What a wild week!
The Dow is up 400 points since Monday and we are just 150 points away from our November 4th high. Once we get over 11,500, we have no reason at all to be bearish from a technical standpoint and fundamentals are out the window so what else should we be looking at? We ended up too bearish on our $10K-$50K Virtual Portfolio as we hit our double-down targets on a couple of index shorts so I am CLEARLY in the bear camp this morning as we're still playing this as a double-top, rather than a breakout but what if we do break out? As David Fry said this morning:
Any worries from Europe, China tightening, higher Jobless Claims are mere inconveniences when the light is a bright green. Let’s face it; this is what the Fed stated they wanted with their POMO activities—higher prices overall with higher stock prices emphasized. The Fed prints money and buys bonds from the Primary Dealers and (wink wink) they know what they’re supposed to do with it. Bears just better get out of the way.
Looking at David's Nasdaq chart, we can see that we are back at 2007 highs. I find this truly amazing as it seems to me things aren't quite as good in America as we THOUGHT they were in 2007, before we found out that Financial earnings were a scam and before our homes lost 1/3 of their value and when our neighbors used to all have jobs but CNBC is telling us over and over and over and over again how great things are so it must be true because they are on TV and TV doesn't lie to us.
So there's our ridiculous rally premise and we're "very excited" to go bullish if we break over the 2007 market highs. XLF has been a real laggard so we like taking advantage of a run in the banks with trade ideas like the FAS April $20/25 bull call spread at $2.70, selling the April $21 puts for $2.55, which is net .15 on the $5 spread that's already $4.25 in the money. So, if FAS makes a .75 gain between now and April expiration and holds it, this trade makes a 3,233% profit. That's pretty good right?
See, that's why we don't fear the upside. If the Fed insists on printing money, we sure know how to grab our share! The risk on that trade is FAS falls 20% and you are obligated to own it at net $21.15 and FAS hasn't been much below $20 since mid-2009 – so it's a nice trade on continuing upside – don't say I didn't give you anything for Christmas!
Want another one? Our Members are already in FAS, UYG and XLF combos from when they were cheaper and we're also in DBA but DBC is a fun way to play commodity inflation as well and DBC is still nearly half of where it was in 2008 so if Goldman Sachs get's their Christmas wish of $100 oil, we can be off to the races on DBC as well.
You can make a simple bullish play on DBC by buying the April $27 calls for $1, those should double if DBC goes up 10% (now $26) near-term. If you don't mind being a long-term commodity player, you can buy the 2012 $26-30 bull call spread for $1.40 and sell the $22 puts for $1.10 and you are in the $4 spread for .30 with a nice 1,233% upside if DBC hits $30. Keep in mind it was $45 last time the markets were this irrationally exuberant so we're not asking for much, just 1,200% to see us through to next Christmas!
This is why we have kept our cash on the side, we can turn that cash into BIG MONEY on a breakout and we only need to commit, for example, 1% to each of these two trades and, if they both work out, the whole virtual portfolio gains 44.66% so that's a nice way to start 2011, don't you think?
Our last Member Virtual Portfolio was a fairly conservative one called "Defending Your Virtual Portfolio With Dividends" from October 23rd. We're done with those as it's going to be time to get much more aggressive if we're breaking out (and we wanted to be in cash in case we don't), so feel free to browse as it has a lot of good notes on sensible long-term investing strategies using options and, as a bonus, several of those stocks have come back down a bit and are still playable (BMY, for example, just tested our $22.50 target and looks good!).
8:30 Update – ROFL! It looks like we won't be needing those bullish plays just yet as Non-Farm Payrolls are a very disappointing 39,000 (160,000 expected). This is great for us of course, as I mentioned above, we were forced to get very bearish yesterday following our rules and CNBC was scaring us but, surprisingly, it turns out they are complete idiots who give terrible financial advice and resemble a proper news station about the way I resemble Brad Pitt (see yesterday's post for more on that subject – on CNBC, not my Brad Pitt envy..).
We're not surprised, I told you the jobs numbers were not real last Thursday and we expected a reconciliation in the more reliable NFP report and we're positioned 100% bearish in our $10K-$50K Virtual Portfolio (which now is looking a lot more like we'll get our $50K!) – we're mostly relieved to see that fundamentals can still be useful in this market but it is SO HARD to wade through this non-stop media BS that even I was worried and making preparations to go long (see above). Of course we learned in the Boy Scouts to "be prepared" and that's what those 1,000% trades are for – they are a way we can dip our toes in the water without committing much cash at the early stage of a rally, just like our bearish bets (had they failed) would have formed a backstop for a larger commitment of upside capital.
In fact. we WILL be taking a modified version of that FAS play now, to protect our BEARISH profits. I regretted not being more aggressive on the XLF yesterday and now we should get a nice dip that will give us a good re-entry so stay tuned in Member Chat and we'll find something that could pop for us! Sorry if I sound excited but I am – I'm always happy when Fundamentals triumph and I'm very happy when the market obeys our trading range – it makes it so much easier to make our calls….
Now, you'll have to excuse me as there's going to be a lot of work to do today. What's striking me at the moment is that the Dollar has been jammed down to 79.6 from 81 yesterday, which is down 1.7% in 24 hours, a pretty big move for a currency that is over 60% of all the money in the World, don't you think? That's stopping the markets from collapsing and sending gold over $1,400 (I already gave you a long play on gold last week – don't be greedy!). This is a truly insane way of propping up the markets into next week's uncertainty with Ireland voting to accept or reject the EU loan package on Tuesday as a rejection there can send the Dollar over 82 and that can knock the markets down 5% at this point.
As I mentioned to Members in the Morning Alert today, Ireland's Parliament votes on the EU aid package and the defeat of Cowen's supporter in last Thursday's election has left his party, who are likely to be thrown out of office right after Tuesday's vote, relying on two independents to pass the aid package. Keep in mind that Ireland is being forced to accept these loans to save Europe – Europe is not saving Ireland but they need Ireland to save Europe – and US!
Have a nice weekend – next week is going to be fun!