Navigating the Stock Market – Isn’t it Ironic?

"It's like rain on your wedding day
It's a free ride when you've already paid
It's the good advice that you just didn't take
Who would've thought … it figures"

Alanis Morissette

It's been a very bearish two weeks for me and the last few days in particular I started to get the feeling the party was over, at least for the short haul, as I didn't like the look of the last leg of our rally to 14,000 and I especially did not like the look of the first few days of this week.  As I said on Monday: "That was the least exciting 90 points we ever gained."

Barry Ritholtz published a great cartoon that summarized yesterdays action quite nicely:

While we are not entirely immune to this sort of behavior on the member site (yesterday, for example, we decided to do shots every time the Dow crossed 13,400 in either direction, leading to 6 shots between 2:15 and 3:00!), we do try to keep a level (if not sober) head about this nonsense.

If you've been keeping up with us this week, you know we loved yesterday's action.  Despite the fact that we wish the market would recover, we always keep our post-it firmly affixed to our monitor which reads "It is NOT my job to save the market" which kept most of us from hitting the buy button during the 4 "recoveries" we got in the past 48 hours.

The members were certainly pleased:

"Phil I’m up 28.2% over 2 days and you can FP that number if you want, I blew away the other guy you quoted last night by 2X, much thanks to PSW!"

"Phil, really looking forward to more emphasis on the LTP! For the most part, my spread positions have been pretty good but I keep getting dinged on swing trading and now have to stop it. I’m one of those who needs a good working port like the LTP that doesn’t require constant attention all day long. I stupidly left 3 long leaps uncovered for just a bit trying to leg into a spread and got caught in this downdraft. Overall my port is down about 10% since I’ve started trading spreads/options 4 months ago. not sure if this is good/bad for this kind of market, but I do know not having PSW, I would have been in much worse shape."

k1 – Posted July 27, 2007 at 3:02 pm | Permalink 

"I’ve been participating in this list for less than a month, but yesterday’s big drop finally turned on the lightbulb for me. I get what Phil’s talking about with hedging, I get what Sage explains with changing trade structures to rescue bad situations, and I get how the LTP is the right way to go for me. I’m starting to figure out how to trade my virtual portfolio (as the man said, making a living, not trying to make a killing).  Yesterday brought a huge load of cognitive dissonance for me, but it yielded a huge gain in understanding. I can’t tell you all how much I appreciate this community, and look forward to the future."

"Phil – once again (two days in a row)…thank you! Not only managed to obey the first rule and not lose money, but also both days ended up putting a little change in my pocket…"

Highlander – Posted July 27, 2007 at 6:25 pm | Permalink 

"I am completely new to options trading and have already learned a lot from you but i need help on understanding today’s dynamics. i am long 30 contracts of aapl jan ‘09 $140’s and have shoted against them the aapl aug 150’s which position i took just before aapl earnings. it was a modified (slightly more bullish) position than your reccommended one of shorting against the aug $140’s.  Today aapl stock is pushed down with the rest of the market with the dow off 208 and nasdaq off another 37 but yet both my options positions (long and short) increased in value to the tune of almost $2,900.00!! i don’t fully understand it but it feels great! 

I am almost ready to give up owning real stock at all. the mind set of options trading that you teach just blows me away and i hope you keep it up in the future.  Any bright guy can be a hedge fund manager nowadays but someone truly dedicated to teaching the options trading art (investing really) to others realtime interactively day after dayis rare indeed, as opposed just talking about as it as does cramer. let cramer have his cnbc podium, the day will come when you will own the web forum!!! "

BillP – Posted July 27, 2007 at 6:32 pm | Permalink

"Highlander – you keep giving Phil compliments like that and he’s gonna raise our fees! Stop it!  "

mike p – Posted July 27, 2007 at 10:24 pm | Permalink

"Phil and all, It sure is nice to be 98% in cash, especially after taking gains from AAPL…..    thanks,mike"

While a little self-promotion is always good for a newsletter writer (and thanks to all for letting us know we are really helping!), it's also very fulfilling because Happy, Zman, Option Sage, Jared and I have a goal of making this the best EDUCATIONAL investing site on the web, not just another stock picker's newsletter or (heaven forbid) "market analysis" site. 

Sure we do all those things, it's very easy to jump up and down and say BUYBUYBUY or SELLSELLSELL like a chimpanzee on crystal meth, but we prefer to work as a TEAM.  Our mission statement (all orgainzations need mission statements) is: "High Finance for Real People – Fun and Profits!" and we try to remember that as we do our best to navigate the difficult waters of the market, even when we have class 5 day like yesterday.

In that spirit of teamwork I want to make it very VERY clear that I'm just the guy steering the boat.  In addition to the regular contributions from Happy Trading, Option Sage and Zman, we have a PHENOMINAL group of contributors who make what we do every day possible and, while we greatly appreciate all the good things people have been saying about us, we would like to thank all of our excellent contributing members for what has clearly been the most exciting AND most profitable week we've had to date!

How did we steer our boat yesterday?

As I mentioned in the previous post, I had pretty mixed feelings going into the morning.  We had a huge recovery Thursday afternoon that I attributed to market manipulation by the fabled "Plunge Protection Team", key members of which decided to go on TV in the morning and THAT was the main reason we covered the upside on Thursday afternoon (at the dead bottom too – pat, pat) as, mythical or not, we DO NOT bet against the PPT!

PPT or no, what I said to the members on Wednesday morning (and repeated in that day's wrap-up) applied equally on Friday: "Nothing has really changed" and it was unlikely that a few kind, and empty, words from our Secretary of the Treasury was going to be able to really turn the markets but, since stranger things happen pretty much every day lately, we did find it prudent to hedge heavily when the market hit 13,350 on Thursday.  Even as we added covers Thursday at 3:31 I said: "Be careful here as Paulson said subprime is contained and added 120 pts to the Dow, all evidence is to the contrary and they slapped curbs on the NYSE to lock in those gains so I’m not too sure this is real right now. It’s all about tomorrow but I’ll reestablish a neutral stance for tonight with my Qs and the DIA calls against the DIA $135 puts, now $2.78, the rest are off the table."

 My morning post was properly entitled "Freaky Friday" and ended with the statement: "The dollar already pulled back off Paulson’s pump while gold is expected to retest the dreaded $666 mark this morning.  Dollar down and gold up = bad economy as will rising rates in a down market so there’s lot’s to look out for today was we head into the weekend very much in cash!"  Rates did go up a quarter of a point while gold tested and was rejected from $666 but the dollar ran into a nice little squeeze that drove it all the way back to 81.

Although I was not 100% committed in the morning post we took decisive action, immediately selling our open CROX calls and rolling up the covered play in our $10KP right at the open and by 9:46 I said: "In general – remember what I said yesterday about trading curbs leaving a lot of sell orders backed up at the brokerages. If we don’t get off to a good start then those orders will be reupped today so we let the DIA and Q calls die and don’t take the puts off the table until we break positive. Until we get back to 13,600 nothing we see will be more than a minor bounce.  CVX is going down on those earnings so what does that tell you?"

• 10:05: "The pending summit is holding up the markets but I’m very, very glad to have worked into what is effectively a Dow strangle. If we start to take off I will DD on my QQQQ $49s, now .86.  Totally ignore the BS price of oil, watch SU to see if crude is going up. They couldn’t possibly be in a better position with record high oil and very low nat gas (they use it to power their process). If they can’t do well now the whole sector is doomed. CVX too, how can they not be positive?"

We did pick up some protective calls on XOM and SLB rather than panicking out of our oil puts as the sector spiked for what I thought was no good reason.

• 10:07: "1/2 out of (index) puts, will DD on whichever layer we stop at that’s nearest the money."
• 10:15: "Here we go folks! Paulson says BUYBUYBUY!!!"
• 10:19: "YHOO is going up so you know they are just throwing money into pretty much anything!"
• 10:32: "QQQQ calls and 1/2 out of DIA puts! I had a progression of DIA puts I laid out earlier and now I’ve taken half of that off the table (the other half will now come off at another .25) and I will DD (or rebuy in full as the case may be) when upside momentum slows in the strike that is closest to the money at $2 in August and $3 in September to cover what I hope are gains to the plus side. At that time I put tight stops or half out of the calls."
• 10:32: "I’m still very skeptical and will be rebuying DIA $135s, even though they are $2.35 rather than the $134s if we turn red here. As I said earlier – I just don’t know and cash is by far the best way to go today as no fundamentals have changed (there goes SHLD again!) so this is all a matter of perception."
• 10:32: "I’m watching XOM breaking below $87 as a significant issue if that happens but I really have to go with my gut here as I put myself in the seat of a shameless market manipulator and this would be my game plan. Why bother having that very unique summit if you’re not going to follow it up with a rally. It would be a disaster to close the market down after the whole economic cabinet and the President try to reassure us…"
• 10:38: "Pisani says calm is good and he’s right but I would be very concerned if we go red at all for any length of time."
• 10:43: "AAPL – getting ready to lighten up on open calls (don’t want to cover as they may pop but if we are failing here this can turn ugly)."

At this point (13,470) I was still waffling and buying some index calls on the way down but our goal was to go 80% cash minimum into the weekend with a strangle on the indices so that a 200 point swing either way would give us a good payoff – we just didn't think is would happen by the afternoon!

• 10:53 (we broke sharply below 13,450): "Ouch – real vote of no confidence for our economic team – all those pent up orders coming in fast.  Stopped out of oil calls, heading to more cash. If the market rallies now I will miss it as I’m going way more bearish including DIA $134 puts, now $2.38 XXX Stopping out of all to cash!!!"
• 10:56: " I love the way CNBC calls sellers "lemmings" on a 100 point drop but on a 2,000 point run up they are called “smart investors.” 
• 11:05: "Don’t forget how much BA and IBM are boosting the Dow since their $100 price gives them significant leverage. MMM is another $90 Dow component having a big day which makes me very surprised they are letting XOM go as it’s usually an easy one to stir up."
• 11:20: "BP, TOT, RDS.a all looking bad so Europeans are getting out of oil. Since they have all the money it’s going to be pretty darn hard for US investors to keep these things up by themselves. HES finally heading deep south. The market still can’t fight an energy sector sell-off and the brokers still have too much money in commodities so let’s keep an eye on HES, SU, SUN, and PTR (Buffett just cut back!).
• 11:20: I’m pre-rolling PTR to the $145puts at $3 in case the Buffett news catches on but it’s a small reduction and he’s way ahead so this is more about me taking a double off the table on the $150 puts.
• 11:46: "*The RIMM bear takes a bow*"
• 12:03: "DIA – no I’m out of the call business, like I said earlier – if that “Summit” of the PPT couldn’t get the markets going then we have a real crisis of confidence and while they keep saying 65% of the S&P is beating expectations, the expectations were for a terrible quarter so BIG FRIGGIN’ DEAL!"
• 12:03: "VIX taking off again and I will remind you to either take uncovered leaps off the table (LTP too) or cover them because once that V goes away you will suddenly find your contracts are worth about 10% less than you thought. When in doubt sell half absolutely applies here but I don’t have too many doubts about wanting to be well protected in this mess. Let my leaps by surprised by a sudden rebound forcing me to roll up my callers and take a small hit for one of my remaining 18 months – that should be the problem I have on Monday!"

We hoped we had found a bottom in the markets at lunchtime but I warned: "PTR selling off a bit. If BA turns down we could be good for another 100 points down pretty fast. IBM holding out too, very stubborn stocks we love in the LTP!"

• 12:41:  "Long-term plays. The only reason we haven’t made many lately is because there weren’t any good deals. Now that we are getting a pullback and possibly falling back into a trading range, focus will shift back to the LTP. For those of you who haven’t been with us for a full year, we go where the money is and USUALLY we are weighted 75% LTP and 25% STP from a virtual portfolio standpoint and the STP is just for fun opportunities that come along.
• "In a “normal” month in a “normal” market, we are thrilled to make 20% and my goal of the LTP is to make 50% for the year. It may not be as sexy but it sure beats losing money like over 50% of the mutual funds do in a flat market so do not be surprised if our strategies shift considerably away from short trades in the fall."
• 1:50: "VIX – that’s what I’m talking about. If you still have a lot of open contracts you are not as rich as you think you are, when the VIX pops so will your premiums! CASH CASH CASH, especially if the dollar is bouncing… "

At 2:09 I cautioned against getting too excited about the "recovery" saying: "Don’t forget Europe sold back to their lows at the close!!!!" and a little later, at 2:47, I was highly skeptical of CNBC's special guest and the mini "rally" that ensued: "Here comes the Cramer mega pump! He just yesterday said this is no time to be in the markets and now he’s out with a BUYBUYBUY! Says we will close up and amazingly money starts flowing in as he speaks.   Oil looks finished at $77 – sick! "  I was done at 3:17 as I had to go to a meeting so I covered the upside and left the puts on the table, protecting gains that got even more spectacular while I was away as the market took it's final plunge at 3:30.

To summarize, there's nothing wrong with a nice, healthy dip if you plan ahead and are ready for it – it may even be the best part of the trip, as it was for us this week.  Of course, only a fool goes downriver without a life preserver and headgear and that's exactly what we try to teach over at PSW – riding the rapids of the markets can be the most exciting thing we do in our lives – but you need be able to look out for obstacles ahead and have the team ready to change course at a moment's notice, no matter how well you think you know the waters.

As I said before, mine were only some of the 303 comments made on Friday's post (a slow day!) as there is never a shortage of trade ideas at PSW.  By keeping our oars in the water and just a little navigation from me as I do my best to spot the dangers that may lie ahead, we accomplish amazing things on a daily basis by contributing as a team and I am very proud of the work we are doing here!

Thanks to one and all for a fantastic week – it's been an absolute pleasure taking this ride with you and I can't wait to see what's around the next bend in the river!

Have a great weekend,

– Phil