 500 looking for good shorting opportunities (as we already had too many longs for the week) and we ended up with a ratio backspread on AXP that went into the $5KP (and did very well) and a short on IGT but that was it – the rest just looked too strong to short.   Into the close, we took another shot at shorting the Qs with QID but it was a "just in case" kind of play – our hearts just weren't in the short side.  We even rolled up the covers on our DIA spread to selling the Aug $90 puts as we worried that a pullback may never come on that play. 

Warren Buffett BullWe did get a slight pullback Friday morning as MSFT and AMZN disappointed but, as I observed in the morning, "THEY" bought Warren Buffett in to bat clean-up for the week and he made all sorts of nice noises on CNBC ahead of the open and salvaged what was looking to be a nice pullback.  We were fortunate to get out of our QIDs with a small profit before the market reversed and headed back up for the day.  My note to Members right at 9:33 was: "QID/Conf – Let’s take $1.35 and run I think.  Better than losing!

We sold DUG puts but the way oil traded Friday I'm worried about that one and the way oil traded Friday I'm back to worrying abou the economy but no one else seems to be so what do I know?  We added a buy/write on USU at $3.05/4.03 with a call-away at $5, looking pretty safe with the stock at $6.  CHSI was another hedged entry at $22.35/23.63 (called away at $25) and a ratio backspread on MA was perfectly timed at 11:23, catching almost the exact high of the day to sell the 3 Aug $200s for $3.85 (now $3.15) against 2 Oct $210s for $4.50 (now $4).  BKC was a calendar spread and we went for a straight win on SONC, with the Sept $10s at .68, which already flew up to .90 (up 32%) and we really like these guys. 

After lunch, when we were done buying burger companies, we moved on to a bull-put VIX vertical on the Aug $27.50 puts and Aug $30 puts for a $2 credit as insurance against a sudden dip (pays 4:1).  We added a calendar spread on SKF to the $100K Virtual Portfolio and a complex spread on UGL, just looking to earn premiums on that one.  Into the close we stayed bullish, adding and LDK buy/write at $9.88/9.94 with a $12.50 call away as well as a calendar spread and we sold naked BRCM $27 puts for $1 as their fall seemed a bit overdone.  Just in case, we adjusted our DIA mattress play a little more bearish into the weekend as we are at the top of our expected range and it would simply be irresponsible not to. 

Will the Nikkei top 10,000?  Will the Hang Seng blow through 20,000?  Is any of this nonsense really justified – even WITH all these "fabulous" earnings?  We have another heavy earnings week ahead of us and we also have heavy data next week, including the Q2 GDP on Thursday.  We have New Home Sales on Monday, Consumer Confidence and Case-Shiller on Tuesday.  Wednesday is Durable Goods and the Beige Book all leading up to the GDP for April, May and June – which will be interesting to say the least.  It's going to be both exciting and informative but I'm sure sleeping better knowing we are well-covered over the weekend!


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