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Thursday, February 29, 2024

Will We Hold It Wednesday – Euro $1.24 Edition

If it wasn't for bad news, Europe would have no news at all.

The funniest thing about watching Europe implode in a sea of incompetence is that we're actually no different over here – it's just not our time yet.  That doesn't stop the punditocracy from pontificating on all the ills of the European Union, as if America will be immune to California as their economy ($361Bn in debt) slips into the ocean

Actually Greece is not the disaster du jour in Europe this morning – it's Spain (who were downgraded yesterday), whose junk-rated 10-year notes are now costing them 6.65% – back to pre-LTRO levels already, after just 90 days of being "cured."  Italy is right behind them, only able to sell 90% of the bonds they auctioned off and even those went for 5.66% on the 5-year notes and 6.03% on the 10-years.  

Meanwhile, German yields hit record lows at 1.318% so how, exactly, does it benefit Germany to "fix" this situation when the fix would be for Germany to go back to paying 3% while Spain and Italy go back to paying 4%?  It's not like Spain or Italy will ever be able to pay back the money anyway so all we're really doing is costing Germany money to PRETEND things are fixed – again.  When will this madness end?  

Extending and pretending is exactly what is being planned as the European Commission is prepared to as European Union finance ministers to give Spain an additional year to meet the budget deficit target of 3%, according to a report in the online edition of El Pais this morning. The newspaper said it had obtained a rough draft of the copy of the economic strategy for the euro zone set to be delivered by the Commission on Wednesday. Media reports said it will issue specific recommendations for each of the 27 countries. El Pais said the EC wants to give Spain until 2014 to reach the budget deficit target of 3%, in light of its economic problems, but will also include draft recommendations on pensions, the financial system, taxes and labor reforms.  

SPY DAILYThank goodness – that will fix everything, I'm sure!  

Meanwhile, on the US side, we're getting worry fatigue and we're ready to rally – as was made clear by yesterday's bullish action which took us over our weak bounce levels, which actually held up for the day.  Now we'll get a proper test this morning as we had a nice sell-off in the Futures but we flipped bullish on oil (/CL) already in the Futures as it tested the $89 line and, of course, we closed yesterday out bullish as our weak bounce levels held up which means the weakness in the Futures is hopefully just a flush – to clear out the weak hands ahead of a proper bounce

Why be bullish?  Well, aside from the technicals per our 5% Rule, there's also the Stock Market Theory of relativity which states – if the World went completely to Hell and everything was destroyed in a storm of fire and brimstone – there would be a market for brimstone futures a day later (see "Christmas Time in Hell" for perspective).  

Investors will trade and some will buy and some will sell in any market – once it settles down.  It's only the uncertainty they don't like and, at this point – we're pretty certain Europe is completely screwed so not much is going to surprise us to the downside.  When the market was high, back on April 23rd (when I was being told I was "too bearish") I said: "Something is bound to happen – all we need to do is choose the form of the Destructor," which is a reference to the attack of the Marshmallow Man in Ghostbusters because SOMETHING was going to destroy Manhattan – it didn't matter what – it was simply inevitable.   

Well, now we're down from overbought to oversold levels and SOMETHING is bound to rally the markets and it doesn't really matter what it is – we're just primed for it.  We could go lower – the S&P's 200 dma is down at 1,283, which is 3.6% down from here – but it's a healthy-looking bottom down here and we know how to buy stocks for 15-20% off and that's WAY below what we believe to be solid support – Christmastime in Hell!!!  

IWM WEEKLYThis is not a BUYBUYBUY premise – just making a case for some bottom-fishing from our cash position.  As I pointed out to Members over the weekend, if we're sitting on generally all cash and we sell a few calls that tie up 10% of our portfolio and obligate us to buy stocks 20% below the current price – it's not worth not doing because – even if the market falls 20% or even 40% – we'll still have 90% cash and be much better off than those who were invested and THEN it will certainly be time to go shopping.  On the other hand, if the markets do bounce here – at least we got a few good sales in before the VIX dropped.  

As David Fry notes on his IWM chart, we're into a trading range now and it's lots of fun for us day-traders as we take advantage of the silly moves up and down each day but it's only fun if we have lots of cash on the side.  In my 10:43 Alert to Members yesterday, I warned: "On the whole, this is not a rally I'd chase until we see our levels taken" and this morning I'll say the same thing about seeing our levels broken – we're simply stuck in a range now, bouncing up and down based on the latest rumor out of Europe.  Yesterday there was a rumor of an announcement at 11 that gave us the day's highs but, by 11:15 I noted:  

Oh no, 11 comes and goes and no QE/Bailout from Europe and we're selling again!  Is this market a joke?  Are there really actual human beings who trade like this –in and out based on half-assed rumors like the audience in a Bugs Bunny cartoon?  

By 11:54 we had flipped back to bullish, as I observed: "Of course everyone is acting like we just had a huge sell-off, which we did, but we're still up nicely for the day…"  That allowed us to make a quick play on oil but, other than that, we had little interest in messing around and we didn't touch our 4 short-term portfolios all day (still bullish).  Our lows do have to hold or we'll be forced to get more bullish but EDZ's ($17.23) still make great hedges, as do SQQQs ($51.80) although TZA is a bit more fun at $20.61 as you can do more interesting combos like:  

  • TZA July $19/24 bull call spreads at $1.50, selling $18 puts for $1.05 for net .45 on the $5 spread that's $1.60 in the money to start.  

So a hedge like that returns 1,111% at $24 on a 3x ultra that's currently $20.61 so a move to $24 would be up $3.39 or 16.5% which would require 1/3 the drop on the Russell (roughly), or about 5.4%.  In other words, should the Russell drop 5.4%, this trade returns 1,111% – that makes it pretty good protection!  Even better, if the Russell should flatline and TZA remains at $20.61, you would get back $1.61, which is still a 257% profit on cash.  

The only way you lose more than the .45 "insurance" premium is if TZA falls below $18 at which point the ETF is put to you.  Since $18 is $2.61 below the current price, we need a 12.6% rise in TZA (4.2% on the Russell) – all the way back to 812 before you end up being assigned TZA at net $18.45.  Let's say TZA drops all the way down to $17 (the all-time low), that's down 7.8% on your hedge but ONLY if the Russell is up 4.2% so, if we balance our hedge properly – there's nothing to fear as our bullish stocks will more than make up for the loss on the hedge and the hedge (now a long-term ownership of TZA) will still be very likely useful to hold at Russell 812.  

Since we make 1,011% profit on the hedge on a 5.4% drop in the Russell we only need to spend about 1/10th of what we think we might lose to be very well-hedged.  So, if we have $100,000 worth of bullish positions that would lose $10,000 on a 10% drop in the Russell – we only need to set up a $1,000 hedge to completely cover a 10% drop and that would return $11,110 if TZA is over $24 at July expirations.  

To do that we buy 20 of the spreads for net $900 and we risk owning 2,000 TZA at net $18.45 so, at $17, we would lose $2,900 (assuming we did not stop out of the short puts and took a 100% loss on the bull call spread – neither of which are good practices).  Even so, our bullish $100,000 would have made about $6,000 (as we're past the 4.2% that takes us to $18) so we're still ahead – we only sacrificed some of our upside to the hedge.  

That's why the chart above shows such a stunning outperformance by portfolios using hedges – the trick is to learn to use them correctly and that's something we'll be concentrating on as we launch the new Income Portfolio next week.  

Meanwhile, a little hedging goes a long way to protecting our bullish entries.  As I pointed out at the outset of our Twice in a Lifetime List, which we'll update in chat today, the initial position was the SQQQ July $55/70 bull call spread at $2.50 (now $2.30 but we took 20% profits and ran at the bottom last week and will re-enter IF our levels break) and THEN we sold ourselves some puts!  

At the time, we weren't sure $61 would hold on the Qs (2,800 on the Nas) and now we've raised the bar to 2,850 ($62 on the Qs) as we CAUTIOUSLY do a little bottom-fishing.  We still need to be careful out there but I've said it over and over for the past few weeks:  

If you're not going to buy when we're low – when will you buy?  


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