What a great day that was!
I'm finally seeing stocks at prices I may want to enter and we used the 5% rule to take some off the table and pick up a few positive postions at the close (just in case).
Even after removing these superstar positions, our short-term virtual portfolio still finished up 28% in total (not bad after a 600 point drop in 5 days).
I was starting to feel silly sitting on all those puts and writing every other day that there were terrible things wrong with the economy and people were starting to laugh at me when I said that commodities (which includes housing, of course) are still in a bubble.
Today justified a lot of those fears… As Option Sage said in our very first educational post: "The next rule we should be equally cognizant of is The Cardinal Sin of Investing which is to ignore risk management – Don’t every do it!!! Simply put “Don’t ever put all your eggs in one basket” otherwise Murphy’s Law kicks in and no matter how confident you were in the position you might quickly find it moves against your initial expectations!"
My initial expectations of this drop began on Jan 10th when I said: " Are you prepared for a down 295 point day? Let’s remember I am a bull with a short-term target of Dow 11,500! I would like to say I would be pleasantly surprised to be wrong but I will not be able to really enjoy additional advances unless we get a long-overdue correction out of the way. I’m saying this today as I see several disturbing market trends while I also see a lot of irrational exuberance on our member site and like Uncle Greenspan, I may feel the need to take away the punch bowl if the party starts getting out of hand!"
While many of you may have forgotten my cautionary words, the virtual portfolio didn't as we tracked progressively more bearish over the next 45 days. Our weekly short-term profits slipped from 100%+ to 42% as I hedged like crazy but, at the same time, we let the long-term virtual portfolio run and gained a ridiculous 100% there. We suffered for our bullishness in the long-term virtual portfolio yesterday as they dropped back almost 10% (to a 97% gain) but they've got all year (at least) to recover and we gained 5% overall in the short-term virtual portfolio, a place were we like to avoid taking losses!
Like I said on the weekend when we shifted to our new tracking system – we need to focus more on virtual portfolio allocation and position management as nothing is more important in a choppy market – I'm only sorry that we didn't have more of a chance to discuss the theoretical aspects of this before we were slapped in the face by the reality of what happens when we don't hedge!
This morning I said "let's keep some perspective" so let's keep it on our indexes:
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Dow is down 416 points (3.29%) less than Google moves at lunchtime! The bad news is that we also dropped 1.7% since our 2./20 high – welcome to the 5% rule!
- Transports fell 155 points (5%) in two days.
- S&P dropped 62 points off their high (4.3%) after bouncing off 1389 (4.97%)
- NYSE made a 20% bounce off the week's 5% mark to finish 4% down at 9,079.
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Nasdaq fell 5% from it's 2/22 high but just sort of died there.
- The SOX held up the markets with just a 3.7% drop and holding the 470 line!
- Russell was our leader and fell the full 5% (since 2/22) and stayed there.
I'll set levels in the morning but we can expect a 20% (of the drop) bounce at the open and ANY failure of today's lows by more than 2 canaries means you ain't seen nothin' yet with this drop but I remain cautiously optimistic ahead of the GDP report, which I think will beat the 2.2% consensus.
The NYMEX jokers tried to pretend a global market meltdown was a good thing for crude as the roaches pulled out all the stops to maintain oil prices while bailing on the actual oil stocks they are trapped in to the tune of $3 Trillion. There are still 600Mb on order for delivery to Cushing, OK between now and June which is really amazing when you consider the fact that they only processed 32Mb last month and only 42Mb were scheduled for delivery this month.
This is the biggest scam ever perpetrated on the American people – in a time of crisis, this oil CAN NOT be delivered in that quantity so the contracts are a meaningless, manipulative way to paint a false demand picture for crude, which has inflated the "value" of $3T worth of energy stocks by a factor of 2 (at least).
The total value of the 900M barrels of Crude that are on order for the remainder of 2007 is "just" $54Bn. If we assume a true value of $36Bn ($40 per barrel) then that means it cost the manipulators (in aggregate) $18Bn in order to get a $1.5T return on their energy stocks. After 2 years of drawing retail investors (directly and through funds) into the sector – these guys have an easy 25% margin to pull the carpet out from here – that's another 5% drop for the markets in general if this thing unwinds!
Gold barely budged yesterday and I said in the morning that if we don't see a nice deflation of commodity prices then we may be in for a pretty severe correction so let's be very careful out there! The dollar found some support at 83.5, which was our last breakout to the upside and best not be crossed.
Let's not forget that stocks are a commodity too and a falling dollar makes your equities more valuable in a perverse sort of way (but then your companies get paid in dollars so it's very complex).
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We closed out 11 winning positions (4 calls) with an 81% average gain today – (s) indicates short positions:
| BA | Mar-07 | $ 90.00 | Put | $ 2.70 | 42% |
| BAB | Mar-07 | $ 105.00 | Put | $ 1.65 | 50% |
| CHKP | Apr-07 | $ 22.50 | Put | $ 0.70 | 75% |
| FDX(s) | Mar-07 | $ 120.00 | Call | $ 0.55 | 66% |
| FXI(s) | Mar-07 | $ 109.0 | Call | $ 0.25 | 88% |
| GLW(s) | Apr-07 | $ 22.50 | Call | $ 0.40 | 53% |
| GLW | May-07 | $ 20.00 | Call | $ 1.95 | 44% |
| MRO(s) | Mar-07 | $ 90.00 | Put | $ 1.00 | -26% |
| PHM | Mar-07 | $ 30.00 | Put | $ 1.45 | 314% |
| SU | Mar-07 | $ 70.00 | Put | $ 0.70 | 75% |
| TSO | Mar-07 | $ 90.00 | Put | $ 3.30 | 113% |
| 81% |
We got 1/2 out of our oil positions ahead of inventories with fairly tight stops on the rest as there is no sense in giving up these fabulous gains:
- COP Apr $65 puts – 90%
- CVX Mar and Apr $70 puts – 95% and 60%
- MRO Apr $85 and $90 puts – 375% and 200%
- MUR $50 puts – 114%
- PBR $90 and $95 puts – 150% and 270%
- SLB $65 puts – 79%
- VLO $55 puts and Apr $57.50 puts – 75% and 66%
- XOM Apr $72.50 puts – 144%
I tried to get out of other oil puts by setting tight stops in the afternoon but the darned things just kept going down! We took PBR (hedged), PTR (hedged), CVX, GE and DIA calls but if we don't break through a 20% retracement, we're going to be dumping a lot more than those calls!
