9.3 C
New York
Monday, February 6, 2023


Free-Fall Friday – Are There Any Dips Left to Buy?


No one told us markets could go down?  This is an outrage, I demand an investigation – TURN THOSE MACHINES BACK ON!!!   

Has it already been a week since I said "Stop the Rally, We Want to Get Off"?  As I noted in that post, we began our list of 12 Long Put Plays for Members on Thursday of last week (near the end of what I called "A Weak Week of Denial") and some have already doubled while others, like PCLN, have gotten even cheaper, which only makes us love them more…

I concluded that this rally was fake, Fake, FAKE and gave my reasons on Friday so no point in going over them again – now we're just watching and waiting to see what sticks as we haven't actually done a lot of technical damage (see Dave Fry's chart) – Yet! 

Although we were TRYING to get bullish on Monday, we did so only after setting more aggressive targets in our Weekend Review of the 5% Rule (see post for details and levels) and by 10:09 on Monday, our first trade idea in chat was the very bearish TZA spread that I featured again in Tuesday's post, which was the April $17/18 bull call spread at .42, selling the April $17 puts for $1 for a .58 credit.  TZA finished at $18.39 yesterday and the spread is now .54 but the short puts are down to .65 for a net gain of .47, which is 81% in 3 days and a good way to offset the 2.3% drop in the Russell – isn't leverage fun?

What was not fun is what happened to people who trusted Credit Suisse to run an honest game with their TVIX instrument.  As noted by ETF Digest's David Gillie, an ETN is an unsecured, unsubordinated debt security with significant basis on the credit rating of the issuer. Although ETNs may be named to indicate tracking certain futures markets or indices, due to the fact that their holdings are credit notes rather than tangible assets, such as ETFs, their price becomes largely supply and demand based rather than based on underlying holdings.  As Kid Dynamite points out – it does say right in the TVIX prospectus:

The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment.

Oh Please!  Like we're going to read the prospectus before we buy a financial instrument?  We don't have time for that – we're savvy investors – now where are those Credit Default Swaps that will protect me from bond defaults?  

We did have a bullish play in Member Chat on Tuesday but it was TLT, as that ETF (not ETN!) touched $110 again and my 1:35 comment to Members was:  

TLT coming back to a defendable $110 line.  April $108/110 bull call spread is $1.15 and you can sell the $108 puts for $1.30 for net .15 credit on $2 spread with 900% potential profit in 31 days.

CAT WEEKLYTLT got back to $112 yesterday and the $108/110 bull call spread is already $1.50 and the $108 puts fell to .70 (thanks, in part to that collapsing VIX) and that's net .80 already, up from a .15 credit in 2 days and that's up 533% already – LEVERAGE!  We also had a longer-term EDZ hedge and I reiterated 9 of our Long Put Trade Ideas just ahead of the close as the market ship did seem to be taking on water – even if it wasn't sinking yet.  Ironically, on Tuesday, we were discussing VXX and how dangerous that was to play (we do) because of the way that ETN imperfectly tracks the VIX.  Frankly, it didn't even occur to me that people were long on TVIX – we were shorting it in October because it sucked

CAT was one of our Long Puts and it didn't take very long for the May $95 puts to jump from .95 to $1.90 – a nice double with LEVERAGE!  The point of "LEVERAGE" is to use it to your advantage because, if you are going to be able to make a 100% gain on a relatively small drop in the Dow (2% this week), then you have 50:1 LEVERAGE on the short side.  That means, if you have, for example $100,000 invested and you fear losing $10,000 on a 10% drop in the market, you only need to put about $2,000 into leveraged protection and you're going to be well covered.  Of course, if your $100,000 isn't going to MAKE at least $2,000 if the market doesn't fall – then you're just wasting money and should probably go to cash – hedging is tricky that way – you have to have an actual plan!  

Our plan on Wednesday was to watch and wait but, since our bullish hedges were on their way to big gains, it was prudent to hedge the hedges and we discussed an aggressive long on DDM, using the May $70/75 bull call spread at $2.10 IF (and only IF for you programmers) the Dow got back over 13,200.  Sadly it didn't but the DDM spread is still $1.75 – down just 12% – even if we had triggered it, it would be a small price to pay against the 81% gain on TZA, the 533% gain in TLT or the double on CAT.  It's very simple, when we make a good gain, we either take the money and run or we lock in the gain by taking a trade in the other direction – that helps set us up for the next turn (very good when we're trading in a channel – which we have not been lately).  

Wednesday was oil inventory day and we got the gift of $107.50 oil to short and we hit our $105 goal yesterday for another fun week of poking the speculators.  At 12:12, I thought the "rally" was looking a bit forced and I added 2 more disaster hedges for a slightly longer time-frame than our TZA play:  


  • SQQQ June $10 puts can be sold for .60 and the June $10/14 bull cal spread is $1.05 for net .45 on the $4 spread.  
  • DXD May $12 calls are $1.20 and those can be offset with one of this morning's bullish short puts.  

The SQQQ June $10 puts are still .55 and the $10/14 spread is $1.11 so up "just" .24 so far but what we like to call "on track" for the potential 788% gain with SQQQ at $11.  The DXD May $12s are only $1.25 and also still playable if the Dow remains below 13,100.  That's another key to hedging – you have to keep tightening those stops to protect the wins – once we have cash, we can always find more trade ideas to hedge with!

Yesterday, as we like to do when we're winning on the bear side, we looked at a speculative upside play on DIA, using LEVERAGE to potentially turn $8,700 into $400,000 if the Dow makes it to 20,000 (up 50%) by Jan 2014.  We're up 8% in 3 months and up over 25% since October so, if you think this rally will never end – it's a perfect trade!  Of course you can turn $870 into $40,000 or $87 into $4,000 – going for the big bucks was just an example and again, if you have $100,000 CONSERVATIVELY invested and you're worried you might miss something – then $870 tossed at that can goose your returns 40% – even if you do miss an epic rally. 

During the day, as I'm sure you can guess, we added bullish trade ideas to the mix.  Long-term, of course, as we are long-term bullish – we're just looking for a short-term correction as the market has certainly gotten ahead of itself.  Most likely we'll flatline into the weekend and next week marks the end of the Quarter so anything other than a move up will make us VERY bearish.  Cashy and cautious is still our overall stance – when we're flexible, we can make plays like the ones above on Monday, Tuesday and Wednesday and be back to cash on Friday and sleep very well over the weekend – looking forward to the next opportunity in either direction next week.  

We already made our Egg McMuffin money in the Futures this morning as my 4:49 am comment to Members in Chat related to taking advantage of a sharp Dollar drop that popped the Futures:

Meanwhile, Dollar all the way down to 79.57 with Euro at $1.327 and Pound at $1.587 so not likely they'll go up more than 0.024 and 0.013 respectively and that means 79.50 should hold and that means we can poke at Futures shorts again at Dow (YM) 13,030, S&P (/ES) 1,395, Nas (/NQ) 2,750 and RUT (/TF) 825.  

By 8am, the Dow had fallen to 12,962, 1,385 on the S&P, 2,730 on the Nasdaq and 816 on the Russell.  The RUT pays $100 per point per contract so $900 on that move alone so don't expect us do do much today other than sit back with our Egg McMuffins and watch the fun – there will be plenty of opportunities to jump back in next week for another round of fun!  

Have a great weekend, 

– Phil


Notify of
Inline Feedbacks
View all comments

Market timing is hard – just look at the track record of many so-called gurus…




Wouldn't it be nice to know whether famous pundits had a good track record? One of my missions at "A Dash" is to find the best experts. Beware of those who pretend expertise that they really lack.

A great source for track records is CXO Advisory. This source is objective and strong on research methods. The guru grades page shows the public record of many of the people we follow. You can check out the individual analysis to see exact public statements and the interpretation. I strongly recommend frequent visits to this site. But let us check out the quiz list. I made it easy by listing them in order of success.

Pundit scores

And from the Dept. of  NYT Scathing Editorials You Will Likely Never See:

PCLN- Jabo- you citations reinforce just how juicy this will be as a short ala NFLX/GMCR. It will be spectacular when, not if, it happens.

What? Phil did not make the Famous Pundit list? I demand a recount.

Thank you Phil!
Pstas-I would bet Phil's score would top anyone on that list.

PCLN touted its most revenue is from Europe, but according to Europe Online Travel Report 2012, Expedia had the highest number of unique visitors in Europe, followed by Priceline (http://www.reportlinker.com/p0799336/Eur… ), so PCLN is still number 2 in Europe. and PCLN is just a middleman company, not even a company producing goods. With search engines, Google, Yahoo, Bing join the business, and hoteliers ganged up to form their retail search engines such as RoomKey, and free of charge platform such as Global Hotel Exchange.

Also Expedia has better tie with China, it is ridiculous that Expeida's market value is around 1/7 of PCLN. Sometimes, I wonder how PCLN does its accounting to make a online travel agent to be so profitable.

Shadow – nice ride man 🙂 that's pretty insane.  My vette is 'only' 400 hp/ft-lbs (LS2) and that's scary fast.  I can only imagine what 500+ is like in a light, all wheel drive car, but I suspect it would be fun to find out :D.
I have always been into the american muscle, and have wanted a vette since I was old enough to know what one was.  It was a real dream come true when I got my 2005 convertible in  08.  It was my daily driver (z51 suspension option and all) until the end of the year when my fiance and I purchased a 2011 camaro they were trying to get rid of to make room for the new ones.
Back in my youth I drove a 72 monte carlo in high school (graduated 84), a 57 bel air hard top (no post) in my late teens / early 20's, and a 66 chevy II ss that i traded for the 57.  The 57 I did a lot of wrenching on, pretty much the entire drive train was replaced by me and a friend (383 sbc, turbo 400 trans and 12 bolt 4.11 posi rear, ran mid 11's with 150 shot nos the one and only time it was at the track if i remember correctly).  
It's only been the last 5 years or so that my interest in cars has rekindled.  I am trying to find a classic car to enjoy, but i have not found what I am looking for at a price that I can justify.  Unfortunately, I don't have any place to work on a car, so a 'fixer upper' isn't really an option at this time.
Anyway, nice chatting with you about cars 😀  Have a nice rest of the weekend, scot.

I have updated my volatility charts (weekly and monthly):


I have added a new weekly chart based on Friday's prices and updated last week's chart also with Friday's prices to see who was outside the bands for the week:

Losers last week were:

SHLD – Coming back to reality!
APA – I guess weak Nat Gas prices!
VXX – Doh!
CAT – China…
JOY – China…
NKE – Bad guidance!
FSLR – Bad month for solar!


PCLN – Sorry Jabo!
AMZN – Good pick by Pharm!

I have also updated the monthly volatility chart using Friday's prices and outside of the VIX ETF, everything is behaving as predicted.

Corzine, professional liar?
Interesting comment from an anonymous commenter in the Daily Telegraph as follows:
When one of my friends at Goldman got divorced his very clever and wealthy wife hired a private detective to look into certain practices at Goldman. It was uncovered that all of the partners had been given a rather extensive course in exactly how to lie and be convincing.

Of course I have no idea whether this is true, but it would be interesting if someone investigated further. I still think Corzine should be arrested and charged under the RICO laws.
From Wikipedia:
When the U.S. Attorney decides to indict someone under RICO, he or she has the option of seeking a pre-trial restraining order or injunction to temporarily seize a defendant's assets and prevent the transfer of potentially forfeitable property, as well as require the defendant to put up a performance bond. This provision was placed in the law because the owners of Mafia-related shell corporations often absconded with the assets. An injunction and/or performance bond ensures that there is something to seize in the event of a guilty verdict.
In many cases, the threat of a RICO indictment can force defendants to plead guilty to lesser charges, in part because the seizure of assets would make it difficult to pay a defense attorney

Ipad/dpas:  It kind of jibes with this apparent rumour and picture of a large number Chinese returning bagfuls of the iPad 3 at the 5th Ave. store because of lack of dutch tulip like "enthusiasm". 
Translated from Chinese on Google: http://translate.google.com/translate?u=http%3A%2F%2Fwww.wenxuecity.com%2Fnews%2F2012%2F03%2F21%2F1690867.html&sl=zh-CN&tl=en&hl=&ie=UTF-8
The next quarterly earnings going to be interesting anyway.

Market alert …
April 6th: Good Friday, market closed.

I couldn't stop watching Waiting for Godot. I was impressed that you would pick such an appropriate show in relation to market participants. I find myself waiting to live as I want and in the meantime ammusing myself with anything. The Bloomberg show doesn't really explain AAPL on Friday. Your right about the need for more liberal arts, more BA and you get less BS!

PCLN/Phil – I like your idea of selling the May 750 C for $24.50 even better! In case PCLN misbehaves, they roll to the July 790 @ $23.50. then to the Oct 850 C @ $23.40 (by which time it is GOAAAAL!!!!!! on the Jan 14 700/800 BCS), and for good measure they roll to the Jan 13 900 C @ $24.40 and by then the PCLN 2015 options will be available so a whole new range of possibilities. By that time, the sold Jan 14 410 Puts will be down big. And of course, along the way, adding a new $100 BCS would round off what would be a very nice story. If the unthinkable happens over the short term and PCLN should actually go down, collecting the money on the shorter term sold Calls, buying back the Jan 14 410 Puts and heading back to Dodge would probably be the best course of action.
This highlights one of the most profitable lessons I have learnt here – Leveraging a successful long dated artificial buy write. I tend to have a stable of these at any one time. For the most successful that have moved nicely into the money, I start selling short calls and short puts, generally being guided by the movement within the stock's channel. Calls are sold in the range of the upper channel, conversely Puts are sold in the range of the lower channel. I don't use this technique on the MOMOs (usual suspects, now including AAPL), but for the likes of JPM, SLB, CHK, MON, it has tended to work well.
Finally, while I am generally agnostic to the Bull/Bear case, something in my bones tells me that circumstances are converging to make one adage on Wall Street true this year – 'Sell in May, and Go Away'. I noted Barry Ritholtz's position as being a 'miserable long'. Others have either left tons of money on the table, or lined up to short the maximum out of the market. If the adage SiM becomes a reality, then many people's reputations will be salvaged. Everyone who has profited out of this run up since Q4 2011, can then buy their favourite stocks at lower prices.
Phil, I think many members would appreciate your wisdom and foresight on protecting (harvesting?) a portfolio of gains during this period. I know there are the standard hedges (DIA, SDS, DXD, SQQQ) but I would be very interested in a more expansive perspective. Would it embrace selling everything? Moving into a single vehicle (e.g. SPY) just to allow complete focus in a downward spiral? Planning for such an eventuality now, or as one wag put it – the time to plan for winter is in summer, you don't plan for winter in winter, could be a smart move.

Best performing stocks of 2012:


6 of the top 10 are in health care!

Cars – you guys will be amused by a vehicle I spotted on Colorado Blvd in Eagle Rock (part of LA) a week or so ago. It was some sort of customized Model T, very shiny and pretty, – not so much the Model T coffee grinder exhaust but more of a rumble. There was no hood over the very shiny, chromed engine, so at a stop I looked over at it. There was the brand label, all shiny – "Offenhauser". Pointed that out to my son, who has some interest in cars and power, and he didn't know what that was. ~sigh~

And to make it worse, he said, "huh! Only four cylinders?"

Offenhsuser- used to be makers of racing engines, I believe. Compact and very powerful as I recall.

BTW, it looks like Europe is on DST now. So back to the 6 hours difference with Western Europe and 5 hours with the UK. The 3:00 AM trade is again at 3:00 AM!

The product that put them on the map was called a ram manifold for huge V8s of the 60s, could feed huge quantities of fuel and air. Lots of power and very short engine life.

Thank Spain, now we have someone else to fix, and first we must fear the end of everything!

can't open that FT article? What does it say?

jabo – here you go – from FT:
Europe’s bailout bazooka is proving to be a toy gun – By Wolfgang Münchau

Welcome back to the crisis. And it’s set to get worse once the markets discover that the eurozone is about to fudge the increase in the European rescue umbrella. The argument I am hearing is a wonderful example of circular logic: we don’t need a bigger umbrella because market pressure has eased.

Well, the market pressure has gone up again recently. Investors are concerned about Spain. Over the weekend, Angela Merkel was preparing for one of her celebrated U-turns, by letting out a trial balloon in the German press that she would, after all, be ready to accept an increase in the rescue operation.

But the arithmetic is tedious and most statements you get obfuscate the issue through double-counting. The US and other members of the Group of 20 leading economies want the size of the eurozone’s contribution of the total umbrella to be doubled from the current €500bn to €1tn. In that case, the International Monetary Fund would put up a further €500bn. To get there, the eurozone would have to do two things. First, it would need to merge the €440bn European Financial Stability Facility, the temporary umbrella, and its permanent successor, the European Stability Mechanism. Second, it will have to make the EFSF’s share permanent because the EFSF is due to expire next year. Both of these measures would be necessary to reach a total of close to €1tn. But Ms Merkel is not going to offer that. Not even close.

As I understand it, she is ready to offer only a partial merger and only for a transitional period. Specifically, the Germans are proposing to tack on the existing commitments of the EFSF – the programmes for Greece, Ireland and Portugal – to the ESM. That would get us to a ballpark of €700bn. The trouble is that you cannot just add these numbers. Once the old programmes expire, they are gone. Any new money will have to come from the ESM. Over time, the ceiling will revert to €500bn. This deal would, at most, give a small, temporary increase in the ceiling.

Still, it would raise Germany’s maximum risk temporarily from €211bn to about €280bn. This presents a huge political problem for the chancellor because it would require a vote by the Bundestag, which had previously agreed that the total liability of €211bn must not be broken. The €211bn figure has taken on symbolism in the German debate. Ms Merkel and other politicians have pledged many times not to break it. It is not clear she would get the support for such an increase. The CSU, the Bavarian wing of her party, is opposed. After Sunday’s election in the Saarland, her coalition is facing an even bigger test in North-Rhine-Westphalia, which holds early elections in May. Remember, elections there messed up the first Greek programme.

A total merger of the EFSF and the ESM would raise Germany’s risk temporarily to about €400bn. I find it hard to see how the German parliament would simply accept a near-doubling of the risk, after having been told time and again that this would not be necessary. And even this would not satisfy the rest of the world, since this is only a temporary increase.

The usual European response to such a stand-off is the use of creative accounting. I have heard the suggestion that one could “stretch” the callable capital of the ESM. That would leave the magic number of €211bn untouched. But it would also mean that the total rescue capacity can be no higher than €500bn at any time. The outcome would still look more like a toy pistol than a “big bazooka”. It took the markets several weeks to understand the significance of the recent political and economic developments in Spain. It may take some more until Germany’s stance on the ESM is understood.

But it is only if you consider the two together that the real significance becomes clear.

The current ESM is big enough to handle small countries, but not Spain. I expect Madrid eventually to apply for a programme, specifically to deal with the debt overhang of the Spanish financial sector. But even a minimally enlarged version of the ESM will not be big enough.

What this stand-off tells us is that we are approaching the political limits of multilateral programmes. If you want to claim funds of such size, you need joint and several liability – ie all eurozone countries need to be jointly liable – not individual liability among member states. Call it a eurobond, call it what you like. If you do not want that either, then you have to accept that there is simply no backstop for Spain. As I said, welcome back to the crisis.

Yup, Spain is next on the block but it looks to me more likely we run up in to the end of the week/quarter/window dressing. Then???

Would you go for the May 18/22 BCS now .87 ,  or: 17/21 BCS @ 1.12

Good morning every one. Some one knows when we are closing today???

1 4 5 6

Stay Connected


Latest Articles

Would love your thoughts, please comment.x