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Friday, March 1, 2024

Goldilocks and the 300,000,000 Bears

Talk about feeling outnumbered!

As the guy in Airplane kind of said – "Looks like I pricked the wrong week to get bullish!"  Of course, as I often tell people I am neither bullish nor bearish – I'm rangeish – and our range is the 5% band between around Dow 10,200 and S&P 1,070, which takes us as low as Dow 9,690 and S&P 1,016 and as high as Dow 10,710 and S&P 1,123 before I really "flip flop" my positions.  Despite the fact that this is the range we predicted last October and is the range we've been in (other than a brief trip to 11,200, which we shorted the hell out of) all year – people still seem to find it necessary to call me either bullish or bearish as we navigate the channel.

I suppose I have been HOPEFUL for the month (now heading into day 14) that we will finally make a little progress and establish a higher floor at our usual mid-points while, at the same time, the MSM have decided that we are all going to die.  That does make me kind of bullish by comparison doesn't it?  We are mainly in cash and we are well hedged to the downside so, unless we are REALLY heading much, much lower, there is little profit in speculating to the downside, other than our quick trades.  As PT Barnum once said:

"A man who is all caution, will never dare to take hold and be successful; and a man who is all boldness, is merely reckless, and must eventually fail. A man may go on "’change" and make fifty, or one hundred thousand dollars in speculating in stocks, at a single operation. But if he has simple boldness without caution, it is mere chance, and what he gains to-day he will lose to-morrow. You must have both the caution and the boldness, to insure success." 

Balance is the key to long-term success and we've had many conversations about that in Member Chat.  Our goal is to be neither bullish or bearish but rather to sell premium to both the bulls and the bears when conditions permit us.  As Ravalos said Friday in Member Chat:

"Ever since I became member (actually before I became member I was already following your newsletter for quite some time) I find it hard for me to BUY PREMIUM. Over time, I’ve realized that buying the premium results in my virtual portfolio account reflecting red numbers as the time progresses.. on the other hand, selling the premium almost inevitably results in green numbers all over my virtual portfolio (confirming indeed the whole premise of being the house in a casino)." 

Nothing makes me happier than seeing our Members "getting it."  If PT Barnum were able to sell options to the suckers (who are born every minute) I doubt he would have bothered doing anything else.  Selling option premium to others is the epitome of caution AND boldness and, as Ravalos notes, the best way to insure success.  So we don't really care whether the market goes up or down – As long as it says in our fairly narrow 5% range on each side of our midpoints, we'll be just fine as long as we remember to sell contracts to the bears when we are near the bottom and to the bulls when we are near the top.  Watching the economy should be incidental compared to watching our ranges! 


Yet I see a lot of people getting all hot and bothered about the economy, which is clearly a mess and needs fixing but that shouldn't prevent us from TRADING THE MARKETS – which have a little, but not too much, to do with the actual economy.  I pointed out in Friday's post that the Dow rallied from 580 in August of 1975, when we were losing 500,000 jobs a week back to over 1,000 in Q1 of 1976, when we were losing 400,000 jobs a week.  It was a relative improvement of 20%, far less than the improvement we've seen as job losses fell from 650,000 at the beginning of last year to about 450,000 18 months later.  Should the fact that job losses haven't returned to their normal 300,000 a week (it's called turnover on 140M jobs) be considered an abject failure of this economy? 

What’s going to happen next?

That’s the main question I get from people.  I find it interesting that so many people want to believe that I can see the future but I suppose that’s been the same for thousands of years – people want to know what’s going to happen and they are willing to put their faith in someone who’s just a little more insightful than they are.  This isn’t unique to stocks, my old consulting company was called Delphi Consulting – also taking advantage of my reputation as a business prognosticator.

While I do pride myself on my ability to spot trends early AND to figure out how to make a buck playing them (you can see how I did last year in our 2009 Review) – I don’t like it when that part of my reputation distracts from my general message, which is that NO ONE, not me, not Cramer, not anyone, can tell you what is going to happen next in the markets and the best strategy you can follow is one of maintaining a balanced, sensibly hedged virtual portfolio that can make money in ANY market direction.

There is an excellent presentation by James Montier, now of GMO, who listed "Ten Lessons (Not?) Learnt," which is a must read for all our Members, as it lists and expands on 10 themes that echo what we discuss every day at PSW – things every investor needs to hear and understand before they go chasing off after the next guru who promises to give them a peek at the future (emphasis on my 5 favorites):

  • Markets Aren’t Efficient
  • Relative Performance is a Dangerous Game
  • This Time is Never Different
  • Valuation Matters (in the Long Run)
  • Wait for the “Fat” Pitch
  • Sentiment Matters
  • Leverage Can’t Turn a Bad Investment Good
  • Beware of Over Quantification
  • There is No Substitute for Skepticism
  • The Benefits of Cheap Insurance

In short (since this is not supposed to be a philosophical article) neither James Montier or I can predict the future.  I can’t speak for the thousand other bozos who tell you they can but we’re telling you, for a fact, that we cannot.  Our job is just to keep an eye out for good opportunities, be they bullish or bearish, that have a good chance of making a little bit of money

When the media is extremely bearish, you will find me often defending the bullish side and when the media is extremely bullish, I will tend to poke holes in the bullish outlook.  Why?  Because our goal is to be BALANCED so I will always nudge you towards the middle.  If you are looking for extreme bullish or bearish sentiment then I'm sure there's an App for that but you won't be getting it from me.  I think people who think we are heading back to 666 on the S&P are idiots and I think people who see a V-shaped recovery back to 1,566 are idiots too.  About halfway between the two, at about 1,100 on the S&P – like Goldilocks I think the markets are priced just right.

When things are in balance, they are very easy to push one way or the other and the Gang of 12 take advantage of that and unleash their TradeBots in either direction because there is A LOT of money to be made stampeding the beautiful sheeple in and out of their positions as they leave a trail of losses and fees in their wake.   

While things can get pushed too far in either direction, it is more likely that they go too far to the downside, which is why we ALWAYS advocate our Mattress Plays as well as some disaster hedges, no matter how bullish our current outlook may be.  Anyone who had money in the markets on 9/11/01, or even in 2007, 2008, 2009 or 2010, can tell you how nice it is to have 5% of your virtual portfolio in a play that makes 500% when the market dips 10% very quickly.

 Our first post of this week was called "Monday Market Momentum (or Lack Thereof!)" and we were up around 10,700 on the Dow and, guess what?  I was BEARISH!  I pointed out that we had rallied on QE2 expectations and that everyone seemed to have ignored Meredith Whitney's waring on the Financials from Friday as well as the terrible jobs news.  I warned not to get excited about Europe's 1.5% open and I also said:

I’ll believe in QE2 when it’s matched by a big-gun stimulus program that creates JOBS FOR THE MIDDLE CLASS – a situation we discussed in detail over the weekend in "The Crisis of Middle-Class America."  We are not taking any positive moves in the markets too seriously until we see some improvement in the lot of the bottom 90% of our people.  We are bullish – in that we are betting the rich (Big Business) will get richer under current market conditions but the foundation of this country is still crumbling and that makes it kind of hard for us not to take all of these moves with a Lot’s wife-sized grain of salt.

That was, of course, 500 Dow points ago and I got pleased enough about the correction to turn a bit more bullish at the end of the week but I find myself very frustrated when I have to explain to people, over and over again, that I am not a perma-bull.  We are playing a range.  Not everything in the World has to be all one way or all another way with no possibility of compromise.  I used to be a Republican (in some past life, when Lincoln was President) and now I'm a Democrat and maybe things will change again and I'm always open to both sides of a discussion BECAUSE I'M SEEKING THE TRUTH – and you don't find the truth by closing your mind to conflicting opinions (or market signals). 

Monday's first Member Alert of the Week came at 9:45 and I don't think I was too ambiguous saying:

Looks like we have a nice, bump at the open with Nas making that 2,300 mark but no one else looks very serious so far.  Breakout levels remain: Dow 10,700, S&P 1,155, Nas 2,300, NYSE 7,350 and Russell 666 – I don’t think we have enough to get through it this morning and if we don’t get QE2 tomorrow, then down we go so make sure you are well covered – just in case.

QID Aug $16/17 bull call spread is .42 and is .42 in the money and you can sell $16 puts for .29 to drop the net to .13, which is a nice way to play the Nas down and we can kill the trade if we get green on the Russell (666) and the Dow (10,700) for a small loss vs. a potential .87 gain (669% upside).

QID finished the week at $18 and the $16/17 bull call spread is .90 and the $16 puts are .05 so net .85 for a 553% gain in 5 days.  That's what I'm talking about when I say a nice 500% hedge can help you enjoy the rough spots in the market!  I made a call to cash that out with "just" a 392% gain on Wednesday as we flipped to a DXD hedge that was able to make another 900% as 392 + 900 is more than our 669% potential upside on the QID hedge alone.   Also, by flipping out with the profit, we lock in gains and only play the DXD with profits so we no longer care if the market reverses on us.  Balance – it's ALL about balance!

On the bull side, I liked the idea of selling the HPQ Jan $39 puts for $2.10 (now $2.95, down 40%) and I still like that target.  My 10:20 comment on our Mattress play was to go naked on the Dec $109 puts and those popped from $6.50 on Monday to $9.25 at Friday's close but we rolled up to the $110 puts and then stopped half out so it's messy to track. 

At 11:42 I put up another bearish trade idea on SDS, with the Jan $31/35 bull call spread at $1.50 (now $1.65), selling 1/2 the March $27 puts for $2.60 (now $1.40).  So that play is up from net .20 per long to net .95, which is up 375% in 5 days but notice where the payoff really is – you get very little gain out of a vertical (just the net delta of the two positions) but the short put does most of the heavy lifting in the early stages of the play and you can cash the puts out for a $1.20 gain, which reduces your basis to .60 on bull call spreads that are $2.64 in the money (up 340%) already and we KNOW (because we just saw it happen) that it's going to be hard to lose much on our vertical if we reverse so we lock in most of the percentage gain we have now by sacrificing .60 of our potential best-case upside.  This, of course, assumes we are adequately insured otherwise

BECAUSE we had good protection we felt good about taking some long gambles on the way down.  Balance, balance, BALANCE and, have I mentioned – BALANCE is the key to managing a portolio.  Perhaps also – BALANCE! 

SPWRA I have a soft-spot for but not so soft that I didn't want a tight cover into earnings so we liked the Jan $12.50s at $2.15 (now $1.55) covered with the Aug $13s at .72 (now .06) so up a tad on that one but we expected the disappointment and the plan was to roll down to the $11s for .70 more and then wait for a bounce or sell the Sept $12.50s, now .60 if SPWRA can't hold $12.

CSCO was another calendar spread from Monday morning (we were busy!) and that one was the Oct $24/Aug $25 combo for net $1.11 (now .23) with the sale of the Oct $23 puts for .59, now $2.10 so a total disaster there but we got out at the bell before things got too ugly.  If you are still in this spread, the adjustment I like is rolling to the Jan $20/22.50 bull call spread at $1.35 (+$1.12), which makes net $2.46 on the $2.50 spread and rolling the Oct $23 puts down to the Jan $21 puts ($1.70) for net .40, which makes your new net basis $2.27 and the worst case is you are assigned CSCO (if under $21 in Jan) at net $23.27 but, of course, you can roll the puts down and out to the 2012 $20s (now $2.85).  So, as the great Yogi says: "It ain't over 'till it's over." 

UNG went against us this week but the Jan $6/7 bull call spread at .60 is still $1.29 in the money and still valued at .60 while the short Jan $6 puts sold at .34 actually fell to .32 so a whopping .02 profit on the week there!  That was it for our bullish plays on Monday and our last move of the day was my 3:53 call to roll those DIA Mattress puts up to the Dec $110s and "stay naked through tomorrow" as we still expected that drop on the Fed.  My best comment of the week came just after Monday's close when Jvest said:

Phil, need advice on a DXD hedge adjustment. Around 7/14 you suggested and I bought a DXD Oct $26/30 bull call spread financed by sale of Jan 2011 $25 puts. When I first bought it, I saw some moderate gains and probably should have closed it out then, but I kept it around as a medium-term hedge. Now the spread has fallen out of the money and the put sale is almost at the money. How would you adjust based on what we know today?

To which I responded (in bold because I thought it was important for ALL Members):

DXD/Jvest – See above.  When all you guys start capitulating on your short positions I usually figure that’s a great time to get aggressively short because the end is probably near.  Keep in mind we are trading a range and right now we are at the top of that range so hedges like DXD are going to get stressed.  If you do not need the protection, of course take it off the table but if you do need downside hedges, then a simple roll on the call side can give you a much bigger upside

I don't know how many ways I can keep saying the same thing and I do apologize if I sometimes get testy but we go through these things over and over again yet every time I feel like we're starting from scratch.  And I'm not even talking about Jvest's question, this is more about the general very short-sighted view I see a lot of people having as they get way too focused on short-term market movements and lose sight of what has been, so far, a very reliable big picture.  After hours Diamond asked me if I thought JPM and BAC, who were lagging the market move, were being held back and I thought that comment was also important enough to bold for all Members:

BAC, JPM/Diamond – I think they are trading accurately and it’s the rest of the market that’s being boosted.  Same goes for a lot of big caps, which made modest gains compared to other sectors.  Why can’t the Dow hold 10,700 when we were over 11,200 in April?  Why can’t the NYSE break 7,200, when it was up at 7,700 last time oil was $82 and copper was $3.40?  The Nasdaq was 2,5535 in April and the RUT was 745 last time gold was over $1,210 – if this is a rally, it’s a very strange one and, of course, the last time we were at those 5% higher levels – we dropped like a rock over 10% in 2 weeks so what on Earth is everyone getting excited about??? 

So there's a quick summary of Phil the Perma-Bull's Monday adventures.  In retrospect I could have said short everything and I would have looked very smart but not everyone is a day trader and we picked up some nice stocks for medium-term positions very cheaply.  Only time will tell if I was wrong on those but if we stick to our rule of taking 20% losses (of full positions – see Strategy Section) off the table and make the occasional 300% gains on our hedges – then we pave over A LOT of mistakes, don't we? 

We took a few speculative longs early Tuesday but, as we popped on the Fed report and I did my usual highlights and interpretation for members my decision was:

So it’s "take money and run" on those short-term, long plays – that’s about it I think.  Nothing to see here, this is wishy-washy BS that people will read what they want into but it solves nothing

The dollar took a total dive and I just realized my logic was right but my direction was wrong on the Yen trade as I should have been looking to SHORT the USD/JPY ahead of something that was going to be dollar-weak!  This is why I don’t play currencies – too confusing!   Now they are down to 85.26 Yen to the dollar and I do still like the upside on the support issues

My call for the next day at 3:40 was:

Sell-off/Jrom – As I said above, Fed notes good for 50% retrace and that’s where we should finish.  Then we think WWAD (What Will Asia Do) and the Fed "reinvesting" in TBills isn’t really doing anyone any good at all unless they were worried about the US being able to keep borrowing money but judging from the bid/asks we’ve been getting in note auctions and the way people still fly to the dollar every time a banker in Spain sneezes – I don’t think very many people were worried anyway so no major effect and that means we revert to our means around the 2.5% rule (10,450 on Dow) in absence of some other catalyst.

Geez Phil, pull in those horns you mad bull!  By the way – look what the Dow did the next day:

Wednesday morning I said:

Range trading is great but you have to BELIEVE in your range.  The bottom of our range, as I posted in yesterday’s Morning Alert to Members, is Dow 10,200, S&P 1,070, Nas 2,200, NYSE 6,800, and Russell 635 and until we fail 3 of those 5, we will continue to make bullish plays when we get near those levels, just as we make our bearish bets as we test our breakout levels.  Even these levels are just 2.5% off our midpoints so we don’t get gung-ho bullish until we hit the full 5% bottom – which is now the rising 50 dmas (red lines) – but we’re kind of losing faith in getting back there so we’re a little more aggressive with our buys now than we were last month.

I'm sorry to have to repeat this stuff but you would think I didn't say a word of it to listen to some people.  I started this review to see if I was really too bullish because that's what I'm hearing from pretty much EVERYBODY as the week finished to the point where even I am thinking I must have been too bullish this week.  As I review the week, I realize that, in fact, everybody is crazy EXCEPT me.  That's OK though – I'm used to being the lone (and lonely) voice in the wilderness!

My trade ideas for Wednesday were a USD artificial buy/write that's not too far off target, IWM $64 calls that were later 1/2 covered with the weekly $63s (which expired worthless, of course) that we ended up giving up on, AAPL Aug $260s that stopped us out for a 25% loss, a MO artificial buy/write, that new DXD spread (Aug $26/28 bull call at .70, selling $26 puts for .40 – the 900% play I mentioned earlier that's currently 333% in the money), an AA 2012 artificial buy/write, an MEE Jan artificial buy/write, a C March artificial buy/write, an XLF Jan artificial buy/write and another doomed CSCO play (net $21.10 entry in October).

Notice we tend to go with artificial buy/writes for our longs when the market is uncertain as we only risk assignment of a 1x position, as opposed to 2x if we are assigned a regular buy/write.  By keeping our initial commitment low, we can bottom fish with roughly 20% cushions and be comfortable that we can DD and then DD again to ride out at least a 50% correction in the market and establish our full, long-term positions at very serious discount to today's prices (IF we should be so lucky as to get an another opportunity to buy at those crazy-low prices). 

It was Wednesday night that I began to get annoyed with all the negativity on the site (and in the media) and I won't re-hash it here but it is worth reading if you missed the bull-bear debates in Member Chat.  By Thursday morning, I declared the markets depressed again but like the song, the game plan remained the same as I closed the morning post with:

We had a few bullish trade ideas (and a CSCO spread that needs to be dumped right away!), trying to get ahead on some bottom fishing yesterday but so far, so bad on those!  Today we may actually be forced to join the bears if we blow 3 of our 5 bottom levels but I am hoping that this holds as it would be very nice to begin to establish what has been the mid-point of our trading range as more of a base.  

Is that too optimistic?  We’ll see…

We took a stab at the DIA $104 calls in the Morning Alert but they went nowhere and we gave up.  VZ was good for a 2012 artificial and CSCO 2012 $22.50 puts sold for $3.90 are still $4 and net $18.50 is a VERY nice entry on CSCO!  We like CSCO's price so much that we also picked an artificial Jan buy/write.  Gold was shorted with a GLL bull call sprerad, STX looked good enough for a regular buy/write, a JWN ratio backspread is underperforming for now, IDCC was a long ratio backspread, CAVM and NETL both looked good for artificial buy/writes as they were killed with the SOX and we found a nice, "boring" XLF vertical to make us 17% in 7 days.  I also reiterated that USD play with a slight variation – I really like that one!

My 2:07 prediction in Member Chat was a pretty good road map for the rest of the week:

It would be encouraging if they can hold 10,300 and 1,080 but still lame if we can’t get green after such a massive sell-off over 3 days.  We’re down 3.7% since Monday’s close with the actual 5% drop line at 10,165.  Tues we bounced off 10,560 (1.25%) and yesterday we couldn’t take back 10,432 (2.5%) and now we’re looking at 10,298, which is 3.75% down so it’s possible we’re stepping down in a controlled drop to the 5% lines and that means we need to look at the 4% line (10,272) as that will be our bounce zone anyway and that is about what we bounced off this morning.

Note the bounce line of Thursday afternoon and Friday on the above chart.  This stuff isn't complicated folks and, when the market does exactly what you expect it to do – why on Earth would you then change your expectations based on what it just did?  

My TGI Friday post was "Hoping the Weekend Brings Perspective" but I heard little of it, either from our own chat room or from the MSM, who are in full-blown disaster mode already.  I dd the charts, I did the graphs, I pointed out what the cycles of greed and fear lead to in the markets and then we all sat back to watch our levels which – held…

Friday's trade ideas were just another GLL artificial buy/write, a TBT spread (as we no longer trust them naked), an ARNA 2012 artificial buy/write, a NFLX ratio backspread, HPQ short put sales and a full buy/write on HERO, which was a great catch by Pahurik as they are way cheap at $2.28.  That's it.  My 3:07 comment to Members was:  

Weekend stance – off this disappointing two-day run I’d say as neutral as possible over the weekend.   I do think we need a good blow-off bottom now because we blew our chance to turn it around on volume yesterday

Trading Range – I was counting on QE2 AND a stimulus announcement by next week.  After the weekend we may have neither so it’s really going to be all about watching our levels in absence of any fundamental market forces.  Monday we have the NY Fed and NAHB Housing Index.  Tuesday is Housing Starts, Building Permits and a PPI that will also be BTE along with Industrial Prodcution (probable disappointment) and Cap Utilization (dragged down by refiners).  Thursday is Leading Economic Indicators and the Philly Fed and that’s it for the week so, once we get past housing, the newspaper is more likely to move the markets than the data points

Not much to add to that.  We'll see what happens Monday but my overriding concern for next week is an oil crash taking us lower or a general commodity crash set off by a big dollar bounce as the BOJ steps in (already happening – as I predicted – and that currency trade would have made a Bazillion dollars already) and tries to get the Yen back closer to 90 Yen to the Dollar.  Copper is key as last time we failed 1,070 on the S&P, copper was under $3.  It's now at $3.25 and over $3.20 is considered "healthy" by us while under $3 is BAD. 



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