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Monday, December 11, 2023

Weekly Wrap-Up – 10,000 or Bust!

I think I was right on the money last week when I said:

The bar for corporate earnings is still set at very easy to beat levels yet, like this limbo-playing child, when they announce their beats of very low expectations we’re going to get all excited and tell them how great they are doing.  The problem is, these are not kids who we hope may grow up one day to be President or CEOs of major companies. these ARE CEOs of major companies and they are being paid top salaries for top performance and we, the stock purchasing public, are paying top dollar for what should be SPECTACULAR performance, not beating 75% off last year’s earnings by a penny! 

In that post, I rattled off a list of stocks that seemed overpriced to me: AMZN, BIDU, AM, PALM, NFLX, PCLN, URBN, UHS, CERN, CREE, GMCR, CY, SWM, TRLG, BKE and you would have had a fabulous week just shorting those stocks as only NFLX, URBN and CREE stayed positive.  Now most newsletter writers would quit right there and make a giant ad saying they were 12 for 15 on the week but, as our members know, THAT'S NO BIG DEAL AT PSW!  I'm just going to remind members that they can refer friends to FREE advice like that in our trial newsletter and earn 20% or more off their subscriptions for doing it. 

Picking stocks is easy but a few percent here and a few percent there isn't much fun is it?  On that list, the two we attacked were AMZN and BIDU, both of which ran (in our opinion) way too high AND had very liquid and very overpriced call options that we could sell to collect premiums.  AMZN is a staple short in our $100K Virtual Portfolio and we had set up BIDU the week before, selling Oct $420 calls for $8.30 and the Oct $430 calls for $7,20.  While both went higher on Monday, the fact that we had a plan for managing the trade kept us from panicking and, thankfully, Monday was the only day those positions gave us trouble and both finished the week worthless (100% profit for us). 

Adjusting our positions kept us busy this week as we STILL have a slightly bearish bias and I apologize for that but, as I said in Friday's post: Every time I try to get a little more bullish, they pull me back in!  It's the curse of being a fundamentalist, it's not enough to show us a shiny box with a pretty bow – we like to know what's in the box before we buy it.  Right now, the global economy is a cardboard box with some shiny wrapping paper (MSM cheerleading) and it's all tied up with $15Tn worth of deficit spending on behalf of the global governments.  

Paul Krugman and I have nothing against deficit spending, it's the best way to avert a severe economic downturn and we just may have accomplished that but it is worrying that so much of THIS deficit's spending went NOT to building things and NOT to manufacturing things of lasting value but instead was used to bail out past failed investments and re-inflate the exact same bubbles that crashed us just 12 monts ago.  Gas is back to $2.75 a gallon, Oil at $79 a barrel, copper near $3, gold at $1,054 – "brother can you spare 27 dimes and a nickel just so I can make it to my job interview" is not a premise that's likely to reinvigorate the middle class.  But the investor class is happy and, in this top 10%-centered, screw the poor society we have in America, that is all that matters and we will party like it's 1999 as long as the Dow can stay above 9,999:

We were all about going with the flow this week as we had a wild mix of bullish and bearish picks as we were skeptical bulls at best.  I don't summarize spreads here as it would take all week to write a review but the majority of our long plays were hedged and our general goal was to pick low-risk/high-reward bullish plays so we could minimizer capital commitment to positions we don't have our hearts quite in yet while still giving ourselves a very attractive upside profile if the market does indeed break higher.


Just Another Manic Monday – The Inverted Risk Pyramid

My attempt to get bullish hit an immediate bump in the road as I unfortunately (or fortunately, time will tell) read Gregor MacDonald's: "The Alignment of Asset Reflation and a Collapsed Economy" that morning the neatly explained my fundamental frustrations.  I discussed the Dollar, Global Trade, Latvia's Pending Collapse, and the Risk Pyramid – sometimes I go back and read these and even I feel like I'm getting an economics lecture!  My conclusion set the tone for the week:

So happy Monday to you!  MacDonald is very likely 100% right and we are heading off a cliff but, as he also points out, gold and the S&P can rise 30% before we get to the jumping point.  The strategies we discussed this weekend along with our Watch List and long index vertical plays will allow us to play along without losing our heads – just in case we wake up one morning and find that the cliff was a lot steeper than we had imagined!

We had lined up a LOT of bullish spread plays on our Watch List and our trigger levels were:  Dow 9,829, S&P 1,071, Nas 2,146,  NYSE 7,047 and Russell 620 and, in my morning Alert to Members, I pointed out that it was the Russell that was holding us back.  It is very normal for small-cap stocks to lead us off a market bottom, which has clearly been the case in this 6-month view.  But notice the Russell also falls faster and harder during a pullback as it is the small-cap stocks that get hurt first as the dollar weakens and purchasing power declines. 

I've called the Russell our canary in the coal mine and this week's under performance needs to be taken seriously if it turns into a trend.  Our Monday selections were:

  • ERY Nov $11 puts sold at .75, now $1.10 – down 46%
  • GS Nov $210s sold for $2.40, now .87 – up 64%
  • DXD at net $31.40, now $32.93 – (Apr bull call spread)
  • CERN Nov $85 calls sold for $4.70, now $4.15 – up 12%
  • CERN short at net $82.90, now $84.37 – (Nov bear put spread)
  • BAC Nov $17.50 calls sold short at $1.37, now .75 – up  45%
  • BAC Nov $17.50 puts sold short at $1.10, now .95 – up 13%

That's a great trick in earnings season, playing for the volatility crush into earnings by selling puts and calls, preferably on a stock that isn't likely to move too much.  With GS, we took advantage of the very high market expectations to sell a call that was over 10% out of the money for 2.5% of the stock price – that's a 12.5% cushion!  BAC was so attractive we sold both sides of that trade and, of course, we hedged low because we thought they may disappoint but also because, if they fell far below $17.50, we really don't mind owning the stock at net $15.03.  The same is true for ERY, which would be put to us at net $10.25 and is now $10.74 so the fact that the put is currently selling for $1.10 doesn't bother us as we have no intention of buying them back

Testy Tuesday – Topping or Popping?

We took advantage of Monday's dip to cash out our winning short plays from the prior week.  I said in the morning post: "Despite the low volumes, buyers are clearly in control of this market" and I went over my logic from the previous day's Member Chat, where I told the bears that we weren't getting the downside movement we needed and it was a good idea to switch sides, comparing it to betting as a fan (of bearish positions) vs. betting as in investor (on whichever side happens to be winning at the moment).  I pressed the point, saying: 

I never understand the "fan" behavior of market players.  If you see the market going up and up and up and up – perhaps it’s time to make a few up bets.  Bears don’t earn loyalty rewards or get frequent-complainer points from the market so, if your "team" is getting trampled, it’s OK to switch sides – at least for a while – no one will think any less of you.  In the case of our bull-market bets, we have a great opportunity to switch sides at a very significant line this week, the 2009 highs of Dow 9,829, S&P 1,071, Nas 2,146,  NYSE 7,047 and Russell 620 – 3 of which held up yesterday despite the afternoon sell-off.  If we can confirm these levels on real volume today, it will simply be madness to be bearish until those lines are crossed again to the downside.

I strongly recommend reading that post if you are "not a flip-flopper" as being a flip flopper is the most profitable way to play the markets these days.  In fact, in that very morning's post, I noted how totally screwed Cramer fans were as he piled them into CIT at $2+ on Sept 28th and they were diving down to .85 on bankruptcy rumors but, by the afternoon, I flip-flopped and called a buy on them.  Why, because they were holding up too well – so I figured something was up.  They ran up to $1.15 the next day and hit $1.20 on Thursday, up 33% off Tuesday's track,  Of course take the profits and run because we have no faith but, just because you are short on a stock, doesn't mean you should be blind to it when it looks strong

Meredith Whitney did us a solid and downgraded GS and OPEC raised their demand forecast and our futures were pointing solidly lower but we had good retail numbers and warned Members in my 9:51 Alert: "9:45 Dow volume is just 19M so no conviction to this morning’s selling so far so I continue to warn bears not to let profits slip away."  Our biggest mistake of the week was staying short on oil and OIH but it's a mistake we continue to make as we've pressed those bets by rolling up and doubling down so we REALLY hope oil doesn't break $80 next week.  Our Tuesday plays were:

  • ERY Nov $10 puts sold for .65, still .65 – even
  • ERY at net $9.80, now $10.74 (Apr bull call spread)
  • AIB at $8.53 (buy/write), now $8 – down 6%
  • ISRG Apr $210 puts sold for $17.80, now $15.20 – up 14%
  • ISRG Apr $280 calls sold for $22.50, now $24 – down 7%
  • FXP Nov $10 puts sold for $1.50, now $1.70 – down 13%
  • ERY at net $12.15, now $10.74 (Jan bull call spread)
  • DIA $97 puts at .25, stopped out at .15 – down 40%
  • DIA $100 calls at .25, stopped out at .65 – up 160%
  • EWZ at net $70.30, now $75.49 (Jan bull call spread)
  • EDZ at net $7.50, now $6 (Apr bull call spread)

Notice something new is creeping into our trade ideas – pair trades!  As market conditions change, our trading style changes to adapt and these weekly wrap-ups are a great way to keep tabs on what's working and what isn't over time and it's especially helpful to go back to historical posts, when the market conditions were similar and see what was working and what wasn't.  That's one of the reasons I started keeping a trade blog in the first place.   ISRG, DIA and EWZ were all paired with hedges.  In my 3:37 comment to Members we took that DIA play based on my belief that we'd get a 200-point move in one direction or the other (it was only 150, but that was enough for the play to work). 

If you are wondering why we would take bull calls on ERY at net $9.80 and net $12.15 with the $12.15 spread in Jan, it's a matter of risk/reward.  The April spread was the $9/11 for net .80, conservative and pays a $1.20 profit (170%) if ERY moves up modestly over time.  The Jan spread is a very aggressive $11/15 spread for $1.15, which pays $2.85 if successful (247%) and they are not as risky as they seem as bull spreads hold value well, especially on volatile ETFs.  In fact, ERY fell from $12 to $10.74 since we took that spread and it's still $1 (down 13%), which is not too bad for a volatile ultra-ETF, not even worth scaling into or adjusting yet..  

Wednesday Rally – INTC and JPM's Piles of Chips

Big beats from INTC and JPM gave us every possible reason to make new highs.  I had called for shorting after hours in Tuesday's chat as the run-up to $22 was just way overdone and they actually finished the week back at $20.18, lower than they were before earnings.   The hardest decision I had to make all week was not adjusting our "too bearish" $100K virtual portfolio that day or the next as we took two consecutive hits in row that drove us down to $93,000.  By Friday, we were $117 short of a full comeback – Ah, the advantages of not panicking….

  • ERY Nov $12 calls at for $1, now .65 – down 35%
  • Oil futures short at $75.35, done at $74.50 ($10 per penny, per contract, profit!)
  • OIH Nov $125 calls sold for $5.75, now $7.40 – down 28%
  • DDM at net $38.20, now $40.21 (Jan bull call spread)
  • IWM at net $61.20, now $61.68 (Jan bull call spread)
  • UYG at net $6.40, now $6.08 (Dec bull call spread)
  • DIA $99 puts at .30, done at .15 – down 50%
  • DIA $100 calls at .30, done at .65 – up 116%
  • SLX short at net $60.70, now $57.41 (Nov bear put spread)
  • SLX Nov $62 puts at $5.70, now $5.80 – up 2%
  • SPY short at net $106.68, now $108.89 (Nov bear put spread)

In my 12:30 alert to members, as the Dow once again looked like it would hit 10,000, my comment was: "So, look at 9/22 and 9/23, which were a blow-off top and we were down at 9,600 that Friday (25th) and 9,400 the next Friday (10/2).  This is why I remain paranoid on days like this.  If we are really BREAKING OUT, then we have another 1,000 points to play with but buying on a day like today or killing short plays can be extremely counter-productive.  The best thing you can do is add more conservative bullish plays that negate your short-side losses until we have a clear picture."

Notice the string of bull call spreads we took mid-day, those were contingent on us holding 10,000 for more than a day so already questionable but the first two make 67% and the UYGs make 150% if UYG gets to $7, making them a very nice offset to our still bearish positions if the market does start to gap up on us before we can establish other, more conservative bullish positions, like the ones on our Watch List.  Our main concern on Wednesday was a huge pop from the Fed, failing to get that, we never got around to getting more bullish. 

Thrill-Ride Thursday: Jobs, What Jobs?

As I noted in the morning post, Wednesday had been a tough day for us because, while we were prepared to make an orderly transition to bullishness, we were not ready for a bullish spike up (as indicated in the picture here).  Of course, 500 Dow points for the month of October happened to be our famous 5% rule for the month and that, we felt, entitled us to a 100-point pullback so we STILL stayed bearish. 

As I said in the morning post: "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…  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."

We took advantage of the morning dip to pick up some bullish plays but nothing crazy as the Philly Fed was a huge disappointment:

  • RAD at $1.58, now $1.58 – even
  • NUAN at $15.55 (buy/write), now $15.27 – down 2%
  • IMAX March $10 puts sold for $1.05, now $1.05 – even
  • CBI at net $18.70, now $20.12 (2011 bull call spread)
  • GLL at net $12.40, now $11.54 (Apr bull call spread)
  • GOOG at net $561, now $549 (March bull call spread)
  • XOM $75 puts at $2.60, stopped out at $2.40 – down 8%
  • SRZ at $5.12 (buy/write), now $5.15 – up 1%
  • PARD at $6.86 (buy/write), now $6.87 – even
  • C 2011 $5 calls at $1.02, now .97 – down 5%

Well we sure were trying to pick some upside plays.  Notice they are generally hedged as we don't trust them and also, taking a lot of bullish verticals allows to make low dollar commitments with limited downside, just in case the bullish thing doesn't pan out… 

Frightening Friday – You Mean Markets Can Go Down Too?

It didn't take much to send the market back down on Friday.  Minor disappointments from GE and BAC and we were down 100 points by 10 am on strong volume.  I noted in the morning post: "We have struggled for two weeks trying to get more bullish but even at yesterday’s exciting close we remained 55% bearish and decided to hold that stance into the weekend.  As I updated our $100K Virtual Portfolio last night, I was surprised and disappointed that I could find no justification to raise my targets on AMZN, BAC, C, GE, UYG or XLF, sticking with our generally bearish positions, even though they burned us this week.  While both GE and BAC beat on earnings this morning, both companies missed on revenues and what’s surprising is how sharply the markets reacted to such small misses."

  • ICE Nov $100 puts at $4.80, now $3.35 – down 30%
  • DIA $99 calls at .65, done at $1.05 – up 61%
  • DIA $99 puts at .10, done at .05 – down 50%
  • ICE Nov $110 calls sold for $4, now $4 – even
  • SRZ Jan $5 puts sold for $1.20, now 1.20 – even
  • VZ at $28.93 (buy/write), now $28.90 – even
  • HGSI at $20 (buy/write), now $20.02 – even
  • NTRI at $18.62 (buy/write), now $18.60 – even

It was hard to be terribly impressed by our finish this week.  We didn't hold 10,000, the Russell didn't hold 620 and the SOX finished well off for the week, down 3%.  We'd feel BETTER about our bullish bets IF we got another correction, perhaps a test of our 50 dmas at Dow 9,650, S&P 1,050, Nas 2,075,  NYSE 6,950, Russell 595, SOX 310 and Transports 1,925. 

The Shanghai is just 2.5% under the Sept high at 354.58 and we'll be watching that closely as well as looking for the Hang Seng to get over 22,300 and if the Nikkei can't hold 10,200 we've got real problems (10,275 is 50 dma and they are just shy).  Over in Europe, we either get new highs with Asia or we retrace 50 dma's there which are:  FTSE 5,000, DAX 5,600 and CAC 3,700 – all of which look more likely than a move up so anything green in Europe can be taken as a real plus. 

Before we get too excited and jump on the medial hype-wagon about our "recovery," let's take a look at this great chart by Prieur du Plessis, which shows us how far we've come but also reminds us how far we still have to go.  As I keep saying to members – If it's a REAL rally, we're not missing much by being a little cautious here:





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