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Monday, February 6, 2023

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Tuesday – Topping Out or Just Pinning the Fed?

Tough call today

The Dollar bounced off 79.75 this morning, nothing to crow about for Dollar bulls as the Euro remains just over the critical $1.30 mark and the Pound is solidly over $1.55 for the moment.  

You could say it's a bearish sign that the Dow and the NYSE stopped dead at our breakout levels but that's to be expected on a first attempt at breaking out – even if they have already attempted the same move back in late October, when the Dow was 5% lower in it's test and the NYSE was testing the same line (7,866).  

Our broadest market index is the one that's holding everyone back as what little volume there has been in this rally has been fairly narrowly focused on certain leaders.  Now a pessimist might say that this is a reflection of the blatant manipulation of the indexes in which certain Banksters place buys on stocks that have disproportionate positive effects on the junior indexes in order to fool retail traders into believing there is a rally while the Banksters drive the VIX down to multi-year lows, dump all their stocks on the bagholders and prepare to cash in by crashing the markets on a major event like tomorrow's FOMC Rate Decision which is, in fact, very unlikely to have any language specific to the QE3 that has been promised by the MSM since Thanksgiving.  

SPY DAILY An optimist would say – well, you can read almost any MSM site for that.  It's lonely at the top of the range when you are bearish, one by one the other bears capitulate and soon you are there all by yourself with your shorts – your lovely, lovely, cheap shorts!  The Dow shot up yesterday to just over the 12,749 breakout line we have as the tippy top of the range on our Big Chart so of course I called for DIA puts in Member Chat.  The DIA Feb $123 puts, which came in around .75 and finished the day not much higher at .78 after topping out at .95.  Ranges usually hold – if you're not going to have conviction at the very top of a range to short – when will you?  For one thing – you have a very good stop line to watch!

As noted by Dave Fry in his SPY chart, the bulls have engineered their golden cross and have spent a hell of a lot of money and time doing it – now they are counting on machines and retailers to respond like Pavlov's dogs to the sign of the cross and take all those expensive shares off their hands.  

Or maybe CAT should be at $106.  The p/e is a reasonable-looking 16 and they are projected to grow next year despite the Global outlook for a mild recession in the first half.  Looking at other major Dow components:  CVX at $107 is only 10% higher than it was in 2008, when oil was $140 a barrel (with projections of $200) and Natural Gas was $8 – makes sense to you, doesn't it?  BA I do think is worth $75 for many reasons and IBM at $189 is more than I'd pay but I wouldn't kick them out of bed either.

JNJ is $5 off it's 2008 highs, KO is 5% over, MCD is 50% higher than it was in 2008, MMM is back to $90, PG is $10 shy of their $75 high, UTX is back to $80 (but down from $90 in July), XOM is a bit shy of their $95 high (also with oil 40% lower and nat gas 70% lower) and TRV wasn't in the Dow in 2008 but is over their highs by 10%.  Those are the Dow components over $50 – the ones that count in this price-weighted index.   

MCD Just reported nice revenues of $6.8Bn in Q4 along with $1.33 in earnings and that was indeed quite a bit better than 2008, where we had 0.87 EPS on $5.6Bn in earnings so nice – but is it up 50% nice?  Maybe the problem is that there are so few good stocks these days, that the really good ones are now fetching a hefty premium, which helps explain the Dow's relative outperformance since November.

Without risk (see above diagram), you can make a case for pricing MCD at $100 but are we accounting for the current risk in these prices?  Are we accounting for the risk that sent MCD from $66 in Aug 2008 to $46 in October?  

Of course they were a screaming buy at $46 but the fact that they CAN fall that far needs to be taken into account when determining the VALUE (not PRICE) of a stock as a part of your portfolio.  We could go over the components one by one (maybe on a weekend) but the bottom line is we are priced to perfection at the moment and that perfection includes ONE TRILLION additional dollars being poured into our $15Tn economy (6.66%) by the Fed pretty much TOMORROW.  

Anything less than that may lead to a bit of disappointment.  

Not to be nitpicky – but the Dollar was at 88 in Q4 2008 so the Dollars MCD was collecting then were 10% more valuable than they are now.  While the growth of MCD is still impressive – they are a bit of a "Recession Stock" that benefits from the decaying buying power of the Global Middle Class, who have traded down to Happy Meals and the Dollar Menu to the benefit of MCD – other Dow components and other companies in general are far less impressive when viewed in the light of the earnings power provided them by the worth(10%)less Dollars they are now reporting earnings in.  

Of course, if you are an American, you have to buy your MCD in Dollars too so it's right that they should charge you an additional 10% for their very valuable stock, isn't it?  Priced in Euros, in fact, MCD dropped 2% this week but it's not about the day to day picture – it's about the Global Macros.  In 2008, we didn't think the entire system would collapse in a single quarter, we didn't know the housing market would collapse or that over 100M people World-wide would lose their jobs in the next two years or that entire nations would face bankruptcy.  So maybe, just maybe, we can be excused for ignoring the risks. 

VIXBut now?  REALLY???  Are we back to completely ignoring risk as if everything is all better in Europe and Japan and China and the good old USA despite the fact that pretty much NONE of those 100M people got their jobs back and another 100M people were born and they don't have jobs either!

STAGnant Global economy, rampant inFLATION and we are pricing things BETTER than they were in 2008 – before we were made aware of how many problems lay just below that bullish surface?  

I suppose it's the lack of a sense of risk that is really bothering me.  As you can see from the chart – we've been this complacent before (and paid the price) but, as I said to Members yesterday – if we break our levels we'll just have to switch off our brains and stop reading the news so we can invest properly along with the crowd.  

But we're not there yet.  Where's my Trillion Dollars Dr. Bernanke?  Where's the deal on Greece?  Where are the jobs?  Where are my breakout levels?  It's hard to be patient but I believe the risk is real and I'd rather be relieved to find out I'm wrong and my biggest problem is how to deploy my pile of cash than to be fully invested and falling off a cliff – at least I learned that in 2008. 

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PHARM – where do you think IMGN goes from here?  Are bullish long term, and what about short term?  And BTW, kudos to all AAPL players, including myself!

Appl
thnks lflan, Phil and lvmoda.
been sitting on my ars since Christmas waiting for this friggen pullback and couldn't take the wait any longer.
when lflan  said he was staying pat today, then Phil threw in a last minute  trade and lvmoda's 3:33 trade suggestion, I pulled the trigger on
2 long Feb. 385 C @   $39.3
and 3 short Feb. 390 P @ $4.4
and also have a s/l of TQNT Feb 4 C @.93 now trading @ $6.15
3# lobsters at the Capital Grill this w/e!
thanks guys

Apple typically fizzles the day after earnings. The best time to sell near term calls is right at the open. My only concern is where will it be on Friday, and if the answer is 440 or better, I may as well leave my friday 435/440 spread alone. 

Gotta hand it to you Phil, time after time you know how to call those plays!  Sure your last name's not Brady?  Oh, forgot, you're probably a Manning…

Way to go Phil!  Have I said how much I appreciate your site lately! Your ability to teach and your willingless to give others a forum to demonstrate their own skill sets makes your site remarkable. I got great help from you, jmm1951, and Iflantheman (special thanks!) today. Hell, if I have many more days like this I may even be able to sign up for a full year rather than doing it just quarterly. Tomorrow is another day but, fabulous job today!

zipla, et al…..Give me overnight to contemplate where to go with AAPL next and I'll post my thoughts in the morning.  I'm sure my plan will be some form of 'selling into the excitement',  but I will certainly look to squeeze as much as possible out of these trades we have in the AAPL portfolio.  And, yes, more plays are coming.  If I can get more of you guys to just trade AAPL you will lose interest in most everything else.        🙂     Well, I don't mean your girlfriend';  I'm just talking about stocks here.  

Congrats Iflan well done!

Phil, Peter D and all.  Has anyone studied the difference in SPY verses SPX in relation to cost / profitability of trading?  SPX is 10 x SPY.  Spreads on ATM SPX is $2 – $2.50 ish.  Spreads on ATM SPY are .03 – .10 so equivalent to .30 – $1.00.  SPY commissions are 10x SPX.  So given you have a portfolio large enough to handle SPX trading, which is better to trade.  I don't care if i pay more commissions with SPY as long as the math works out in my favor.    I guess the big factor for me, is you get guaranteed execution on the SPY at bid and asks but on SPX you are trying to get through a Mark price.  So if the market is moving i would guess it would be harder to get SPX traded.  Any thoughts are appreciated.

Iflan, I agree with drcraig above, AAPL typically sells off after the opening tomorrow morning, tho with such a strong pop tonite maybe they'll hold til Friday this week.  In fact it typically sells off for the next several weeks, so perhaps after this week some kind of short-term bearish play is appropriate? 

Value ideas – While waiting for the Fed, breakouts, breakdowns, etc. I have been researching value ideas.  In reading “What Works on Wall Street” O’Shaughnessy identifies the top strategy as “trending value.”  The basic idea is to come up with a composite value indicator based on PE, P/S, EV/Ebitda and other value indicators and then by stocks that are from the top decile of all stocks. Next he also adds the criteria that the stocks must be in the top half of all stocks in relative price strength.  He backtests the top 50 stocks that fit the criteria for a one year hold back to 1929 and shows over a 20% per year growth rate.  I’m greatly condensing his work, but you get the idea – pick value stocks that have some relative price strength.
 
Since we all have access to the gold level at Sabrient, I decided to test their Stockfinder since they have a composite Value criteria and a composite Momentum criteria.  I tried to pick stocks with an over 90 Value rating and over 50 momentum rating (midcap and above) and came up with the following list:
 
WDC, AGO, STLD, XRX, MUR, KRO, BPI
 
All but WDC and BPI also have a dividend greater than 1 percent.  Any thoughts on the shopping list?

And congrats to Iflan and all the APPL players.  I enjoyed a few gains a couple weeks ago but have backed off from short-term trading.  Well played!  

jerconn…yes, that's correct.   AAPL tends to slide in the weeks after earnings.   I'm looking to set up plays that might work for that pattern.  And, if the overall market trends downward, it will tend to pull AAPL with it.  Yes, one of the things I hope the younger traders can glean from watching us trade AAPL is that we don't really care which way it goes…..up, down or sideways.   All we want to know is when it's going to do what so we can set up the trades to catch the movement (or lack of movement).   And this trading principle applies to all stocks.   Who cares which way CMG or NFLX or any other stock goes.  All I'm interested in is figuring out direction, so it can be traded for profit.   

Iflan – absolutely, it's just that AAPL tends to have a more clearcut pattern and cycle – for example, you can expect it to sell off for five to eight weeks or so – this is not my research but from some other pundits who have done very good research, perhaps like yourself.  Anyway, relying on you for some more great trades…looking forward!

Congrats lflan… I am looking forward to the portfolio update tomorrow morning! Should be good…

One caveat to consider on the post-aapl earnings fade is that this time there will be dramatic price target upgrades coming from the analysts, likely in the 600-700 range.   I would expect the fade this week for the earnings traders to close out and then a strong trend upwards through feb expiration as institutional players skew for growth by reallocating more of their portfolios to aapl.  The first few upgrades may well push the stock over 500 by feb expiration.  The Q2 revision up 5% by aapl is a strong tell, and there may not be a chance to buy a dip after this week (ignoring the fed, iran, europe and obama, of course..lol).

Phil-
I would like to echo the sentiments of dclark41.  Joining this site was the best thing I have ever done to aid my growth as a trader/investor.  There are so many smart and experienced people here sharing their ideas that regardless what your investing style is you will learn something daily.  Thank you and all the regular contributors for your generosity.

Congrats, lflan and the AAPL longs!  I don't have any AAPL accept an iphone, so fairly neutral reaction from me.  In one of the links that you guys posted, AAPL counts $600-$650 per iphone as revenue.  That's good business as my two years old iphone is dying and I will be happy to get a new one.  At a cost of nearly $1/day, Steve Jobs and crew did a good job in selling expensive products to the general public.  Competition may bring down the $600 revenue per iphone soon and to me it's one of the reason why AAPL is not at $700.  Not a negative thought, just thinking of the possibilities.

lvmoda  /  AAPL…..I believe that's right.  This time, with such strong earnings and guidance, the pullback could be delayed.  We have to take all possibilities into consideration as we look for the highest probability trades over the next few weeks.

Joining the chorus, thanks IFlan!!!  On completely sidebar note check out "Chimes of Freedom: The songs of Dylan" 75 songs covered by an array of stars for an  Amnesty International benefit. Only 20 songs in but so far very impressed by the depth of the talent.

robert/SPX versus SPY,
You know I'm a SPX guy, so I may be a little bias.  You should try both and see what you like.
 
Here's my tidbits.  SPX usually fill close to the mid price.  The market maker will grab it very fast if you offer 50c over the mid price.  If you trade iron condors, 50 SPX spreads is easier to manage than 500 SPY spreads.  The larger SPX option value allows you to go further OTM, e.g. you can sell SPX Feb 1150 puts for $1.4 (Mark price), while the 14c on SPY means you have less profit after commission (percentage wise).  I do like the liquidity of SPY though.  When VIX spikes, I would sell long dated puts on SPY as they have much higher premium.  If you do covered calls for income, then SPY is a must as it pays dividend.
 
Then there is tax.  SPX is automatically qualified under Section 1256, with 60% as long term gain and 40% as short term gain.  Since option sells are usually counted as short term gain, this is a big advantage.  SPY may not qualified automatically as it is not cash settled.  Of course, you can argue to have SPY under Section 1256, but I'm not a tax lawyer to tell the answer for sure.

Lflan-TheMan! / AAPL
 
We need to organize a dinner or something for you from all the PSW'ers who are massively profiting from your ideas!  I'm dying to know what the Apr 425/450 will be priced at tomorrow!
 
I'm guessing that we are all going to be getting out of the weekly 425/430 spread for around $5 as soon as we can, right? 

AAPL & Max Pain Theory
I trade AAPL options full time and I use Max Pain (see note) to help me select my strike prices.  It does not work quite as well for an opex that is near a big event or earnings (like today), but on normal expirations, it is quite accurate and time tested.  I don't feel so comfortable with the Jan4 cycle (because of earning), but the Feb cycle I will use.  I just wanted to pass on that the max OI on the Feb calls is Feb 430 and for the puts it is 400.  I usually give myself some cushion by using the next strike for safety.  There are allot of great things you can do with options if you set up trades outside this range.  The generally high IV makes for great option writing.
Nobody knows where a stock is going to go, but it is very useful to have a tool that help you know where it will not be.
note:  for those who do not know, in quick terms, it is the theory that the close will be at a price that inflicts the most pain on the long option contracts.  The BOTS will push the price below the highest Call open interest, and above the highest Put open interest – at opex.

lflan – Thanks here as well.  I stayed without covers on my 415 calls based on your bullishness, also short puts and covered calls played out as well.  enthusiasm.  Thanks to Phil for putting me in a position with his recent calls to permit me to play this a bit more agressively than normal.    

I would speculate [and have] that, given the well-known effects of advertising, the SOTU speech should boost the dollar overnight no matte what is actually said.  One of those nice predictions that has a definite sell-by date.  Whether that is bullish or bearish for stocks is a trickier call, on which I am positioned neutrally.  Could be an up day for the VIX, however.

ccsincsd thanks for info, that's interesting. In your experience, do the max OI strikes usually remain fairly intact, say from 3 to 4 weeks out?

Help, I'm looking for the chart someone posted in the last couple of days comparing 2008 to 2011.
 Seemed like we were better off.

ccsincsd – I have been looking at that on and off, it seems to work when I look, though I haven't actively used it yet. Do you use a free maxpain calculator or do you pay for something like the current pain data at optionpain.com? How long do you wait? optionpain.com is showing $400 for February now, which seems unlikely at this point. I'd love to hear more details. 

Just read the Phil's post. After all of that all I can say is, hey CMG is worth 360? and all the pink ponies fall out of the air and splat like blood.
 
Please god kill off that PIG. Can I cash in my "one time" or what?

kurt, 2nifty / MaxPain
No, the max OI strikes do move at 3-4 weeks out, but then settle in pretty solid the last 2 or so.  Can see an easy 1-2 strike move as it firms up.  I use TA to time my option writing, and it is usually with 3 weeks remaining in the cycle.  Want to capture as much premium as possible, but with the best feel for where it will not close.  Again, I usually give myself at least 1 strike of margin for error.
No, no calculator needed.  TOS goes a great job of displaying all the strikes with OI and all the greeks in an easy to see format.
You can get the pretty color display at optionpain.com
My Pal Travis has put his entire focus on just AAPL option pain at aaplpain.com  You can learn allot at his site.
(note, as the weeklies volume and OI is growing, I am seeing that the MaxPain is starting to work with them as well as the monthly opex.  Sad, its a big manipulated game by the big fellas.  I'm just trying to figure out how to play on their field.)

Madame Botox// is NPelosi thought of seriously by serious thinkers? she's  a third rate mind in a with a 'death becomes her visage'..and the President made a vast error giving her the reins..he must feel like the fellow who sold Elphaba that bicycle..i thought the sotu address was quite good..luckily he is running against a juggarnaut of arrogant mediocrites

Roro:  http://www.bloomberg.com/news/2012-01-25/europe-can-beat-this-crisis-but-maybe-not-the-next-clive-crook.html
 
I dunno, that dollar's looking better and better.  Timing unknown, as pointed out.

Mr. Davis,
 
 
Let's say you had a $100,000 virtual portfolio and you wanted to invest 50% in stocks and leave the rest in cash, margin, hedges and aggressive short term (25KP like). So therefore you bought $62,500 in equities and sold both calls and puts for $12,500…net $50,000. The puts you sold had strikes on average 15% bellow the current price so if put to you, you would have to come up with $50,000 or 100% of porfolio.
If I wanted to hedge away 100% of the risk in case of a 20% drop in equities for 3 months. By buying 2x inverse (like SSO) bear put call spreads and funding the spreads with short put sales on things I want to own 3 months out..could it be done? Could it be rolled reasonably need be?
You mentioned you like your portfolio to to be about 60/40 maybe 70/30 if you are feeling really good about your investments. Could you please explain how you can be 60/40 if you are only 50% invested like you suggest when building a Long Term Portfolio. Is there somewhere on your site I can view an example of a portfolio like that?
 
 
If you was beginning to build a new portfolio today, would you start buy selling 2013 puts on companies you really want to own now or would you wait for a pull back when the VIX is higher?
 
 
Also, what do you think about selling 2013 puts on sectors you would like to own in the future…seems less risky to me.
 
 
Thanks!

Refreshing academe – seems appropriate what with SOTU speaches and all..
The Moral Illusion of Governmental Authority

FOMC meeting – Obviously it wil depend on the outcome and the way the statement is worded, but hypothetically speaking if there is no intention of QE3 in the short term, do you think the probability of drop in commodities/ metals (oil and gold) may be higher than stocks?
Also the inventories today could be another factor to watch out on oil?

shouldn't it be AAPL's revenues that we compare with various countries' GDP, rather than AAPL's market cap?

Phil
I agree and it certainly is a wonderful group. You should be very proud.

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