It's a rumor-driven market.
Early this morning, the Futures were up because, SUPPOSEDLY, another round of "peace talks" have been scheduled and, why not, they've done nothing so far? Meanwhile, in reality, China is back to lockdowns as Covid is once again spreading over there and that, by itself, would be enough to knock down the markets (ding to the global economy, more supply chain issues, etc.) and oil is still around $104, which again, by itself would be enough to take down the market but I guess it's better than $128 last week so YAY! – I guess.
This is why we use our Bounce Charts during a crash – they keep us grounded and remind us that all this short-term movement is meaningless in the big picture and, in the big picture, we're not making any progress. That's why on Thursday I can write a Morning Report titled "Thursday Failure – Rally Fails at the Strong Bounce Line (/ES 4,320)" and you can see above that we EXACTLY failed on Friday at 4,320. When you see us make predictions over and over again that get hit ON THE BUTTON – you have to think there may be something to our 5% Rule™ – right?
Remember, these are the same levels we've been using since we topped out in December and predicted a 20% correction in the markets and that was before the war:
- Dow 36,000 to 28,800 would be a 7,200-point drop with 1,440 bounces to 30,240 (weak) and 31,680 (strong).
- S&P 4,800 is 20% above 4,000 and that makes it an 800-point drop with 160-point bounces so 4,160 (weak) and 4,320 (strong).
- Nasdaq is using 13,500 as the base and we bottomed yesterday at 13,103. 14,100 is the weak bounce and 14,700 is strong.
- Russell 1,600, would be about an 800-point drop with 160-point bounces to 1,780 (weak) and 1,960 (strong).
We're still where we were last Tuesday, with the Russell on the cusp (1,979) but the S&P is now dangerously close to 4,160 and, if that goes, then expect the Dow to begin catching up. That make the Dow the best downside hedge at the moment and, at 33,025 this morning, we can play a cross below 33,000 short with tight stops above the line – risking some small losses against a potential gain of $7,500 per contract if we fall back to 31,500 (a bit below the strong bounce line).
In our Short-Term Portfolio, we have a mattress play shorting the Dow ETF (DIA) which we initiated back in January:
| DIA Long Put | 2022 16-SEP 350.00 PUT [DIA @ $330.02 $0.00] | 50 | 1/28/2022 | (186) | $125,750 | $25.15 | $6.73 | $23.74 | $31.88 | $0.00 | $33,625 | 26.7% | $159,375 | ||
| DIA Short Put | 2022 16-SEP 320.00 PUT [DIA @ $330.02 $0.00] | -50 | 1/28/2022 | (186) | $-75,750 | $15.15 | $3.43 | $18.58 | $0.00 | $-17,125 | -22.6% | $-92,875 | |||
| DIA Short Put | 2022 18-MAR 335.00 PUT [DIA @ $330.02 $0.00] | -10 | 2/15/2022 | (4) | $-4,400 | $4.40 | $3.33 | $7.73 | $0.00 | $-3,325 | -75.6% | $-7,725 |
At the time, our target for March was $335 and we're a bit ahead of schedule with those short puts expiring on Friday. Of course, we will just roll them to April or May whatevers as we're 5:1 covered and the real trick to a Mattress Play is that, if the market drops faster than you think, then we are triggered to double down with another long spread as we roll down to 2x something lower – which then increases our coverage and provides us cover to take profits on our original long puts (the Sept $350s in this case).
Note the $350 puts are now $31.88 – more than the $30 max payout for the spead. If we were to buy, for example, 50 Jan $325 ($26)/295 ($17) bear put spreads for net $9, then we could take some of those Sept $350 puts off the table using $30 for a stop. Since we only paid net $10 for the first set and were in for net $19 total – it won't take long before we have a free spread and we can start the cycle again if we have to.
There are a lot of moving parts to a Mattress Play and the best way to learn is through practice but, unfortunately, it's been about 10 years since we've had a flat to down market to practice in – that's where these hedges are appropriate. We can also do them with companies we feel have topped out, like Chevron (CVX), which rose a ridiculous 70% since October and that's $100 BILLION in market cap to $332Bn for a company that madee $15.6Bn last year. Not terrible but they lost $5.5Bn in 2020 and oil is going to crash hard if this war ever ends. Also, they are talking about windfall profit taxes on oil companies and that would also spook investors.
So, in the Short-Term Portfolio (STP), we can:
- Buy 15 CVX Jan $200 puts for $40 ($60,000)
- Sell 15 CVX Jan $170 puts for $21 ($31,500)
- Sell 5 CVX April $160 puts for $5 ($2,500)
This is a $45,000 spread we are buying for net $29,000 so we have $16,000 (55%) upside potential if CVX simply finishes below $170 (where it is now) – in January. We'd have to lose over $30 per short put to be hurt on that side and the June $150 puts are $5 and the Sept $140 puts are $5, so we can probably roll along to $130 or $120 and still have our $30 edge and, of course, if things are going that well – we can buy more long puts...
Should CVX move higher, the April puts go worthless and then we sell $2,500 more for the next 45 days and we have 312 days to sell so let's say 5 more chances at $2,500 could lower the cost basis to almost $15,000 on the $45,000 spread if all goes well.
It's a good, educational play, the kind I like to have in our hedging portfolio for our Members. Since we do believe CVX will come back below $150 eventually, we'll also take any chance we can get to roll the $170 puts to the $160 puts and then the $150 puts when and if it can be done for $5 or less – widening the spread by $10 each time.
And don't forget we have the Fed this week on Wednesday at 2pm, followed by a statement from Powell at 2:30. We'll be covering that in our Live Trading Webinar, Wednesday at 1pm – 3pm. We should always be nervous when the Fed shedules a dove (Evans) at the end of a week – it means they expect trouble. After Powell, we have the Philly Fed, Industrial Production, Housing Starts, Home Sales and Leading Economic Indicators – the last of which could be very ugly.
And speaking of the Fed Meeting – here's how ridiculous things are at the moment:
And look at all these earnings reports still coming in:
And, of course, as my fellow soothsayer, Spurinna said: "Beware the ides of March."
Phil any opinion on DOC as an armchair trade. Buy the stock and sell strangles. Options only go up to Oct but a great div payer.
Phil / BIIB – I struggle to understand what you are seeing here…. It's highly unlikely that the Alzheimer drug get Medicare approval, – The EU rejected it, and 10 of 11 dr. on the FDA panel rejected this as well…..
At what point do we give up on BABA? Or is it a forget position hoping for something to work out? This is getting painful.
…and WTRH
DOC/Yodi – Everyone is worried about how the REITs will deal with the rate hikes. My issue with DOC is that even $16.50 is $3.75Bn and their best year was $64M so we're talking 50x. It's a nice idea of a specialty but they are miles from executing vale and, in this environment, I would not bet on rapid growth.
BIIB/Batman – I don't agree. They cut their ask 50% on the price and, even if medicare doesn't approve it, it will still be bought privately for the 80M people on the planet in the Top 1%. I doubt they can make more than that in the foreseeable future so their pricing strategy is probably a good one. Currently in the US, 6M people have AD and there's no real competition for treatment. Let's say the treatment is $30,000/yr and, by the way, it is covered as an infused therapy under Medicare Part B. So we have 60,000 people who can afford $30,000/yr in the top 1% and that's $1.8Bn in the US alone. Are the ultra-rich going to choose Maui over their cognizance? It's a trick question because they can easily afford both!
https://www.fiercepharma.com/pharma/doctors-survey-suggests-biogens-aduhelm-still-has-8-billion-peak-sales-potential-if
It will take time but they'll get there and, like I said, that's all bonus money to a company trading at 13x on their current portfolio of drugs.
BABA/Rn – Well if China is going to start going after them, they are screwed. Our 10 Jan $200 short puts in the LTP are down $88.950 and have $78 left to 0 and there's no premium left to burn. So let's say we risk $25,000 (down to $50) against the possibility of making back $88,000 if things do wash over rather than panicking out?
WTRH/Hwtd – They are blaming a poor Q on resurgent covid but that should have been good for them, not bad – so I am starting to lose faith. I'd like to give them one more Q to see if their processing business is catching on.
Thanks Phil, times are questionable all over, hart to say what happens tomorrow.
Phil / BABA – another view – I assume you are thinking the drug not getting approved ( By Medicare) is already baked in? I think it's pretty risky taking a position just prior to the Medicare announce….. But your crystal ball is probably better than mine…. I'll sit on the sidelines for now and cheer for you.
FDA advisory panel of 11 doctors and scientists voted 10 to one to reject Aduhelm (since they were con- vinced it had no efficacy and had severe side effects), the FDA passed it anyway. Pursuant to clearance, there has been highly vocal public criticism of the FDA from the medical community. This has re- sulted in insurance companies refusing to pay for the drug, particularly since Biogen is charging patients $28,000 for a course of treatment. It has also outraged physicians, who are refusing to prescribe it, stating its dangers. Patients in clinical trials have suffered brain swelling and bleeding, and one has died. Furthermore, the advisory board to the European Medicines Agency (EMA) known as CHMP (Committee for Medicinal Products for human use), also voted down Aduhelm, meaning it probably.
won’t get approved in Europe. Sales of the drug were only $300,000 in the third quarter, down from $1.6 million in the sec- ond quarter, when it was launched.
BIIB/Batman – As I said, it seems to be OK as infused therapy but wider use is in question and, as you can see, there's a lot of push behind this thing with that override. I think not getting approved is baked in and we'll now see what actually happens.
Yuch, by the way:
Good money already on the /YM shorts so I'd protect $1,000 per contract on 1/2 and $750 on the rest.
BIIB/Batman – I wonder to what extent this attack on Aduhelm is all related to the impact it would have on our Medicare system if approved? This would be a game-changer if it works but, if it does, good luck keeping it out of the hands of the people who need it. BIIB is getting old people's lobbies to back them up.
The Cafficon variant:
Phil,
Factoring in recession, is it a good idea to buy puts on DASH/TWLO/CRWD/ZS and other high flyers? Maybe calls on SARK?
Thanks
Recession/Harip – I think they'll break the glass on another stimulus before letting the markets crash. As I said this morning, the Dow has about 10% catching up to do if you want to make a bearish wager – why try to pick a specific loser. Originally, we thought Tech was the most overvalued sector – so our primary hedge was SQQQ. After the Nas had their drop, we switched to TZA and now we're looking at the Dow to catch up in the race to the bottom. In these days of Trillion Dollar valuations – you never know who is going to get bought so there aren't too many companies I like to short.
SARK has doubled this year, I guess it can go further but there's a lot of good companies they are betting against.
ZS and CRWD certainly seem to have futures, just got bid up too much, too early. TWLO pretty much the same and DASH is definitely suffering – I'm not sure human delivery is a viable business model and the drone future isn't getting here fast enough but, of course, people put up with Bezos losing money to build market share for 20 years and he also was running at 100s of times his earnings. It seems to have worked out in the end – certainly not for the people who bet against him.
All red at the close. Nas down about 2% – so sad…
China crashing, down 5% across the board.
lookig back, which is the only thing I'm good at, DASH is just wow. I mean WOW. Imagine having puts in Nov when it was 240, now 80. That's just a dream come true. And it follows the obvious mega-trend: Un-covid = people going back out now. So simple. Focus on simple! ZOOM. whatever.
AMC is buying a non-producing gold mine. AMC is (was?) a movie theater right? That makes sense. People tell make don't make sense. In te context of a movie theater buying a (defunct) gold mine, everything I say makes sense.
NEE? Are they the mega-trend decarbonization darling of 2022? Jan23 130 calls at 0.25 say "worth a shot." Right? Maybe NEE starts selling NFTs or buys a metal mine? I mean, that would make more sense for them to do it than a movie theater? If they become a meme stock, they can reach 800 per share? ($1.7T val)? Doubt it. But $1000 of those calls at a quarter is worth $3M if it happens.
Mega trends. It's my new catch phrase (since, you know, I was sick of bitcoin bashing by 2015).
drones/eVTOL need a better battery than Li-ion and that's going to be aluminum ion so that's the play there.