Yesterday was very hard for us.
Our theoretically conservative $100,000 Virtual Portfolio dropped 6% in one day as we had a farily bearish position into options expiration that I stubbornly refused to adjust this week. Surely, I thought, after running up 250 Dow points from Thursday, 10,000 would act as some kind of resistance? We're also up a neat 500 points for the month of October so that's our 5% rule and to not get a 1% pullback, even in the most bullish of markets, is very rare indeed.
So we stayed bearish yesterday and got crushed by the AMZN $90 calls we sold as well as UYG calls we sold and our PSQ calls we bought for protection got slaughtered as the Nasdaq flew up not 5% but 5.5% for the month and up 6.2% from it's October 2nd low. While we are disappointed, we're not terribly concerned as we're only going to roll the calls to November anyway and I did promise the members that, if we hold our breakout levels for 2 closes, then I'll be shifting more bullish. I've been trying to identify more bullish positions this week but our mix has still tended bearish as I'm just having so much trouble buying into this rally.
In yesterday's Member Chat, my comments on the current situation was:
I do wish we were more bullish, this is a very smart group of people and we’re pretty bearish but so is the general investing public or there’d be volume to this rally. I have a hard time ignoring the fact that 600,000 more people lost their jobs this week and, even if it’s "only" 500,000, I still think that’s not really a sign of a healty economy. I think the REITs are off in fantasy land and I think so is the government, who cannot keep borrowing money at these low rates. The dollar has dropped 25% of it’s value since March so the market is only 25% ahead of the currency fall which means a flight back to the dollar, which could happen very suddenly if an EU nation like Spain collapses, could send our market down as fast a 9/11.
That being said, we have no choice but to follow the technicals and now that we can look at nice, easy support levels like Dow 10,000, S&P 1,100, NYSE 7.200, Nas, 2,200 and RUT 620 and simply call that the mark at which we’re 60% bullish. I’ve given some thought to what kind of protection we should use in a market like this and I’m thinking of taking some higher-percentage payers for protection as the higher we go, the more likely we have a scary correction as some point but, on the other hand, we want to try to minimize our capital at risk on the short side because once we’re over these levels, there’s no reason we can’t just go up another 20% because Dow 12,000 is no stupider than Dow 10,000 – we’ve already maxed out the stupid meter and the next stop is panic buying by the herd.
How’s that for a bullish sentiment?
So please pardon us as we go through this transitional period from expecting a pullback to giving up and running with the herd. This isn't really a new plan – I said in Tuesday morning's post that it would be foolish not to switch sides if the bulls can pull this off. That lecture was aimed primarily at the bears on our site but I also need to take my own advice and at least pretend to cheer for the bulls if the market can actually plow it's way onward from here. I'm a bit too much of a macro-economist to promise I'll be a die-hard fan but I do promise to stand up and cheer whenever the wave hits my section…
As you can see from the above chart, following our $100KP (which is now pretty bearish), we went through our Euphoria stage as we went well ahead and are now back between fear and desperation as we drop back to $93,000 but I often tell members to ignore single-day moves and that's what we did yesterday as the markets have a way of skipping you from panic to relief very quickly but not if you capitulate and flip your positions the minute they hurt you or you can just get whipsawed on a bounce and find yourself in a real "lose-lose" situation.
Yesterday's trade ideas included DIA puts (rolling our Jans up), ERY, short OIH, DIA puts (Octobers), DDM, IWM & UYG spreads (upside hedges), DIA calls (to pay for the puts), short SLX, short SPY and long CIT (on rescue rumors). So it was a pretty crazy mix of plays for a pretty crazy day. Jobs data and C earnings were our biggest concerns going into this week and I just couldn't see changing our game plan just because we crossed 10,000 on the Dow, especially when you consider that TRV ($48) and CSCO ($24), who weren't in the Dow until June, account for 576 of those 10,000 points (it's about 8 points per $1 in this very stupidly price-weighted index). Swap GM ($0) and C ($5) back in and we're back to 9,500 (not really as they'd rebalance, but you get the point).
Japan got the point last night and the Nikkei gapped back over the 10,200 mark that we also consider very important. Sure they drifted down the rest of the day but they finished at 10,238 and, as the great Fernando used to say: "It is better to look good, than to feel good." Likewise the Hang Seng fell 250 points this morning but that was after gapping up 362 points at the open so we have a marvelous looking up 112.60 but, sadly, all that hard work left us at 21,999, which gives us a very un-marvelous double top at 22,000. Gee, who would think that 100% up from the March lows would act as resistance?
Resistance was futile in Europe yesterday as the Dax made a new high at the 2.5% rule but the FTSE and CAC stopped at their September highs, up "just" 2% on the day and this morning they are off about a point as the ERBD (Bank for Reconstruction and Development) issued it's semi-annual report on Eastern Europe showed that the 29 country block, which includes mother Russia, will shrink their GDP a combined 6.3% in 2009, an 18% downward revision from the May report.
The EBRD stressed that the recovery will be "fragile and patchy," and that the differences between economies will widen, largely reflecting the degree to which their banking systems have been damaged by the crisis. "It is also clear that the social costs of the global economic crisis are only likely to be felt in earnest next year, when corporate bankruptcies and unemployment will continue to rise," said Erik Berglof, the EBRD's chief economist. "Growth over the medium term.. is also likely to be below the trend experienced over the last decade."
We "only" lost 514,000 jobs this week so yay, I guess. Continuing claims are back under 6M and our core CPI is "only" doulbe the 1% increase expected by the Fed, who are really keeping a lid on inflation in their minds. We did get a huge number from the Empire Manufacturing Index, which jumped to 34.57, up from 18.88 in September. Sure the prices paid shot up while the prices received index was negative – indicating dangerous margin contraction but, Hey, doesn't 34.57 look marvelous? We get the Philly Fed Report at 10 am and if NY is coming on strong I would think Philly won't be far behind so look for them to beat the 13.5 expected of them.
GS had their expected beat but it isn't very exciting compared to JPM and C "only" lost .27 per share vs a loss of .38 per share expected and that should keep the shares around $5 so our spreads are right on track. There have only been 4 misses all week and they all came since yesterday's close: STLY missed but is being forgiven, HOG missed by 50% and is being forgiven, MNI missed by a penny and is selling off and UMPQ missed by a mile and is trading up so, despite some early market disappointment, we are still in a positive earnings environment and we'll take advantage of the morning dip to press some of those upside plays – just in case we get a proper breakout.