Fake News Friday – What A Fool Believes

Oil shot up  to $110.55 yesterday.

The news was that a pipeline in Saudi Arabia had been attacked and oil had been running up all day into this "news," which, funnily enough, turned out to be fake.  We caught the news at 3:05 in Member Chat (thanks Kustomz) and we had been waiting for oil to stop going up so we could short it.  The turn came at the $110.50 in the Futures (/CL) and we caught a nice run down to $109 and I reiterated, at 3:36, with oil still at $109.88 my love for the USO April $40 puts, which were $1.08 at the time and finished the day at $1.15.

As Malsg pointed out in Member Chat: "The pictures of the fire are taken in daylight … but Saudi sunset was several hours ago … the oil market only stared going nuts after the close."  A very good observation that gave us the resolve to stay short on oil – which is working out fantastically this morning as well. 

We also grabbed an aggressive short spread on BNO, as it seemed the whole day's run had been BS, with traders in the know stocking up ahead of the fake news so they could unload barrels into the retail suckers who bought into the spike.  Don't worry though – no one who bought oil up from $105 on Thursday to $109 ahead of the news will be arrested or even questioned – we'll just keep pretending the total farce of oil trading is a legitimate pricing mechanism, even though it costs people around the world hundreds of Billions of Dollars each year in excess charges (see "Goldman's Global Oil Scam Passes the 50 Madoff Mark").  

Now, this is the part where I would usually point out how the economy is weaker than we think etc. but I'm not going to do that this morning because the S&P still over 1,360 and, if a stronger Dollar isn't going to stop this rally – nothing will.  Even yesterday, I joked to Members that I wasn't going to highlight negative news items in red anymore as there was no such thing as bad news in this market.  

As you can see from David Fry's SPY chart, we''re back testing the bottom of that channel today and, if we don't break down here, then we can go another week at least on the bull run.  Just last Friday I was pretty sure we'd break under and we didn't and, as Dave says – it's just like 1999 – but 1999 was a great year to be in the markets, it was 2000 that sucked.  

Last Wednesday we poked over 1,360 and I laid out 10 trade ideas with the goal of adding "one more bullish trade each day that we're over the line" as 1,360 and our other Big Chart lines made for excellent signals to take profits off the table.  Before we buy, we hedge, of course and our two hedge plays were:

• SQQQ April $13/17 bull call spread at .70, now .50 – down 28%
• DXD April $13/15 bull call spread at .55, now .50 – down 10%

As I pointed out in the post, both of these hedges have strong upsides on their own and don't NEED bullish offsets but I did suggest the AAPL 2014 $300 puts (selling to raise cash), which are still $15, despite the fact that there are now 2,300 open contracts ($3.45M) – that funds a lot of bearish spreads!  Another offset for DXD was the FDX April $80 puts at $1.10, those are down to .75 already (up 32%) and would have completely offset the loss of either hedge so far.  T was another 2014 offset with the $25 puts sold for $2.15 and those are still $2.15 as we don't get much movement out of 2-year options.  Our last offset was SKX, with the Oct $12 puts selling for $1.55 – the same price they are now.  

So you can get better prices for the spreads and 3 of our 4 bullish offsets are the same price as last week – that's pretty good for a start.  Now let's see how our 10 bullish trade ideas are looking after 7 trading days (see original post for logic on each trade):  

• SKX Oct $10/14 bull call spread at $2.20, selling $12 puts for $1.55 for net .65 – still .65
• SU 2014 $25/37 bull call spread at $6, selling XOM 2014 $65 puts for $5 for net $1, now $1.86 – up 86%
• USO June $40/46 bull call spread at $2, selling SCO Oct $26 puts for $3 for net $1 credit, now .82 credit – up 18%.  I like this one because you are long and short oil at the same time.  
• AA 2014 $10 puts sold for $2, still $2 – even
• X Jan $25/2014 $20 buy write at $17.04/18.52, now $17.57 – up 3%
• PEG Sept $30 buy/write at $27.07/28.53, now $27.20 – up 1%
• HOV 2014 $2 puts sold for .90, now .85 – up 5%
• BAC 2014 $3/7 bull call spread at $2.75, selling $10 puts for $3.30 for net .55 credit, not .35 credit – up 36%.  36% seems like a lot but it's just .20 out of $5.10 (927%) of potential gains so still very playable.  
• HCBK Jan $7 buy/write at $5.14/6.07, now $5.23 – up 2%
• FTR 2014 $5 buy/write at $2.43/3.71, now $2.50 – up 3%

Not much was missed so far if you didn't participate.  "Unfortunately" nothing got cheaper, other than our hedges and, as expected, only our energy plays did much in the past week as we're still at the same top we were iffy about at the time.  Still – we're over our mark on the S&P and especially if the Dow is over 13,000 and for sure if the Nas breaks over 3,000, we'd BETTER have bullish plays in our portfolio and these are my 10 favorites for a breakout.   

Of course, during chat in the past week, we put up another 20 bullish trade ideas and we'll continue to do so whenever there is a good opportunity – these just make a good benchmark list we can keep an eye on but clearly, so far, there has been nothing wrong with remaining cashy and cautious as we test these major range-tops.  

I am most worried about the Russell, as they have shown weakness this week and we've had some horrific dips that sure don't make it look like there's a whole lot of support above that 775 line. Also, on Dave's chart, you can see RSI and MACD curving over – that's not usually a good sign either but I'm not much of a Technical guy, just an old-fashioned Fundamentalist who thinks things are horribly overvalued at the moment but clearly, like 1999, the Fundamentals are out the window for now so we'll run with the herd and play the technicals until they fail us and THEN we'll party like it's January 2000 – or October 2008…

If you want reasons to be cautious, I'm not going to give them to you (been working hard to get myself more bullish) but there's a great presentation by Jason Leach of Cravens Brothers called "Sleepwalking Toward a Precipice" that gives a great overview of where we are and how we got here.  

Even now, oil just spiked back to our shorting spot at $108.50 (as noted most recently in yesterday's post) on another ridiculous spike up from $107.60 and that's one bearish bet we will keep making.  Our other bearish note going into the weekend is that, once again, our Treasury has another $140Bn worth of debt to pawn off next week in 4 days worth of auctions and we already got another nice entry on TLT, as they tested $115.50 yesterday – as that has probably been the easiest money of the year so far – betting TLT to go up when we're selling our notes.  

Next week, now that Greece is fixed, we should be hearing more about Spain, who are missing their 2012 budget goals by a mile, with a 5.8% deficit now forecast this year and -1.7% GDP projected to go with their now 23% unemployment.  Phil Coggan is not worried about Spain – well, not when "the entire European Ponzi scheme is running out of suckers" and if you need to get gloomy this weekend – try his new book "Paper Promises."  

“The massive debts accumulated over the last 40 years can’t be paid in full, and they won’t be paid,” Coggan says. “The debt crises of Greece, Ireland and Portugal are just the start.”

Coggan, the Economist’s Buttonwood columnist, is too levelheaded to predict a financial Armageddon. He does foresee a tipping point as wrenching as the collapse of Lehman Brothers Holdings Inc. (LEHMQ), complete with plunging markets, plummeting industrial output and corporate bankruptcies. No wonder it has taken $1 trillion in cheap money from the European Central Bank to get lenders to buy Italian and Spanish debt. 

Have a great weekend, 

– Phil