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Wednesday, November 30, 2022

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Friday Failure – Weak Bounce Levels Turn Into Resistance

Resistance is, unfortunately, not futile for our indices.  

On Monday we discussed our expectations for a 2% weak bounce for the week, which would be a 20% retrace of the 10% drop I had predicted we'd have way back (and a bit early) in March.  That constitutes a WEAK bounce and not a rally and they almost fooled us on Monday by taking back most of that 2% on day one but, since then – it's been pathetic and we've essentially done nothing the rest of the week.  

The levels we were looking for were laid out in Monday's Member Chat and in Tuesday morning's post and were:

  • Dow – 12,750 (12,540 is 20% retrace/weak bounce), now 12,529 – off by 11
  • S&P – 1,343 (1,319), now 1,320 – off by 1
  • Nas – 2,900 (2,840) , now 2,839 – off by 1
  • NYSE – 7,720 (7,560), now 7,552 – off by 8 
  • RUT – 780, (765), now 766 – off by 1

SPY DAILYSo, out of 25,024 points worth of predictions, our system is off by 22 for the week – less than 0.1% – not too shabby!  This is our 5% Rule in action and it works very well in a Bot-driven market.  

As you can see from our Big Chart above, 2 of our indices (S&P &, Nasdaq) are right on their lines and the Russell is just over it's -5% line on yesterday's super-stick while the NYSE is just under and the Dow is a very silly index anyway and we don't really care what it does as long as it's in the ballpark but notice it's 2.5% WEAKER than the other indices (5% weaker than the S&P, which has held up best).  

The strong Dollar is not good for Dow components, who make much of their income overseas and some of the components, like AXP, CAT, CVX, HPQ, IBM, JPM, MSFT, PG, UTX and XOM have been tremendous drags for various reasons but they are all looking a bit more attractive at these prices so I think it's time to play the Dow bullish – in case we do get good news over the weekend.  

NYSII'll put up a specific play in the Morning Alert but the simple idea is the Dow is 2.5% behind 3 of our majors and 5% behind the S&P and, since it's the rest of the World that's dragging us down – if we're going to go short, it's EDZ (now $18.54) – and we already discussed various hedges using EDZ in yesterday's Member Chat and it's been our primary hedge for quite a while (see last Thursday's post for two we recently closed). 

While we HOPE (not a valid investing strategy) that we're at least going to get an oversold move up – let's keep in mind looking at Dave Fry's NYSE Summation Index, that we may have said the same thin last Summer in mid July – when the S&P was at (drum-roll please) 1,300 – on it's way to 1,100 over the next 3 weeks!

So it's not that the market hasn't gone anywhere in the past 4 days – it hasn't actually gone anywhere for a year…  

The Dow was 12,550, S&P 1,300, Nasdaq 2,850, NYSE 8,450 and Russell 840 – hmm, the RUT and the NYSE aren't doing so good and they are our broadest indexes and down about 10% from last July.  Where's that bull market they've been talking about?  So now we see that the Dow isn't really that far off base – only per it's more recent performance but, over the long haul – it's the S&P that's over-achieving and perhaps that means a nice SDS trade (ultra-short S&P) would do us well for the weekend.  

The key to a good short-term hedge is to have an attainable goal and manage your losses (as it is insurance) and we can see from the S&P chart that 1,290 is a solid floor and they're at 1,320 so that's 30 points down, which is 2.25%, which is 4.5% on the 2x SDS which is $16.88 x 1.045 = $17.63.  So, not a very sexy move expected BUT the SDS June $16 call is only $1.08 – just .19 of premium.  The June $17 calls, on the other hand, are .58 and 100% premium so, if we set up a bull call spread of the SDS June $16/17 calls, our net entry is .50 and we can offset that by selling CHK June $13 puts for .40 (or any other stock you'd REALLY like to own if it drops 15% in 3 weeks) and now we're in the whole spread for just net .10 in cash with a 900% upside potential if SPY drops on us.

UUP WEEKLYThat's a nice hedge!  You can also be more aggressive with CHK long-term, selling the 2014 $13 puts for $4.20.  You net into CHK at the same price and let's say we sell 10 of those and collect $4,200, which obligates us to buy 1,000 shares of CHK for $13.  TOS says the net margin on that sale is just $1,350 and we can take that $4,200 and use $3,000 of it to buy 60 of the bull call spreads and now we have a potential $6,000 hedge for the weekend (through June expirations) and we still have $1,200 left from the put sale so our net entry on 1,000 CHK would be reduced by $1.20 to $11.80, which is 25% BELOW the current price.

That means we are getting $6,000 of upside protection for free in exchange for promising to buy CHK for $11.80 and, if CHK is higher than $13 in Jan 2014, we keep the $1,200, which is an 88% return on margin.  Won't you sleep better over the weekend with protection like that?  

Cash is still king as we now (since we only got a weak bounce and failed to break over) are back to leaning bearish.  From the news chatter, it's very, VERY doubtful the EU comes up with a concrete solution over the weekend and it is slightly possible the EU melts down over the next 3 days and we wake up Tuesday down 300 points or more.  Setting the tone into the weekend (from SA Market Currents):

The slow-motion train wreck continues in Greece, with police urging citizens to keep their money in the banks rather than sowing the seeds for a wave of home thefts. Greek banks have seen almost 25% of their deposits drained out over the last two years, and are likely to be shored up today or Monday with €18B of bailout funds that are weeks overdue.

"Greece is a failed state," says incoming Deutsche Bank co-CEO Jurgen Fitschen, speaking at a conference. Moving on to Spain, he says the numbers needed to revive the country's banks are "staggering."

The real nightmare scenario for the EU power elite is what if Greece exits EMU and thrives, says BNY's Simon Derrick. If Greece leaves, devalues, collapses, and then quickly rebounds (a la Iceland, though it was never part of the eurozone), the other struggling states (and their electorates) are sure to take notice. 

The euro hit a 22-month low against the dollar yesterday, and has lost 5% in the last 3 weeks after barely moving against the dollar for most of the year. There's no end of reasons, though a notable downward driver is confirmation from some of Europe's biggest fund managers that they've been dumping euro assets on Grexit concerns.

Bankia shares are suspended in Madrid amid reports the Spanish lender plans to ask for a government bailout of over €15B following a board meeting later today.

Catalan President Artur Mas appeals to Madrid for a rescue, saying his region (home to Barcelona) is running out of debt financing options. "We don't care how (Madrid helps), but we need to make payments at the end of the month." The euro falls to session lows at $1.2510.

Mario Monti's insistence he can bring Germany around to acting in the EU's "common good" may rest on support from Merkel's domestic opposition parties, which are far more disposed to liability sharing. They believe they have the blueprint for such with a so-called European redemption fund floated back in November.

 "Monti couldn't reform (his) own country, now he will deliver substantial changes in (the) EU treaty that requires loss of sovereignty for 17 nations," asks Uldis Zelminis, responding to the Italian PM's confidence he can persuade the EU to go for common eurobonds.

With the focus so strongly on Europe, it has been easy to miss the data pointing to economic trouble in China, India, South Africa, Brazil and elsewhere. The specter of renewed crisis looms large if activity is slowing in sync around the globe and not just in isolated regions. 

As I said the other day on BNN, US equities may be the best place to park your money but that's more of a commentary on how absolutely TERRIBLE the rest of the World looks – certainly not a ringing endorsement of US equities.  You can't seriously read this news and conclude that it's time to buy commodities and the last crash should have taught you that gold drops along with everything else, which is why CASH IS KING – we can always find something to buy later if we have our cash – now if only there were a bank we trusted to put it in….

Have a great holiday weekend, 

– Phil

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A Fourth of July sighting of 1020 skiing in a bathing suit would be a rare sighting indeed!
 
I would love to take the family to see the Boston Pops on the 4th. Any bugs on the river?
 
The 1020's don't do Bugs…..
http://www.youtube.com/watch?v=sgWVFR8I9ZU

Phil – first of all that's an impressive photo of Tahoe in July, if that's what it is…now back to Iran – your assumption of equivalence between our western governments and Iran's autocracy, and between us and the Iranian population, just doesn't stand up to scrutiny.  We may not be okay with Russia or China inspecting us, but that does not imply that Iran should not allow us to inspect them.  The Iranian government is motivated by religious figures who assume that absolute Truth is at their fingertips and therefore they are divinely sanctioned to "wipe Israel off the map" or wipe anyone else off the map that they so choose…the American gov't still has to stand for election and to at least some extent they have to answer to their actions.  The Iranian gov't has noone to answer to but Allah (in their own opinion).  And even if Iranian's are on the whole a good bunch of buds who we could go out with and enjoy a beer, it is not they who we are dealing with.  As was evident from the last presidential elections, their voices are not heard, they are repressed and manipulated.  Moreover, just as they were getting their act together and maybe just about ready to throw the clerical bums out, your good friend Obama left them high and dry for the mullah's to fire on them at will.  So, let's not draw a moral equivalency between what we would or wouldn't tolerate, and what we think the Iranian's should put up with from us…and by the way noone is talking about "taking over," conquering, or otherwise occupying Iran – the discussion is how to take out their nuclear facilities, nothing else.  The discussion is not about whether the average Iranian would be okay with that, but about whether it is necessary in order to maintain the peace in the region and the world at large.

car / You definitely want a convertible in Southern CA.  Hertz offers the Volvo C70 retractable hard-top convertible.  Beverly Hills Rent-A-Car, which has a location in Las Vegas, offers the Mercedes E550 soft-top convertible.

Power of Compounding/Phil: Great monologue Phil.  Another one for the books.  I bet you could give one hell of a TED presentation that would be worth more than most of the existing TED presentations combined.  Then the RSA guy who does those elaborate magic marker illustrations based on TED talks might do a drawing based on it.  It'd be great.

SWW/Phil – i appreciate the effort to develop this.. It is clear your primary audience is not the daily-participating subscribers. So to put on the hat of the weekend reader who would like a summary of the week gone, a healthy dose of option concepts, but mostly is looking for actionable information for the NEXT week, here goes:
1/ i like the friday close numbers at top of front page. also like the table of contents.
2/ highlights of the week on page one is great. what was THE news for the market and any particular stocks or market swings that were affected.
3/ the week that was – i'd like to see this condensed to just a two page spread for all five days, or three if you must. member chat comments was great in the old SWW..with a snippet here and there. taking up a 1/4 page per day now is too much.  again, the week that was is history. what happened that is pertinent to the trades we'll be considering for the next week..that's most important. And call out the results of any short term trades that were put on and closed in the week, or longer ones that closed in the week. If lessons can be drawn from any particular trades, explain it.
4/ The week ahead – what's the phil take on the week ahead? not interested in a rotating opinion from others here..it is PHILSTOCKWORLD we are subscribing to.. Love the news events calendar being included. Valuable to have this in whatever SWW settles down to, imho.
5/ Option Strategies – love this and this should be the section for rotating 'experts.' Over time, the subscriber should have a good library of strategies, ranging from a primer on covered call writing (ala craig's ira strategy) to buy/write basics, to iron condors, broken wing butterflies, premium selling, naked put writing as an entry, concepts on trade managment such as out at 20% and/or roll at 50%, etc, and hedging 101 type stuff again and again and again using the real world examples that come up every week in member chat. Also this would be the section for exanding on various concepts like stock market physics, Phil's microwave theory, etc.
6/ Biotech corner – a must keep page! thank you Pharmboy!
7/ Missed seeing the big chart. An excellent back page/last page item.
8/ color.. don't get too spashy with images.. sucks my inkjet dry! specific examples, on the front page, the PPT slide-like graphics to shot the BBY and XLF trade ideas was hard to read and wasted space. the pictures on the side of the trade added nothing for me.  If font sized can all be a bit larger would be good too. needs to be readable when printed out on paper.

SWW/Phil – friday close numbers.. also would be good to include the VIX.

Two cents more on a Western vacation: After 10 years living in San Diego and more than 20 with places like UT and NV, I would agree with the tenor of the comments here — either head to San Diego, which is amazingly cool compared to LA in summertime, or head to SFO/Palo Alto/ Humboldt coast/Wine Country.  LA is a traffic-clogged furnace, I would avoid it like the plague.  Nevada is even hotter — like 125-130F hot.  I have nothing to tell you about Las Vegas, other than Tahoe would be equally entertaining, has a wonderful lake, and, again, is much cooler.  I once drove Philly to LA after college, and remember pasting newpapers to the inside windows, A/C notwithstanding, and bathing in the ice cold Colorado river and finding my [long] hair dry by the time I made it 100 yards back to the car!!  Bottom line — stick to northern venues, or mountains, forests and lakes.  Jackson Hole is very cool at that time of year, in both senses.  And you are welcome to stay in my Utah mountain place, [8,600 ft] if you approach SLC at any point, 20 mins from the airport, if you're tired of hotels by then.

For those interested in bottom-picking coal companies, a caveat: "San Francisco, CA – Coal is going down in the United States, and that's good news for the Earth's climate. The US Energy Information Administration has announced that coal, the dirtiest and most carbon-intensive conventional fossil fuel, generated only 36 per cent of US electricity in the first quarter of 2012. That amounts to a staggering 20 per cent decline from one year earlier. And the EIA anticipates additional decline by year's end, suggesting a historic setback for coal, which has provided the majority of the US' electricity for many decades.

Even more encouraging, however, is the largely unknown story behind coal's retreat. Mainstream media coverage has credited low prices for natural gas – coal's chief competitor – and the Obama administration's March 27 announcement of stricter limits on greenhouse gas emissions from US power plants. And certainly both of those developments played a role. 
 
But a third factor – a persistent grassroots citizens' rebellion that has blocked the construction of 166 (and counting) proposed coal-fired power plants – has been at least as important. At the very time when President Obama's "cap-and-trade" climate legislation was going down in flames in Washington, local activists across the United States were helping to impose "a de facto moratorium on new coal", in the words of Lester Brown of the Earth Policy Institute, one of the first analysts to note the trend. "  http://www.aljazeera.com/indepth/opinion/2012/05/201252614334480622.html

Phil I see you have been meditating Hedging/JFW 
In deed I must congratulate you on this article excellent explanation!!! An other copy for my collection. Do not blame me again if I pull it out again 11 month later!!!

Hi all – DD = double down ?, drawdown ?… clarification please.
TIA

DD = Doubledown

   UBS writes this week that risks to U.S. equities are weighted to the upside — "Our forecasts are predicated on the view of UBS economists and strategists that a Greek exit from the Euro will not occur, and that U.S. GDP will grow at 2.3% in 2012. Given the conservative assumptions used in our model, we believe risks are skewed to the upside. However, a disorderly Greek exit or weaker-than-expected economic growth would likely cause earnings to fall short of our estimates."  On a more somber note, it's being pointed out that Telefonica [Spain] has it's 3-year bonds yielding 3%, while Spanish govt. 3 year notes currently yield 5.22%.  This is temporary, one would suspect.   

thx nicha….

Phil / Hedging – Excellent and thanks; most informative!.  With your OK, I will add it to WIKI for other 'newbie's' to read and take heed of.  I have been trying to get both my kids (avg. age 30) to get into investing.  I will also send them your reply so they can also see what is possible over time with the correct techniques.

Summer vacation?
Nothing beats San Diego, and North County of SD.
Orange County has its ‘nuveau’ charm too.
And as someone said, Santa Barbara, San Luis Obispo and even Pismo Beach, San Francisco are unbeatable for vacations.
I try to “vacation” every weekend, if I can along the coast….no hassles so far…no passport, no currency problems, no illness, no ‘corrupt policio’ etc to worry about…simply Unbeatable!

NatGas / Bloom Energy
Since we love our NatGas plays here, anybody heard about Bloom Energy?  They aren't public yet, but have some great stories.  http://www.bloomenergy.com/
Even AAPL is using them,
http://gigaom.com/cleantech/apple-is-finally-confirmed-as-bloom-energys-customer/

Phil Thanks Yodi, I think.
This was seriously mend no German humor!!!!

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