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Sunday, March 3, 2024

Testy Tuesday – Fed Pop or Drop?

Isn't this exciting? 

We popped all of our 5% levels yesterday, now all we have to do is hold them and we can start looking ahead to the 10% lines.  Just 10 days ago, on Friday the 10th, we did our last multi-chart study and I said in the morning post: "I am not TA guy but If I were a bear, I’d be pretty darned concerned about the charts as it looks to me like the 20-day moving averages are registering a short-term mistake in a generally rising trend."  Look at how those 20 dma's have snapped up in less than 2 weeks (blue lines are mid-points, green circles are 5% levels):

So Gold and Transports are running away with SOX falling behind.  We've been playing the SOX up with USD, which is up 10% since I picked it in that Friday's post but that's been a relative underperformer for us as we nailed the bottom with a buying frenzy into the late August drop which culminated with my very bullish "September's Dozen" from the 3rd.  There were actually 10 stocks and only 9 fit in the multi-chart (I dropped HMY, who already gained 15%) with way more than a dozen trade ideas for our Members to take advantage of the anticipated short-term moves.  Of the 10, only IRM has been laying around but we weren't expecting a quick move on them and played a conservative April spread and took the risk on Oct $22.50 calls, which are our only loser, down 30% at .20 but I still like them if we break up from here.  

The leverage you can gain with option plays is truly stunning.  On BRCM, for example, the trade idea was a straight purchase of the Sept $32 calls for $1.25, BRCM topped out at $35.49 with the calls close to $3 on the 14th and they expired on Friday at $2.16, which is up 72%, even for people who didn't stop out between there and up 140% that Tuesday.  That trade was a combo trade with the sale of the October $30 puts at .70 and those are down to .30 (up 57%) which are well on their way to expiring worthless for a full 100% gain.  We also took an artificial buy/write that stretched from Jan to Jan 2012 so that was 3 trade ideas on one stock – you can see how quickly we get past a dozen!

We get aggressive at the inflection points – had we failed to hold our levels in early September, we would have quickly bailed out of the aggressive plays so the risk/reward ratio on them was pretty high and, of course, being able to make 72% or 140% in less than 3 weeks is always a good thing but it's also one of those good things that only come to those who wait and, unfortunately, now we are back at an inflection point and waiting (patiently, I hope) to see if it's going to be time for an October Dozen or more Disaster Hedges. 

Of course, we went with the disaster hedges first.  We do so on the same logic as we took the aggressive plays – if we fail our lines (in this case, if we break over our 5% lines and hold them), then we kill the trades – as disaster hedges are essentially very aggressive short plays with 500% return targets.  These are INSURANCE plays to protect our bullish positions, not bets that we think the market will fail.

I still have my concerns as the September "rally" has come on very low volume and it's entirely possible that the whole thing is simply "window dressing" by funds, looking to post up a good quarter to stop the massive flow of monthly withdrawals, which means it will be very hard to trust anything that happens between now and the end of the month.  We still have the madness of the election season to contend with as well as our housing data (better than expected starts today!), total lack of employment and significant overhead resistance.  Worst of all, it seems that individual investors have now turned bullish and they are hardly ever right! 

Our International multi-chart is also looking strong with the very notable exception of the Shanghai and the Baltic Dry Index but these are things we MUST NOT ignore, especially as the Shanghai heads down to test that 50 dma at 325!  It's hard to see copper holding up if China is failing and Hong Kong (the HSI) is NOT where the building is.  India continues to be on fire and Europe is much improved but the Nikkei is pathetic and up solely on Yen manipulation – which is not something we can count on being sustained long-term:

On the whole, I love Caroline Baum's quote in Bloomberg this morning: "Recovery Deniers Just Got Mugged by Reality."  That about sums it up, doesn't it?  As I pointed out in June's "Worst-Case Scenario: Getting Real With Global GDP!" when I was attempting to talk bears off the ledge after our "flash crash" sell-off:   

We have a lot of new Members since then and I want you to understand exactly what I mean when I say things are undervalued so we can be prepared to act if the opportunity arises…  We have already been rewarded with 20% discounts to buy back the same stocks we loved back then (Feb) with hedges that protect us all the way to 40%.  Should we wait for 40%?  What if 40% never comes?  What if the MSM doomsayers are wrong?  Since we have a plan that works in either direction, we’re sure not going to idle all of our cash for no reason – certainly not at today’s interest rates

Well, opportunity may be here again so let’s ignore the BS and prepare ourselves for some real shopping opportunities.  The world will not end tomorrow and, even if the Western World drops back to the stone age, somebody in China will still want to put a diaper on their baby tomorrow morning and, one day, our stocks will recover!  Plan the trade and trade the plan and we will be able to go out there and, not only shop with confidence, but have fun doing it!

That was pretty good advice with the S&P at 1,042 and now that we're at 1,142 we're going to be a little more cautious but we're not going to automatically assume things will get bad again.  Perhaps we've actually recovered, perhaps things are actually getting better.  I know – BLASPHEMY!  But I'm willing to say it, even if no one else is

CAUTIOUS optimism is the watch-word heading into the Fed this afternoon.  Most likely they will not be upping the QE at this meeting and we should get a sell-off that re-tests our 4% lines of Dow 10,608, S&P 1,112, Nas 2,288, NYSE 7,072 and Russell 660 – anything better than that will be bullish indeed but we'll be hedging for a dip – just in case. 

Be careful out there!



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