Wild Weekly Wrap-Up

This week really started last Thursday afternoon, with the Dow cratering to 10,500.

Something needed to be done and it was well timed as we noted the turn in the Asian and European markets during member chat and that gave us a reason to make some bullish calls way at the bottom.  I had noted at 11:57 that the huge drop for the day was being caused by the STT rumor, as that bank led the financials down as it dropped over 50% during the session (recovering most by the close).  My comment an hour later as we bottomed was: "Capitulation at 1pm is very good because we have time to turn back.  LIKE ASIA DID TODAY!!!"

• At 1:04 I also noted I like the C March $15s at $2.50, now $6.72.  Even with a half sale of the Oct $15s at $1.33, now $5.75, those could be rolled up to 2x the Oct $20s, now $1.97 for a .39 per share loss on the short side (so far).
• At 1:33 I pointed out how fast the UYGs were rising and I liked the Oct $18s at $2.70, now $3.70 but that's down from $6 on Friday, a great example of why you should ALWAYS sell into the initial excitement).
• At 1:39 we got the news that Britain had banned short selling (thanks DB!) and, just a few minutes later STT confirmed that the rumors about them were (and I believe these were the CEO's actual words) pure BS.  In my comment at the time I said: "Speaking of HOV.  I don’t think I’d be too quick to cover builders and finacials here.  Maybe next they ban all shorting…"
• At 1:42 I noted: "How can UYG $18s only be .68, that seems low considering the possibilities…"  Those possibilities turned out to include the calls rocketing to $6 the next day and finishing at $4.
• At 1:52 I predicted a huge short squeeze for London's open the next day and pointed out the XLF as $19, now $21.30 was a great way to play but they too were way up at $24 on Friday morning and not taking a 22% gain in 4 trading hours is just silly.

That's why I'm going over some of these.  By the way, these are ALL of my general trade ideas for that afternoon but not the trade ideas discussed as responses to specific questions or we'd be here all weekend!  We have a lot of plays we've been looking at in the Financials and there may be another huge run-up next week if the bailout goes through but run-ups don't do you any good unless you take profits, even if those profits only make up half of your losses, it's far better than nothing.  I'll be discussing this week ways to pre-roll positions so you can feel better about taking profits off the table, without feeling like you are "missing out" on potential additional movement. 

• At 2:09 I noted GS had traded down to $90 and C down to $15 and my prediction for our markets was: "US rule (on short selling) – I can’t believe they would do it here but London trades as much as we do and the pressure may come for a level field.  I’m wondering if what we are seeing at the moment is money coming out of other things and rotating to financials…"
• At 2:37 I pointed out the ADM Jan $17.50s were just $3.75, now $6 after pulling back from $7 (but the idea was to cover on the way up). 
• 3:03 I mentioned that NAK at $4.72 were a good as usual, the are back near that price now after a brief trip to $5.75 on Monday.  I cannot emphasize enough how good it is to take nice, quick gains off the table.
• At 3:52 I said: "Keep in mind we could have another 2 days like this and still not be back at 1,300 on the S&P so this is going to be very interesting.  We need big follow through tomorrow but I think the new rule is going to give us a big kick off in the morning plus, don’t forget we thought we’d have a big run off the bottom into the close of the quarter (next Friday) we just didn’t think the bottom would be so low!"

On Friday morning we knew it was going to be bad for the bears but I didn't like the rumors of the proposed bailout or the sudden rule changes and I said in the morning post: "…what the government is doing now is just as wrong as what the hyenas have been doing all year and it’s too little, too late for people who lost their life savings and jobs as BSC, LEH, FRE, FNM, AIG and many others were allowed to die before GS’s stock fell below $100 and finally spurred Paulson to take some action.  And what is that action?  Taking all the bad debts off the books of GS and company and sticking the taxpayers with the bill.  This is truly insane people, enjoy the rally but at what price victory?"  The price, it turned out, was WM and I was 100% wrong about that one, thinking that the bailout would come in time to allow them to get bought.

We knew enough to be very disappointed with "just" a 400-point gain on the day, I had said we needed to get to 11,800 to show real progress and, sadly, that never came.  At 9:05 am last Friday I said to members: "The 50 dma on the Dow is at 11,400, over that line and we are probably going to sustain next week.  Before the crash, I had been assuming that by the end of the month the funds would want to put at least a 5% gain on the market and that would be from the July 1 open at 11,400 so we’re looking for 11,970 as  a minimal target for next week or it may be time to ge back to cash and gold… If you’re a fund and you’re long, now you can’t short to cover so we may see some sell-offs at regular intervals on the way up as the only way to take profits is to sell shares but with rule changes like these, it’s going to be very tricky to spot patterns…  We should keep in mind that this may be a one-week or possibly one-month thing but there still may be hell to pay on the other side.  That doesn’t matter now as everything that isn’t nailed down is flying up but at some point we have to figure out what "normal" is."

Just ahead of the bell on Friday,at 9:29 my comment was: "We’ll see what happens but a lot of this exuberance is irrational."  At 9:46, I put up a quick short list into the huge open saying: "Not a lot of profit taking but we should take these seriously as ones people are nervous about on the run:  WB, CALM, IBM, SIGM, JASO (lots of solars), LUK, BIDU, FMCN, ING, CELG, SLM, FIG, SHLD, ISRG, TIE ($12.50!), POT/MOS/Ags, DO, ZMH, SKS, JNJ…"  I think, of that group, only IBM really held up,

By 10:05 on Friday I was already annoyed saying: "I am not liking this sell-off if we fall below 2.5% gains on the indexes!  If all this crap can’t sustain a 400-point move, what is going to be left to do?"  At 11:38 I said: "Biggest danger over the weekend is a slate of articles that hammer on how much this is all going to cost taxpayers and how deeply in debt this puts the country etc."  12:17: "New wave of buyers coming in, that’s good.  I won’t be happy at all if we can’t get over 5% across the board as it makes us very weak compared to rest of world."

The day ended in some disappointment and at 2:54 I said: "Almost 3pm, hopefully time for a late-day surge to the close.  Seems like and awful lot of work for the PPT to go through and not follow through with a big finish…  Yesterday was 3pm on the dot…  Covers – I’d say if no pop by 3:15 then it’s probably best to take advantage of the still-good premiums but full covers are just a bit too dangerous (almost as dangerous as no covers)."  At 3:07, however, I did not think the Sept DIA $114 puts were a good deal into the close, as I thought the no-shorting rule would help keep the market from dropping below 11,400 for the day but the Dow quickly slipped and just 6 minutes later I said: "Wow, now we know why those puts were so expensive!"  We held it in the end, finishing at 11,388 but not where we wanted to be by a long shot.

While there were only a couple of spreads we looked at all day, as it was more a day devoted to profit taking and covering from the previous day, I did have one of the best ideas for a trade all week at 3:25 when I said:  "Speaking of ETFs – Was looking at butterfly on SKFs:  Selling Sept $100 puts and calls against $105 calls and $95 puts for a $4 credit.  Risk is $1 and pays $4 at $100 in 40 mins…"  The SKFs ended up closing at $100.00, those are really fun plays to make on an expiration day when you find them.

In the end, the NYSE did close up 5% and was a little encouraging but the Dow was not.  Over the weekend we looked at our various sectors and my comment upon review was: "Not exactly an awe-inspiring group is it?  And that’s WITH $1.3Tn in government aid, I’d hate to see them under harsher circumstances."   I noted the weekend shutdown of Ameribank and warned ABK could be next and overall my comment was:  "I discussed the "hail Mary" nature of the government’s action in yesterday’s post and and the ball is very much still up in the air and this could go either way.  This week, we’ll take a look at some defensive plays in gold stocks and even ETF shorts (if we are allowed to buy them).  Now more than ever, a put may be your best friend."

Almost prophetic of the next two day's market move, I said last weekend: "It’s almost pointless to review the week as there has never been a more blatant case of market manipulation than we had on Thursday and Friday of this week.  Just because the manipulation is in your favor, doesn’t mean it’s a good thing and we have to watch out for this now massive house of cards as the government tries to prop things up one plan at a time."  In our Political Post of the Week, I asked the question about the $700Bn bail-out: "How are we going to pay for it?"

 By Monday morning it was clear that the taxpayer would be footing the bill but niether Bush, McCain or Obama have been willing to say it out loud, leaving the country under the very correct opinion that our leaders simply flat out lie to us and treat us like children.  Leaving our fate in the hands of government certainly spooked the market on Monday morning as we crashed from our highs.  This did not catch us by surprise as we were already concerned that the S&P priced in Euros was about to fail at the 50 dma, something we had been watching for weeks.

On the bright side, the dollar held onto it's 50 dma, now at 76.23 but that did not stop oil from from climbing 3% from Friday's close, back to $106.89 and up $26 from the Sept 16th low.  My main concern on Monday morning was the outrage in London over LEH transferring $8Bn out of that office on its final day, creating a crisis over there.  Gordon Brown spoke out against it and I said: "Losing international confidence can quickly equate to us losing traction in this "recovery" tenuous as it already is.  KFT starts in the Dow today, replacing  AIG, which will be a shame if the rescue plan for that company succeeds.   I think anything less than 11,800 for the week will be a disaster as there has been a massive globally coordinated effort to save the markets and if that doesn’t work – what next?  Everything has been done short of sending in armed troops to force investors to buy stocks at gunpoint and that is what is going to be needed if Congress can’t get things done quickly and put a plan on the table that does not look like simply and injection of cash to prop up the financials at taxpayer expense.  Expect continued positive motion in the markets but, if we don’t get it – be very afraid!"

It only took until 9:43 on Monday for us to get very afraid and my trade ideas over the next 30 minutes were MS $25 puts at $2.75, now $4.60, Russell $700 puts at $12 (RUTVT), now $23.80 and well off the bottom, IWM $76 puts at $2.92, now $5.62 off the same bottom, the SKFs as usual (but nothing specific), VNO (put spread) and SRS $70s at $8.30, which topped out at $15 on Wednesday and are now back to $8.55 another good example of our #1 Rule.  We looked at some bullish plays on the way down but mainly spreads as there wasn't too much to get excited about with all the bearish momentum.  My bullishness at the time was based on the fact that the huge move in oil was false (it was) and that our government would surely act in time to save the markets (oops).

I responded to Malai's question as to whether I was still bullish at 3:53 on Monday afternoon saying: "No, not very bullish.  I expect a bounce once they firm up this package but it’s going to take a very long time for this economy to dig out.  Ignore crude today but overall there was a lot of damage done to the dollar and not a thing said to support it as we continue this leadership crisis in America.  Until some package is signed into law, then uncertainty will reign the markets.  I can’t even imagine how bad today would have been if people could short financials, as they are down 8% based on just people selling things off that they own. "

All day Monday it was driving me crazy that MSFT could not get any traction on the heels of a $40Bn buyback announcement and they finished at the day's low.  THAT is how irrational the selling was on Monday (now up 10% from Monday's close).  My closing comment on Monday was: "That was one rotten looking day but now the bears need to see follow-through because if they can’t get a double bottom off of this start, then we may actually be done going down but it sure doesn’t look likely at the moment."

Tuesday morning was easy to predict as we expected to re-test our lower levels and we did.  I was liking the idea of picking up the SMHs as they fell that morning and that index made a fabulous comeback on Friday.  At the end of the Tuesday morning post I said: "I would not be surprised to see a little panic selling around the testimony but that may be good if it moves us into the "acceptance" stage of grieving for the death of capitalism in America as Paulson moves this country as far towards Socialism as it has ever been in its history but, like the man says – we have no choice."  That was pretty much how it played out but the testimony lasted for 2 days followed by a little incident with WM on Thursday night that gave us, hopefully, a final test of the lows.

My general comment to members as the testimony began was: "Other than the same speculative calls we looked at yesterday, I don’t think I’d be looking to jump in too bullish ahead of the testimony."  At 12:49 that day I decided a good rule of thumb would be: "Still lots of time to come back though so I wouldn’t get too excited on the short side unless we break S&P 1,200, then that can be a nice line to add puts and get out if we cross back up."  That pretty much summed up what happened with the S&P for the week as we were up and down around that line all week.  Listening to the Senate hearings at 1:32 I pointed out: "OK, senators using the word frightened and panic is NOT good!"

We got some positive noises from Dodd at the close of testimony and we did a little bit of bottom fishing on Tuesday afternoon but the finish was very disappointing and I said at 3:43: "Long or short you just have to take profits quick the way things are trading.  Lots of opportunities on oversolds and overboughts but nothing lasts more than a few hours and you feel like a kamikazie pilot sticking with a position…"

Tuesday evening we got the good news that Buffett was investing in GS and I was very wrong to think that would be good news for WB and WM as well.  On Wednesday morning in the main post I noted:  "We are still on shaky ground" and we kept a sharp eye on the Big Chart levels we had laid out the night before, hoping to find SOMETHING that looked like a floor.  SPWR gapped up too fast for the morning play but selling the Oct $95 calls for $10 that morning was a great idea as they dropped to $3.35 at Friday's close. 

Wednesday we looked at a RIMM butterfly ahead of earnings that only lost $2 so far despite a 25% drop in the stock, this is a good play to review and we will follow through on it as a great example of how butterflies can be of great value in hectic markets.  I will do a write-up on this trade similar to last week's SKF butterfly.  Also note that each week we are adding long-term trade ideas under the Virtual Portfolio Tab.  In the Wednesday Wrap-Up I was happy with the progress I saw being made in Congress but we kept a "wait and see" attitude for Thursday.

Thursday morning GE lowered guidance and I considered that a huge buying opportunity as investors over-reacted to the generally expected news and those trade ideas worked out great already.   I concluded the morning comments saying: "It’s all about what Congress does this week.  We may indeed have had our Buffett Bottom this week at 10,800 on the Dow and 20 on the XLF but it’s going to be tough to go too long into the weekend without something signed, sealed and delivered that makes some serious progress towards improving the outlook of the financial sector.  So far, every rally has been sold into as the inability to take offsetting short positions has turned everybody into day traders."

At 10:40 on Thursday I said: "WM $2.50s are .65 and you can sell the $4s for .35 so that’s .30 on a possible $1.50 payoff if the package comes out favorable to them.  I can’t believe that they are putting together a $700Bn bail-out that’s going to let the nation’s biggest bank fail, that would be truly stupid!"  Well, unfortunately I was dead wrong and our government can be that stupid as JPM was given another deal of the century, being handed over WM's seized assets for less than one penny on the dollar WITHOUT having to assume most of the liabilities – AMAZING!

At 1:56.with the Dow still over 11,100 I got nervous and said: "Sounds like the bailout is only $250Bn at first and subject to approval going forward, good time to cover some financials.  Qs got harsh rejection at 42."  That was confirmed at 2:22 when I noted: "SKFs flying again, something is going around that says things are not good again."  At the end of Thursday's trading we got bad news from the White House, about WM and poor earnings from RIMM – it's amazing we weren't down 300+ on Friday morning!

Friday was "Deal Or No Deal" day for the markets and it does look like something will get done.  Whether or not it will be enough to help remains a mystery.  I pointed out a lot of good global meltdown hedges, both in the morning post and in Friday's member chat but, right at 9:05 am I said about them: "I added cover plays at the bottom but be careful, I still think it’s possible that they present a plan by EOD or the weekend." 

That was how we spent the day until we caught the turn up at 1:11.  At 1:24 I said: "VIX still high.  XLF held $20 yet again.  C coming on strong now – big change in enthusiasm."  That is how we are spending the weekend- hopeful but weary.  We looked at a few put ideas in the financials on the way up in the afternoon as we had been a little bullish going into that rally and a little balance goes a long way in this market.   We also found some very good positive plays on NYX, FXP puts and Russell calls as things could certainly go either way.

My biggest fear is that they fire this huge gun and nothing happens – confidence is not restored and the sell-off continues.  WB is still on shaky ground (although maybe merging with C) as are NCC and dozens of other banks and, if the bail-out plan is not comprehensive enough, we may still get downgrades from ratings agencies that once again cause spiraling capital shortfalls in banks that have too much debt exposure.  Hopefuly that won't happen and the plan will work but – stay tuned, it's going to be wild!