Thank Trump it’s Friday – President Claims Deal with China is Coming
by phil - November 2nd, 2018 8:27 am
2,763!
We are officially back to where we were on October 12th on the S&P 500 and still below where we were on the 19th, when I wrote: "TGIF – Closing out a Weak Week in the Markets," saying:
That's right, we opened on Monday at 2,763 and closed at 2,750 on the S&P (/ES) and this morning we're at 2,782 and climbing on a supportive note out of China, whose entral bank governor and banking and securities regulators said recent volatility in Chinese stocks didn’t reflect the nation’s economic fundamentals and “stable financial system.”
That flipped the Shanghai up 2.5% into the close, reversing a sharp downturn as China released weaker (6.5%) GDP data than expected (6.7%). Chinese exports, by the way, held steady from last quarter as they are not, so far, being affected much by Trump's tarrifs, which is actually bad because that means that there's more potential trouble for their economy ahead.
So here we are again, two weeks later, a little worse for the wear yet people, including reporters who should certainly know better, are calling me on the phone and saying "can you believe this rally?" Well no, I really can't believe it – it seems kind of unbelievable that we rally yet again on the same "progress" in China trade that both countries trot out to boost their markets when it suits them.
Oct 19th was options expiration day and we opened at 2,775.66, ran up to 2,797.77 and closed at 2,767.78 so we could have another interesting day ahead of us – especially with the Non-Farm Payroll Report coming out at 8:30 to povide us with real data that might move the market. Our last Non-Farm Payroll Report was on October 5th, when the S&P opened at 2,902.54, up a little from the previous days close despite a big miss in payrolls but we finished that day down 7 at 2,885.57 and we WISH we were less than 120 points (5%) away from that this morning.
Even China's beleagured…
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Thursday Thoughts – Holding Nasdaq 7,000 is up to Apple (AAPL)
by phil - November 1st, 2018 8:33 am
Well, we got our weak bounces – now what?
October ended with a bang with the indexes rushing up to the weak bounce levels which, for the sake of an update from yesterday's (and last week and the week before's) predictions are:
- Dow 24,300 with a weak bounce at 24,800 and a strong bounce at 25,300
- S&P 2,640 with a weak bounce at 2,710 and a strong bounce at 2,780
- Nasdaq 6,870 with a weak bounce at 7,080 and a strong bounce at 7,230
- Russell 1,485 with a weak bounce at 1,530 and a strong bounce at 1,575
- NYSE 11,880 with a weak bounce at 12,150 and a strong bounce at 12,400
So the only change from yesterday, despite the "massive" rally, is that we have now turned the S&P and NYSE weak bounce lines green with /ES at 2,723 (still the low end of the bounce range) and the NYSE right in the middle this morning at 12,250. Until the Nasdaq and the Russell confirm their lines – it would be crazy to buy into this bounce and anything less than strong bounce lines is still a very dangerous market to go long into.
This is the worst part of my job because I have to be like the parents telling the kids not too eat too much…
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Window-Dressing Wednesday – Painting a Prettier Picture to End the Month
by phil - October 31st, 2018 8:25 am
And we're back! (for now)
Keep in mind, of course that 2,710 is only the WEAK bounce line on the S&P and we need to clear AND HOLD all the bounce lines before the market is back in a truly bullish mode. While the 5% Rule™ protects us from jumping in and chasing false bottoms – after such a huge fall it's frustrating to sit on the sidelines while stocks recover.
Our predicted bounce lines are:
- Dow 24,300 with a weak bounce at 24,800 and a strong bounce at 25,300
- S&P 2,640 with a weak bounce at 2,710 and a strong bounce at 2,780
- Nasdaq 6,870 with a weak bounce at 7,080 and a strong bounce at 7,230
- Russell 1,485 with a weak bounce at 1,530 and a strong bounce at 1,575
- NYSE 11,880 with a weak bounce at 12,150 and a strong bounce at 12,400
After yesterday's strong rally, we're already back above all our -10% lines except the Russell, which actually fell from 1,750 to 1,450, which was 20% so bounces from a 300-point drop are 60 points so 1,510 (where we are now) is weak and 1,570 is strong so really, on the Russell, that 1,575 line – is the more important number to clear which means, logically, if you are going to back a bullish horse, /RTY may be the way to go.
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10% Tuesday Correction – Have We Fallen Far Enough?
by phil - October 30th, 2018 8:31 am
Wheeeee!
There's nothing like a nice sell-off when you're ready for it. Yesterday's dip blasted our Short-Term Portfolio over the 200% line, up $207,272 for the year and up $23,088 (23%) since our 10/18 review as we briefly flipped more bullish for the bounce but then, since the bounce didn't make it over our Strong Bounce Levels, we doubled back down on our SQQQ hedges last week and turned ourselves back to bearish – just in time for this week's catastrophe.
The primary purpose of the Short-Term Portfolio, which started with $100,000 on Jan 2nd of this year, is to protect the Long-Term Portfolio so we're always looking for bearish hedges – no matter how well the market is doing – but we also hedge our hedges with short-term long positions, to help lower the cost of our insurance. For example, we sent out a Top Trade Alert to our Members on Sept 6th with the followin hedging idea (we very rarely add hedges to Top Trades, so it was a big deal):
- Sell 10 MU 2021 $42 puts for $6.40 ($6,400)
- Buy 100 SDS March $34 calls for $2.60 ($26,000)
- Sell 100 SDS March $40 calls for $1.50 ($15,000)
That was net $4,600 on the $60,000 spread and, unfortunately, we used Micron (MU), which turned around and fell 20% since then but, fortunately, we only promised to buy it for net $35.60 and it's now $34.60 so not a panic but those put contracts are now $12 ($12,000) so a bit of a drag but the S&P Ultra-Short (SDS) March $34s are now $7.50 ($75,000) and the $40s are now $4 ($40,000) so net $35,000 on the spread less $12,000 if we buy back the puts is $23,000 which is up $18,400 (400%), which is why the Short-Term Portfolio puts up such crazy gains in a pullback.
Now I do still like MU but, as I said at the time – any stock you REALLY want to buy at the net put price will do. Meanwhile, all SDS has to do is stay over $40 and the premium on the short calls will expire and the net of the spread will rise to $60,000 – so…
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Monday Market Madness – IBM’s $33Bn Shopping Spree Gives Tech Investors Hope
by phil - October 29th, 2018 8:27 am
Hope.
It's a powerful thing. IBM (IBM) announced over the weekend that they will be buying Red Hat Softwars (RHT) for $33Bn which is more than 50% over Friday's $20 close at $116. I noted in our chat room this morning that $33Bn may have seemed less ridiculous as IBM began negotiating with RHT, probably over the summer as RHT had just been at that valuation – though the people who valued them there were IDIOTS, of course.
RHT has $3Bn in earnings and $250M in profit. If it were an IBM division it would have been shut down years ago as not worth keeping but IBM sees RHT as leverage as their customers are the customers of Amazon (AMZN), Microsoft (MSFT) and pretty much all the other cloud providers and that gives the mighty IBM sales force a foot in the door to leverage the 10s of Billions of Dollars they spend on cloud services and THAT is why this deal makes sense for IBM.
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It's also a brave and confident move by IBM CEO Ginny Rometty and it's the kind of thing woman CEOs do that men almost certainly would not, which is make a move that carries a lot of personal risk for them, has no immediate payback but paves the way for the company to be much healthier in the distant future. It's a nurturing move and the question now is whether she will be tarred and feathered for making it but predominantly male investors and analysts.
We're in a fairly painful IBM position in our Long-Term Portfolio as we sold 5 2020 $145 puts in January for $12.50 to net in at $132.50 but this morning IBM will open around $120 so we're down about $6,250 (100%) on those. We also bought 15 2020 $120/150 bull call spreads for $14 ($21,000) back in July and yes, we still have all of next year but now net $9 is down $6,000 on that end too – ouch!
I think a lot of short-term investors may pull the plug but I have long-term faith so, most likely, we'll rescue $13 from the 15 2020 $120 calls…
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GDPhriday – Taking the Economy’s Temperature Amid Investor Concerns
by phil - October 26th, 2018 8:11 am
Wheeeeeee!!!
So much fun to trade a volatile market. Already this morning (7:30) we picked a quick $1,000+ trading the Futures in our Live Member Chat Room and that's always a nice way to start the day but we stopped out Gasoline (/RB) with just over $200 per contract on a 15-minute trade and Oil (/CL) contributed $110 per contract and the indexes were good for a quict $150-250 each between 7:17 and 7:34.
Now we're looking for a pullback and our 7:17 entries were:
Well, we're re-testing Wednesday's lows so hopefully a little bounce here at 24,600 (/YM), 2,650 (/ES), 6,750 (/NQ) and 1,470 (/RTY) so I'd go long the laggard here but very tight stops below.
Also /CL over the $66.50 line and /RB $1.785 are both fun longs for a Friday.
Watch the Dollar though, we don't want to see it over 96.50 and VIX under 22 would be nice too!
We've got GDP at 8:30 and last quarter was 4.2% and this quarter we'll be lucky to see 3.3% and it's likely to be downhill from here but the question is – has the drop to 3.3% been realistically priced into the market and, sadly, I don't think it has. Certainly any print below 3% would cause a new wave of panic and over 3.5% will be relief – so that's the zone we're keeping our eye on.
Google (GOOGL) and Amazon (AMZN) disappointed on earnings last night with AMZN dropping 10% pre-market. Netflix (NFLX) is down too, mostly because it's got a 100x p/e ratio and people are starting to realize how stupid that is and that does not bode well for other Nasdaq high-fliers, who may actually be held…
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Two Thousand Dollar Thursday – Our Webinar Trades Make Money in the Downturn
by phil - October 25th, 2018 8:32 am
Wheeeeeee!
This is exciting, isn't it? We had our Live Trading Webinar yesterday and our last Trade Idea was a long on Gasoline (/RB) at $1.82 with a planned double down at $1.80 for a hold into the weekend if we had to but already we're up $1,000 this morning (and done there) and that, added to our quick trades on the Nasdaq (/NQ) and the Russell (/RTY) Futures during the webinar put us well over the $2,000 profit mark on our Futures Trades, which is just where we want to be with 2 hours' of "hard" work.
The indexes were far too scary to trade overnight and, even this morning, I'm less than enthusiastic about the "rally" that's lifting the Dow (/YM) back to 24,800 because that's still 2,200 points (8%) down from 27,000 which means it is only a weak bounce (20% of the 10% drop) and we're not going to be impressed by anything less than getting back over the 25,300 mark, which is still 500 points away.
These are the same bounce lines we predicted we'd need yesterday morning after completing the 10% correction – we just weren't expecting to complete it yesterday and we didn't quite get to 24,300 (the 10% drop from 27,000) but we never quite got to 27,000 either – so fair is fair I suppose…
Actually, I'm not expecting us to bounce back to the strong lines and, as I said last night on Money Talk (where we announced our portfolio adjustments and DID manage to add the MJ trade we discussed yesterday morning), I think we're going to fail our lines and fall another 10%. To that end, we added a Russell Ultra-Short (TZA) hedge to our Money Talk Portfolio in yesterday's review and, in our Live Member Chat Room, we added an additional Nasdaq Ultra-Short (SQQQ) to our Short-Term Portfolio at 10:40 am:
In the STP, we have 80 naked short SQQQ March $14 calls at $1.25, now $2.13 with SQQQ at $13.65. I'm still iffy
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Will We Hold it Wednesday – Indexes Struggle to Regain their 200 DMAs
by phil - October 24th, 2018 8:44 am
We're back!
Yesterday was a wild one and today should be interesting as well as markets attempt to shake off a fairly catastrophic failure of their 200-day moving averages. As you can see from our Big Chart, all 5 indexes failed at some point, effectively earasing 100 days of gains and threatening to turn negative for the year. New lows gave us new bounce lines to look for and, yesterday morning, we reran our 5% Rule™ and came up with:
- Dow (/YM) 24,800 (weak) and 25,300 (strong)
- S&P (/ES) 2,710 (weak) and 2,780 (strong)
- Nasdaq (/NQ) 7,080 (weak) and 7,230 (strong)
- Russell (/RTY) 1,530 (weak) and 1,575 (strong)
As you can see, the Dow and the Russell are right on their test lines so we can pretty much make our bets this morning depening on which way those two levels (1,530 and 25,300) break but we think the market is set to give the strong bounce lines a good try, which makes /RTY a good lagging bet if it breaks above 1,530, with very tight stops below because failure there would be a very bad sign for all the indexes (in which case we could short /YM below 25,300 with tight stops above).
We still have the same problems we have last week: Crazy President, Brexit, Italy, Trade Wars, Debt, Iran, Saudi Arabia, Venezuela, Inflation, Economic Slowdown… combine the last two and we get the dreaded Stagflation! NONE of these things have gotten better so the question is whether or not a 10% correction of a record-breaking rally is enough to put us into a rational zone or if we still have another 10-20% correction ahead of us?
While I'd say another 10% would be very likely, 20% seems a bit of a stretch because there are companies like Apple (AAPL) who are making fantastic amounts of money and have valuations that are well-justified and unlikely to suffer much from the above factors (the ones we know about anyway). That does kind of put a floor on how far down we think things can fall but, spoiler alert, that's still more than 10%!
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Tumblin’ Tuesday (Again) – Markets Turn Ugly, Dow 25,000 Fails
by phil - October 23rd, 2018 8:34 am
Wheeeee!!!!
As you know, we love a good sell-off because we're very well-hedged but now we seem to be breaking even lower and we'll have to look at improving our hedges – just in case. We are significantly lower than 10/9's Tumblin' Tuesday and 10/2 was "Tuesday – Trouble at 1,700 for the Russell" and we're miles from that now as we are almost down to 1,500 and Sept 25th our Morning Report was: "Toppy Tuesday – Markets Bounce Back Ahead of the Fed" after 9/18's "Tariffic Tuesday – Markets Ignore Another $200Bn Drag on Global Trade". Oh, and last Tuesday was: "Tempting Tuesday – Nothing has Changed but Markets Move Higher."
I don't do these reviews to say "I told you so" – it's my job to tell you so! Reviews are important because next time we're in a similar situation, you may recognize that that's what happened last time and that will help you make better trading decisions. That's why I started keeping a blog in the first place – to review my own thought process as I traded! Like last week, when I warned about chasing weak bounces, which we were clearly having that day. On that Monday (15th) we had posted the bounce lines for the indexes, according to our Fabulous 5% Rule:
- Dow (/YM): 25,450 (weak) and 25,700 (strong) – now 25,317
- S&P (/ES): 2,775 (weak) and 2,800 (strong) – now 2,766
- Nasdaq (/NQ): 7,100 (weak) and 7,250 (strong) – now 7,157
- Apple (AAPL): $223.50 (weak) and $226 (strong) – now $222
- Russell (/RTY): Anything below 1,552 is catastrophic – now 1,545
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Maudlin Monday Market – Trying to Muddle Through
by phil - October 22nd, 2018 7:50 am
Not much going on.
China is doing what they can to prop up their markets this morning as President Xi Jinping vowed “unwavering” support for the country’s private sector. In a clear hint that Beijing will do more to protect China’s economy, Xi insisted that his government was standing behind its business leaders. In a letter to private entrepreneurs, the Communist leader pledged:
“Any words and practices that negate and weaken the private economy are wrong.
Supporting the development of private enterprises is the Party Central Committee’s consistent policy."
We also got a boost from Italy, whose rating was cut by Moody's but not all the way to junk, as expected – they are one notch above junk and have agreed to try again to submit a budget that's acceptable to the EU. On the home front – our own fealess leader has pledged to also make America a Capitalist Paradise but this weekend he also promised the Middle Class some super-secret tax cuts that no one in Congress seems to have any idea about – especially as he's promising them pre-election and Congress isn't even in session to pass them.
When Congress does come back, they'll actually be working to avoid a Government shut-down as Trump's prolific spending has already broken the very generous debt ceiling and another cut would surely shatter it beyond repair. Rule #1 of government is that you don't run up deficits in a strong economy – that's when you are supposed to pay them down! If you never pay them down – what are you going to do the next time there's a crisis?
We have a busy data week ahead with the Fed's Beige Book out Wednesday, Durable Goods Thursday and 3rd Quarter GDP on Friday and estimates have been heading lower and lower with the usually optimistic Atlanta Fed down at 3.9% from 4.9% forecast last quarter. Q2 was 4.2% so anything under 4% is slowing but under 3.5% will be seen as a very negative sign. Along with data, Earnings Season is heating up with 100 (20%) of the S&P 500 about to drop their reports:
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site