Terrific Tuesday Wrap-Up

Well that went just like we expected it would!

I love it when a plan comes together and I also love it when I stop looking silly for urging caution during a 350-point 2-week rally but it gives you a real sense of perspective when you give back 150 points of that rally in just on day.

Not that we didn’t make money to the upside, we’ve had a good few weeks – but there is something particularly rewarding about not just locking in those gains but making nice additional gains when the market goes the other way as well.  As I said in the weekend wrap-up, we took a lot of "defensive" long positions as we went from 80% cash back to 60% cash but we never forgot what a house of cards we were betting on and today our hedging really paid off.

Make no mistake, it’s not over yet – we could still get another reversal but now we know our virtual portfolio is healthy, well-protected and able to make money in either direction, we can relax a little as we look for clues as to broader market trends. 

The return on the Short-Term virtual portfolio jumped 20% this week, with a 10% overall gan and our Long-Term Virtual Portfolio is back at 132% as our biggest problem there was that our callers were getting away from us.  The Free Picks virtual portfolio leads a truly charmed existence and has jumped to a 215% gain, now up to $78,811 and our Complex Spreads posted a nice gain to 75.9% from 68% this weekend.

Are we diversified?  You bet we are!  And that’s the key to this market.  It’s that James Bond investing philosophy we first discussed as we set the tone for the month’s strategy back on June 24th.

As we will be heading into a very tricky summer and as I am VERY satisfied with the current mix on our member board, that will be it for new memberships until after the site redesign in late August.  Officially I think the cut-off will be Sunday so don’t say we didn’t warn you, but we have a lot of strategy work ahead this summer and it needs to be done to best serve the needs of our current members.

I said we would get tests of critical levels this morning so let’s see how we did against my predictions:

• Dow 13,500:  Finished at 13,501.
• S&P 1,515:  Finished at 1,510, not good!
• NYSE 10,000: Finished at 9,960, another failure.
• Nasdaq:  2,600: Finished at 2,640, safe for now.

With all our indices finishing at their day’s low, I’m not very enthusiastic about a quick recovery.  As I said in member chat this afternoon: "Finishing at LOD not a good sign. Nothing I would want to bet on other than a cover but let’s remember that we didn’t catch this cold, we started it so this fever may travel around the world tonight."

We upped the ante on oil puts, repositioning to August for the most part with 10% of our committed STP capital now short on the oil sector – by far our riskiest bet but one I decided to take ahead of inventories tomorrow as oil pricing is yet another house of cards that is ready to collapse.  There’s some interesting action going on in the Senate as an investigation into Amaranth is turning into an investigation of oil price manipulation that is very strangely reminiscent of of my September article "Is the NYMEX Oil Market Being Manipulated."

The Senate Permanent Subcommittee on Investigations, which is investigating excessive speculation in the energy markets, concluded in a recent report that the energy-trading regulatory system was broken. Among other things, it’s calling for electronic energy-trading exchanges — primarily, IntercontinentalExchange Inc., or ICE — to be subjected to the same level of regulatory oversight as traditional energy futures exchanges like Nymex, a unit of Nymex Holdings Inc. 

Our other large open bet is on gold to the upside and our miner stocks are holding up well so far.  Let’s not forget the huge bet NEM made on the long-term price of gold last week and, as I said this morning:  "With Bernanke speaking on inflation we need to watch gold very closely – the last thing we want is for gold to take off while the markets go down as that will indicate a rapid loss of faith in our Goldilocks economy."  Well, I don’t know about you but I’m losing faith, despite Larry Kudlow using the term Goldilocks a dozen times this evening as if saying it would make it so.  Just remember, the story is about Goldilocks AND three bears, today was just a quick visit from Baby Bear (inflation).  Momma Bear is earnings and you don’t even want to be in the room if Poppa Bear (the end of the Yen carry trade) shows up!

We can blame Uncle Ben for today’s downturn but it wasn’t so much what he said (although I think he is setting us up for a new, more hawkish stance on real inflation from the Fed), but what he didn’t say.  Bernanke, for the first time in a long time, had no soothing words for the markets about inflation or sub-prime mortgages.  Without Uncle Ben to tell investors that the very obvious disaster in housing may not be such a big disaster, it does tend to look kind of like an actual disaster.  S&P and Moody’s decided to downgrade Billions of questionable mortgage backed securities in what I think was an ill-timed attempt to bury the change under what they thought was going to be the usual BS that Bernanke has been spouting these past few months.  Without Ben’s usual comforting words, these downgrades hit the market pretty hard, sending the brokers and bankers over the same cliff builders fell off ages ago.

We had a great day of intra-day trading on the members site because we got out of oil puts on the morning dip and got back in ahead of Bernanke’s speech as I called it way early, including a very nice new play on MA puts early in the morning.  We didn’t get out of many things as we were pretty well balanced but we took good advantage of yet another DNDN spike to reposition those calls.  Unfortunately, they announced a lawsuit after hours so our remaining positions are not looking too hot as we rolled higher: