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Saturday, December 3, 2022

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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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Nasdaq and Dow both at a 26 RSI and McClellan should be around -250.  We are oversold.  If we get a negative open tomorrow, it will be very deeply oversold.

FU HAMAS!!!!

Laddoo   Flan's MoMo is in a 50,000.0 drawdown. Lol

I love Hummus!!

Neet – What numbers are these?

Phil Roulette –  yes, the probability of zero wins in 24 spins is the probability of losing once (37/38) multiplied 24 times:
 
(37/38)^24 = 0.5273
 
So the probability of winning at least once is 1 – [the probability of losing] = 1 – 0.5273 = 0.4727 (or 47.27%)
 
For reference if you bet 38 times, it would seem logical that someone would "win at least once" since there are 38 spots on the wheel, but the actual probability of at least one win is only 63.7%. A 100 spins would be 93.5%.

stjeanluc,
SPX Levels.

US says palestinian attacks on israelis "counterproductive"..hahahahaha
 
NO TAX BILLS THIS YEAR AND MY BET IS THERE IS A COMPROMISE ON RATE RAMP AND CAP GAINS AND DIVY HIKE..IF NO ONE WANTS TO DANCE WE ALL PAY

angel – I'll take the other side of that trade. Partially.
 
Tax rate goes up to previous high and a ramp for cap gains and divy….. 🙂

Take care of yourself Phil, feel better.

There is no way to make these charts look good. Obviously going below the 200 DMA was a bad signal and it has been confirmed. Volume has been increasing every day as we have gone lower. For some of these indices, we have to look at the lows of June for the next line of support. For example, the NASDAQ line of 2457 looks like the next area of support. The Russell is looking at support around the July lows so about 765. Same thing for the Dow around 12,500 although Fibs would be around 12,420. S&P and NYSE are looking somewhat better with a Fib line around 1350 for the S&P. The NYSE is only looking at a 50% retracement at 7865 – much better than all the other indices.

Relatively speaking, financials have done well compare to the rest of the market. XLF is only showing a 38.2% retracement based on the June lows. There is a zone of support between 15.17 and 14.81 with 15 being the obvious target. But the Dow Transportation got hammered today – down 2.5% and below 5000 now. 4900 looks like the next target with June lows only 50 points lower at 4846. It is now negative for the year. But the divergence between the Dow and the Transport has been closing over the last couple of months. Here is a comparative chart since the lows of June:

Not a healthy trend for either index!

Bets / Angel – Hope you are making money on the market to pay off your bets!

I guess we should be able to leave the Middle East soon:

Middle_Eastern_Oil

Roulette –  well, we were originally discussing the probability around at least one win (one win, or multiple wins), given a fixed number of spins (e.g., 24), not the average number of wins. So the law of averages doesn't apply.  The MOST LIKELY number of exact wins is of course equal on the individual outcomes (that is, 38 in roulette), divided into the sample size. It is the variance around this number that you are referring to, for a very small set of spins, (e.g. less than 10x the spots on the wheel), the variance is quite high. If your sample size is smaller than the outcome set then the variance is more important than the average. As I said before a gambler spinning 38 times in roulette (equal to the 38 spots on the wheel) will win at least once only 63.7% of the time.
 
The gambler plays for the variance and the house plays for the law of averages over large sample sets (as you indicated) Without that short term variance that randomly favors the player (even with a 5.26% house edge!), no one would play, obviously. I'm not sure how to calculate the standard deviation over 1,000,000 spins for any one number to be off by >50% but it would be an exponential function and over that many spins would be infinitesimal.
 
In poker, do you mean one person having a card you hold, or one person matching the flop with at least one card? Not sure what you were saying there but let's establish a probability based on some on the latter and these assumptions:
You hold two unmatched cards (e.g. AQ offsuit)
You are playing against 6 other players (7 total)
The flop is 9,7,3
What is the probability that at least one player's card matches the flop, given each player has unmatched hole cards (i.e., no one has a pair):
Probability of player 1 NOT matching the flop (given you did not match the flop) = 38/47 * 37/46 = 65.03%
Probability of player 2 NOT matching the flop (given you did not match the flop) = 36/45 * 35/44 = 63.63%
Probability of player 3 NOT matching the flop (given you did not match the flop) = 34/43 * 33/42 = 62.13%
Probability of player 4 NOT matching the flop (given you did not match the flop) = 32/41 * 31/40 = 60.49%
Probability of player 5 NOT matching the flop (given you did not match the flop) = 30/39 * 29/38 = 58.70%
Probability of player 6 NOT matching the flop (given you did not match the flop) = 28/37 * 27/36 = 56.76%
So the probability that no one matches for a pair is: Product[Player 1 through Player 6] = 5.18%, giving a probability that someone hit for a pair = 1 – [nobody hit anything] = 94.82%, which is actually far higher than 80%, as you had assumed. 
 
This is actually an important example of why it is imperative to raise AQ. You are giving every one else a chance to beat you if you call a bunch of player limping in at the big blind bet size. If you raise and all but 2 players fold, you reduce the probability of the above probability to 58.6% so you have a much better chance of holding up with your ace high in this case, obviously.
 
(note that probabilities shift slightly but not all that much if there are some pairs or matches, for example, if you have A3 instead of AQ the probability above that some one also matches at least one hole card to the flop drops to 92.52%. Also note that when compared to the roulette calculations, these are a little different because every card dealt changes the deck, but the roulette wheel never changes.)

Just in from the dark, cold streets of London again, long walk down Oxford and Regent, Xmas lights very nice, actual made me feel semi-cheerful, although the Apple store was notably empty.  I saw noise-cancelling Bose headphones for sale there that I bought in the U.S. four year ago for $125 — I dunno, Apple looks cheap, but I sure like my Samsung….  
 
  Didn't log in until after the market closed, but I followed up on the Starbux drop with some puts, and racked up a 68% gain, my kinda Xmas cheer.  I realize Palestine doesn't have any oil, but Angel's right to send in updates, it's really rocking and rolling over there right now, this won't be over quickly or easily.  
 
And for those of you struggling with less than a 50/50 chance to win at roulette, how sharp are your eyes?  If you watch where a particular croupier, who probably spins the wheel within a reasonably small range of force, drops the ball, you have a decent chance of cracking the 50/50 barrier [at the least] and impressing your date with your James Bond-like savoir faire: http://www.insidescience.org/content/physics-knowledge-can-tilt-odds-roulette/796  

Omitted:  Bose London price, $485!!!

Ready to scoop some oversold stocks?

http://www.bespokeinvest.com/thinkbig/2012/11/14/sp-500-stocks-farthest-below-50-dmas.html

As badly as HPQ is trading, it's only one notch down from AAPL. Ouch!

Get Well Phil!

Phil–I hope you feel better immediately!

Phil/ kidney stones
Holy cow!
those things are painful!
and I thought all you had was a cough/cold?
wishing you a speedy recovery!

Phil – hope you are better soon!

That's rough Phil, prayers are heading in your direction for comfort and healing.

Phil, You are a trooper-hope you feel better soon.

PHil – what do you think about playing for a bounce with tomorrow TNA $49.50 or $50 calls? 

Tax cuts-I remember GWB saying when he inherited Clinton's surplus saying: "Now is the time for a tax cut to give some $ back to the people." AND: ":You can't raise taxes during a recession." I guess never a time for taxes.
2 great Quotes I remember:
"Republicans love America but hate 1/2 the people living in it."
"Republicans always say government dosen't work then get elected and prove it."

Get well soon Phil! 

Phil/AAPL
I am in the Oct 550/625 BCS Bought 550 @ 64, sold 625 @ 40. I've been selling front month calls – now in Dec 580's @ 8.70, now 6.10-should I roll to 570's? Or do you have another suggestion like rolling BCS out to 2014's?

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