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Thursday, October 6, 2022


Testy Tuesday – Bottom Busting or Big Bounce?

Wheeee, what a ride!

Finally all our very boring sitting around at 75% cash makes us feel smart as the market makes what we hope is that final blow-off bottom to re-test our lows.  I already sent out an Alert to Members this morning so a lot of this is old news to them but nothing has changed since 4:30 so here's a quick reprise – What we are mainly seeing in the futures this morning is 2 major factors that are driving the markets lower:

1) Japan, where too strong Yen (88.6), -0.1% industrial output, -1.7% exports, rising unemployment (just 5.2%) AND lower houshold spending (-0.7%) numbers sent the Nikkei down 1.25% today to 9,570.  If you think about it though, pretty much all of that is a strong Yen issue because it lowers demand for the exports (making them more expensive) and then factories slow down and people get laid off and household spending drops from that PLUS the fact that it’s now cheaper for them to buy imports so they can buy the same stuff at lower prices. 

So, overall, nothing people shouldn’t have expected but ugly to read about.

2) China, where the Shanghai fell 4.27% today to 2,427, which is a lot because they are a 10% limit down market on individual stocks so you can bet the selling isn’t done if the AVERAGE was down 4.27%.  The Hang Seng was ugly too, falling 2.3% to 20,248.  What sent China off a cliff was kind of silly.  The Conference Board, which is a NY-based research firm had reported that Chinese economic indicators rose 1.7% in April – something at the time (June 15th) we thought sounded a bit high.  Well, funny thing is it turns out the people at the Conference Board must have been high on something because it turns out they made a "calculation error" and the correct number was just 0.3%.

There is a third factor in play and, earlier this morning I thought it was too silly to be considered but, apparently, you can panic retail investors over pretty much anything.  On Thursday, there are $547.5Bn worth of bank-loans from last year's special liquidity program that are due to roll over and there are rumors circulating that the ECB won't renew the facility at all.  The ECB has, in fact, already promised to replace it with rolling 3-month loans at the same rate, hoping to make it annoying enough for banks to seek long-term funding elsewhere.  The ECB is also pissed off at the banks who have taken their money for a year, yet haven't increased their own lending – which was the whole point of providing liquidity.  The same nonsense goes on here but, as I may have mentioned last week, our Fed works FOR the banks and just keeps funneling free taxpayer money to the banks while the banks keep reducing the amount of money they lend to those taxpayers. 

So Asia was awful and, in Europe, it’s another day of protest in Greece and Europe is dropping 2.25% and taking our futures down about 1.25% so far (8am).  Let’s watch those international 2.5% lines (red ones are the downside of course) around our key levels (circled).  None of these charts reflect today’s action, unfortunately but we will be looking for the DAX to show a little strength on that 6,000 line and we hope the FTSE can hold 5,000 and CAC 3,500:

We needed a blow-off bottom and hopefully this is it and not a sign that we’re in another deep downtrend (as many are betting on).  We have our TZA disaster hedge from Friday and Thursday’s SPX and other SDS hedges (like the one on the Buy List) short-term but we are generally too bullish for this drop, especially on our Mattress Play where the June 30th $102 puts we sold for $1.60 are going to be well in the money today (so they have to be rolled to July).   

Since we can expect the VIX to shoot back up to 40, the best way to add protection is going to be selling puts on ultra-shorts against bull call spreads, like TZA July $6/7 bull call at .60, selling Aug $6 put for .48 is net .12 on $1 spread for a 733% upside.  Our risk is owning TZA at $6 but a drop like this should show you that owning a little TZA can be quite comforting in the event of an emergency so if you are protecting $25K invested in a $100K virtual portfolio, then selling just 20 TZA Aug $6 puts (which can be rolled) for $960 and spending $240 more out of pocket buys you $2,000 of downside protection and your risk is owning 2,000 TZA at net $6.12.

Keep in mind that, if you are looking at a $2,000 loss on your $25,000 at this level then if TZA stops your bleeding here, even if the market rallies back and you end up losing $1 on 2,000 shares – it’s going to be the $2,000 you get back on your $25,000 bullish positions.  It is worth sacrificing some upside to protect your principal when we don’t know how bad things are going to get.  Also keep in mind, though, that if have sensibly hedged positions, like our buy/writes, that this drop is NOTHING and doesn't need to be protected yet and that means we can afford to take longer plays with better pay-offs to protect against further downside AFTER we have a real breakdown.  Right now, all we are doing is testing "flash-crash" lows again.

We absolutely don’t want to buy puts as the VIX will send the premiums way up and we’ll be paying top dollar on a momentum play.  That’s why we’ll be looking for some reverse-index puts to sell, like the TZAs because, even if the market turns back up, the VIX will shrink and our buyback won’t be so bad if we decide to take it off the table. 

So let’s not panic – this is why we are 75% in cash and this is why we always have a disaster hedge in place, to take advantage of just such a drop!  Take a good look over the Buy List as we’ll get some excellent entries and also, in the comments on the buy list, we had some 10 margin plays to make and those should also give us great prices into the drop as well as our list of 500%+ plays, which we should also get great entries on BUT – let’s make sure our red levels (-2.5%) hold up first:

Globally money is FLYING out of stocks and into US Treasuries and we are now at record lows (very bad for TBT) so we’ll watch that as well as $77.50 oil (now $76.30) and $3 copper (we’re right on the line) as both are generally bullish levels despite all this panic.  Meanwhile, our friend who initiated the XLB trade we followed last Tuesday was a genius!  The July $32/30 bear call spread was already 100% in the money yesterday at $1.40 (up 75% from .80 entry) and today is likely to be a good day to take that money and run as copper tests our mark and FCX looks for a bottom around $62.50, which is a tempting buy down there.   

If this selling keeps up, it’s going to be a rotten way to end the first half of the year but, as I mentioned last week, we were relentlessly driven down last year from June 12th (8,800) through July 10th (8,150), a 7.5% drop that was reversed in one week and led to the insane rally that took us up to 10.500 in November so it seems a little premature to panic as we fall from 10,500 on June 18th to perhaps 9,800 today (6.66%).

So here we are again, right before the Holiday weekend and, wouldn't you know it – we're heading down!  It's very comforting to see our 5% rule obeyed so well as we fail at the 10,500 mark this week (20% up from 8,750), which makes our EXPECTED retrace (20% of the run) 10,150 so we'll be watching that line closely on the way back up but, for now, we'll be watching that 5% pullback off 10,500, which is 9,975 – which is what we need to hold to call this just a bullish pullback.

I’m expecting Case-Shiller Home Prices to be a relief (9am) and Consumer Confidence at 10am may be an upside surprise as well so maybe our open won’t be all that bad but, right now – the futures are awful!  Ideally, we would at least like to hold those June 8th spike lows and the June 7th close, which were: Dow 9,725 (low close 9,815), S&P 1,042 (1,050)  Nasdaq 2,145 (2,158), NYSE 6,480 (6,512), Russell 608 (617), SOX 326 (332) and Transports 1,921 (1,955).  So scary low numbers to shoot for but much more important to see us hold those closes.

9am Update:  We did get Case-Shiller and we had great numbers – +0.8% vs -0.5% in March and up 3.8% for the year, better than the 3.5% expected and the 2.3% in last month's measure BUT, the S&P took ALL the fun out of the report by titling it: "While Most Markets Improved in April 2010, Home Prices Do Not Yet Show Signs of Sustained Recovery."  Not very catchy is it?  So that has done NOTHING to improve the futures, nor did ICSC Retail Store Sales, which were off 0.5% this week but that isn't stopping them from forecasting +3-4% for June as the calendar shifted Memorial Day sales into the June count so May was better than it seemed and June will look great – next month!

We're going to watch FCX at $62.50, AAPL at $260, CAT at $62.50, PFE at $14, OIH at $95, XOM at $57.50 and XLF at $14 as all are stocks we'd like to sell puts against and all are stocks that should hold their lines in various sectors IF WE ARE NOT BREAKING DOWN.  If they can't keep it together, then we'll be hitting those disaster plays hot and heavy

Let's be careful out there!   



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It will be interesting to see if C-S is ok and whether it has an impact on the futures.

 Good morning Phil!  I was up for the most part of the night shorting the minis when 1070 broke.  Got out about 2 hours ago for a good gain.  But now I’m REALLY sleepy but have to adjust portfolio for this.  
DAX holding the 6K line but FTSE and CAC a tad below your key levels. 
I too got a little too bearish by selling those puts against existing mattress plays and will have to roll them out to July if no incredible turnaround can be mustered into the close.
About the TZA hedge, do we employ this at the open, upon break, or upon holding your 2.5% lines?

Phil,  this is a terrible day for this, but when you get a chance I would like to get your take on the steps NJ took to balance their budget.  This austerity movement seems to me to be the catalyst for a move down in the overall market and what they did in NJ may become a model for how states if not the federal government are forced to move.  Thanks and again no hurry on these thoughts!

I didn’t bet your morning warning and have not been getting your sites emails or warnings. This has just been in the past 2 weeks. I emailed Greg but still the problem persists. Thanks

Jomptien, sometimes your email preference resets itself.  so go to your account settings and reclick what you want to get via email

Good Morning!  🙂

Looks like we’ll open right at the level I was watching for: /ES 1055, SPY 106. Unless things really look dire, I will put on long positions in SPY today, although starting small of course. A trip to the 1050 area would let us test support from early in the month.

Hey all,

New buy pick and short sale picks of the day in Worthington Industries and Standard Microsystems, respectively.

Check out my analysis, entry, exit, and stops for these two.

We are looking to exit Micron this morning within the first few minutes.

I own JULY DIA 105 calls at a basis of $0.78. What would you recommend?
Secondly, I own the FXP July 38/40 Bull call spread. What do you recommend here? Thanks.

Can we have a tripple bottom? I’m not so sure. I think we break to new lows……

Put my first batch of SPY calls on (July 98s). This isn’t a long-term trade, by the way. Just looking for a bounce from oversold conditions.

Good morning,
IWM 62.62, 62.91, 63.27, 63.64, 64.29, 64.93

question – Phil or any of you sagacious ones, I am not permitted to hold short calls naked, i have July TZA 6/8 call spread the $6 side is profitable at the moment. Would it be smart to roll the long to Aug, say $9 because of lower delta and cost then let the short side expire and sell the long after expiration for a small loss (maybe)?

AAPL moving to the 50 after all. Too bad I didn’t stick to my guns on that one.

 so.. buy buy buy or rather wait wait wait? 🙂

If you can roll TZA options without getting raped on the spread, great. I find options on it to be pretty much untradeable.

Let’s try to remember, China is even more manipulated than we are; so this was done for a reason.  Perhaps to scare the EU into dropping their austerity measures, if so this is a great buying opportunity !!

There is definetly going to be a big bounce today.

Be very careful catching knives today.. this could very easily turn into a FMD except for some foolishness around 1040.  FAZ could/should be +12% when it’s all done and said.  On the other hand, if we bust through 1040 today and not tomorrow or even Thursday I’ll be a little suprised.  But then, that’s how they line up the bagholders.  When no one thinks it’ll happen. 

so matt are you even thinking this may be oversold?

Add to IWM levels 61.90, as we are already below 62.62

thanks eric, at least you have confirmed that it isn’t a far fetched plan.

lapper/email – thanks

Got long a little AAPL on the tag of the 50.

CC must be bad!

52.9 June!

Holy S***

Back out of AAPl at a small loss.

Still a free money day (FMD) to the downside..


Covered those SPY calls on that little bounce. I think matt’s right that the risk today is high.

XOM at new yearly low,  should be a buy here

This should go without saying, but this is no day to be a hero on the long side.
I did have 3 quick TNA forays before the ugly consumer confidence # and took out about 35-40 cents fighting the trend; but I think the rest of today will likely remain ugly.
Watch to see if S&P can retake 1050.

I don’t get it…..TNA…..level 3 bids higher than ask???

I own JULY DIA 105 calls at a basis of $0.78. What would you recommend?
Secondly, I own the FXP July 38/40 Bull call spread. What do you recommend here? Thanks.
This is a repost but needed your thoughts this morning when you get a minute.Thanks.

BP is up on a day like today…. Nice!

I also have the DIA July 105 calls from last week and they are down over 60%, are we cutting our losses at some point or still hoping for a turnaround? 

Hitting the Neckline on S&P

Vallejo Ca. police earn 120k/yr and 100% healthcare???? 

A free money day is when we have consistently higher highs and higher lows or just the opposite in today’s case-

And they are going to get a 7% raise???

Broke the neckline on S&P.  The legendary Head and Shoulders is complete.

From the technicals we could see the Russell below 600 so I’m not buying calls yet and we are still below the 8ema so this is what TZA is for !!

 Anyone noticed that CNBCs screen quotes are weird today:  Nasdaq -2.8 now, Dow -5.5, GS down 5.5…..the list goes on. Strange.

Sold 1/2 of my FAZ position at 16.47..

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