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Weekend Wipe Out – All the Way Back to Mid-November Lows!

Well I hate to say I told you so but

No wait, that's nonsense – what market prognosticator doesn't love to say "I told you so"?  Actually, it's kind of my job to tell you so and the reason I'm so popular is because, more often than not, when I tell you so, I tend to be right.   I'm not right all the time and my single biggest flaw is I am often right but sometimes way too early and timing is EVERYTHING in the markets.  It's not good enough to tell you what is going to happen (give things enough time and everything happens eventually, right Cramer?) - I need to get the period right as well so we can turn it into an actionable trading idea that makes money

As a fundamentalist, I didn't like the entire last 500 points of the rally.  I had predicted the market would finish the year at 10,200 way back when it was down at 8,650 when the idea was we'd have a Santa Clause rally to 20% (10,380) and then a 20% pullback of that run (346) into Jan earnings that would take us back to 10,034 so the entire run from 10,200 to 10,700 REALLY annoyed me.  It didn't annoy me just because it made me wrong – I'm wrong a lot and I'm old enough to have learned how to deal with it.  What annoyed me was the manipulation as, clearly, the fundamentals in no way, shape or form justified the additional 5% move up. 

I've gone on and on about how fake the move was and how manipulated the markets were and how artificial the support was and I think I've pulled out the Seinfeld "fake, Fake, FAKE" clip often enough now that I don't even have to do a link (but I love it, so I do) or explain how it's a metaphor for recent market activity so I'm not going to waste our valuable time here.  Let's just do a review of the recent action, which is my best way of preparing for the upcoming Members only post where I'll be charting out new levels and coming up with action plans for the week ahead. 

So don't read this if you can't stand to hear "I told you so" because this is the review post and I did tell you so!

When did things go wrong?  Clearly they were wrong for ages but when did things go wrong enough that they finally affected the market?  I'm cranking up the old Way Back Machine all the way to Dec 22nd, where our famous PSW Holiday Shopping Survey showed a less than rosy outlook of Retail Sales and, the next day, I wrote a post called "Which Way Wednesday – For Retail Sales" where I expressed my concern that Retail Sales and Commercial Real Estate were likely to take down the markets.  My timing premise was that Retail would disappoint and then, at earnings time, we'd begin to hear about large-scale store closings which would panic people (rightly so) out of CRE, which seemed shaky at best

Nonetheless we had our Watch List (now our Buy List) as the markets continued to press higher and my outlook for 2010 was published on Dec 27th in "A Tale of Two Economies" where my premise was that this country was starting to look like pre-revolutionary France where the top 10% (epitomized by Wall Street Bankers and their bonuses) flaunted their wealth in front of a peasant population that pretty much comprised EVERYONE ELSE as the middle class was dying and getting more and more angry about it every day.

Since we don't know WHEN the revolution will come, my plan was to play the companies that serviced the top 10% of the population, who are flush with cash from the market rally and, most importantly, EMPLOYED and able to buy things like food and fuel – luxuries that are more and more growing out of reach of the average citizen.   Of course, there's a reason we call them "the beautiful sheeple" and one of my timing mistakes was underestimating how much crap the American people were willing to take before getting angry.  

Of course, I can be fooled too (you can fool all of the people some of the time) and when MasterCard released a Spending Pulse survey on Dec 28th, my dumbfounded headline was "MasterCard's Monday Madness - Retail Up 3.6%?"  As it turned out, that was complete and utter BS and retail was actually up less than 1% from last year's AWFUL numbers but by the time we got the real numbers, the damage had already been done and we broke up all the way to 10,600 by the next morning.  I said that Monday:

I’ve been playing for a big, sharp sell-off that just doesn’t look like it’s going to happen now as it was going to be retail that I expected to take us down, with imminent store closings finally deflating the REIT sector.  Now what?  I have some serious rethinking to do and it looks like we are going to track more in-line with the bullish side of the economy (the success of the top 10%) and ignoring the suffering of the masses for as long as we can get away with it.

We still have our concerns and we’ll wait for a bit more data but we’re not going to fight the tape and we will remain mainly in cash until next week, where we can see how much of this year-end rally we can hang onto but this morning we have upgrades on AAPL and AMZN, which should help the Nasdaq to keep leading us higher and oil is up to $79 thanks to some weekend terrorism (also helping gold stay over $1,100) so it’s business as usual this week and business is usually good in thinly traded markets!  

One of my HUGE concerns was the growing tanker glut where reports were that as much as 25% of the fleet was idle and that didn't even include the 168 tankers that were storing over 300M barrels of oil offshore and we were incredulous as oil creeped back over $80 per barrel when 25 days worth of US imports were floating in the ocean in addition to our record inventory levels.  This was coupled with a dollar that had risen from 74.23 on Thanksgiving to 78 on Christmas Eve (up at our 5% rule) and, at 10:03 in Member Chat that day, my comment was: "Why is V still falling??? MA too - something is fishy with those retail reports…"

My trade idea off those observations was the SMN July $6/8 bull call spread at $1.10, selling the Jan $6 puts for .70, giving us a net .40 entry on the $2 spread to cover what I considered a strong possibility of Basic Materials selling off during the quarter.  On that day, the Jan $6 puts were .40 and our TARGET sell was .70 so we planned on it going down first, then up and that's EXACTLY what happened.  These hedged plays are a great way to take advantage of this kind of irrational market movement and going long on the spread leg gives us plenty of time to be (eventually) right.  The sold puts expired worthless last week and that July spread is already at $1.30 (up 225%) and $1.89 in the money so right on track for the full 400% gain but we're so far ahead now, we set a stop at 200% (25% trailing stop). 

In Dec 29th's "Top Testing Tuesday" I was livid about the pre-market manipulation and maybe it's just me but I get a kick out of reading my old posts and watching my disgust build day by day as the shenanigans went on.  My statement as to whether or not the rally had enough fuel to sustain the move was: 

I don’t think that matters as GS and the Fed manufactured far more than that this year between discount window borrowing and high-frequency trading – they’ve built this house of straw up in record time – let’s just hope there aren’t any big, bad wolves out there looking to knock it down…   I doubt anyone will care – or at least not anyone who has any control of the markets as "THEY" are determined to finish this year off with a bang and we are just lucky to be able to sit back and watch. 

We peaked out Tuesday morning and we had fun with some short plays.  On Wednesday, the 30th, I wrote a special post called "2010 – Time to Arrest the Oil Extortionists?" as oil went back over $80 on what I considered blatant, flagrant manipulation as I asked about the coverage by Criminal Narrators Boosting Crude:  

Is it FRAUD or merely CRIMINAL NEGLIGENCE that they failed to mention that petroleum imports for the week were off 11,291,000 barrels from the week of 12/18/08?  Not only was there an 11.3Mb decline in imports but there was also a 4.5% drop in refining output – meaning (at 19Mb/day) that the refiners supplied 6Mb LESS product per week than the year before.  So we have an 11.3Mb decline in imports that leads to a 4.8Mb drawdown in our crude inventory for the week (net 6.5Mb LESS demand) and we have a 6Mb decline in production that leads to a 3.9Mb drawdown in refined products (net 2.1Mb less) AND THEY CALL THAT AN INCREASE IN DEMAND???

I think I mentioned we were shorting SMN as it wasn't just oil but copper, gold, coal, silver…  all were making ridiculous runs with no evidence of demand whatsoever.  My logic for these things is a commodity bubble also bubbles up the commodity sector and if XLE and OIH and the Ags make up 20% of the S&P 500 and OIH (for example) goes from $110 in December to $130 in January (up 20%) on what are essentially false pretenses, then can't we simply infer that 4% of the S&Ps gains over that time period are BS and can easily be reversed?  That's all it takes to apply my fundamental outlooks to my chart projections – we just try to separate what is from what should never be as we wait for it to show (please excuse the rambling and obscure Zeppelin reference but I do like to amuse myself on weekends). 

Wednesday we got bad news about a debt crisis in the EU but our own government stepped in to prop up the markets by promising $4Tn in future bailouts under the 1,279-page “Wall Street Reform and Consumer Protection Act” that clearly protects only one thing – Wall Street…  I think if I had to pick the spot that I got well and truly disgusted with Wall Street and our government, this was the day!  We also had market boosting news from China with claims that banks there were lending at a new record pace, a pace I said was ridiculous and unsustainable and my closing comment was:   

Don’t be fooled though, the MSCI World Material Index is now at 234 which, according to Bloomeberg, is 81 times earnings for that sector.  This is why we like SMN as a short play as well as EDZ – just in case people aren’t willing to pay 100x for commodities in 2010…  Europe has pulled back a bit this morning as have the US futures.  We’ll see if we can hold our levels this morning after yesterday’s exciting finish.

We had not been making many plays that week as I had called for cash into New Year's but my first trade of that morning was selling SCO (ultra-short crude) Feb $13 puts for .90 (now .15) and I pointed out to members:  "Bearish sentiment is at the lowest levels since April 1987.  Please look up April 1987 on the charts.

Notice the nice 10% correction off the 25% run right at the peak of bullish sentiment.  On Dec 30th, we were almost 25% off our July lows and continuing higher without a pullback just did not seem likely to continue.  That night I posted "The Last Charts of the Decade!" and we used Fibonacci series coupled with our normal 5% rule calculations to determine that our technical tops should be Dow 10,549, S&P 1,135, Nasdaq 2,314, NYSE 7,389, and Russell 638.  My conclusion was:

Lack of volume remains my main concern as it’s very possible that every single point gained in the past 2 weeks was total BS but we’ll find out soon enough next week when some real volume should return and, since all volume has been down volume since September – I’m maintaining a bearish stance until then.

Notice I said that every point gained off of 10,200 may have been total BS and look how fast we dropped right back to it this week!  As I said, timing is everything, I had the motion right but I was a little early expecting the move back down.  We had a half day on the 31st and my post that morning, for those who didn't cash out into the long weekend was "How to Have a Happy and Safe New Year with Hedges."  The hedges were, of course, brilliant and all are doing their job but more important is the point I made about ignoring the media hype machine when making investment decisions:

I myself have gone from being the lone market optimist back in March (see our Crisis, Year One Review) to being one of the 11% of the remaining pessimists as the market takes back over 50% of it’s losses (I am arguing that it’s less than 50% in my Last Charts of the Decade).  Whether we are, as I think, at the apex of a very normal Fibonacci retracement or whether we are at the mid stage of a full recovery back to our 2007 glory remains to be seen but for now, I can re-use the same statement I made to Members when I argued the media was too bearish in March (click on image for great video):

"Television is a powerful and emotional medium, it is very difficult to go against the will of ALL these "experts" when they get on TV and all tell you to sell (or buy) and then their TV station backs them up with bearish news and bearish guests – it’s a natural bias that develops, they aren’t going to make their own paid personalities look foolish by contradicting them with facts and dissenting opinions." 

Substitute bullish for bearish and we have my quote of the day for December 31st, 2009.  If you do nothing else today in the markets, at least consider the idea of establishing some hedges – just in case we open the new year on a down note.

I advocated a small initial disaster hedges of 5-10% of the virtual portfolio going into the new year with the intention of doubling down if things kept going higher, giving us good long-term buffers.  As I pointed out in that post "that is the cost of insurance" against our bullish positions.  

As we are doing today, I began Jan 1st with a "PSW Rewind of 2009"  so we could look back before trying to look ahead, followed on Monday, the 4th by "My 2010 Technical Outlook," where we discussed the 10 lessons not learned and, after many chart reviews, I concluded that the low volume manipulation made the movement uncertain but that I strongly felt that the commodity led rally bubble would pop in the near future.  My fundamental analysis coming into earnings was not too bright as I said:

As you can see from the chart on the left, our little spike in the Nasdaq this past month has put the capitalization to GDP ratio of the NYSE and Nasdaq back over 100% – well above historical highs.  As a fundamental investor, this just rubs me the wrong way and I have very serious concerns that the earnings numbers we see this month will not be able to support what is already becoming bubble-like market behavior as expectations have far outpaced the actual improvements in corporate earnings.

I added TRANQ 2,000 (Nasdaq Transport Index) to our critical watch list and that index saved us from making the mistake of falling for what otherwise was looking like a big breakout in early January.  My outlook conclusion for January in that post was pretty accurate as I said: "Strap in – it’s going to be a wild ride – THAT I can predict!"  I won't go into too much detail about the next two weeks as Monday we topped out at 10,650 and that was followed by 2 full weeks of even more blatant market manipulation where the sheeple were fleeced daily and sometimes twice daily in what I call a Bugs Bunny market after the time where he throws an intemission switch and stampedes people mindlessly in and out of a theater (5:10 on the video).

If you thought I was disgusted Christmas week, you should read Jan 6th's "Fake Rally Follies!" where I compared the blatant chart painting to pornography, citing Supreme Court Justice (back when we had a real court) Potter Stewart's famous statement that he wasn't going to attempt to define obscenity "but I know it when I see it."  David Fry agreed with me as he too "saw it" in the charts but that did not stop the markets from tacking on 2 more weeks of gains – "all" the way to 10,725 on the Dow and 1,150 on the S&P. 

In my weekend post of Jan 10th, I re-emphasized the need for disaster hedges with SMN Apr $9s down to .45 (now $1, up 122%) and DXD Apr $26/33 bull call spread at $2.20 (now $3.50, up 60%), FAZ July $20/35 bull call spread at $1.60 (now $2.70, up 68%), FAZ July $15 puts sold naked for $2.45 (now $1.85, up 25%) and SDS March $34/44 bull call spread at $1.40, now $2.60 (up 85%).  Of course, for example, $2.60 is NOTHING on the SDS March spread as the potential upside is $8.60 and that's the point of disaster hedges – So far, we have a little 5% correction in the market and if, for example, you had just 10% of your virtual portfolio in these hedges that gained 122%, 60%, 68%, 25% and 85%, you would very likely have offset the entire 5% loss on the other 90% of your virtual portfolio and those gains ACCELERATE as we go down further with the DXDs having 200% more to go to a full payoff (and DXD is just under $31) and FAZ paying a whopping $15 on $1.60 if the financials crash betwen now and July etc. 

If you are not using these plays, I urge you to go back to the original posts and at least experiment with this strategy over time, it's worth establishing a paper trading account to get comfortable with these hedges.  As I reminded Members that Sunday: "Remember, your hedges are supposed to lose money if the bulk of your virtual portfolio is flying" – this is something I found that some people lost sight of as the markets went higher and higher - giving up on the hedges rather than scaling in along the way or at least rolling the ones they had to follow the market… 

On Monday, Jan 11th, the futures were up 100 points (as usual) and my post was titled "Monday Market Momentum - Can We Keep It Up?"  I ripped apart the bullish premise for moving the markets higher, especially the skyrocketing commodities (yes, I was 2 weeks early with my original call).  I put my foot down at $84 oil as a weekend Rent-A-Rebel attack was the only reason oil was moving up and, to me, that just smacked of being an act of desperation on the part of the oil pushers, who were getting worried about the upcoming February contract expiration and needed a spike to unload into.   

There were lots and lots of fundamental things going wrong that day including AIG removing 45 geographic housing areas from it's riskies underwriting category (a big mistake reflected in AIG's drop), banks were boosting their lending to hedge funds to record levels, BCS won the first ever Dubai foreclosure case and China approved both short selling and margin trading (but only for rich people who qualified) on the same day that Fitch warned that "Chinese banks are creating "a growing pool of hidden credit risk" through financial moves that shift loans off balance sheets."  I hated to be a stick in the mud but these things did bother me and I urged extreme caution until we got past the post MLK-day earnings week – silly me! 

AA disappointed us on Tuesday and I warned that the Beige Book was likely to remind us of a darker brown color on Wednesday.  I was thrilled to discover that hedge funds (the ones we had noted were given record funds from the banks on Monday) had made record bets on higher crude and fuel prices with the CTFC telling us that "the total net number of long positions held by so-called large speculators in NY crude, heating oil and gasoline futures is at an all-time high."  I, of course, reiterated my short position on USO and OIH (and our short sale of the XOM $70s was also a home run but not, obviously, the Leap at this moment).  Monetary policy was tightening in China and I predicted doom for FXI (it's down 10% since that day so far) and I reminded readers that I liked FXP long (it's up 20%) as a way to play it.  We had a great time day trading the markets and I detailed that in a very educational post HERE.  

Wednesday, the 13th, was "Beige Book Boogie" day but I predicted (after Tuesday's crazy action) that we were once again in a "Meatballs Market" where bad news JUST DOESN'T MATTER and, indeed, despite what I thought was a TERRIBLE Beige Book – the market just kept going up.  Thursday we got another boost from one of the Gang of 12 as DB said "Ignore the Unemployed Men Behind the Curtain" and forecast the US economy would grow 6% in 2010.  I pointed out how insane that was and ran the numbers but there must be people who don't read my column as the market did fly up to 15-month highs that day, causing me to call for a cash out on our bullish positions (unhedged ones).

My premise that stealing from the poor through commodity inflation to give to the rich through speculative gains was not a firm basis for declaring economic victory, something I had already covered a long time ago when I was popping the last rally bubble in the "Dooh Nibor Economy"   I warned that we were partying like it was 1999, adding "or 1929" – complete with this video to hammer the point home.  But, like I said, it seems that not everyone pays attention.  In addition to my commentary and the video, my 9:44 Alert to Members contained the following warning: "Be very careful today, I still feel like this whole thing can snap on one bad news story."  The next morning, I was right already but nowhere near as right as I was the following week!

I predicted a "Freaky Friday" on options expiration day and we were not disappointed as the Dow dove almost 200 points intra-day but we were smart enough (burned enough times) not to go too short into the weekend.  In the morning post I was really getting fed up with the public apathy to the ongoing swindle on Wall Street (especially as Karl Denninger pointed out ridiculous manipulation in the S&P futures) and maybe I woke someone up because things finally started changing this week as the Administration struck back with Obama leading a populist revolt against the hand that usually feeds him.  I won't rehash it here but it was quite a manifesto I wrote in that post.

We were thrilled with the sell-off as we had cashed out our bullish plays at 10,700 and the nice drop on Friday felt like we were finally making some bearish progress.  My 1:35 chat comment to Members set the stage for this week as I said that day: "So funny, a whole week of gains I thought were ridiculous wiped out in 4 hours."  It was even "funnier" this week as 4 days of trading wiped out 2 months of gains.  In my "Wild Weekly Wrap-Up" I detailed all 68 trade ideas for the week (only 12 losers) and we carried some of our focus index shorts through to this week and it's interesting to see how some did now that we've run 7 more days (not including complex spreads):

  • EDZ Apr $4 puts sold for .50, now .30 – up 40% 
  • VNO Feb $65 puts at $1.25, now $2.85 – up 128%
  • FAS Feb $98 calls sold for $2, now .35 – up 82%
  • TBT Feb $48 puts sold for $1.10, now $1.55 – down 40%
  • RTH Feb $90 puts at .80, now $1.35 – up 68%
  • IYR March $46 puts at $2.20, now $3.45 – up 56%

VNO is not an index but we switched to shorting VNO at $70 as SRS was simply way too annoying as a way to short CRE – nothing against VNO, who are a good company, but they have been reliably rejected at $70.  Notice that TBT is working against us at the moment.  This is why, when interviewed on BNN last night, my pick of the week for next week was – TBT!  Those guys can come in fresh on a position we lost 40% on – that's a great deal!  Of course, when we sell a put short it's because we are willing to take a long-term ownership of the stock.   In this case TBT would be put to us at net $47.90 and TBT is currently trading at $47.35 so we are far from worrying.  This is something that takes getting used to with option put selling as the 40% paper loss on the puts is "just" a 1.1% net loss on the stock position and that is still better than if we had bought the stock straight up for $50 last week. 

We use short puts to hedge our early entries into a stock that we want to own long-term when we are not sure that they won't be dropping further on us.  Another nice thing about selling puts is you can "roll" them to a longer month at a lower strike and the Feb $48 puts at $1.55 can be rolled to the June $44 puts, now $1.50, for 5 cents – giving us another 10% downside buffer in case we decide we want to avoid the assignment this month.  Isn't that a nice, relaxing way to test-drive a stock – especially in an uncertain market.  You'll see a lot of put selling in this weeks picks as we are not at all sure when the music will stop on this downslide so we are bottom fishing with caution.

Last week was a short but exciting one.  I my Martin Luther King Day post I had a dream (well, actually a discussion with a commodities trader) and that prompted me to warn Members to get out of gold (not the first time I've said this) and, finally, my timing was spot on this week.  I put up just two working plays for the day (obviously to be executed the next day).  My 12:12 comment to Members was: "I’m not so bullish on the RUT between now and Feb as I do expect a market correction of about 5% (taking RUT to about 610) between now and then."  The Russell finished the week at 617, down from 640, so not a bad call on the whole and we still have a 2 weeks to February!  Special feature this week will be trade adjustments to fix our bullish plays that got burned (and there were plenty!):

  • UYG Feb buy/write at $5.40/5.70, UYG now $5.47 – off target, no change.
  • IWM 2011 $62/68 bull call spread at $3, now $2.60 – down 20%, no change
  • IWM Feb $65 calls sold for $1, now .53 (pair trade) - up 47%, stop at .60 (.10 tailing)

This is another very nice strategy we've been using lately, using a long bull call spread as a base to sell calls against rather than just a leap as it gives us much better coverage in case of a major sell-off. 

Testy Tuesday – Have the Markets Become Comfortably Numb?

I said on Tuesday: "I have a theory that the markets (and the American people in general) aren’t irrational, they are simply shell-shocked after suffering a very traumatic group financial experience…"  That was my expectation for the low-volume complacency we have been seeing in the markets and my outlook for the week was to watch for a return of volume because "high-volume (relatively) days almost always tend to be down days."  I went on to conclude: 

Earnings season is like party time for options traders – even with the low, low VIX, there’s still plenty of fun to be had but we’ll be taking it easy this week as we try to get a grip on sentiment from reading the early tea leaves.  If the volume stays low, it should, as I predicted on Friday, be back to business as usual and business is usually up as long as bad news continues to roll right off the shell-shocked public’s back

We already had an almost entirely bearish virtual portfolio and we were looking for ways to balance to the upside and, of course, the cornerstone to our strategy is scaling into positions (article here from our strategy section) so please don't look at these trades in a vaccum – until we violate the 5% rule (and we're right there) then we have to look at the 5% pullback I predicted as a buying opportunity – the first one we've really liked in a while.  Of course, in additon to my Monday comment to expect a 5% correction and my Tuesday warning to "take it easy" I did post this helpful visual aid:


I know, way too subtle….  Anyway, we did mix in a lot more bullish plays and hopefully they do come in handy down the road and the adjustments posted are based on the assumption that we are following sensible scaling strategies.  I had not intended to trade much on Tuesday but we continued up on a low volume rally so, after closing out our bullish V play, I said to members at  12:37:

12:30 Dow volume is 87M, with 90M being "normal" at 1pm so volume is trailing off fast but we’re still going up and up and up.  I’m getting very interested in the idea of going short again here on the Dow as they are about 20 points off Thursday’s high (from which we fell 150-points).  DIA $106 puts dropped to $1.38 so that’s my put of choice with a DD at $1.12 for a $1.25 avg entry and a stop at $1.

  • V Feb $85 calls at $3.35, out at $4.50 - up 34%
  • QQQQ March $47/46 bear put spread at .45, now .70 – up 55%, stop at .65 (.10 trailing)
  • CAKE 2011 $17.50/25 bull call spread at $4, now $3.70 – down 8%, rolling $17.50 calls to $15 calls for $1.20 or less.
  • CAKE March $22.50 calls sold for $1.30, now .80 (pair trade) - up 38%, on target
  • WFR Feb $14 puts sold for .85, now $1.30 – down 53%, can be rolled to March $13 puts, now $1 so no worries yet
  • WFR March $13 puts sold for .65, now $1 – down 54%, can be rolled to Apr $12 puts, now .75 so no worries yet
  • WFR 2011 $10s at $5, now $4.30, – down 14%, would like to roll to $7.50s for $1.35 if possible
  • DIA $106 puts at $1.38, now $4.88 – up 253%, should be stopped out or tight stops (.25 trail)
  • EDZ March buy/write at $3.50/4.25, EDZ at $5.59 – on target
  • TBT complex spread, too complicated to list here – on target
  • XLF March buy/write at $13.88/14.44, now $14.18 – off target, no change
  • SDS complex spread, too complicated to list here – on target
  • TWM Feb $21 calls at $2.65, now $4.70 – up 77%, should be stopped out or tight stops (.25 trail)

So we had intended to relax and not play too much but we ended up taking a large set of very bearish trades.  The main reason was that the market was flying up on the ridiculous premise that the loss of the MA Senate seat in Tuesday's elections would be fantastic for health care stocks and great for the market in general as it was going to "stop Obama" and the evil Democrats from doing all those nasty things they do to the market (like having it run up 50% off the March lows).  Maybe I'm too liberal and cynical but I considered this asinine and I said to members at 3:43: "I really think this is all about the fundies dumping their health care stocks on a whole new round of suckers as the spin a brand new tale right before they collapse the tent."

My 3:54 call into the close, after making all those bearish picks was: "This will probably be my last bearish judgment call because if they crack up from here, it’s just going to be foolish to be bearish but I’ll give it one more night and see if all those reporting companies can send us higher tomorrow (plus the miracle in Mass)."  You may disagree with me and think that GS and their gang of 12 and the MSM don't manipulate the market through a mix of program trading and well-timed rumor mongering but it is funny how often my cynical view of the situation pans out, isn't it?

Whig Party Wednesday – Republicans Take Kennedy's Seat at the Table!

I was very pissed that the Dems blew it but fortunately, John Stewart was even more pissed so I let his clip do the talking.  Our consumer confidence was down and German Investor Confidence was down and New Home Construction was down and Mervyn King said we're all doomed and that led me to close the post with: "So happy Wednesday to you!  Looks like we’re glad we were short yesterday and we’ll have to see in chat if our levels hold up, giving us yet another chance to flip bullish and have a 2-way day or if we finally have a proper sell-off, maybe with some volume this time.."

  • DIA $107 calls at $1, out at $1.20 - up 20%
  • DIA $103 puts at $1.13, now $2.94 – up 160%
  • NSM March $14 puts sold for .65, now $1.05 – down 62%, March $15 puts are .55 so no worries
  • SPWRA March $21 puts sold for $1.50, now $1.95 – down 30%, no change
  • AAPL 2011 $185/230 bull call spread at $22, now $19.10 – down 13%, roll down $5 for $2.50 (always)
  • AAPL 2011 $185 puts sold for $18, now $21.80 – down 21%, no change
  • TWM Feb $25 calls at .90, now $1.80 – up 100%, plan was to cover with $26 calls at .90 for free bull call spread or, at this point, protect the double with .15 trailing stop.
  • UNP March $67.50/Feb $65 diagonal at net .20 credit, now .15 credit - up 25%, on target (you have to be patient with these!)
  • IMAX June $10s for $3.50, now $3.90 – up 10%
  • IMAX March $12.50 puts sold for .90, now .80 – up 11% (pair trade), on target

We got cautious, expecting a stick save in the afternoon and my 1:14 comment to members was

Dow volume 115M at 1pm and we’re right back down to stickable levels (145M by 3pm).  Of course keep in mind we’re playing up for the irrational stick that has no basis in fundamentals – that is very different from being bullish.  We got the Mega-Stick on Friday afternoon that followed through to yesterdeayd morning and we got a similar move a week ago Tuesday into last Wednesday but, ONE DAY, the stick will fail us and we’ll sell and sell as people wake up from their stupor and realize the market is up 27% since last earnings and these earnings are NOT 27% better…  TWM $25 calls are nice movers to the downside at .90, using the $24.25 line as a stop (right here).

My last trading comment to members at 3:53 was: "DIA $107s hit goal at $1.20 – Don’t be greedy!!!" as we had no lasting faith in our open bullish bets.  After hours we made some quick gains trading oil futures to the upside ahead of inventory but wisely took that money and ran as we didn't expect a good report – just the anticipation of one!

Philly Fed Thursday – The Fix is In!

I was livid about the ridiculous lack of funding and time given to the Financial Crisis Inquiry Commission and I correctly anticipated Job Losses would be worse than expected (I have to publish the first half of my post before the 8:30 reports in order to make our morning newsletter mailing) and I also correctly predicted the Philly Fed would be worse than expected (and it was REALLY bad) and China's GDP was just way too hot at 10.7%.  Oh yes, and Nouriel Roubini said the global market rally would be coming to an end – now THERE's a guy with good timing!

My opening comment in the 9:50 Alert to Members was: "I am for shorting into this morning spike as it’s nonsense, especially this run in the Nas – most likely it will reverse but I’d like to see a clear move back to resistance first.  QQQQ $45 puts give you great leverage at .56 and you can use $46.20 on the Qs as a stop out, looking for .70+ on the day."  but, at 11:59 I commented to Members "QQQQ $45 puts are now $1.25 and that is PLENTY!" they are now $1.60, up 185% for those who hung tough but 123% in 2 hours is a nice rate of return… 

  • QQQQ $45 puts at .56, out at $1.25 – up 123%
  • DIA $107 calls at .avg .67, now .42 – down 37%, hope is the only plan!
  • DIA $102 puts at $1.11, out at $1.37 – up 24%
  • GS March $150 puts sold for $4.50, now $7 – down 55%, no worries yet, Apr $145 puts are $6.80 and GS is at $154 so it's all premium anyway.
  • IWM Feb $61/63 bull call spread at $1.18, now $1.07 – down 9%, setting stop on $63 calls (now $1.22) at $1.30 (.10 trail)
  • IWM March $59 puts sold at $1.20, now $1.68 – down 40%, May $54 puts are $1.60 so we are good for another 10% drop so no worries yet
  • XLF Feb $14 puts sold for .25, now .45 – down 81%, need to keep an eye on these!
  • XLF 2011 $15s at $1.39, now $1.19 – down 14%, roll down to $13 calls for $1 would be nice if possible
  • ZION $19 calls sold for $1.40, now .75 – up 46%
  • APH complex spread, too complicated to list here – on target
  • TASR 2011 buy/write at net $3.40/4.20, TASR at $5.84 – on target
  • XOM Apr $65 puts sold for $1.90, now $2.45 – down 29%, fine
  • HOG Feb $25 puts sold for .90, now $1.80 – down 100%, looking at roll to 2x the March $23 puts, now $1.15 no worse than even.
  • GE 2012 $12.50/17.50 bull call spread at $2.60, now $2.55 – down 2%
  • GOOG March $530/560 bull call spread at $21, now $15.80 – down 24%, stop on $560 caller at $22 ($2 trail stop)
  • GOOG March $540 puts sold for $11.50, now $20.60 – down 81%, no worries at all, June $500 puts are $20.50 but, with an expensive put like this, it's worth considering that you collected $11.50 so only worry about the $9.10 you are down and roll that down to the March $510 puts, now $10.40 but only if the markets keep going lower.
  • GOOG 2011 $880 calls at $3, now $2 – down 33% 


Notice that, because we were going down so fast, we started trying to protect our bearish profits with some upside plays – a little bit of bottom fishing and a few day trades, but with stops, of course.  If you are going to let profits ride, it's a good strategy to poke at protective plays but don't let the protection be more than it is – just a way to ease you through the bounces until you decide to stop out your bearish plays…

At 5:28 am I sent out a special Alert to Members regarding managing our Mattress Plays (our normal protective virtual portfolio puts) and how to add to them in a down market (something that hasn't come up in quite a while).  The basics of this strategy can be viewed by non-Members in my original article: "The Stock Market Parachute."  It's amazing how fast we went from worrying about being too bearish to worrying about being too bullish, isn't it?

Fall Down Friday – Stop the Week, We Want to Get Off!

Hmm, 3 headlines with exclamation points in 4 days – that can't be a good thing…  As I said that morning "Boy, when sentiment shifts – it REALLY shifts!" (another exclamation point!)  My outrage of the day was the very bad Supreme Court decision on "corporate personhood" and I was looking at the lack of rail volume coupled with our ongoing concerns following the Baltic Dry Index as well as CNBC's "cover up" (for lack of a nicer word) of the oil inventory data.  Nonetheless, we were still loaded down with bearish positions so we kept poking at bull plays, hoping Mr. Stick still had game:

  • DIA $105 calls at $1.18, out at $1 – down 18%
  • EDZ March buy/write at $3.50/4.25, EDZ now $5.59 – on target. 
  • BTU March $44 puts sold for $2, now $1.80 – up 10%
  • WFR March $13 puts sold for .70, now $1 – down 44%
  • BYD March buy/write at $5.57/7.78, BYD now $8.38 – on target
  • WFR 2012 $10 calls at $5.50, now $5.30 – down 4%
  • DIA $106 calls at .86, out at .60 – down 30%
  • HOV 2012 $2.50/5 bull call spread at .95, still .95 – even
  • HOV 2012 $2.50 puts solf for .70, still .70 – even (pair trade)
  • ISRG March $300 puts at $3.70, now $4.40 – up 19%
  • AAPL March $180 puts sold for $5.85, now $6.40 – up 9.45
  • EDZ Apr $4 calls at $1.75, still $1.75 – even

As we were near the 5% rule for the week, my 3:48 comment to members was "Back to cash but leaving disaster hedges, which are looking great now as this is shaping up to be some disaster."  I noted that there wasn't very much support between here and another 5% drop if we head lower on Monday and we added those EDZ calls near the close just in case Roubini's Global melt-down scenario starts on Monday. 

It would have been fun to go gung-ho bearish but we had a fantastic week last week and cashed out our bullish plays on top and now we had a chance to cash out the bear side (or most of it) after a 500-point drop – it just doesn't make sense to push it when given a gift like that.  Starting this week off in cash gave us a great opportunity to jump on the bear wagon on Tuesday and we rolled part of those profits into some bottom fishing but we're sure ready to short the next leg down if Mr. Stick can't pull it together over the weekend.

In our next post, we'll be discussing our next set of watch levels and what the week ahead may bring…  


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  1. Good morning.

    Big strategy discussion at the end of Friday’s post (some politics too!) if you are interested but please let’s follow-up here so I don’t have to go back and forth. 

  2. Innocents- You are correct in that no one reads the contracts but you don’t have to be a lawyer or CPA to recognize a risky deal. As any enterprising con artist will confirm, the mark wants to believe the unbelievable (i.e., greed). Picture this. I am making $40 or 50 g’s a year; I am trying to buy a $400,000 home that a few years ago sold for 1/2 that; someone is going to lend me $390,000 or more without having to prove I make any money; I don’t have to pay but token interest for 5 yrs; etc. Bells and sirens and whistles should be going off in one’s head screaming STOP. There was no fraud. People who entered these deals got just what they bargained for – a very risky arrangement with appropriate serious consequences. These so-called victims would not likely lend to their brother in law or neighbor on such terms yet they blithely accepted the largesse of complete strangers and expected no strings attached?
    The question is, what accounts for this profound level of stupidity? And I mean pervasive stupidity on all ends of the deals from the originators to the underwriters to the appraisers to the lenders to the bundlers to the credit swap suckers and on and on? The simple answer if greed but I will leave it to the philosophers and psychologist to elaborate.
    The facts are that plenty of ordinary people resisted the temptation to take that "extra" $100,000 cash-out when doing a re-fi because they reflexively understood the common sense rule that something too good to be true likely is bogus.

  3. All – I’m planning to open a new account for options trading since Schwab is too expensive and does not trade futures.  I know Think or Swim is popular amongst subscribers here.  My trading buddy swears by Interactive Brokers.  Are both fairly comparable?  If TOS is better, please explain.  Thanks. 

  4. Phil – my trading buddy only trades futures, mainly the nasdaq e-mini.  A number of key things he likes about futures are the ability to trade them on a 24/7 basis and the huge leverage he can get.  In terms of betting on index movements, it appears that you like options better than futures.  Please explain the pros/cons for a retail investor from your perspective.  Thanks! 

  5. Phil
    No question about it – you have been warning about overvaluation in the markets for some time along with the prediction a correction will materialize sooner than later –  I heeded your advice for caution the week before last, and closed out 50% of my portfolio and went to cash  Thank you for the sage advice.. With my stops and hedges in place I thought the balance of my positions were safe. Obama’s two speeches this past week made the decision for me on another 40%, so now I am down to 10% with most of the positions 100% hedged with no stops as I would be killed by taxes if stopped out. So here I am starting over "squeezing nickles into quarters" and looking for bearish opportunities that seen to be the most attractive plays going forward. When this correction reaches the levels we had early spring of last year, then I will begin to accumulate stocks using the buy/write strategy.
    Re your very interesting post on the residential real estate experiences, I must confessI was a contributor/participent in the bubble formation. Like so many others taking out mortgages on houses, I was leveraging this opportunity as a speculator. On the mortgage application, you would always be asked the question – "Will this be your primary home that you will be residing in?" I would always give a Yes answer. What an easy scam that was – after a week of residency, you rent it out and go get another "primary" residence. At one point I had five "primary" residences, however they all were in sequence. I do not think I was alone, and I made a lot of money for realtors that did almost nothing for their few minutes of work. This was legal and I did not lie, but the regulations were a joke. These type of regulations allowed speculators like me to legally contribute to the bubble.

  6. Good Grief!  Where did the gun salvo come from?  Put serial numbers on bullets to "trace" them back to the shooter?  How are you going to implement that given all the foreign manufacturers of bullets? Not to mention the BILLIONS of bullets that are currently in circulation.   Do you think bullets stay intact after hitting something?  This isn’t CSI.  Most bullets are shattered or hopelessly mangled when they hit something, making identification of them impossible.  Tax bullets?  There’s already a tax on them.  Are you suggesting a punitive surtax on 40 million people a hopeless effort to catch criminals. Jesus Phil. Your being liberal is one thing, but that is an absurd position to take while at the same time endorsing the legalization of pot, which does far more damage to people long term than guns do on a per capita basis. You’re flying the typical liberal flag in that you endorse the legalizing of harmful products that you APPROVE of while criminalizing those you DISapprove of, facts to the contrary notwithstanding?  I expected better from you.
    Do you know that sports shooting is one of the fastest growing sports in the US, and its injury rate (ZERO) makes it less dangerous than high school girls field hockey?  Would you just ban the sport because you disapprove of it?
    I’ve come to respect many of your opinions here, even those I disagree with.  Frankly, this is your blog and you can write what you like but I do pay for the privilege of reading about topics where you are the expert.  The gun comment is one where you’ve just completely gone off the rails.  Please! Stick to what you know. Tell me how I can navigate this market.  That’s why I’m here.  Spare me the liberal gun argument.

  7. Phil, What do you think about BRK.B right now? OK to buy now or need to wait for a pullback?

  8. Innocence/Pstas – Well I’m just going by my experience running a company that handled over 2M closings in 10 years and the several hundred times me or my people were called to offer expert testimony on these matters in court BUT you say the average person should know to ignore:

    • The advertising from the government and the MSM telling them it’s "the best time" to own a home
    • The "conventional wisdom" of how owning a home is the best path to retirement
    • The realtor (that they think is working for them) tells them the house is a bargain and they should "buy as much house as they can afford"
    • The appraiser (who they hire) tells them that the home is fairly valued
    • The mortgage broker (who they hire), who says they qualify (ie. can afford to pay under reasonable, foreseeable circumstances) for the loan, which is the best deal he can get them (not to mention the old chestnut:  "Of course you’ll be able to refinance at a lower rate long before that baloon payment comes due").
    • The lawyer (who they hire), who tells them everything is in order with all the contracts and that there are no traps that may harm them down the road.
    • The title people who "insure" their home (also for a fee)
    • The homeowners insurance company who accept whatever value they put on the contract (for a fee, of course)
    • And, of course, they should also have been ignoring the fact that there had been a very positive trend in home values all the way back to 1970 so that ANYBODY who bought a house prior to 2006 was making money (on paper). 

    I guess you are right, these "so called victims" are nothing but scammers taking advantage of the poor, innocent system.  Thanks for straightening me out! 

    New account/Terra – All I know is I love TOS.  I have not tried IB so I can’t explain anything and I think it’s always a matter of personal preference anyway.  Why not open a virtual account on each and practice trading – then you’ll know what fits your style better. 

    Futures/Terra – Also a matter of preference.  I like futures when I think something is very obvious and we have a nice inflection point to trade off and I do like the fact that I can trade on news at 4am or midnight.   There’s not fudge factor in futures though, you are pretty much wrong or right while selling options for premiums gives you a pretty nice cushion. 

    Gains/Gel – I am so thrilled you pulled back.  I’d hate to see last year’s great gains wasted!  Nothing wrong with waiting for clarity before re-entering is there?  As to real estate, it’s a systemic problem, the rules are designed from the ground up to create a vortex that funnels wealth from the bottom to the top.  They system works because the guys at the top drop enough incentives along the way that people like you (and me, I was making a mint selling title work on over-valued, over-flipped homes) would fight over the crumbs and grease the wheels while they jacked up home prices (see linked chart) from $100,000 in 1995 to $250,000 in 2006 despite the fact that there were no shortages and no real population growth.

    What they accomplished, moving 80M mortgaged homes up from $100,000 to $250,000 is to generate $12Tn in additional mortgages (PLUS commercial) along with all the inherent fees and interest which is how the banking industry managed to grow 3 times during the same period.  You can chart this scam right along the same timeframe that GS et al decided to enter the business.  They built this thing from the FRE/FNM rules, the advertising, the mortgage industry, the whole concept of refinaning, the ratings agencies – everything, all designed to turn homes into exploitable commodites without regard to the side effect that the American public had to pony up an additional $12Tn (x 2.5 on a 30-year mortgage) to live in the same homes they had been able to afford at $100,000 (3-4 times an average single person’s annual salary) just a generation earlier. 

    The scope of this fraud on the American people is so massive and the time-frame is so large that you can’t even point a finger at one person and say "he did it" but believe me, "THEY" did it.  They are the same guys who sat in Jeckyl Island 80 years ago and carved up this country and those guys were the same guys who used to own the rails, and the oil companies etc, etc. as they took this country from boom to bust pretty much since it was founded.  Jefferson hated these guys and I do too as they have done more damage to this country than any terrorists ever could.

    OK – time for me to go have fun!

  9. Phil; on that Free Speech ruling that you don’t like; here is a well reasoned opinion for you courtesy of Dr. K:
    On yesterday’s Supreme Court decision loosening restrictions on campaign contributions by corporations:

    I think it’s a great ruling. The most important amendment is the First Amendment. The most important of our rights is free speech. And the most important element in free speech is political speech. And that’s why the governing class has always attempted the . . . regulation of political speech.

    The less, the better.

    Now, it has to be admitted that one of the downsides of this will be a marginal increase in the power of money. However, for all of the restrictions that we have had under all our laws – the [campaign] finance laws — money always ends up having its influence one way or the other. It finds its level. It goes around loopholes. You hire smart (and now rich lawyers) and you get around [the law].

    And, secondly, the only way to completely abolish the power of money is to do what was done in other English-speaking countries and . . . ban all political money and you have it all paid by the government. The problem is: If you do that, it’s a huge advantage for any incumbent.

    So, I think what we heard today [from the Supreme Court] is exactly what you ought to do: disclaimers and disclosures so everybody knows who is giving and who is financing. But open the gates.

  10.  Hey Phil! Great post. Some advice to prepare for next week. Overall, still 60%+ or so in cash. But, a couple positions that are hurting. Let me know what you think. I’m short the following puts, and am happy to take delivery of the stock in all cases, if thats best….but if you think rolling or hedging would be better, i’d like to hear your advice. Thanks!
    1. Sold GOOG 580 Feb Puts for 20 (now 38). 
    2. Sold AAPL 210 and 200 Feb Puts a while back.  210s are now 18, 200s are now 12. 
    3. Sold GS 170 Puts. Yikes. Sold at 5, now 17. 
    Hope your weekend is going well.

  11. Hanna
    I have the short 200 AAPL puts as well. I contemplated a close out last Friday, but decided the risk/reward balance  favored  keeping the position. Notwithstanding the market dynamics (weakness), I could see a pump upwards in the stock on both earnings and the i-pad announcement. I, like you, could care less what happens short term,(assignment is OK)  as this stock is headed up sooner or later as AAPL holders are part of the cult that makes AAPL what it is.

  12. OK, I have to admit I am a bit confused by this post Phil. I follow this every day and last week PSW officially went "cautiously bullish" and the week’s chat was replete with bullish plays (some of which I utilized and am down badly on now, I will be happy to provide the list if you want to suggest some follow up adjustments). Yeah I know you never really believed in this last bit of the run up, but you did throw in the towel and went bull because you said in essence being bearish was not making sense these days. You also updated the buy list and told us to use accordingly. But after reading this post you seem to infer that you were bear 100% of the way, which just ain’t so. The number of bull plays (long term not just day trades) provided last week just DOES NOT jive with the spirit of this post. So what is it here at PSW? Are we bulls, are we bears or do we just don’t know??? 

  13. Victims- scammers, yes to a degree but more likely willing participants within a confederacy of dunces. While I agree on the array of cheerleading, this does ring a bit of the devil made me do it defense. As a very firm believer in personal responsibility, I will have to part company with on this one. The fact remains that millions chose not to participate in the charade and if more had done so, the card house could not have been built. Surely some interesting books will be forthcoming on the psychology of it all and the aftermath. I find it interesting that while the bank bashing is well deserved, I wonder how much of it may be guilt absolving/transfer or whatever the psychological diagnosis is for shifting the blame to others?

  14. Bord- Phil can defend himself but my two cents worth is that the best he can do is provide a framework for reference to the market and the rest is up to you and me. I agreed with his bearish overall assessment on the fundamentals and also agreed that at some point you have to go with the flow. Sometimes, stuff happens.
    There is a lot of Cramer bashing on this board, for example, somewhat justified. But, I always respected his response to his critics which is "f you think I am wrong, then bet against me". You pays yer money, you takes yer chances.

  15. Guns/Jcm – Well you have to start somewhere.  You make it a requirement going forward and I imagine old bullets get used up at some point.  There are many ways to identify something, multiple serial numbers or embedding micro-coded fragments are both fairly cheap ways that would help (not perfect, but help) in identification.  The tax doesn’t have to be "punative" - just enough to make the ammo traceable so perhaps the US can no longer tie with Zimbabwe in gun deaths (and we are at 5x Canada and 20x the UK).  I am not a big fan of guns but I’m not for "criminalizing" them, that’s just your knee-jerk inference because I stepped on your turf.  I do think that people who want to use guns do need to take responsibility to make the sale of guns and ammo as "safe" as possible and right now it’s clearly not.  I have family and friends who are in law enforcement in NY and NJ and I’d hardly call them liberals but you go to a few police funerals and you’d swear some were leaning that way…  Gun crime is back on the rise (77  NY policement killed by guns from 1990 to 1999, 146 since 2000 is not merely a statistical bump) at the same time as police budgets are being slashed and if we start heading back to 70s-style levels of crime (likely if the recession continues) then we could be passing right by Zimbabwe and heading for Columbia levels of violence.  It’s one thing to fight for your right to bear arms but what are you doing to fight to stop the criminal use of firearms – or is that someone else’s problem that just so happens to be a by-product of your rights?

    BRK.B/Bord – I would love them on a pullback to $65, otherwise I’d rather wait for the options to get more liquid.  Last time I picked Berkshire, they were were at  $2,400 in Feb ($40) so it’s hard to be in love with them now.  If they had been at $40 with options to sell back then I think I would have backed up the truck.  Not to be goulish but Buffett will die or retire and there will be an opportunity to buy Berkshire cheap in the future so, until I see some very nice option plays shaping up, I’m not in any great hurry to buy over $65. 

    Speech/Cap – More spurious arguments that dance around the point, this is not about free speech because corporations do not speak.  This is a BS loophole to get around campaign finance laws.  No one has ever said the CEO of a corporation can’t speak freely or any of the officers or any of the workers have they?  So why are we now creating brand new, artificial people who can also speak?  What happened to one-man, one vote?  Does the CEO get to vote twice – once as a citizen and once as a corporation or is he only limited to donating twice.  I have a corporation so I can donate my limit personally and as much as I want as a corporation and so can you but do you know who doesn’t have corporations to fund their candidates?  That’s right, the bottom 90%.


    • GOOG – The Feb $580s can be rolled out to the June $530 puts (now $31) so keep an eye on that roll.  If you do have to roll there you may want to sell the June $600 calls, now $20 to protect yourself a bit more because it is possible for GOOG to get driven down to test $500 if the market keeps heading lower.  You can also mitigate 1/2 the downside by grabbing the $530 puts for yourself as a momentum trade if you are comfortable day-trading the contracts.
    • AAPL – All this put selling is fine as long as you REALLY wanted to own the stock at that price.  If not, then you need to look ahead to a roll where you do want to pay up.  Feb $210 puts are $18 and the rolls aren’t very good as the July $185 puts are $15.75 but that’s about right as an average of your two puts.  As with GOOG, once you feel the pressure to make that roll, you should seriously consider offsetting with a sold call, like the July $230s, now $10.   There is a trick for these (and GOOG) where you can cover with the July $185 puts, now $15.60, so about what you collected – again to cut the losses if they keep dropping.  The delta of the $185 puts is .35 vs .43 of your current putters and you can ride them until AAPL finds a floor and then go back to naked.  Or, if AAPL plunges, then you can do a 2x roll of the putters to the July $160 puts or lower (now $7.50) and that puts a $25 buffer between you and them so AAPL would have to fall all the way to $147.50 (the $25 buffer divided by 2), less the $15 avg you collected is $132.50 downside break-even – not bad coming off being in trouble at $197.75. 
    • The point to having a plan like this is to not panic.  You keep an eye on your escapes and don’t let them get away with you but, as long as those rolls remain about where we’re looking at them, you don’t have to do anything and can wait for AAPL to move back up but I’d get the hell out even and be happy if they have a run-up on their earnigns or the IPad announcement as you’ll just be lucky to get back to even at this point.
    • GS – Stops are a good idea on these plays, by the way.  Same deal, as long as you REALLY want to own GS, then you can roll down to the Apr $155 puts at $11 and that puts you in for net $156 vs. $170 in Feb and, of course, you can always roll again. 

    Bullish/Bord – Well it’s still in progress, I haven’t gotten to this week yet.  Of course put up a list if you want and we can look at where we can go (like Hanna just did).  As to the last part – we just don’t know, which is why the most important thing is to be mainly in cash and I did say many times that I wanted to wait out this past week before re-commiting.  That doesn’t stop us from making a few trades but the idea is to scale in so a drop like this becomes an opportunity to commit more capital, rather than a reason to panic. 

    Victims/Pstas – To me, the average person buying a home, pre 2006, is the couple who need a place to live and have saved up enough money to get a first or bigger home.  Generally, their lives leading up to the purchase are consumed with scraping together a deposit and borrowing deposit money from relatives and, of course, house hunting.  They have been told (and it was true at the time) that real estate was the best way in the world save and grow money and the realtors promoted the idea of "home as an investment" to people who never made an investment in their lives. 

    The math of interest and ammortization is well beyond the understanding of the average home purchaser and I rarely met a home buyer who wasn’t surprised when I pointed out that the interest on a $200,000 loan at 6% over 30 years was $230,000 which means buying a $240,000 home with a $40,000 deposit actually cost them $470,000 so their home had to double for them to break even.  You may live in the world of property flipper and speculators who were certainly guilty of gaming the sytem but about 10M real people per year were simply trying to buy a home in which their family could live and they were sold a bill of goods that sucked up their entire life savings and obligated to a lifetime of debt that may never return a penny. 

    Aside from the many other flaws of public education, why is it we don’t teach the kids anything practical like investing or saving or how to buy a home or a car?  It’s way more likely a student will do those things than need to dissect a frog or remember how far down the crust of the earth extends before it hits the upper mantle or even the capital of Missouri but for some reason it has been decided that our future generations should be completely ignorant of finances other than the endless math problems my kids had to do in 2nd grade to make sure they know how to make change (useful for working at McDonalds). 

    I used to help my employees buy homes and they were generally a bright bunch of people (and we were in the title business so they knew scores more than the average home buyer) yet when I would sit down and do the mortgage math with people and talk about the hidden expenses of home ownerhsip (painting, repairs, lawn care, randome tax increases, road assessments…) it was generally the first time they ever heard of it.  It would break people’s hearts when I would explain to them that buying a home wasn’t the best idea at the time and I will tell you that they are PROGRAMMED to believe that they MUST own a home to be "successful." 

    Also, I would tell my employees things like, if you take that $200,000 mortgage payment ($1,200 a month) and instead pay $1,500 a month, that you will knock $100,000 off the interest over 30 years and will actually pay off half the loan by year 11 vs year 20 without.  So $40,000 in extra payments over 11 years gives them a $100,000 return (150%), which is better than any other form of investment they are likely to make yet NO ONE tells them these things.  Not the realtor, not the mortgage broker, not the schools, not their lawyers – NO ONE.  Instead they are encouraged to put $300 a month into an IRA and play the market at an 8% average return (not counting the recent tragedy of course) while forking over $100,000 in extra interest over 30 years ($277 a month). 

    This isn’t complicated, it’s simple!  Putting money into an IRA rather than paying off the mortgage is STUPID!  Yes NO ONE tells people this.  Of course, with rates over 6%, the magnification of this math is stunning.  Another thing they never tell you is that if you pay your mortgage twice a month (same amount just 1/2 paid 2 times a month) that you can save $60,000 off a $200,000 mortgage without spending a penny and the loan would be paid off in 24 years.  Don’t you think that’s the FIRST thing they should tell you in school or that maybe your realtor or your mortgage broker or your banker or your lawyer should mention this stuff to you?  

    Anyway, this is what I mean when I get pissed about the systemic rip off.  Car loans, Credit Card loans, Payday loans, Mortgages are all ways that they system is used to take advantage of a poorly educated poplulation to charge them far more than reasonable rates of interest all so bankers (and the complicity service people who feed off the crumbs) can fatten their wallets at the expense of the masses and our "elected leaders" do nothing at all to combat this – not even a friggin’ educational pamplet – sickening!

  16. Cap/Speech  Like Phil said. ;)   Phil is there anyone you can "high 5"  when completing these spot-on writeups? :)   ( ya, I like the mans work.)

  17. Phil, I just met a young man who is a laid-off O.C. sheriff…..he’s selling cars now. :(

  18. Mauldin is at it again…..and his economists are downright scaring the pants off of me.  That island that was mentioned … well, not sure that is gonna help….
    Pstas – from your post on Friday’s blog, San Diego County and California – I have always thought that Texas will not be the first to cede from the Union!  What does Tx have?  Nothing.  CA has food, oil, tech and pharma – just need to figure out the water thing!  Although our politicians giving themselves a nice pension didn’t help their cause in recent years!

  19. Education- Finally, something on which we are in 100% agreement! I have been saying the same forever. I learned such things at home as surely many others did. My folks were products of the Depression and pounded into us the virtues of saving and frugality – "pay yourself first"; "don’t buy depreciating asset(cars)  with borrowed money"; "if you don’t have the cash, you cannot afford it" etc. A lot of today’s problems (as seen from the left and the right) can be solved with a healthy dose of personal responsibility. Teaching kids how to be that way (managing their money) would go a long toward that goal.

  20. Pharm- San Diego- That’s OK, when I get out there , we can start working on the water thing:)

  21. Phil
    Your posts are woven with accuracy. This whole real estate explosion, which was the spark that damn near put the entire world into a depression, will be debated for years to come. Your "front row" experiences certainly allows you to serve as an expert witness. For all of these "less than bright buyers" with almost no financial know-how, acted with one premise in mind, which was recited to them over and over – "your home purchase is the largest asset you will ever own, and real estate is the best investment you can make,as it has always appreciated in value". These buyers thought they could never lose, as they could always sell into an appreciating market, therefore there was no risk. Nothing is forever – not even diamond valuations, or even BRK-A valuations, as we experienced this past year.

  22. Pstas
    Your consideration of becoming a California resident some time in the future is based with a high level of inteligence and pragmatic thought. I have lived in some of the best locations in California over the years ( SF, Belvedere, Newport Beach, Manhattan Beach, Laguna Beach, Montecito and for the past 10 years Pebble Beach. I can tell you, I have spent a lot of time in the San Diego area, and it may very well be the best location in California, and when my wife throws me out I will be settling in North County. The state unfortunately is not perfect, as it has suffered from a horrific plague in Sacramento (state government) that could have not done a worse job of keeping our fiscal house in order. The balance sheet replicates Madoff’s bookeeping records. There is only one way to correct this massive mess is to entice business to locate here or expand what is here now. The geniuses in the state government are doing the opposite by raising taxes and romancing labor unions. There is, however, hope in the future with elections not too far off. Meg Whitman (E-Bay founder, Bain Capital associate and Harvard MBA) is willing to help and is running for Governor. The state needs a complete overhaul politically, as stupidity prevails. Pstas, we need you here to help, and I will put your name in the hat.

  23.  Phil – Couple of positions that I need to salvage…
    1. FDX Feb 75 calls at $9 (now $6.10)
    2. AAPL April 210 calls at $12.90 (now $10.35). I prematurely took out a Feb caller Thursday… :-( . Do you recommend a play through the earnings or wait out the earnings and iPad announcement.

  24. terrapin -
    IB vs TOS – TOS has a better trading platform -
    IB has rock bottom margin rates – and options trading – you do have to pay for feeds – per  months so the cheaper trading at IB may be offset by price of paying for quotes -
    At IB you have to pay a couple of bucks a month for quotes for futures, commodities, and foreign stocks – level II – have to pay for – not sure if you get all of this for free at TOS

  25. Phil – I need some major help with dia, spy, and efa covers – I missed the roll downs on covers – trying to follow posts, trade a fast moving market, and take conference calls makes for bad trading – not to mention my own mistakes -
    I cannot give you a break down of total cost on puts and covers b/c i have rolled out and taken covers on and off so I think we should just go for maximizing profit given current positions – on the dia I know b/c just initiated.
    Part of my problem may be that I hate buying back the covers at a loss – my inclination is always to roll them out a month or even roll them all the way out to june to create a vertical put spread – also – I know we are taking profits by rolling long puts down – I did it to take money off table as instructed but once the position is deep in money – it seems counterintuitive to roll down and pay more premium.
    What do you recommend for current covers – Thanks very much
    All positions fully covered - just started switching from spy to dia on friday 
    DIA – June 105 Puts @ $7.40 (cost 6.25)  – cover Feb. 104 @ 3.51 (cost 2.4)
    SPY -  1/2 June 114 Puts @ 9.02  / 1/2 June 111 @ 7.44
    SPY covers 1/2 Feb. 111 @  3.42 & 1/2 March 109 @ 3.85 (cost 4.04 – missed roll down from feb. 112 market moved too fast on me / I was too slow)
    EFA -
    June 59 @ 6.47 covered with 1/2 Feb. 56  @ 2.82 & 1/2 Feb. 55@ 2.20
     Thanks again

  26. I do think that people who want to use guns do need to take responsibility to make the sale of guns and ammo as "safe" as possible and right now it’s clearly not. 
    I could say the same thing about people who sell pot to 12 years olds, a drug you’d like to see legalized.  Yes, that’s a cheap shot, but so was yours. 
    It’s one thing to fight for your right to bear arms but what are you doing to fight to stop the criminal use of firearms – or is that someone else’s problem that just so happens to be a by-product of your rights?
    Another cheap shot.  What am doing?  It’s all I can do to avoid violating the moronic laws that currently litter the books which attempt to criminalize my every move.  I’ll give you one example.  Here in NJ, if I drive to the gun range, with my gun unloaded, with ammo and magazines in SEPARATE bags as required by law, and all locked away in the trunk, but I stop for gas along the way, or, Heaven forbid my car breaks down and I need to be towed somewhere, I have committed a crime for which I can be punished by up to 2 years in State prison.  Did you know that?  What moron wrote that law? How on Earth, does that combat gun crime?
    Stop supporting stupid laws written by morons and maybe we have some common ground to talk about the larger issues.
    I’m not going to argue with you Phil. It’s your blog. I can leave if I want.  But before I do, I have a question. There have been a number of political shots taken lately, and their relevance to short term option trading is highly debatable.  So, is this a political blog or an investing blog?  If there is some relevance to trading, then I can understand the politics, but I’m not seeing the relevance here.

  27. Somewhat of a Political Post so skip if so inclined.
    I had an idea. I’m not usually political but with the excesses and greed of late, sometimes you get to the point of saying "I’m mad as hell and …"  Anyway here’s the idea.
    The current overwhelming sentiment in this country is that we are a nation of the financial elite (top 10%), and the financially challenged (bottom 90%). I believe that a large part of the "outrage" directed toward the financial elite that we hear about on news shows daily, comes not from the idea of the actual wealth owned by the financial elite, but by "how" they acquired it and "how" they continue to acquire more. For example, look at the popularity and admiration enjoyed by Warren Buffet and Bill Gates. Right or wrong, I think most people believe that Buffet and Gates acquired their wealth in ways that are morally aligned with the values of the "American Dream". They applied their intelligence, worked hard, and capitalized on lucky circumstances. On the other hand, there is a large percentage of the financial elite, thought of as the "financial crooks", that acquired their wealth and continue to acquire more wealth, by using that wealth in morally corrupt ways to buy power and influence. We only need to look at the political lobby industry to understand the roots of these beliefs. 
    Now the supreme court has ruled that corporations and other 3rd parties (read instruments of "financial crooks") can contribute unlimited funds to help insure the continued morally corrupt application of their wealth toward purchasing the necessary power and influence to continue acquiring more wealth for themselves.
    It is easy to understand the populist outrage as more examples of government giveaways to the financial crooks hit the headlines daily while those headlines are shared with dire predictions of bankrupt safety net programs such as social security and medicare. All the while, the paychecks of the financially challenged continue to be debited with deductions for those programs they have been paying for all of their working lives and now believe will be bankrupt very soon. Given the facts of the national deficit and declining government revenues those predictions are increasing and being endorsed by very well respected analysts. 
    So with all of that background which I’m sure is no surprise to anyone, I’m wondering why we can’t take a small step in the direction of leveling the playing field somewhat and helping re-fund those programs which are the financial safety net for the financially challenged by creating a political influence tax. It seems to me that this is a "seize the day" opportunity. There are few things that I hate more than being bombarded with political ads and hearing the political drivel as each party pounds their chests while demonizing their political opposition, but with the recent supreme court ruling on corporate and 3rd party political spending it appears to be a freight train that can’t be stopped.  This being the case, and knowing that the financial crooks value power and influence above all else, lets impose a 100% political influence tax. For every dollar spent on political influence one dollar is paid in tax for exclusive use in funding those programs which exclusively benefit the financially challenged, i.e. social security and medicare. While I will still cringe at the blatent political content filling the air waves, it would bring a smile to my face knowing that whatever the cost of producing such drivel was, matching funds at the expense of the beneficiaries, are being put to GOOD use.

  28. jcmcn
    Here is the way I see it…..
    Politics = Government Choice
    Government Choice = Laws & Regulations
    Laws & Regulations = Criteria For Measuring Investment Direction & Risk
    Investment Risk = Direction for Investment Strategy
    Following this chain of logic and the inter-relation of each component, then one must assume Politics is a large part of everything that happens in our lives INCLUDING risks and strategies we collectively follow and contribute to at PSW,  allowing us to be better informed and educated at the level to insure success as investors and traders. Politics, therefore is a component of the matrix that is commonly known as market wisdom. IMO

  29. jcmcn
    As a former lawyer who is experienced in pleading my case, I will present my credentials which on a personal basis will prove my theory regarding Politics and the correlation and influence on investment strategy. Last week I experienced the largest loss in any three day period in my trading life – I lost 225,000K between Wednesday and Friday. This loss was 100% attributed to POLITICS, namely two speeches by a POLITICIAN made solely for POLITICAL reasons, trying to re-generate support for his populist base. This is prima facae evidence that cannot be challenged, and for those that ignore these type of POLITICAL risks then all I can say is "Good Luck".

  30. Gel — I get that, but the argument that’s been going on here has been about which pack of scoundrels are to blame for the recent/current crisis.  That is not helping any of us become better investors because everyone with an opinion is convinced they are correct and the other guy is hopelessly naive or a tin hatted conspiracy theorist.  Sure it makes for entertaining reading but while this was going on, we all covered our shorts and went long because, as bord pointed out, the consensus on PSW  was that it no longer made sense to be short.  Then, as fast as you can say "top tick" the market drops 500 points in two days.
    Now, I admit that I’m just pissed because I covered my shorts a week too soon, and I accept my responsibility for that.  But I repeat, I’m not seeing the relevance of the political discussion that has manifested itself on this board. As part of a long term strategy, sure.  But for a site that is supposed to be about option strategies, which by their very nature are short term, no.

  31. Gel — WRT to you second comment.  You prove my point in a way.  I know that hindsight is 20-20, but if we were going to use politics as a springboard for some ST trading positions, then we should have been shorting the sh*t out of the market the first time that the Administration decided to attack the markets. Because REGARDLESS OF WHO is to blame, EVERY time a President bashes the market, it tanks.  EVERY TIME.  But because there is a tendency on this site to hate Wall Street and to give Obama the benefit of the doubt, we all missed this major market flag.   Maybe the market goes up again from here, but you don’t get many 500 points moves in 2-3 days and this site completely missed it because, in my opinion, it was distracted by emotion. I read comments about how the IBs were going to shut down HAL in response to Obama and how outrageous that was and how dare they, but not one comment about how , "Well, when a Prez bashes a market, it usually goes down so lets get short until this fight quiets down."
    So, in my VERY HUMBLE opinion, may I suggest that if we’re going to discuss politics here, let’s keep it relevant to how it impacts the trading environment, because that’s all the matters now.  Historians will be discussing, and disagreeing about the long term effect long after we are all gone.

  32. The political info is a distraction during the daily blogs, so I would agree jcmcn.  I do enjoy it on the weekend or after hours, as we can discuss items to help understand all different viewpoints.  As for guns and bullets, I brought it up in Friday’s post.  I think it is time that this country becomes more progressive and join the rest of the world on this stance.  The right to bear arms was written into the constitution for a defensive measure many years ago.  It is time we updated it a bit, as many other sections have been updated through the years.  Rifles and shotguns for hunting – great.  Semi autos and automatics, 9-15 shot handguns – that is overkill, literally.  As for drugs, I brought it up as well, and legalizing drugs and taxing them would put to rest a ton of problems in this country. Yes they are addictive, yes children can get a hold of them….but if someone really wants them, they can find them legal or not.  Robitussin has opioids in it (ie, morphine like drugs).  Europe sells codeine over the counter in pain meds.  Alcohol and tobacco are no different than drugs in my eyes.  All are items of abuse, it comes down to how much and how often.

  33. Also, many of us have been bears for months (as Phil has been preaching).  I (like MrM) couldn’t stay short any longer, as things were getting busy at work, thus I had to throw in the towel.  I am in mainly cash, as it was the safest play to be in……and it was mentioned here  by Phil and others!
    By the way, for a pick that I like ….. ILMN again – but let’s see where the dust settles b’f diving in.  They have fallen back to almost where they were when I recommended them a month or do.  I will try to get a write up out on them and one other pick this week.
    As for the TA book, it is being edited, and I should have at least the first chapter out in the next week or so.

  34.   it is time that this country becomes more progressive and join the rest of the world on this stance
    Says who?  :)

  35. The United Nations!  ;)

  36. Molon Labe UN

  37. Appreciate the politics, on both sides.
    Phil, you seem to like WFR, in a variety of trades throughout last week. Its a stock i’m unfamiliar with so did not trade. Now, i can get in on all of the positions more cheaply! Yay! (i hope) So: Do you still recommend it? Which trade should i consider?
    Thanks a lot for the advice on GOOG/AAPL/GS!

  38.  I like that Idea jcedens.

  39. Speech / Phil.   Maybe that’s the difference between you and me.  I won’t give 1 red cent to any politician.  Neither will my corporation.
    And, so says you, that this isn’t about free speech.  But, in fact, it is.  And what’s the difference between corporations or unions spending money on ads or giving money vs. hiring lobbyists to influence policy ?  At least the former is out in the open !  The latter is full of all sorts of nefarious backroom deals.  You know this is true.   Plus companies bundle cash from their employees all the time to circumvent individual donor limits.
    I don’t know what you are carrying on about anyway.  Obama violated campaign financing laws and took in money from many ineligible and illegal sources including foreigners.  So did Hilary.  Prominent Republicans may have also.  The whole system stinks.
    But I don’t particualrly care for politicians regulating political speech in order to insulate them from criticism or to perpetuate an incumbency.
    Its like plugging the dyke.  Fill a few holes here, and new (loop)holes open somewhere else.
    As Shakespeare said, let’s kill all the lawyers !

  40. And while we are on political topics, here is my latest:

  41. Gel; sorry to hear about your losses.  This political stuff is all an excuse as far as the markets are concerned.  Maybe it helped push things over the edge a bit … but this would have happened anyway.  Hopefully we can get 1 more rally going so we can be better positioned for a move down.
    AAPL earnings monday.

  42. Jcmcn
    Your points are well taken. My emphasis in this discussion is that we must recognizr the existance of the possibility, or even the probability of POLITICALLY based risks that exist whether we like it or not. Having awareness of this risk, regardless of the origin, provides with the amunition to execute the "best there is" hedges that we have learned at PSW. We have to protect ourselves first, and argue who or what is to blame later  (preferably on the weekends). Most of my trades (I did over 90 on Friday) are options, and I as one who has leveraged risk, always looks on the horizon for black swans that could adversely impact my portfolio including weather forecasts. ( last week I was caught without protection and was blindsided by an event that I thought would never happen). I have to agree, the historians that follow us will determine who the real scoundrels are in the real estate crash, but for now it is not material to our primary objective which is to exist as profitable traders.

  43. Gel, such political stupidity is not limited to CA unfortunately.  It is everywhere.  NY, and NJ are just as bad; although at least NJ threw that bum Corzine out.

  44. Cap
    Well spoken… it is a contributing factor, however as you say the market was due for a correction. My losses were exactly what I made the first week, so I am not suprised, but am pissed for what the catalyst was that set the correction in motion. Maybe I am a political animal that needs to be neutered.

  45. Gel; bad moves happen to all of us; sometimes its not a bad move; just bad luck.  The important thing is to adjust and protect yourself better.  I have no doubt that you will.
    While I haven’t been harmed by this downturn; still being weighted bearish; there are a couple of positions that I wish I didn’t put on or had hedged better.  Ok so far; but on a big flush I would get hurt a bit.  Hopefully, the market stabilizes or bounces and I can adjust and position better.
    As for the catalysts; you just have to watch the charts.  Many pros don’t even pay attention to CNBC or anyone speaking on TV; they just trade what they see.  Only later do they find out that Obama said this or that.
    He’s said so much crazy stuff and the market kept going up anyway; so why wouldn’t it go up more this past week.  People are only saying its his fault cause the market went down.  I think the Bernanke stuff may have exacerbated the move down on a Friday; but remember, this is mostly algo’s piling on to a directional move.

  46. Political Cartoon of the Year !
    Use it, Phil !  :wink:

  47. Cap
    Many thanks for your very respected opinions. I reviewed the links you have provided and digested the insight offered by these contributors. Looks like the majority believe a reversal is more than possible next week, and I look upon this as an opportunity to close out any long positions that are not needed. I am still sitting on some short puts on AAPL and hoping for a nice bounce there that may provide some follow through to the market in general. I think this bounce, if it happens,  will be short lived and I will be essentially on the sidelines waiting for a significant correction to resurect my long plays.I look forward to this opportunity to trade with a bearish attitude and improve my skills in a downward market. I really must be market bearish, as I closed out my long option plays on ISRG and took the profits, on a company that replicated AAPL in profit potential.

  48. Cap-good charts on those links.

  49. Thanks Gel, Pstas.
    I too am looking for that bounce; looking at 1120, 1135 and 1150 as possible targets.  More likely 1120-35.
    Futures are currently green; S&P about 6 points right now FWIW.

  50. Interesting Webinar this week; I think its open registration (and free).
    Market Timing Webinar with Master Trader Jeffrey Spotts: This webinnar will be held this Thursday at 1700 CT …

  51. Phil,

    With regards to your mortgage comment; I would like to share with you my situation. Back in 2000 my wife & I bought our very first home.  We wanted a bigger more expensive home (who doesn’t, that’s the American way), but we decided to go conservative & purchase a home for 170 with 10/10/80 fixed (cash/2nd/1st) mortgage. In addition, I ran the math on the 15yr vs 30yr mortgage, it was only $280 more per month to go with the 15 yr loan….so we did.  The following year, I manage to refi for lower interest rate & I was able roll the 2nd mortgage into the 1st…I choose a fixed 30 that time.  Then in the summer of 2005 rates bottom & I refi for 15yr 4.5% fixed…I told my wife at that time that we just sealed our fate at this home, I told her that there is no way we are going to buy 3-400K home when we only owe 4-7 yrs on ours.   And then the BUBBLE POPPED….almost all my friends and family are buried on their mortages, while my mortgage/equity ratio stayed positive. As of today, we only owe 8 more years!  Our mortgage is about 85K & we do NOT have a 2nd mortgage or any significant credit card debit.

    Choosing the 15 yr loan was the SMARTEST financial  decision I have every made. Several people thought I was crazy at the time, including the real estate & mortgage reps.


  52.  I think that we are becoming a nation of haters and blamers.  There seems to be a total lack of personal responsibility.  One of my colleagues is short selling his house so that "he won’t be upside down"  he just doesnt want to live in THAT house for another 10 to 15 years.  so he is gonna play the system – this is inexcusable for a high income earner.  similiarly, i had two 23 year olds on welfare – during the csection, the young dad pulls out his iphone to take a picture….nice.

  53. Phil, Just as the market swoon may have, in part, been fueled by talk of trouble in Bernanke’s nomination, when it is clear that he will be confirmed this week, there might be a Bernanke relief rally, no?

  54. Meg Whitman will have my vote in November. The last high profile republican I voted for was Reagan in ’84……

  55. Good morning!

    I was going to get up early and write a chart post but Micheal Clark had such a great review I don’t feel the need (main page).  I’ll just make up a nice, simple level chart for the 5% rule later.

    Futures moving up nicely, we expect a 1% move up (20% bounce off 5% drop) in the very least otherwise – LAME!

    Oil still looking weak at $74.30 (3:24) with nat gas at $5.80, gold just rejected off $1,100, copper rejected at $3.35 and silver back over $17 but lame below $17.50.  Gasoline is under $2 – no recovery is real if gasoline can’t hold $2.

    High 5s/1020 – Well my kid’s are thrilled when I emerge from what Tina calls "the man cave" – hugs are better than high 5s in my house (it’s nice to have girls from that perspective).  Job thing sucks, these police layoffs are really starting to worry me – so shortsighted at just the wrong time.  Selling cars is not a bad idea though, my brother took my advice and took a job at W. Palm Beach Lexus based on my top 10% theory and he’s doing great over there after struggling in Boca (those posers aren’t rich enough).  He says most clients don’t even finance, they just come in and write a check…

    Mauldin/Pharm - "Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant. No careful reader of Friedman and Schwartz will be surprised by this lesson about the ability of governments to mismanage financial markets, a key theme of their analysis."  A very good read (as was last week).

    Education/Pstas – Yes but we can’t expect the Jaywalking generation to home-school their kids, right?  Fundamental changes need to be made to our existing eduction system (and that’s a big DUH, as we’ve been falling behind for decades now). 

    Homes/Gel – That’s one of the reasons I’m getting so angry now.  While it’s nice to re-inflate the economy and all that for some, at the bottom of this con is a whole new round of people who are being told "there is no better time to buy a home than right now" even though home prices still haven’t undergone a proper correction and rents are dropping so remaining renters and saving money is the wiser course for most people until we find a true bottom in housing. 

    San Diego/Gel – That’s where my younger brother (not the car guy) has decided to go (he’s escaping NYC).

    FDX/Pyern –  You can only "save" a call if the stock is going to turn around so best to cut and run if the market heads lower.  You can sell the $70s ($10.60) to stop the bleeding, there’s no margin there, of course, as a downside momentum play and that $10 pays for a roll to July $65s where you can turn it into a proper spread but, keep in mind, if that seems like a hassle you’re not into, then cutting and running is a good option.  AAPL I have more faith in a rebound on.  Oddly, AAPL is hurting FDX (to a minor extent) by moving some of the best selling electronic items to local distribution centers (their stores) rather than having them shipped all over the place.  I don’t like AAPL above $185 as an entry so this is also a cut and run but you have Apr calls so a momentum cover with the Feb $200s is a great way to stop the bleeding.  Their delta is .54 and yours is .44 so it’s not like they’ll kill you on a bounce back either but they will hold their value well through earnings (as should you) but then drop fast if AAPL disappoints.  I think AAPL oversold last week and you have the announcement and earnings this week so you will probably get a chance to get out even or better – if you didn’t like this little drop then what is your plan for an earnings miss?   Think about that before you don’t get out even and live to fight another day…

    Samz List:

    DIA – I assume that’s a full cover.  Keep in mind we’re playing a long game there.   It doesn’t matter if you lose this month, as long as you stay on track for a double.  You have to June $105 puts and the Feb $104 puts at net $3.85, now net $3.90 BUT the $105 puts are now $3 in the money with a .61 delta.  The $104 puts still have $1 in premium and can be rolled down to March $101 puts ($3.10) as the premium wears down and then the Apr $99 puts ($3.10) and PRESTO – you are $6 in the money off your $3.85 spread so no big deal so far and just don’t let that roll get away.  Should we fall back below 10,200, you may want to add 1/2 x June $100 puts, now $4.90 and set a stop on 1/2 your $105 puts at $7 (.50 trail) to lock in some of that profit if we turn up or prepare for a roll to 1.5x an even lower strike for the putters if we keep going down (see Friday morning’s alert for DIA rolling strategy).

    SPY – Same general logic, it’s a long, rolling type of play and as long as you are on track to turn it into a vertical that doubles your net to the downside, then you are in the right position.  I do not like the SPY compared to the DIA covers though – just look at the difference:  With the DIAs you have a $1 spread that gives you 50% coverage while the SPY June $111/ Feb $111 doesn’t even give you 50% coverage and the Feb $111 putter has a bigger delta than your June $111s.  I would kill the SPY trade as it’s redundant to the DIA (and the reason you miss rolls is sometimes because you don’t have time to manage all these positions, right?) and you can cover a severe market correction with SDS Sept $30/37 bull call spread at $3 (133% upsdide if SDS is up .70 from here in September) and that $3 investment can be recouped by selling (for example) 1/2 the Feb $43s for .60 – a 20% move in SDS away.  Doesn’t that sound like a more relaxing way to hedge – SDS has to drop 20% to put you out of the money (and then you can sell Sept puts for $3 to pay for the bull put spread if you think we can bounce).

    EFA – See Michael’s charts.  There is no inverse correlation between the US and foreign markets so diversification with these things is a myth.  Again I think it makes life too complicated to have hedges that need to be managed on multiple indexes (note our disaster headges are not calendar spreads, they are more or less "set and forget") and you are better off just killing them.  EDZ is a much better way to short emerging markets and you can buy July $6s for $1.25 and sell March $7s for .45 all or part depending on how bearish you feel as there is no way you can lose to the upside and .45 is great downside coverage on the July calls, probably enough to roll down to the $5s if EDZ sells off and then you can sell Apr $6s for .50 and so on until you get a pop or it’s July and the market never went down so your bull plays (hopefully) make more than you lost on the hedge

    Guns and politics/Jcm – I’m not trying to change your opinion and I do agree that we have lots of stupid gun laws that do nothing for controlling gun crime.  My objection is to the NRA’s attitude that removing the laws solves the problem rather than coming up with modified laws that make sense.  Also, do you really believe a NJ cop will put you in jail for 2 years if you get towed under those circumstances or is that law used to hassle actual bad guys?  While I would prefer to keep politics to a minimum here, I’m not going to apologize for seeing things and talking about them.  I was constantly berated by right-side members for saying that George Bush’s policies were misguided and they were driving America off an economic cliff – I guess I was too unpatriotic to be right but, sadly, I was right and the country did fall off a cliff and now we are going to go right back to Big Business as usual and you want me to zip my lip, bend over and take it?  I don’t think so thanks, we’ve already had a generation berated into silence by people who know what’s good for America and that didn’t actually work out so well…

    Influence tax/Jced – It’s a great idea but don’t forget that 1/2 of the people being asked to pony up the tax would argue that the money should go to a more "neutral" use like deficit reduction (or, even better, lowering taxes while still running insane deficits as if we are children with no concept of consequences).  Did you know that the entrie SS deficit can be fixed by just removing the $6,600 withholding cap?  Good luck getting that passed as it’s a tax that would ONLY affect the top 10%. 

    WFR/Hanna – WFR makes a lot of basic semis that are used in solar cells so they are a sideline play on renewable energy and they are diverse enough where they make money whether that industry is hot or not so I like them for a long-term hold.  They are VERY volatile though and they just settled a lawsuite with a major client that significantly cuts back on expected revenues but I think this final sell-off is a good chance to scale in.

    Speech/Cap – I see how you consider yourself independent as there is no party far enough to the right for you is there?  I need to get on with my morning so I’ll let the NY Times do the talking for me (and I know, LIBERALS!)and you can write back to the editors if you disagree:

    With a single, disastrous 5-to-4 ruling, the Supreme Court has thrust politics back to the robber-baron era of the 19th century. Disingenuously waving the flag of the First Amendment, the court’s conservative majority has paved the way for corporations to use their vast treasuries to overwhelm elections and intimidate elected officials into doing their bidding.

    As a result of Thursday’s ruling, corporations have been unleashed from the longstanding ban against their spending directly on political campaigns and will be free to spend as much money as they want to elect and defeat candidates. If a member of Congress tries to stand up to a wealthy special interest, its lobbyists can credibly threaten: We’ll spend whatever it takes to defeat you.

    This issue should never have been before the court. The justices overreached and seized on a case involving a narrower, technical question involving the broadcast of a movie that attacked Hillary Rodham Clinton during the 2008 campaign. The court elevated that case to a forum for striking down the entire ban on corporate spending and then rushed the process of hearing the case at breakneck speed. It gave lawyers a month to prepare briefs on an issue of enormous complexity, and it scheduled arguments during its vacation.

  56. Phil – thanks for the help

  57. As a 2 month member I have noticed the political commentary has gotten way too much here in the last few weeks. It seems like now over 50% of the posts are just political chitchat with no applicable value to trading markets. And maybe that’s why EVERYONE here perhaps missed signs of the impending correction, because everyone here had this absolute obsession about the MASS election. I know that on election day this team collectively took its eye off the ball (the market) that day cause the chat was nothing but mass mass mass. Absolutely no one linked it to an actionable trade. I don’t pay $250 a month to read people ranting politics, I pay it to get information to make informed trades and make money. So it’s true that no one can predict the future of markets, but I think we all have to ask ourselves if this running political pissing match on chat is making anyone any money when you consider its distractive nature. Sure if you want to blow off steam (because that’s all you are accomplishing) and write1-2 sentences that will piss off every democrat or republican here, why not I guess that’s free speech. But the long extended rants and diatribes, can we all agree to limit those to non-market hours??? 

  58. Phil -
    I take your point about dia being better than spy. I am going to kill the spy and efa - good point on correlation. 
    Do you have your options analytics modified to use bid / ask or trades -
    bc my system is showing the feb dia cover 104 with a .6062 delta and the june 105 with a .5727  .-
    I am guessing with less volume on the longer dated options that the delta is not that precise

  59. Good cartoon Cap! 

    As to the big downturn – let’s not get all crazy with the bearishness just yet.  We have our bounce today and then we need to see what happens.  Even if we assume that the run-up was artificial, a 5% drop and bounce is natural and is not a proper signal that things are getting much worse.  It would be imprudent for people to panic out of bullish positions just because we had a pullback after a massive run.  We had 27 losing trades out of 61 last week but most of the losing trades were bullish buys on a dip that didn’t reverse – maybe yet or maybe they were too early but it was fantastic to be able to take long-suffering bear bets off the table and start taking a few long positions so IF the market heads back up (and GS still has the Bots and the Fed is still showering us with money and China is still a mythical la-la land that is growing so fast they have to put the brakes on) - then we have plenty to celebrate instead of being annoyed like we have been since 10,450 broke

    The supreme court just handed Wall Street the greatest gift of the 20th century – it’s a game changer. You (the top 10% investor) can now rest assured that your companies will be able to get "good government" in future elections.  Would they dare tax us?  Will they dare stop us from producing a few greenhouse gasses just because a few million "scientists" are concerned that we may be destroying the planet?  Now we can finally make some progress on capping these silly lawsuits so it will no longer be profitable for law firms to represent those annoying little people who die from our products.  Yes, there is plenty to celebrate going forward and there’s no crisis so big that we can’t inflate our way out of so crank up the presses and stop worrying – it’s "Morning in America once again!"

    15 Years/XLF’d – A very good addtion to the discussion!  I didn’t mention that one because it does significantly increase the payments and is not for everyone (especially as few people have the sense to "right-size" their home purchase in the first place) but is, of course, miles better than taking on 30 years of debt with 60% of it being interest payments alone.  Congrats on your foresight and wisdom.

    House/Jo – I don’t know about IPhones on welfare but when you buy a home you are the junior partner to the bank.  They are the money partner in the transaction but you are paying them a very large amount of money to assume the risk with you.  If the investment were truly risk-free for the banks then how the hell do they have the right to charge you 6% interest in the first place?  Morgan Stanley just stuck their bank with $5Bn worth of SF office buildings – they simply walked away because the numbers didn’t work for them. 

    Why should individual homeowners not be allowed to make the same rational investment decisions that MS did?  I know it’s a moral hazard but a lot of that is because it has been hammered into our heads (by Wall Street/MSM) that it’s OK for businesses to go BK or walk away from bad deals and debt obligations but NEVER for people, who should beg, borrow or steal rather than admit they can’t afford something and hand the keys back to their bank partner who financed the deal. 

    If a guy bought a $500,000 3Br home and has a $450,000 mortgage and has been paying $2,700 a month to the bank for 5 years, he has given his bank "partner" $162,000 yet he still owes $418,000 plus he put $50,000 down on the deal and paid the bank a $5K fee on day one.  So the bank has $217,000 and the guy has a $418,000 debt.  The home is now worth just $300,000 – it’s simply an investment that didn’t work out. 

    Must this guy stay in his $300,000 home and pay $2,700 a month (and I’m sure the town isn’t dropping the taxes) even though his wife lost her job and they can no longer save for retirement or college for the kids or should he make an intelligent business decision and walk away, leaving the bank with his $217K in cash (almost half the home’s cost) and the full ownership of the property while he goes out and gets and apartment or a $250,000 home that is about the same size as his last one but with 1/2 the taxes and a $1,500 (assuming all $250K borrowed) monthly payment that allows him to save $1,300 a month for retirement and college?

    There is a frenzy in the Corporate Media to villify these people and make it seem like they are somehow cheating you because you "are doing the right thing" and paying your mortgage, no matter how upside down you are.  Of course the banks want you to keep paying them 6% interest on $500,000 for a $300,000 home for as long as possible - but they also have insurance in case you don’t and you, the "responsible" homeowner, are already paying for any losses the banks may incur which is, as you said – nice!

    Bernanke relief/Juda – Any excuse for a relief rally will give us at least a small recovery but we need to watch our 5% levels (which I’d better get working on!) closely to see what’s real and what’s not.

    Politics/Bord – I do prefer that politics not be discussed during trading hours but sometimes things do come up during trading hours.  I would strongly encourage you to go back and re-read Tuesday’s comment section because it was SPECIFICALLY the policitcal discussion that led me to conclude that I would make a bearish judgement call into the close because I believed the run-up in health care and the hype about the Brown election was overdone already and the fact of his election (and the possibility of his defeat) was likely to be a "sell on the news event."   I don’t know that I would have made that call just looking at the charts and covering my ears and saying "La la la la la" every time someone tried to mention politics during my precious trading hours. 

    When Obama sent the markets down and Barney Frank sent them back up should we have pretended it wasn’t happening?  It’s one thing to say we generally don’t want to be having political discussions during a trading day but let’s not stick our heads in the sand and get our asses kicked by investors who are mature enough to handle discussions that do, in fact, move the markets.  I made 13 picks on Tuesday (more than a normal, non-political day and way more than I had intended BECAUSE of the politically driven action) and 5 were entries on CAKE and WFR then we had a 34% winner on V a 55% winner on the Qs, a 253% winner on DIA a totally on-target buy/write for EDZ, a TBT spread that’s so-so, a bullish XLF spread that’s holding up, a bearish SDS spread that’s working great and TWM calls that are up 77%.  Sorry you are not getting your $250 worth, I’m sure Option Monster or Cramer would have done much better for you without the annoying discussion.

    Deltas/Samz – I’m just looking at whatever TOS is listing at the moment.  I don’t know what they are basing it on but the important thing is the net delt of your positions and having a realistic expectation for what will happen if there is movement one way or the other. 

    OK, NOW it’s time to work on my charting!

  60. pstas/Phil. I absolutely agree with you. We are big boys and girls and how our money is deployed is up to us and no one else. I frankly just felt that Phil needed to be called out to explain himself a little after reading that weekly roundup he wrote. To me it read like a self-congratulatory piece that did not reflect the total reality of what he was recommending trade wise. Everyone needs to account for themselves once in a while, especially when in the Thursday morning post (the day before the big drop) he wrote and I quote "that’s why we’re bulls, because fundamentals don’t matter right now." Thursday we’re bullish, Saturday we were always bearish??? I thought maybe Cramer had clunked Phil over the head and was impersonating him online…LOL. Seriously, though, Phil is very thoughtful, and what he recommends is balance, which means being a bit bearish, a bit bullish and/or neutral-- which is good. But after reading the weekly wrap up, which implicitly said "those silly bulls, who ever gave them the idea that bullish was a good idea" I had to stand up and call "bulls*t.

  61. Phil,
    Hey relax OK I am not attacking you. This is your business so you can run it however you want. It’s true that political events do move markets, no one is denying that. I am just trying to make the point that chat often contains useless name-calling, castigations, rebs blaming dems and vice versa which is not helpful. It was a call to the those who write such comments to try to be a little bit more of a team player by helping everyone stay focused on the markets by not launching personal political attacks. I don’t know how others perceive this site, or what it’s designed for, but I view it as a TEAM where we all try to help each other make money. And how can that be achieved with personal political attacks that are bound to offend, or even disgust,  other members of the team? 

  62. As Mr. Dooley once "said": "Politics ain’t beanbag".

  63. Actually Bord, what I said is "This is why we’re bullish on the markets (or the market manipulators, at least) - fundamentals don’t matter!"  – If you are going to put quotes around something I said in order to insinuate I am trying to make myself look good, at least have the decency not to take it totally out of context in order to make me look bad.  

    You have been here two months and if you read Thursday’s post where I said:

    After what looked like a good recovery, there are signs that Northeast Manufacturing is in sharp decline.

    Jobless numbers are on the upswing as temporary holiday hiring is being trimmed faster than census jobs can pick up the slack.  We had a big build in inventories in Q4 as clearly manufacturers were overly optimistic and a sharp rise in commodity prices during the quarter didn’t help much either. 

    I followed those LEAD paragraphs with my commentary on what BS the funding for the Financial Crisis Inquiry Commission and how it’s making a mockery of the process (but I guess it was politics so you read "blah, blah, blah") and then I said "This is why we’re bullish on the markets (or the market manipulators, at least) - fundamentals don’t matter!"

    That was, of course, written before 8:30 and, a little further down the page, it says "8:30 Update:   Woops, we got our jobs numbers and they were quite a bit worse than expected with 482,000 people filing claims last month and continuing claims at 4.6M – 100,000 more than estimated."  I closed that morning post with "Europe is up about half a point acrosss the board ahead of the US open, which is a mild retrace of yesterday’s 2% sell-off but none of this matters until we get our 10 am data and that won’t matter either as fundamentals are right out the window in this Meatball Market so we’re just going to go with the flow and have some fun during earnings season."    

    That was before 9:30, of course and, at 9:50 I sent an alert out to ALL members (because I considered it important) saying, in bold lettering: "I am for shorting into this morning spike as it’s nonsense, epsecially this run in the Nas – most likely it will reverse but I’d like to see a clear move back to resistance first.  QQQQ $45 puts give you great leverage at .56 and you can use $46.20 on the Qs as a stop out, looking for .70+ on the day."

    So if you want to blame me for somehow steering you wrong then go right ahead and find someone else to blame your trades on but don’t sit here and quote me out of context and compare me to Cramer – that’s a friggin insult and you know it so take you bullsh*t call and shove it!