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Sunday, November 27, 2022


Toppy Tuesday or Time to Buy the Dip?

Just when I thought I could get bullish, they pull back again!  

While still EXTREMELY skeptical of this rally, I AM trying to get in the spirit.  As I noted yesterday, we have aggressive new levels that we determined in our weekend review of our 5% Rule and still need to see some more progress before we can throw caution to the wind and BUYBUYBUY like it's 1999.  Despite our best efforts, the silly move in the Russell yesterday had me putting up a TZA hedge in our morning Member Chat:  

RUT made a crazy move from 823 to 830 this morning for no good reason.  TZA April $17 puts can be sold for $1 and the the $17/18 bull call spread can be bought for .42 for a net .58 credit for a $16.42 net entry with TZA currently at $17.73 so it's a hedge with a bet against RUT 850 in 30 days.  

At 1:23, I followed up by saying: "Look at the RUT now, stuck at the 1.25% line. Obviously, 840 is the 5% move up from the new 800 base so we take that and expect an 8-point pullback but the indexes have been routinely overshooting by 20% (848) and even 40% (856) before pulling back so now that we're past 840 without a pullback, we'll just have to wait and see but, no matter what, we should expect to see 832 re-tested eventually, which is why I liked the TZA play as they crossed that line this morning."

SPY WEEKLYAs it worked out, that was the dead top of the RUT and we quickly got our break back below 840 and our ride down to 832 at the close.  At 2:50, the Russell Futures failed to get back over 840 and my comment to Members was: "840 on RUT, this is the spot to press those shorts if ever."  As you can see from the above chart – we went very nicely off a cliff right after that.  JRW, our Russell expert had called the bull run and was ahead of me at 2:29, calling "Back to cash!" and my comment, also at 2:50 was:

Cash/JRW – I agree.  As I said last week, better to miss 5% of the next round of foolishness than play this nonsense.  Much fun as it seems to switch off the old brain and buy with the herd, I would hate to miss the opportunity to go short if this all breaks down as that's going to be one hugely profitable trade if it ever happens.  

We're clearly at an inflection point and what we have to be on Alert for is a subtle change of sentiment from the media.  The news is already bad, it's been bad all quarter – but only now are some analysts finally putting the pieces together.  Suddenly S&P's Capital IQ is finding that projections for Q1 earnings are now as low as 0.5% growth, not even 1/4 of expectations by those people we lovingly refer to as "economorons," who are able to miss their estimates by HUNDREDS of percent on a regular basis yet remain employed.  

"Traders are now really fearful that companies are not going to be able to hit their earnings targets next time around," says Todd Schoenberger, managing director at LandColt Trading in Lewes, Del. "That may be the catalyst to really get stocks trending lower, and it could very well stay that way the rest of the year."  S&P is expecting full-year earnings growth of 5 percent that would send the "500" to an aggregate of about $105 per share.

In this upcoming period earnings season officially kicks off April 10 when AA reports.  The best sectors are expected to be Industrials (10% growth) followed by Information Technology (4%) and Consumer Discretionary (3%). The weakest sectors likely will be Materials (down 15.5%), Telecom (-14%) and Utilities (-4%), according to Sam Stovall, S&P's chief equity strategist.  In all, six of the 10 S&P 500 sectors are likely to see earnings declines.   Companies themselves have been preparing investors for a letdown, with the level of negative preannouncements at their highest level since the March 2009 market lows.

I pointed out way back on Feb 29th that a large portion of the S&P's projected 10% jump in 2012 profits were coming from one-time reversals of loan-loss reserves by the Financials.  Their anticipation of a rosy economic outlook allows them to, once again, throw caution to the wind and minimize the cash set aside for a rainy day – declaring the cash they free up as profits.  This has nothing to do with actual economic growth and the fact that the 2008 loan-loss reserves were inadequate to the tune of a $780Bn TARP bailout seems to have been a lesson lost on both the banks and their regulators as we are right back to where we were before the crisis exposed what idiots we were at the time.  

Another one-time benefit that is boosting earnings are the tax-loss write-offs that are still on the books to the tune of almost $1Tn for US corporations.  This allows them to drop much more money to the bottom line, tax-free, than they would under ordinary circumstances.  

X, for example, wrote off $1.7Bn in 2009 and another $464M in 2010 and even another $2M last year so they will have to earn over $2Bn before they have to pay taxes again and that will inflate their apparent net income by 35% – THIS is why you see a pop in S&P "earnings" – it has little to do with an economic "recovery" but that's the story they are selling.

As I'm still trying to get bullish, I won't get into the issues in Europe or China or the wobbly US local economies or the fact that the S&P is downgrading US CDOs in a move that may make current rates unsustainable.  We won't discuss the fact that Hedge Funds dumped 78% of their 2-year TBills in last week or the IATA lowering their Airline profit forecast for 2012 by 14% China's slowdown (good slide show from BHP that sparked the morning sell-off) or the way China's Stock Market has become a complete, unregulated joke.  

No, instead we will accentuate the positive and say that things are still looking good because they are looking good and looking good is all that matters, right Fernando?   Will the market continue to look marvelous or will early Q1 earnings this week bring us back to reality – we are trying our best to keep an open mind… 


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Good Afternoon!    No trades in the AAPL portfolio today.   AAPL's gravity-defying action surprising even me.  We must be due for a pullback.  But I've been thinking that for several weeks now.   And remember when some time back we talked about having some buy orders in place on stocks you like, at prices you like?   So I did not have a buy order in for AAPL at 570 yesterday, but wished I had.  Would it have filled, with the brief foray down?  Don't know.  Also, Pharmboy, good call on AMZN.  Closed my bear put spread on it today.   See you tomorrow.  Be careful!

Phil, I have added the closest 2.5% lines in dashes – above Must Hold green and below red (best we can do with Stockcharts). Let me know if that works for you.

To go back to the Ryan plan AH because it will have an impact on the economy (and a big one as it is spelled out), I find it hard to take a plan seriously that includes the following forecast – and that's from the CBO grading:



Revenues—from 15½ percent of GDP in 2011 to 19 percent in both 2030 and 2050;

Medicare—from 3¼ percent of GDP in 2011 to 4¼ percent in 2030 and 4¾ percent in 2050;

Medicaid and the Children’s Health Insurance Program (CHIP)—from 2 percent of GDP in 2011 to 1¼ percent in 2030 and 1 percent in 2050; 

Social Security—from 4¾ percent of GDP in 2011 to 6 percent in both 2030 and 2050; and 

Other mandatory spending and all discretionary spending—from 12½ percent of GDP in 2011 to 5¾ percent in 2030 and 3¾ percent in 2050.

First of all, it admits that revenues at 15.5% are too low (we have been saying for a while – how can you compare Obama's deficit with revenues at 15% of GDP with Bush's deficit and revenues at an average over 19% of GDP but I digress) but proposes to make up that 4% by cutting taxes! 

The Medicare, Medicaid and Social Security numbers seem to basically ignore the fact that we are getting older and that health care costs are growing 2x times faster than GDP (at least).

And then discretionary spending at less than 4% of GDP in 2050. And that includes defense! As Kevin Drum says in MoJo:

This is, to put it mildly, nuts. Defense spending alone amounts to 4% of GDP, and it's vanishingly unlikely that this will ever fall much below 2-3% of GDP. This means that all domestic spending will decline from about 8% of GDP to 1-2% of GDP by 2050. That's prisons, border control, education, the FBI, courts, embassies, the IRS, FEMA, housing, student loans, roads, unemployment insurance, etc. etc. It's everything. Whacked by about 80% or so.

My only guess is that this is only a political document to be displayed for the base as no one could seriously be using this as a baseline to govern. Unless you are ready to cease power to super corporations. Maybe that's the plan, but it should be spelled out then. 

There are stocks performing better than AAPL in the NASDAQ:


Gosh darn it, even NFLX! And PCLN is not far behind… "Beam me up Scotty!"

SHLD is a complete mystery – the more store they close, the higher they go. Total opposite of retail stocks! But I forget, it's not a retail stock, it's a real estate hedge fund!

Escape velocity on the QQQ:

And BTW, another good example of the 10% line – these guys use 59 as a baseline from last year, and QQQ seemed to stall a bit around 65 this year which would be the 10% line! 

Article about negative effect  of high temperature on battery life in AAPL products.

So, ARIA sold it to MRK….nice.  The deal terms were going to pay ARIA a small percentage, and ARIA has a leukemia drug that is lights out.  I know, I know, the mTOR inhibitor IS best in class….but again, it comes down to body bags now.  There is an mTOR inhibitor on the market.  Tomorrow, we will start to sell puts on ARIA to get back in.

How about this strategy Phil – basically a synthetic:


I guess the difference with financing a BCS with the short put is that with a synthetic you don't cap your maximum profit.

This is one heck of a comment about demand from someone that derives benefits from high oil prices. Is anyone listening!
"At the moment, he says, there are no customers asking for additional crude."
Saudi oil minister Ali Naimi

AAPL minitrade
I used to have a couple of AAPL leaps, but  I found the effect they were having on my overall portfolio volatility was a bit more than I wanted to tolerate because even 2 LEAPS represent $120,000 of a very volatile stock, even when short calls are covering.
However recently have started to dip my toe back in the water with some very small scale trades to dampen down the volatility. For example Thursday last week I sold the 2013 $500/$490 bull put spread for $307 and am already up  $30 or a bit more depending on fill price. This won't buy many Egg McMuffins, but on the other hand it does represent a 10% profit in less than a week, which is good. I may experiment more with this kind of trade, because with  tight stops on the downside contingent on the stock price, it could be a useful play. With the deltas at 0.16 and -0.18 they are probably a bit too far out of the frame to be really useful, but I will probably look at other expirations and prices.

jmm1951  ……    Selling bull put spreads.    A few months ago Phil gave me a verbal thrashing for selling bull put spreads.   And yet, I have made tons of money with this option strategy.  I think the trick is to sell the spreads on stocks that are not likely to drop precipitously…..such as AAPL.    I find that I can routinely make 5 to 10 percent per week selling these types of spreads on AAPL.  There is one in the AAPL portfolio right now.   So I've read what Phil has to say about it, but I don't fully agree with his contention that it's a bad trading technique.   Given the right stock and  the right spread choice, I think you can make a lot of money with these spreads.  

 jmm1951–every trade/strategy has a dark side.  work your plan, know your absolute risk and rolling/repair strategies prior to entering any trade. happy trading

Do you actually live there?
Are you on a resort?
I have never been there, and was wondering how easy it is to visit…and how safe, given the armed robbery of cruise passengers recently somewhere in Mexico.

Yup Rustle, the party of small government for you… I just don’t know how they reconciliate all these contradicting positions in their minds.

Man were do thet get these moron from

hmmm need to work on that syntax before asking that question

Quote from Forbes article:  "Let there be no doubt that Obama will do everything in his power to bring down oil prices."   Well, it's an election year, that makes sense.  SCO looked good today, and with the Saudis on Obama's side, we may be looking at "Don't fight the Prez" on oil prices.  I'm banking on the symbolism of "under $100", and hence think $98-$95 is the political "must hold" line.  http://www.forbes.com/sites/greatspeculations/2012/03/20/saudi-king-defies-irans-mullahs-to-help-obama/ 

Angel:  Nice!!!!!

first of all who is the worst typist on the site?…second if i thought it wasn't a series of typos i never would have used the word syntax..(is that better?)

Something has been bothering. Me about this rally, and I think I have an idea. I went to St. Louis Fed website and looked up the M2 money supply for the period from 2007 through present. Interestingly, in late 2007/early 2008 the money supply was 7,500 (in Billions of dollars). Curre toy, we are at roughly 9,700. This is an increase of 29.33%

Here is where it gets interesting vis-a-vis this rally. The top of that rally in DJIA was 14,000 and change, with full employment, bustling economy and nothing but bright shiny days ahead. Had there been 30% more money in the system back then, it would have meant the DJIA was $18,106, assuming a 1×1 correlation which I know not to be completely true, but bear with me.

Maybe, this rally is more a result of that 30% increase in money supply, and not that we are back close to the top in DJIA. If we took today’s levels, and compared them to the M2 adjusted DJIA level of 2007, we are at 72% of the 2007 high(($18,100 x 72%).

Given that the US is the prettiest girl at the ugly contest, we could have some room to run. I don’t think we could get back to $18,100 level without more uptick in the economy, but we could break the previous rally’s high, simply because of the extra money in the system. Plus, with capital flight continuing from Europe and now out likely Japan also, this rally could begin to sustain itself.

So maybe I’m getting a little more bullish at just the wrong time, but since you have been looking or reasons to be more bullish, I thought I might share this premise.

Sorry for so many typos, I hate typing on my iPad. Anyway, FRED website I used was


Fundamentally, I totally with you, but the market clearly doesnt want to hear it rightt now. And I completely agree with your idea that the asymmetric risk is becoming the downside bet, so have been layering a few on here and there.

Hoss – Interesting premise.  The capital flight out of Europe should pump up the dollar, following your logic, but a higher dollar seems to have a damping effect on market prices on some global purchasing power basis.  I wonder how one would figure that in.

hoss: A 30% liquidity premium means oil should run to $190 a barrelThats gonna be a buzzkill.

Yup…and yup. Gets me thinking out of the box alright.

Dollar flight should pump the dollar, but what does one do with said dollar? They have to chase yield, and right now equity yields look better than CDs, Treasuries, MBS……we might see a period of the dollar increasing AND the market increasing(or at least flatlining, which would look like consolidation until the next round of cash infusion which would drive the mkt higher), because of the yield chase.

And yea Kinki, that will be a buzz kill…..until employees start demanding more pay for the same work. Then, fireworks.

And I am no expert, just attempting to look at this rally in a way that might make more sense.

Jabob, exec,

Somebody once said "when your position goes against you so bad you feel like you're going to puke, you should probably double your position".

That's what I just did.

Doubled my TZA (shares), Limit order at $17.36 (for Wednesday)

Lines / Phil – If I understand you right then the lines for the Dow and S&P need to be calculated as the -5%, -10%, -15%, -20% etc from the 16,000 and 1600 levels. So in reality they are not 5 and 10% of the Must hold lines. To avoid confusion why don’t we call these lines S and R then as in S1 and S2 for the -5 and -10% and R1 and R2 for the 5 and 10% lines.


That's impressive.

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