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Will We Hold it Wednesday – Weak Bounces into the Holidays

Wheeee – this is fun!  

As I told you yesterday, I was preparing to call for a bounce and we laid out why we had called a top so you'd understand that we don't take these things lightly.  The chart on the right is the SAME EXACT LEVELS WE PREDICTED ON 10/30 ("10% Tuesday Correction – Have We Fallen Far Enough?") and yesterday the S&P (/ES) bottomed out at 2,631, the Dow (/YM) at 24,355, the Nasdaq (/NQ) at 6,449, the Russell (/RTY) at 1,463 and the NYSE 12,016 causing me to say to our Members in our Live Chat Room at 2:03: "We're taking about $100,000 off the table on the STP and flipping a bit bullish for a hopeful bounce but, if we don't get it, we will re-deploy that $100,000 to buy another $200-300,000 of protection."  

The Short-Term Portfolio is where we keep our hedges to protect our Long-Term Portfolio and we had just finished making bullish adjsutments to the LTP in the morning, taking advantage of low prices to add to our existing positions.  Taking down the hedges from the STP turned us very bullish into the close.  In the very least, we're expecting at least a weak bounce from our indexes as the first attempt to fail our support lines led to strong bounces so, even in a proper bear market – there are still enough idiots out there to buy this last dip before giving up so – why not take their money?

Back in October, we looked at the "30 Risks to Markets in 2018" and that is why we expected the correction and those risks are still out there for the most part but now many of them are REALIZED by investors – so they are less likely to cause panic selling when they bubble up in the news cycle and that means we MIGHT stablize here – down 10%, but I'd still feel a lot better about buying if we weak bounce here and continue on to a full 20% correction.

From 7,700 on the Nasdaq, that would be 6,160 – another 500 points down from here.  From Dow 27,000, we're looking at 21,600 – down 3,000 points ($15,000 per contract in the Futures!).  From S&P 2,950, a 20% correction would be 2,360 and that's off 300 points – also $15,000 per contract to be made shorting /ES and the Russell (/RTY) topped out at 1,740 so we're looking at 1,392 and that would be only and 80-point drop – hardly worth playing. 

We had already predicted the Russell would fall the most thanks to more complex calculations using our 5% Rule™ and now we are predicting that, if we break for another leg down, it's the Nasdaq that's most likely to fall hard and the new hedge we'll be using (IF the weak bounces fail) was just sent out as a Top Trade Alert to our Members yesterday using the Nasdaq Ultra-Short ETF (SQQQ):

As a hedge, however, we're more worried about a correction between now and Jan earnings so something higher than here would be appropriate so, as a new hedge, I'd go with:

  • Sell 5 AAPL 2021 $170 puts for $22 ($11,000) 
  • Buy 80 SQQQ March $15 calls at $3.40 ($27,200) 
  • Sell 80 SQQQ March $22 calls for $1.60 ($12,800) 

That's net $3,400 on the $56,000 spread that's $12,000 in the money to start so you can't lose you're $3,400 unless the Nasdaq improves and, if it does improve, it's not likely AAPL will be much lower.  If, on the other hand, AAPL is below $170, it's not likely SQQQ isn't paying you most of that $56,000 back and you are only obligated to own $85,000 worth of AAPL stock so, as a stand-along – the worst likely case is owning 500 shares of AAPL for net $29,000 ($58/share) but more likely you have some very good downside protection.

You don't have to pick Apple (AAPL) as your offset, any stock you REALLY want to buy at the net price is fine but we REALLY want to buy AAPL for $170 or less – REALLY!!!  That makes using it for spreads like this a no-brainer. It's hard to say if the Apple-bashing has run its course yet but this happens to the stock once in a while as the Banksters know they can manipulate the entire stock market by taking AAPL down (or talking it up) and right now, the Banksters want you to sell all your shares so they can step in and buy them before they tell you how oversold the market is getting.

This is our favorite kind of market because so many stocks are going at ridiculously cheap prices as babies get thrown out with the bathwater and we just cashed in $100,000 worth of hedges and we're either going to plow the money back into $300,000 worth of additional hedges (if the weak bounces fail) or we'll put the money to work buying $300,000 worth of longs for $100,000 – either way, we're going to have a good time!  

IBM, for example, came back down to our buy zone ($115) yesterday and our Top Trade Alert from Oct 31st was:

  • Sell 5 2021 $120 puts for $20 ($10,000) 
  • Buy 15 2021 $120 calls for $11.30 ($16,950) 
  • Sell 15 2021 $145 calls for $5 ($7,500) 

That's a net $550 credit on the $37,500 spread so $38,050 upside potential (6,918%) if IBM is over $145 in Jan 2021.  

We got a quick $10 pop but now it's fading back but we love IBM, who have made $6.7Bn in the first 3 quarters of the year yet you can buy the whole company for $105Bn at $117, which is about 10x current earnings.  That's for a company that made over $12Bn a year all decade except last year, when they took restructuring charges and reorganized the company to accomodate future growth.  Nonetheless, "investors" panicked out of the stock and continue to do so, despite almost being back to normal $10Bn+ earnings already.  Idiots – did I mention that the average investor is an idiot?  Keep it in mind…

IBM's CEO, Ginni Rometty just bought $1M worth of stock at $117 and another $2M for her retirement fund along with a couple of Directors who bought $250,000 each recently.  Now, when Elon Musk buys $1M worth of TSLA stock, I'm quick to point out it's just a stunt as he's worth $22Bn and most of that money is tied up in TSLA stock so all he's doing is pumping up his own bank account by creating a stir.  Ginni is no slouch but worth "just" $45M so, when she puts $3M into her company's stock – it's making much more of a statement, isn't it?  

As you can see, they've also been busy buying back their own stock, at a pace of about 8% per year, which means that $10Bn+ in earnings will be divided by a lot less shares going forward than it was in 2016.  IBM did overpay for Red Hat (RHT) at $34Bn but it's money that was burning a hole in their pockets anyway and they had strategic reasons for doing so and no, there won't be a bidding war because RHT will owe IBM $975M if they don't complete the deal – the opposite of a ususal buyout condition.  

Image result for red hat market shareRHT only makes $250M a year on $3Bn in sales so, on the surface, it seems insane for IBM to buy them but Red Hat has 33% of the Global Server Market (and it's the fastest-growing) and, though Linux is basically free, those same companies buy hundreds of Billions of Dollars in Services, which Microsoft (MSFT) is able to parlay into $60Bn worth of sales and $10Bn in profits.  NOW does buying RHT make sense for IBM?

Red Hat is IBM's foot in the door to customers who do buy all those services that IBM sells – just not from IBM.  Now the first interacton they will have is with IBM sales people, coming to the office to deliver their free version of Linux while discussing all the ways IBM can help them install, host and service that software – it's brilliant actually…

That's why IBM, who were our runner-up for Stock of the Year in Nov 2015 at $140, are now our official stock of the year at $117 and that makes the above trade our PSW Trade of the Year and usually we promise to give people who buy an Annual Subscription between now and Dec 31st a full year bonus if our Trade of the Year doesn't make 100% before the renewal next year (you don't have to make the trade but you do have to subscribe), but this one is so cheap we'll simply guarantee that, by November next year, this trade makes at least $5,000 – or your renewal is FREE!  

We'll talk more about it at today's Live Trading Webinar (1pm, EST) and we'll be watching those bounce lines to see if we're going to buy more longs like IBM, which has the potential to return 6,918% on cash (actually a credit), or whether we're going to add our SQQQ hedge – maybe with an IBM offset?


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  1. Good morning, All!

    We will be having our usual Wednesday webinar today at 1pm!

  2. Mainly looking at horizontal lines, I would be focused on retaking the support levels we breached yesterday (red below). 

    Dow – 24,750 and 24,250

    S&P – 2650 and 2600

    Nasdaq – 6600 and 6500

    NYSE – 12,200 and 12,000

    Russell – 1480 and 1440

  3. Winning:

    U.S. farmers finishing their harvests are facing a big problem – where to put the mountain of grain they cannot sell to Chinese buyers.[...]

    The U.S. government rolled out an aid program of around the same size – $12 billion – to help farmers absorb the cost of the trade war. As of mid-November, $837.8 million had been paid out.

    Some of that money will pass from farmers to grain merchants such as Archer Daniels Midland Co (ADM.N) and Bunge Ltd (BG.N), who are charging farmers more to store crops at elevators where there is limited space. Bunge and ADM did not respond to requests for comment on storage fees.

    Subsidizing huge companies while small farmers take the hit!

  4. Morning Phil/Gang

    Maybe I missed it, is there an OOP Review floating around here?


  5. On the road to a banana republic:

    President Donald Trump told since-departed White House counsel Don McGahn that he wanted to order the Justice Department to prosecute Hillary Clinton and James Comey last spring, The New York Times reported Tuesday, citing two people familiar with the conversation.

    No one the GOP raises as much as an eyebrow!

  6. Choppy crypto trading history:

  7. Who is suffering in this correction:

    Lots of comparison charts at the link.

    Momentum goes both ways it seems!

  8. Phil  / Options on Futures – in the past when I have asked about Options on Futures you were dead set against them. "Futures Options/Winston – I don't do them because that's leverage on leverage and you are taking huge risks that can quickly get away from you (or force you out on a margin call at the worst possible time)".

    So I was very interested in your trade idea (at the end of yesterday's comments) of hedging the NAS using Futures Options – a long put spread.

    Has something changed on FOPs or is it the least worst option for Alter?

    I think there is a role for FOPs in a portfolio – and think it is something we should discuss more on the board.

  9. Good Morning.

  10. Good morning! 

    Investing in GE is like:

    Well, I thought I was going to have a hard time picking a trade of the year but IBM came back down to where we doubled down in 2016 so how could I resist?

    The "W" patterns of the NDX and RUT on the big chart are both downtrending and INDU is not far off if we make a lower low today and those are often signs of a severe breakdown if we fail to get back to the middle of the W (1,575 on RUT, 7,200 on /NQ) and then head back down so watch those bounce lines as a failure to get over those lines means it's likely we're only in the middle of a grand correction!  

    Famers/StJ – What a joke, payouts to ADM and BG disguised as "aid" to the farmers.  Cause a crisis and then use that crisis as another excuse to give more tax Dollars to rich people – AMAZING!  

    OOP/Dreamer - Submitted on 2018/11/16 at 2:08 pm

    Futures/Winston – Yes best of the worst for Alter's "situation".  I would so much rather have our nice SQQQ hedge but feel free to ask for exceptions – they still won't go in the STP.

  11. In fact, here's how we did break down way back in early 2018 – look familiar?

    Europe has already done a bigger correction – is it different for us or are we just lagging?

    And, keep in mind, in the grand scheme of things, this is nothing:

    5,000 on /NQ is the 2000 high and fine, we got back to it in 2017 but another 40% since then has been MADNESS.  Of course they aren't the same stocks but a lot of the same hype is in there and the same stocks went back to 1,000 – I'm just saying a good half of the last 40% has been irrational – so why should a 20% pullback surprise us when it would still leave us up 20% since 2017?

    Like Europe:

  12. Wow, has Trump really been President for 2 years?  Well, the World is still here so a lot of people lost that bet.  He hasn't been impeached yet either – kind of a slow burn all around but both are still possible before the next election!  

    Image result for trump destroys world

    "… and in their desperation, they turned to a man they didn't fully understand."  – How prophetic!  

  13. AAPL really has a very poor showing!!!!

  14. Yemen: up to 85,000 young children dead from starvation

  15. Will Amazon Ruin or Revitalize New York City?

  16. S&P 500 Valuation Floor Is as Wobbly as 2019 Earnings Estimates

  17. Just like to remind you of my PSA play over the week end.

    Today I sold the Dec 18 210 Put for 5.60!!!!

  18. StJ/Bitcoin – was it really 0.17 to 0.01! OMG that's crazy. I remember the 30 to 2 crash and of course the 1181 crypto-winter. I wonder where it all goes from here. Crypto is ice cold right now for sure. maybe the groundhog doesn't see a shadow or something and things thaw in the spring?

  19. Added back 1/4 to /CL long position at 5419.  Risking 20 ticks.

  20. Yet another oil build at EIA but this should be the last one for the month:

    • EIA Petroleum Inventories: Crude +4.9M barrels vs. +2.5M consensus, +10.3M last week.
    • Gasoline -1.3M barrels vs. -0.2M consensus, -1.4M last week.
    • Distillates -0.1M barrels vs. -2.8M consensus, -3.6M last week.
    • Futures +2.43% to $54.73

    AAPL/Yodi – They won't deny rumors that IPhones aren't selling well when it's probably either just an issue with the mix of phones that are selling or possibly AAPL has picked up a new supplier and cutting back the other suppliers.  Either way, manipulators know they can say anything they want and AAPL will refuse to comment.  

    After all, they only earned $14Bn last Quarter, who would want that?  On pace for $60Bn a year in earnings with $250Bn in cash in the bank – yuch! – who would pay $840Bn for that?  It's 14 times earnings (not including the cash of course, which makes it more like 10x earnings + cash).  What a complete disaster – OMG – how fast can we dump this thing???  

    Did I mention that investors are idiots?  

    Image result for apple q3 earnings 2018 slides

    Crypto/BDC – Put it next to the beanie babies – they both might come back…

    Yikes, we can't even hold a 1% bounce?  Pathetic!  

    I'm thinking we're going to need that SQQQ hedge after all.

  21. Hi Winston,

    I don't often mess with futures options spreads, but I do sometimes sell them against futures positions to adjust delta and to add some theta during high VIX moments. Right now I have a little short /NQ remaining and have OTM puts against them, one short put to one short future. I sold the puts during the VIX pop yesterday – it looked like the market wanted to bounce but there was also some fear in the air. I didn't have any idea which way it would break (still don't of course) and wanted to take advantage of the VIX and reduce my position slightly. My /NQs are down $1100 today and the puts (/NQ Dec 6220s) are up $500, so they are doing their job. Getting out of the futures would have been better of course – I did get out of most of them!

    If I'm adding risk here I'd love to know. I am certainly no expert.

  22. Actually, looking at's IPhone Inventories (# in the brackets), it sure doesn't look like a glut to me.  Seems the 6s are flying off the shelves at the reduced price ($25/month) and the XRs are pretty tight supply (69 or less in each category).  

    /NQ/Ati – Sounds like you keep betting against yourself.  Might be better to just wait until you are more sure and place a nice, small, directional bet. 

    November 20th, 2018 at 1:01 pm | (Unlocked) | Permalink 

    HBI/Jabob – Also out of favor but, today, down 3% as XRT is down 3% so just keeping up with the index carnage.  

    /RTY up 2% now, if it hold 1,495, it's bullish for the rest.  

  23. Smooth ride expected for Mexico’s marijuana legislation, experts say

  24. Can hemp be the textile of the future?

  25. Phil, I still have some /RB. Where do you think they will finish? Looks like a bigger draw on EIA then on API

  26. /RB/Japar – You are braver than I am.  I was thrilled to make 0.02 yesterday and be done with it.  I don't know where it will finish, which is why I'm not playing it.  API is generally meaningless, only EIA really matters.  

  27. Sold 1/4 /CL up 130 ticks.  Keeping a 1/4 position.

  28. Phil, there is a fine line between brave and stupid and i missed the exit Monday b/c I was traveling, so I’m more on the stupid side. Just thankful to get out unscathed 

  29. the AAPL bounce is pretty pathetic here

  30. Betting against myself with short /NQ puts vs short /NQ futures – isn't that hedging?! Help! Just kidding, happy to have feedback on it and I WOULD BE making more money if I had just closed them all out yesterday instead of getting cute.

    Off to the airport – happy Thanksgiving everybody!

  31. Good job with /CL Albo! You got your bounce at $53 as you predicted. Good for a $2 move, so some good money there. 

  32. StJ – Thanks.  I'm still long a bit.  Think it still could work higher.

  33. people who believed the beanie baby / bitcoin analogy idiocy are the same people who failed to buy it at $10.

  34. Phil / MVEN

    Whats your current assessment of MVEN.  I thought his was one you had your eye on for the hedge fund???  They seem to be making inroads in media but cannot find much info on why the stock is headed south.  Just noticed them on my watch list and wanted to get your take. 

  35. Were beanie babies ever $10 BDC :-)

  36. Unscathed/Japar – That's all we can hope for sometimes.  

    AAPL/Coulter – Still being relentlessly attacked in the Financial Media – can go on until next earnings.

    Hedging/Ati – Not on the same position!  I mean, you can but really we hedge to protect LONG-TERM bullish positions from short-term corrections against us on the premise that we DO want to hold the long-term positions for a LONG time, regardless of how they perform in the short run.  Given that the market does have ups and downs – hedges are good insurance but using them for short-term trading is essentially just going to make your broker rich from all the fees and spreads you pay.  

    And Happy Thanksgiving to you and all who have the sense to leave early today but, for those who don't – it's Webinar Time!  

    Beanie babys/BDC – I bought Beanie Babies at $10 and sold them for $100 and some went to $1,000+ but I was out and happy and never considered going back into the silly things.  I was in BitCoin at $600 and got out at $17,000 and have never considered going back into the silly things.  So I think it's a good analogy…

    Gold/Pstas – That's why I like to have a miner or two at all times – sometimes you get lucky and they have amazing leverage and, when you're not, you just sell puts and calls as they are a generally profitable business in almost any market:

    MVEN/Jeddah – Very disappointing.  We are working with them and feeding them articles but they've done a crap job of monetizing themselves so far.  As of now, we haven't pulled the trigger and not likely to as they've been serial disappointers.  

  37. MVEN – Bummer!  Many thanks to you for everything you do, and to the PSW board, have a great and safe holiday!

  38. how do we invest in Helium shortage? This is a big deal.

  39. the idiocy comes from applying price theory to different assets and assuming they are the same because the price movement looks similar. Obviously if one applied the price theory of Apple to beanie babies that would be stupid. People that don't see blockchain (more efficient system of trust as valuable) make the same mistake. They compare it to beanie babies because it's stupid. It's OK to make mistakes, it's why investors don't invest in clean energy storage and miss a $2T market and but others do. 

  40. bio--there are no mistakes!!!! ;-)

  41. You guys can buy GE and LB if you want. I'm accumulating GBTC in the 4's (like I said to wait for back in January).

  42. Wish there were options on GBTC…….

  43. BDC/Greencoin,

    Is it dead now?


  44. coins are never dead

  45. pat_swap

    pretty much this is where it leveled out

  46. BDC – I remember GBTC used to be very overpriced.  Selling at parity now ?

  47. Buying back /CL I sold earlier.  Only risking 30 ticks.

  48. albo--i think it is at a 10% premium to its NAV.

  49. Thanks, Jabob.  I'll put it back on my screen.  

  50. Ati / NQ hedges. In terms of risk you should ask Phil for a lengthier explanation. I do know he feels that a big issue (for him) is that there is no underlying to support the option, even though if assigned you normally get the futures contract.

    I like your approach on combining futures and futures options. It could provide an alternative to those little 'pokes' which soon add up and allow you to stay with a futures position longer. But I don't have much experience in that area and it would be great to hear your experiences and example positions.

    Hedging on the same position; it may be a question of semantics, but isn't the short leg of a spread a kind of hedge? And what about selling short term covers on the underlying? If you want to bring it back to first principles, isn't any instrument that reduces your long deltas a hedge?

  51. MO got super cheap again.  We have the 2020 $50/65 bull call spread with $65 short puts in the LTP – it's down a bit and you can do something similar in 2021 with lower puts – a good place to get in.

    $54 is $100Bn and they are dropping $10Bn to the bottom line.

    You're welcome Jeddah, you too.

    Helium/BDC – APD is a good one, my Dad used to work with them.  $160 is $35Bn though and they only make $1.500M a year so not too cheap at more than 20x.  Also, they don't have long options, which is why we don't play them.  

    Hedge/Winston, Ati - Yes but I'm saying that, for a short-term trade, you should pick a direction and stick with it.  From a commission standpoint alone, it's ridiculous to play those things vs simply buying or selling an actual futures contract.  If the Nas is going to fall 200 points, that pays $4,000 per contract and there's almost no friction cost, and they are totally liquid and use about $7,700 in margin (high VIX has driven it up from the usual $4,000).  Playing /NQ options, on the other hand, you're getting hit for 0.25 on the spread and $20+ in fees every time you make a change so about $50 on each leg for each move – no thanks!

  52. So we're drifting into the close but don't forget, this is a US-only holiday.  Hopefully Trump will keep his yap shut so really Brexit is the big concern and that's more likely to be a positive than a negative so I guess we'll take a chance and go into tomorrow with our lower hedges (for the STP/LTP) and just hope nothing blows up.

  53. Trump is unsupervised at Mar-a-Lago Phil! What are the chances he doesn't tweet something dramatic the next couple of days? The chances of starting WW3 are twice as high as a normal weekend.

  54. mkt is WEAK!

  55. Yikes, what an ugly turn into the close.  No bounces at all other than /RTY.

    Oh well, have a very Happy Thanksgiving – I'll be around Friday but certainly not going to be taking it seriously.

    Enjoy the family, 

    - Phil

  56. happy Thanksgiving!

  57. Wow, did we close red on the Dow?  I can't leave you guys alone for a second…

    That's just not good…

  58. Sell the rips… 

  59. sell the blips

  60. Happy Thanksgiving all. 

  61. I think the Fridays after Thanksgiving are generally good days in the market, particularly for retail. This year however, Black Friday may actually live up to its name. Either way, I think next week continues ugliness. Happy Thanksgiving and Peace to all!

  62. The latest FTR article from "The Owl" on SA explains why the latest earnings report should really concern FTR investors.  Why isn't FTR paying down debt?  They keep spending billions on "Growth initiatives", but it isn't resulting in any growth, and meanwhile the very large debt maturities pose an existential crisis for equity owners.  The only way to avoid bankruptcy is to prioritize debt repayment over everything else.  Surely they know this, and have a plan and are not planning on running the company into the ground, but I don't see any evidence of this.  What do you think they are doing Phil?

  63. Wasn't the Owl always a FTR bull?

  64. He said it was possible for them to survive, but they needed to do specific things that he outlined, which they have not done.  He soured on them a 2-3 quarters ago, when they failed to realize the cost synergies that they promised, and failed to accelerate debt reduction.

  65. Thanks palotay.. I remembered reading some of his positive articles on FTR. I did not realize he changed to thinking they were a sour apple. Maybe, he spoke to Yodi ;-)

  66. Here is another good SA article about Tesla's predicament.  I firmly believe that the recent quarter was a one-time financially engineered anomaly, and that it will be very difficult to reproduce results that come close in the next few quarters.  I'm still very short via long puts, and short calls.

    The Good Ship Tesla Is Sailing Into The Perfect Storm

  67. Happy Thanksgiving Everyone!  :)

  68. FTR/Owl,

    His disclosure statement at the end says that he is long FTR, so I guess he hasn't completely lost faith.

  69. EU, Britain agree draft deal on future relations

  70. A $15 Minimum Wage Goes National

  71. Swine fever adds to China’s economic headaches

  72. Weaker German exports, private sector growth worry investors

  73. Trade of the year/QC 


    Thank Phil