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Thursday, March 28, 2024

Follow-Through Friday – How Low Can We Go?

SPY DAILY Ugly!

That's the only word we can use to describe this SPY chart (David Fry's) and, of course, all the other charts as well as we are now approaching our August lows but STILL nowhere near where we were in June (SPY $125, S&P 1,266), when we were down another 10% from here.  

Back in late May, our big worry was Europe and the Euro was way down at $1.24 and Greece and Spain both looked like they were about to collapse and the Dollar was 83.50 and TLT was $129 and the VIX was at 27 – now THAT's a panic!

At the time I said: "If it wasn't for bad news, Europe would have no news at all" and, in the May 30th post, as we fell to our lows, I called the turn saying:

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).

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!!! 

The Dow fell ANOTHER 400 points by the end of the week and the S&P was 17 points below my target and that gave us fantastic entries on all sorts of stocks – including AAPL at $517 but only for people who were prepared to take advantage of it.  That's why hedging is so important – so you have cash ready to deploy on a drop and, if you don't have hedges – then stop-losses are a MUST.  You can't just stand there like a deer in the headlights watching your portfolio melt away.  

There is nothing more dangerous than a fully committed portfolio.  You need to always be a buyer of stocks so that, when they go ON SALE – you are ready, willing and able to buy more.  There are several ways to accomplish this – like selling your winners and getting back to cash in positive cycles, stopping out using the Cal-Slim method withe 8% stops on equities or generating a regular income on all of your holdings through option selling – a method we prefer here at PSW.

We have our annual investors conference this weekend in Las Vegas and it's going to be a perfect time to discuss these strategies as well as target some really great stocks that are going on sale for the first time since June.  While we were buyers in June, at S&P 1,400 in August, I lost interest in buying stocks and we "missed" a lot of the rally that took the S&P all the way up to 1,474 in September because, fundamentally, I didn't see the value.  

NYMOAll we are doing now is burning off the over-excitement as the market finally realizes the fundamentals we've been concerned about since summer.  As you can see from the NYMO chart – we are NOT yet at a panic low but we are at a spot where we've reliably turned back up several times and we STILL know how to buy stocks – giving ourselves 15-20% discounts on our entries and the rising VIX makes that easier for us so – whether we turn up next week or next month – it's time to get into a buying mood because NOW we're back at levels I can get excited about.

It's hard to call an exact bottom but a little cautious buying around here can give us real bargains on blue-chip stocks like BA, where we can sell the 2015 $60 puts for $7.20 for a net $52.80 entry – that's a 25.5% discount to the current price.  I'm not talking about a BET, but an investment where you REALLY intend to own BA for the long-term so why not buy it now for 25% less than it costs?  According to ThinkorSwim, you can sell 5 of those contracts for $3,600 and the net margin cost is $3,000 so you stand to gain 120% on the margin you use over the next two years.  What's the worst case?  If BA goes below $60, you can get assigned 500 shares at net $52.80, so $26,400 is $13,200 worth of margin you need to allocate for a worst-case of buying BA for 25% off and the $3,600 you collect is still 27% of your full allocation.  

That's all it takes to give yourself a very nice annual return and you are only using a small fraction of your cash and margin allocation unless BA takes a real dive and that means you can sweep the cash into interest-bearing accounts as well or use the spare margin to sell premium – like we do in our Income Portfolio when the VIX is high.  

We're not there yet but aside from BA at $71 and AAPL at $537, we have CSCO at $16.50, ABX at $36, BRK.B at $85, RIG at $46….  We can give ourselves additional 25% discounts from these prices and, if you don't like those entries – shouldn't you be in cash and lining up at WMT for the gun sale on Thanksgiving (don't forget the ammo!)? 

I'll go out on a limb here and predict the World probably won't end this time either.  Not to say we don't have a rough ride ahead but if you're not willing to buy low – how on Earth do you play the markets?

Have a great weekend,

– Phil

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