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Try it Again Tuesday – What Will it Take to Move the Markets Higher?

If it's Tuesday, we must be at the week's highs.  

Obviously, we're still bearish and the news we've been discussing this morning in Member Chat certainly hasn't changed my opinion on that.  Back on August 7th (first Tuesday of last month), I said we were about $700Bn in stimulus short of what we need to support S&P 1,400 and we knew we would have to wait a month to see how much we got from Draghi and Bernanke but, so far, and with Ben already out of the way, we have zero.  

At $10Bn per S&P point that puts our fair value all the way down to 1,330 but keep in mind that the $500Bn we did get only lasts for 6 months so more like 1,310 at this point without a proper commitment by the ECB or Fed this week.  Even 1,310 would be up 50 from the June lows and it would represent a neat 2/3 retracement of the rally since then.  Our $25,000 Portfolio has, if anything, gotten more bearish as we dragged along the top but another thing we've done each Tuesday has been to take aggressive bullish positions to cover ourselves IN CASE someone actually does put up the cash needed to goose the markets over our breakout levels (see Friday's post for current positions in the virtual Portfolio and our levels).  

On Tuesday, August 14th, our trade ideas were as follows:  

  • 2 FAS Oct $105/115 bull call spread at $2, selling 1 BBY 2014 $18 puts for $3.25 for net .75, now $1.80 – up 140% (trade stopped at 150%) –
  • 2014 SHLD $32.50 puts sold for $7.50, now $6 – up 20% 
  • 6 EWJ Jan $9 calls at .53, selling 1 BBY 2014 $18 put at $3.25 for a net .07 credit, still net $2.60 credit – down 3,800% (trade stopped at up 1,000%)  
  • TNA Oct $55/61 bull call spread at $2.50, selling Oct $42 puts for $1.90 for net .60, now $1.80 – up 200% (stopped at 200%)

While we do go into these trades looking for about 300% (not the short put, of course), when we make a quick 100-150%, we take it off the table and move on to what we call "fresh horses."  It should be noted, however, that despite the now highly negative result on the EWJ trade, it now makes a terrific new entry as you can buy those 6 Jan $9s for .44 ($2.64) and sell the BBY 2014 $18 puts, which had dropped below $3, for $4 for a net credit of $1.36 and it could give you a tremendous early pay-off if BBY does get bought out.  The EWJs topped out at .63 the same day the short puts bottomed out at $2.90 for net .88 so keep those expectations realistic and you'll do fine on trades like this.  

The following Tuesday, the 21st, our new trade ideas were

  • 2 FAS Oct $107/117 bull call spreads at $2.05, selling 1 BBY 2014 $15 puts for $3.75 for net .35 is now net $1.30 – up 271% (stopped at up 334%)
  • AGQ Oct $38/45 bull call spread at $3.10, selling BTU 2014 $20 puts for $3.60 for net .50 credit, now .75 – up 50% (stopped up 236%)
  • 3 DIA Oct $135 calls at $4.05, selling 1 HPQ 2014 $20 put for $3.80 for net .25, now -$2.90 – down 1,260%

As I mentioned last Tuesday, when you live by the leverage, you die by the leverage but we took the money and ran on the first two trades, which more than paid for the losses on the third (even assuming you didn't stop out at some point more sensible than down 1,200%) and decided that, since that trade was so "off" that it would be the best one to use for our upside trade last week but we dropped to:

  • 2 DIA Oct $135 calls at $1.23, selling 1 HPQ 2014 $15 put for $2.30 for net .16, now -.80 – down 600%

Clearly the Dow is not being very kind to the bulls and clearly, if you are a QE believer, this is still a fun way to play the upside – especially if you REALLY want to own 100 shares of HPQ for net $14.20, which is a 16% discount off the current price.  So your worst case is owning HPQ for a 16% discount and your best case includes pocketing $1,000 at Dow 14,000 on some happy economic news between now and mid-October.  And, of course, if you make that $1,000, then your net cost on 100 shares of HPQ is down to $420!

You can see from the Big Chart why we were not too keen on adding more upside hedges in the past two weeks as that top is looking more and more solid every day and it's only been the fear (for the bears) of massive Central Bank intervention that kept us from being much more bearish in our main portfolios.  Even our Income Portfolio (Members Only), which is long-term bullish, was augmented with a TZA spread to provide us with an additional $35,000 in downside protection on a 10% drop in the Russell (back to 735).  

Yesterday, we were discussing strategies for setting up a hedge fund and we were forced to conclude that the best thing to do with cash is – STAY IN CASH!  This is certainly not a good week to deploy capital in any kind of quantity and, for small positions, the downside is much more attractive than the upside to this market at the moment.  Should there be an actual infusion of QE/Stimulus into the Global Economy, then we have plenty of time to BUYBUYBUY but, until then – we remain extremely skeptical.  

On the whole, we'll be watching and mostly waiting this week to see how it all plays out.  

205 COMMENTS

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I filled on 11 of 12 for the SQQQ DD.

that impertinent stick was downright rude.

Stop on TZA? 

SGEN flying…..

Phil
Have no knowledge of Disney cruises but know someone who lost the selling job. He only did cruises for adults. the money traps were only breakfast provided free, no free drinks even water, and gambeling. There were more expensive packages but that was the under $2,000 packages.

The DIA long calls was a good trade Phil.   I scalped a bunch of 'em for +25%.   

Triple thx. to phil / rain / lflan. Learning more and more everyday!!

You know what's funny is everytime they do this I act surprised and get pissed!!! lol.   Great call on the DIA calls Phil, definitely wished I got them!

Ryan / ccs – At this point, they just make stuff up, see what sticks and hope that no one will check and actually the MSM doesn't so good plan!

WCRX – selling Jan 2013 13 P for 75c or better.

MoMo trade:   Now I've dumped the LULU Sept 22 65 calls  for 4.90.    I'm not proud.  I'll take a few hundred here and there all day.   We are back to AAPL bull call spreads only in the MoMo.

SQQQ – so you are DD at $1.50 now?  What is the basis for thinking we get a sell off this week when the pattern is buy into potential positive ECB news, then sell on disappointment.  Seems to me that spending $1.5 ($1.20 right now)  to get more time and (temporarily) less decay, then DD if necessary would be the play.  Can you explain why the DD now is better, when you will likely roll anyway?  It can wait until AH…

The SS administration has put out a bid for 174,000 hollow-point bullets, which has caused a bit of a stir, as they claim they are for "target practice."  Hollow-points are more expensive than solid rounds, and no one uses them for target practice – they don't behave any differently from a ballistic standpoint.  Cyberspace is buzzing with notions of SS runnning out of money and needing the rounds to mow down grannies at demonstrations.
 
 It's getting weird these days, that's for sure, although even weirder in Spain, where their SS administration is already dipping into reserves to cover payments, the First Secretary of the Spanish Socialist Party is denying that he's purging the Party of Catalan nationalists, while saying at the same time that, "sooner or later, there will have to be a Catalan referendum", and the monthly unemployment figures have risen again in the last month after declining for the last three.  Strange Days.   http://www.youtube.com/watch?v=-NSz-9qqgKE

Doesn't APPL usually sell off a bit on event days? Sell the news?

Lflan / nice work today.  thanks

I think Bernanke is giving stimulus only to institutions that hold stocks in the Russell Index.  That thing is moving like a bat out of hell over the last 6 weeks.

So RUT finishing at days highs…Nice…

Are we really rallying on a Bill Gross tweet "Gross: Draghi appears willing to write 2-3 year “checks” to peripherals. Very reflationary. Buy gold, TIPS, real assets."?  How is this anything new?

Zero
I hand load and hollow points are now cheaper because of the cost of copper, now all they do is expose the lead. Long ago they lined the hollow with tin making a very nasty ripping through now it is all about less copper. The full copper semi wad cutters for match rounds are double the cost now.
 Why does SS need any ammo?

jromeha / high — Not over yet.  I think if the other indcies don't clear their highs, there might be a clubbing into the close.

How many times can we rally on the same news, guess indefinitely is the answer. 

Thanks 2can/Amalfi…….
I'm thinking AAPL may surprise us soon with a stock split.   That should be good for another pop! 

SGEN Mar 30/35 BCS.  Selling the mar $22.5 for 1.80 for a 35c credit.

HOV!

I am seeing some very large blocks trying to keep the RUT up. Premium for puts spiked.

News / Rustle – Like the market, I have decided to ignore all the bad news. That leaves only good news – makes me feel good about everything. What can go wrong with that plan?

The RUT will not drop!!! Dow drops 20, RUT drops 1!

I dedicate this to today's market…..
http://www.youtube.com/watch?v=1wrWbOOmcWI

stjeanluc….I bought a bit of TZA today for downside protection.  That should assure that we get a pop tomorrow.  

That's just unreal:

http://www.economist.com/blogs/freeexchange/2012/09/tax-evasion-greece

 

The trio use a novel technique to calculate levels of tax evasion in Greece. The authors look at a dataset from a large Greek bank, which contains information on individual borrowers’ credit applications between 2003 and 2010. Taken at face value, the data for self-employed borrowers make no sense. On average, self-employed Greeks spend 82% of their monthly reported income—ie, the amount they declare to the tax office—on servicing debt payments. Some professions, like lawyers and doctors, appear to spend more than 100% of their income on debt servicing.

That cannot be right: a rough rule of thumb is that a third of income should go on debt payments. Banks would not lend at these steepling debt-to-income ratios. Weirder still, the delinquency rates on loans do not seem to vary in line with these ratios: self-employed Greek doctors are both the most indebted profession and the one with the lowest delinquency probabilities.

The explanation, confirmed by bankers in statements to the authors, is that Greek banks have adapted their credit models to adjust borrowers’ reported incomes up to a best guess of their actual incomes. Lenders assume that self-employed borrowers in certain occupations are under-reporting, in other words, and plug this assumption into their decision-making processes. Tax evasion is less an under-the-radar activity, more a social norm.

Of course, in the US we have tax lawyers to do that legally especially hedge fund managers. But the Greek system seems much simpler!

Isn't a rotation into small caps generally seen as a bullish sign for the stock market?  I am inclined to think that whatever Draghi says will be spun positive anyway.  I am 97% in cash, waiting for SOMETHING REAL to move this market one way or the other…just one man's opinion

Shadow – Thanks for the hollow point explanation.
 
Many in this country have developed a nasty habit of thinking our government can't do a damn thing right. I had a feeling the hollow points might have been cheaper to buy – Thanks Again to Shadow for confirming my suspicions…..

Some people will only work for cash!

1020
Your welcome, anything to counter the hype.

Phil, you talk about there's only so much money to keep these valuations but if bots are buying and selling and ending flat at the end of day, don't they have the ability to keep moving the markets higher and higher as long as volume is light?

Shadowfax
 
I have been having a problem with my internet explorer.  when it is open all day it gets slower and slower as the day goes on.  sometimes i have to reboot to get the speed back.  it can even get to the point of freezing the whole computer. 
any opinions?

Greece / Phil – This covers only self-employed borrowers which would be probably less than 10% of the population. Employees (public and private) are stuck with the income that their employers declare. It makes a lot more sense then…

Them's some big volume candles on IWM today!

StJean/ Greece
Finally an academic study to corroborate all the anecdotal stories I have witnessed.
Upper Greek class cheats their poorer fellow countrymen big time.
Hopefully, with a bit of German engineering in their Tax Office, they will start collecting taxes and suddenly Greece will be prosper once again.
Angela is doing an incredible job at disciplining the Peripheral Euro governments and administrations.
Average Greeks have been robbed blind for more than a decade by their bourgeoisie and it had to stop but they needed some European help for that.
As an aside, I was traveling through a little village in Piedmont a week ago and they had a big billboard sign on the plaza reading in both German and Italian "Thank you Ms Merkel!"
People wont be duped anymore. Hopefully….

williex / ie — I'd remove any extensions you might have and see if it clears up.

Phil
Those practicing are not world champ marksmen. Hitting a target at 50 feet is the goal +- 1 foot is very good for most.

Greece / StJ – By looking at the professions in the article, i would say at least 20-30% of working population.  There are very very few consolidated firms in all these occupations. People tend to open individual offices, especially to be able to pull through all the tax evasion scams.

rain
 
already tried removing the extensions.  Thanks
 
Phil 
 
will try chrome

Well that was a joke.  Good day to all!

williex
Tried crome faster with same problem you have, links add cookies, some cookies are plane and leagal spyware. When I day trade I never ever check the links on my trading computer. Swab has a spy program. I dumped them. I use a laptop for everything else and never check email during the day. Today not trading I checked 2 links and it killed my speed. Hope you have 2 computers and clear cookies every day. It seems silly but the difference is real.
 
Links from members to pay sites are the worst if you don't pay.

wHAT IS wHAT IS THE aRE WE C

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