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Wednesday, April 17, 2024

Which Way Wednesday – Probably Both Ways, Again

SPY 5 MINUTE What was that mess yesterday?

As you can see from David Fry's SPY chart, we went up and finished down but the volume was a bit lower to the upside than the sell-off into the close.  MSFT and INTC led us to the downside – no surprise really as we discussed both this weekend as Dow components to avoid in the current cycle.

There was no significant economic data, just the usual nonsense about Greece and, of course, the drumbeat of fear regarding the US fiscal cliff that the MSM is banging 24/7.  "What's up with that fiscal cliff" is now how 90% of my conversations begin with anyone who knows what I do for a living.  

I now find that it's easier to say "Oh, we're all totally doomed" than to explain why we're not because when, for example, I say this to one of my Mother's friends – they nod wisely and agree with me while, if I try to explain why they shouldn't worry so much – they get all confused and then say to my Mom – "I thought he was supposed to understand the stock market." 

I guess I should have tried this with my children.  Rather than sitting up for 15 minutes or so explaining why there are not monsters under their bed – I could have just agreed with them and said "Yep, big hungry ones!"  Maybe they'd never sleep again but at least I'd sound knowledgeable about monsters and the imminent dangers they posed to sleeping children.  

Stocks are now at 3-month lows and it's been a month since we strung together 2 up days in a row (Oct 15-17) with the S&P falling from 1,470 on Oct 5th to yesterday's low of 1,371 fir a 99-point drop in 25 trading sessions (6.8%) – losing an average of 4 S&P points a day with 1,360 being our Must Hold line on the Big Chart.  The S&P and the NYSE are both, so far, holding their lines (NYSE is 8,000) and they are our broadest indexes but we're pretty close to having to layer our disaster hedges as we cross those -7.5% lines.

The S&P was at 1,440 when we put up our latest round of disaster hedges on the 20th of October.  Before that, we had just been using TZA as our primary hedge – all the way from $13.50 – now  $17.38 and up 28.7% without even leveraging it with options.  The new play on TZA was the April $14/22 bull call spread at $2, selling the April $13 puts for $1.35 for net .65 on the $8 spread and that combo is already net $1.84 and up 183% so we can take those profits and establish a news spread with the April $17/24 bull call spread at $1.40, selling the $14 puts for $1.05 for net .35 and then we have taken $1.44 off the table, locked in a 121% profit and we're left with a free $7 spread that's currently .40 in the money.  

If you want to be more aggressive, you can add the new spread and stop out the old spread with a 100% profit but we still feel this is a pretty good bottom and it is time to take some profits off the table on our profitable spreads.  

The DXD Jan $49/55 bull call spread at net .85 already shot up to $2.05 for a 141% gain while the SDS Jan $56/62 bull call spread at $1.65, offset by the sale of HPQ Jan $14 puts at .87 for net .88 is only up to $1.02 (up 16%) because HPQ is doing so poorly but, as we discussed this weekend in Vegas – I still like HPQ at this price and the Jan $14 puts, now $1.43, can be rolled out to the 2015 $10 puts at $1.85 to net into HPQ at $8.71 and, of course, if you don't REALLY want to own HPQ for net $8.71 – why on earth would you have sold the $14 puts in the first place?

Our 4th disaster hedge was the EDZ Jan $12/16 bull call spread at .60, selling the Jan $9 puts for .35 for a net .25 entry and, although EDZ has only moved from $11.52 to $11.98, the spread is already .60 as we took those puts nicely out of the money and they are down to .15 already.  Up 140% is not bad on a less than 4% move in the underlying.  That's because we followed the theme of our PSW Conference and we SOLD premium to suckers who think they can predict the moves in the market – we didn't really predict anything other than $16 seemed too high and $9 seemed too low for a 3-month move in EDZ off $11.52!

And, finally, we had our V spread, which a pessimist would say is not working but an optimist would say is still giving us a great entry point.  V was at $140 and is now $142.12 but the Nov $135/130 bear put spread died with a 50% loss on earnings (.42) and the AXP April $45 puts sold for .66 are not helping so far as they are up at .83 so our total loss on the net .23 spread is, so far, .60 but, if the AXP short puts do finally expire worthless, there's still a chance to make .24 – over 100% even on a trade that went badly against us.  

I still like V for a short play if we fail to hold our levels as it's hard to imagine the economy falling apart without the CC companies taking a hit.  We were aggressive with V into earnings and their earnings were good and their early earnings reporting means we can play the Jan $145/135 bear put spread for $4 and I still prefer owning AXP long-term and you can sell the 2014 $40 puts, which are $14.50 (26.6%) out of the money for $3.40 for net .60 on the $10 spread that's $2.88 in the money to start.  

As always – keep in mind these are insurance plays that we hope we'll LOSE – as they are there to protect our bullish portfolios.  When you use hedges that make 100-200% in such a short amount of time on such a minor (6.8%) drop in the indices – you don't need to put much money into the hedge to offset potential losses.  As a rule of thumb, we look to mitigate about 1/2 the damage that we believe a 10% or higher drop could do to our portfolio.  

All of our disaster hedges had, and still have, the potential for at least 500% gains but, when you make 100-200% this quickly – it's a good time to take some bearish profits off the table and re-position into something that won't give it all back up if we finally do turn the other way.  

October Retail Sales are spooking the market this morning as they are down 0.3% but that's with the hurricane shutting down the East Coast in the last week of the month.  Similarly, the October PPI fell 0.2% and even core PPI was down 0.2% and that's recessionary if it's a trend but, more likely, it's just a blip.  Finished Goods are actually up 2.3% for the year with Intermediate Goods down 0.1%.  

We remain overall bullish until and unless we fail to hold our Must Hold lines on the S&P and the NYSE – it only takes one major index to draw a line in the sand to encourage the rest.  Also, Dow transports are still at 5,054 – why are we holding 5,000 if things are so terrible?  Maybe they're not?  


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