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Thursday, December 1, 2022

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Thoughtful Thursday – Setting Up for EOQ Rally?

What a week it's been! 

What a couple of weeks as we dropped from 15,300 on the Dow last week to 14,550 (4.9%) on Monday morning and now back to 14,910 – almost exactly a 50% retrace of the drop and right in-line with what we'd expect with our 5% Rule™.

The other indexes are pretty much in the same boat so, technically, we should concentrate on those 50-day moving averages – and the ones that are in reach are Nasdaq 3,395 and Russell 967.  It's going to be do or die on those this morning and, if we don't hold them into the weekend – well, that's why we upped our covers into yesterday's close – just in case.  

We don't expect the market to go lower, of course.  I gave my reasons to be bullish in Monday morning's post and we pulled most of our short-term bearish plays in our virtual portfolios on that morning's dip (long-term, we've always been bullish and remain so).  In fact, it won't surprise us to get a pretty good push into tomorrow's close so we can finish the quarter off with a bang and this morning we chose to go long on gold again (/YG) at $1,230 and gasoline (/RB) at $2.72 in our Futures plays and gold is already moving higher (as with yesterday's plays) but gasoline is still waiting for a good cross on our line. 

Everything is lined up for a big rally, the Dollar is high and AAPL is low so both can be used to kick the markets into high gear tomorrow as AAPL is still an outsized part of the indexes, even with it's 42% drop since September.

Notice we have a perfect Fibonacci retracement but it will be very bad if we fail to hold $400 – or at least that still-rising 200 dma at $379.  The fact that the 200 dma is still rising despite the stock falling 42% in just about 200 days is an indicator of how fast AAPL climbed before that and, as you can see from the volume lines – these declining volume falls have lead to pretty good rallies in the past, so we're just playing for a pop back to the $455 line – assuming the 4-month range doesn't break down.

As I noted to our Members yesterday in chat: GOOG, who have $50Bn in sales and make $10Bn in annual profits, now has a greater after-cash enterprise value than AAPL, who have $156Bn in annual sales and $42Bn in profits.  If that seems silly to you – then AAPL may be a stock you want to look at (or shorting GOOG, in the very least!) with it's $400 price tag – now less than the cost of an IPhone or an IPad, which they are selling at a rate of approximately 1M per day.  

Would you be willing to buy AAPL for $302?  That's another 25% off the current price.  You can do that simply by selling the 2015 $340 puts for $38.  You can even do a "mini" contract, which allows you to commit to owning just 10 shares of AAPL for a net of $302 and the way it works is:  You promise to buy 10 shares of AAPL for $340 any time between now and Jan 2015 that the seller wants to assign them to you.  In exchange for your guaranteeing a floor to his sale, he pays you $38 x 10 ($380) and Think or Swim says the margin on that trade is $350, so a pretty efficient way to collect $380!  

QQQ WEEKLYWhat happens next is that, if AAPL is over $340, the seller has no reason to assign you the stock and, if it holds it through January of 2015, then the put contracts you sold expire worthless and you don't get the stock but you keep the $380 per mini contract.  If AAPL is under $340 – even if it is $200 – you are forced to buy the stock for $340, but you do keep the $38 per share you collected and that nets you in at $302.

That's the simplest way to take advantage of the AAPL panic but please note we had the same logic at $450 and that didn't work out so we essentially doubled down at $400 and now we're not going to be at all pleased if it drops further but, even at the time, we did think $400 would be the floor and we still do. 

As you can see from Dave Fry's QQQ chart, the Nasdaq has managed to shrug off the anchor that is AAPL stock and make a bounce off their 22-week dma at $70, which is about 3,300 on the Nasdaq – not at all coincidentally our Must Hold line!  

There was much debate at PSW as to whether we should move up our Big Chart ranges back in April, when the broke over.  We had the same discussion last summer and decided the Fundamentals were not there to support the rally and we were right but this time, we decided to move to our higher ranges and, so far, they've more or less held but 3,300 on the Nasdaq and 1,600 on the S&P really MUST HOLD – or the market is likely doomed for a pretty significant correction.  Coming into earnings season – that's a pretty scary place to be.

133629 600 Standing On Its Own Two Feet cartoonsIn fact, this morning we were looking at a Bloomberg article that noted that S&P's credit upgrade to downgrade ratio was down to 0.83, which means there are 17% more downgrades than upgrades to Corporate Credit Ratings as, rather than using cash to pay down debt, companies in the S&P 500 Index are attempting to boost their share prices by buying back almost $700 billion of stock this year, approaching the 2007 record of $731 billion.  This is the kind of idiocy that occurs in bubble markets as companies scramble to justify their runaway stock prices.  If there aren't any real increases in business, the "best" solution they can come up with is to reduce the amount of stock so the "E" in earnings is divided amongst a smaller amount of shares.  

These attempts to pretty up the balance sheets not only mislead investors but they also lead the company to malinvest their own hard-earned money and, rather than grow the company through CapEx, R&D or – God forbid – hiring more workers, the companies burn through their cash buying their own stocks at prices that can't be justified and shareholder value goes up in smoke.  

We'll get a clearer picture of what's going on over the next few weeks but, despite the window-dressing rally into the end of this quarter on Friday – we're going to be taking a cautious stance into the weekend.  

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Repurchasing ABX at this level brings up that old saw about second marriages:  "the triumph of hope over experience."  🙂

Gold down 2.5% and ABX holding steady!

Phil // Thanks
However I'm getting mixed signals – we're bullish in general, balanced in the portfolio, and bearish next week. – did i get that right ? ; >
"Oops, missed TZA – I'd cash in the short calls but now they're paying for the DIAs!  I'm not expecting such a massive TZA drop that quickly now but nothing wrong with cashing in if you feel well ahead.  Leaving open the long (I hope) Jan $35s looking for a pullback is pretty risky – just make sure you have a plan for RUT 980+ and, especially, 1,000.  "
So you're bearish on the RUT ? If thats the case wouldn't it be better to let the Oct short $37's work themselves off until they pay for the spread ? 

We seem to be hitting some resistance at the 50 DMA. That would lead me to think that we should go down tomorrow. 

Tomorrow we will get the China Leading Index, Germany Retail Sales and CPI, Canada GDP and our own Chicago PMI as well the U. of Michigan Confidence (which I still have not received). 

Derivatives/Pharmboy,
Making stuff up to join the EU and then losing 8 billions?  Just unbelievable!  These politicians are putting standup comedians out of a job!

STJ – Greetings from  margaritaville.  It will be interesting to see what happens to gold stocks tomorrow.  Nobody wants to show them in the portfolio at the end of quarter.  Maybe those guys have exited by now. 
Are you able to tell me what the overall AAPL position, both short and long term shows after all the rolls ?  Just curious.  Thanks.

*Test*

/YG is falling again. 1184 so far.

Looks like 1179.4 bottom

There is a rumor that fingerprint scanning is coming to iphones. (lots of applications) Hopefully  $394 is the low.

Gotta love Russians, sons of the soil that they are:  "As well as Snowden, [Assange] considers himself a human rights defender and is fighting for circulation of information. Ask yourself: should such people be extradited to be jailed or not? In any case, I would prefer not to deal with such issues, because this is just the same as shaving a piglet: too much noise but too little hair," Putin said  "Let Mr. Mueller [FBI Director Robert Mueller] and Mr. Bortnikov [Russian Federal Security Service Director Alexander Bortnikov] deal with this issue." 
 
http://rbth.ru/politics/2013/06/25/putin_snowden_remains_in_russias_transit_zone_27481.html?code=0dd35a870803e2a73e41b5ad3cd4a557

yes the wind blew and the shit flew and thus spake vladimir!
(bare chest photo op in the transit zone wearing hi heeled converska and a chest toupee

How did GDX go up today with gold getting spanked again?
 
Speaking of drek gold…
 
http://www.zerohedge.com/news/2013-06-27/day-5-china-open-precious-metals-smackdown
 
unreal.

Hi Phil hope you have warmer weather in AC than here in Germany 10 deg. C. Midnight for you early morning for me.
Question on TLT hold still from previous play now 4 Jul BC spreads 112/115 bought for 2.29/1.11 now .65/.21 and rolled from Jun 3 putters from 115 to 114 for a credit of 2.49 now 4.90 against me.
Planning of selling the long call for .65 and rolling the putter to Aug 112 for a net cost of .70 and selling a nacked Aug 114 caller for .79 to cover the roll. Your thoughts thks

PS on TLT letting the Jul 115 now .21cents expire!!

Phil – up too late. In AC. Where is 4  am or 5am post.  Slacking. 

Thanks Phil. Hope you know I was joking. Although, I do love the updates when you do them. This time of year I am up early and you do fantastic job of coming up with interesting things to read (on my IPhone or iPad of course).

…well, you're certainly not talking to me… 😉

PHIL IS A MENSCH WITH DELICATE SENSIBILITIES JUST SAYING

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