I promised a wild week on Monday and we were not disappointed!
As planned in Thursday morning's post, we went into the weekend bearish, just 1/2 covered with the DIA May $79 puts at $2.71 (now $1.79) against June $82 puts that have fallen from $6 to $5 so all is well (down net .50 for the week as it was 1/2 covered) and we have rolled along to Sept $83 puts anyway and our 1/2 covers are now officially the May $81 puts. Always we are looking to protect ourselves against a major drop. Since the May $81 puts can be rolled to 2x the May $77 puts, we have plenty of leeway in that position. That is the idea of a good virtual portfolio cover using our Mattress Play Strategy – you want it to work when you need it to but not lose too much money when things go the other way.
My 3:37 comment to members on April 9th was: "Very likely we’ll regret not being more bullish as Asia could fly up on us and Europe could kick off Monday in a really good mood and we could gap right up to my 8,200 target for this rally but I never thought we’d hit it without any major pullback." Asia did, in fact, gap open but not until Tuesday (I didn't know Monday was closed) with the Hang Seng jumping 300 points at the open and finishing the day up 700 points. Without an Asia boost on Monday, Europe was more restrained and we all flatlined for the day, justifying our slightly bearish stance.
Despite thinking the markets were topping out, the question featured in Dr. Jeremy Seigel's article was the topic of the weekend: "Is The S&P Valued Too Low?" After one week of earnings, I'm still leaning to the "Yes" camp but that would be too low for THIS economy – the more relevant question is: Will the economy hold on at these levels and recover and that question is still very much up in the air. Also last weekend, we began a new series on "Setting Up a Hedged Virtual Portfolio," which I just finished a follow-up post to this afternoon. John Mauldin's "Is That Recovery We See" took the worrying economic side of our debate and if you re-read those two articles now, it's easy to see why Wall Street sent such a mixed set of signals this week.
We knew what was in store for us Monday morning as I titled that post "Strapping In For a Wild Week" and you think we'd be used to down 200, then up 250 in 5 days. In fact, the action was so tame compared to what we've been getting that the VIX fell 11% on the week. Volatility? What volatility?
Is up the new down? Are we going to see week after week of relentless gains or were we right in calling a short-term top here at 8,200? As I had said in Monday's post, our them of the week was "Getting Worse More Slowly" and this week was a true celebration of market mediocrity. We did a slow burn to the target levels I set right at the end of that post: Dow 7,900 (low 7,840), S&P 833 (835), Nasdaq 1,580 (1,599), NYSE 5,225 (5,273) and Russell 444 (461) and then we did pop up to exactly test my 8,200 target, as well as the 875 mark I set for the S&P in Tuesday's post, so you'd think I'd be happy but I'm just not felling it yet – it still feels very fake and unsustainable, especially when 3 of my targets get hit on the nose like that (these are levels from last month!). It means it's just machines moving the markets and machines don't have changes of sentiment, they'll be trading the reverse as fast as you can flip 011000100111010101111001 to 01110011011001010110110001101100…
Our first trade idea Monday was a huge winner, the MA $170 puts at $3.45, which finished the week at $7.45 if you slept through them going to $12 twice. May $165 puts were the alternative and they did hit our $7 entry before also hitting $12 and higher but at least they held $12 for the week. BIDU May $175 puts at $10.50 had to be the worst trade of the week as that stock did come down but then recovered well and hasn't looked back. The play there was to roll up $5 anytime it cost $1.50 and that puts us in the $195 puts, now $11.15 for net $16.50 (down 30%) but we still have faith in that one. We also went short on FSLR, but we spread that and it worked out perfectly as we're right back where we started from with the putters expiring worthless. .
Selling FAS AND FAZ May $9 puts for a total of $4.30 is working well so far. In theory, only one should be put to you at net $4.70, not a bad entry and you're automatically playing for the bounce! I'll repeat my Monday comment on the financials to bearish members here as it's an important thing to consider: It’s possible there will be no flush in financials. It’s possible that 90% off was overshooting the mark by 20% and that they will hold 30% of their prior values. It’s possible that 50% is the right number and they have another 50% to gain off 30% just to get there. When I buy GS or even AIG, I’m buying them based on what they will earn for me next year and in the next 5 years. I don’t really give a damn how much they lost in 2008 or even last Q if I am fairly certain they won’t do it again. I find it interesting that the same bears who are so quick to tell the bulls that the glory days are in the past and it’s a new market are the same ones that cling to the losses of last year and refuse to believe any evidence that perhaps it was a one-time "black swan" event that will not repeat. I’m not saying that’s what’s going to happen but I certainly would caution against knee-jerk shorting of financials on every run as if nothing could possibly justify a recovery.
That being said I did also like the idea of selling naked SRS May $26 puts, now $4 as that did seem like a fair bottom for the real estate ultra-short but, the way commercial real estate climbed last week, we'll have to see. I called Tuesday "Toppy Tuesday Morning" and I was short-term right as we did plunge for a day. I reiterated that morning: "8,200 was the most I see us going now and I’ve had no reason to change that view after one week of earnings" and I also explained the completion of the V we were forming on the S&P stopped at 875 (and that's right where they stopped on Friday). Although the data we were seeing was making us skeptical, I said at 8:25: "I’m getting the feeling we are back into a "Meatballs Rally" like we had back in the fall of ‘07 where, no matter what the fundamentals – "IT JUST DOESN’T MATTER." Of course, my most timely call of the week was that morning, when I said: " GGP is facing a dangerous end-game with bondholders" – they went BK 24 hours later…
We were in a great mood Tuesday morning as our long-standing DNDN plays finally hit the jackpot but my call to sell into the rally was the right one and that was the high for the week at $22. Just minutes after hitting that high, at 10:52, my first trade idea for the day was shorting DNDN 2 ways: Selling the May $20 calls for $4.85 with a hedge to buy the stock if they cross over never came close to being a worry and those calls finished the week at $2.87 but we took them off the table at $2.75 after just one hour. The Aug $12.50 puts were $2.45 and we originally were looking for $4 but those never hit, now back to $2.81 and we'll either kill them or use them as a hedge on a positive play next week.
We had a nice combo trade on GE ahead of earnings on Tues afternoon that worked perfectly, my attitude on that trade was "Buffett nailed it lending to GS, do you think he made a huge mistake with GE or perhaps they are going to post solid numbers?" Also ahead of earnings we did some complex spreads on GOOG, which worked quite well playing the pre-earnings volatility. FCX was our last short of the day, the May $43 puts at $3.12 but those never made 20% and are now $2.87. Wednesday could not have gone any better if we'd planned it – and we did! We got our level test at the bell, held it and, by 11:19 I was sending out alerts to cash out the June DIA puts and move back to September $83 puts (less delta), selling the Apr $79 puts for $1. It's the little "$1 here, $1 there" wins that make those plays! As early as our 9:51 alert we had already called a bottom with a hedged play on FAS at $7.68 – like I said, could not have gone better…
I was on such a roll Wednesday morning, I even called the "shocking" oil build right but that didn't stop the NYMEX from rallying. A bull call spread of the GOOG May $360 calls and May $370 calls for $5.15 was what I called: "The best, simple upside hedge play I see on GOOG" and that spread looks pretty safe at $7.70 already but, of course, a stop should be set at a 40% gain if it pulls back. Members should go back and look at that trade as we'll be using that logic a lot to make earnings plays. We did play oil down with the OIH May $80 puts, which we rolled up to the May $85 puts, now $3.60 and down 30% but we still like them as an earnings play. We sold the DIA Apr $79 puts yet again for $1 at 11:19 and sometimes I wonder why we bother doing anything else.
We were in quite the buying mood after holding our levels again and we did hedged entries on UAUA at $4.30/5.15, YRCW at $1.12/3.06 and also grabbed an LVS Jan vertical and sold the 2011 $2.50 puts for $1.12 (still there), which I really like because, if you have $1.25 in margin and get $1.12 in cash then it ties up just net .13 to make $1.12 in 18 months and you can put a stop at $1.50 to stop it from being a total loss if they dive again. It was still barely lunch so we were REALLY bullish with all these plays and, at 12:24 I said: "What I really like in URE is selling the June $3 puts for .70 and buying the June $2 puts for .23 so you are in for a .47 credit and effectively have URE put to you at net $2.53 as a worst case." That spread already dropped to .32 (up 25%), which is not bad for a couple of day's work!
Yet another GOOG spread at 1:20 but we didn't hit our target entry (too bad as the concept was sound!). We liked the BBook at 2:00 and we didn't buy into the headfake as only 3 of our 5 indexes crossed the lines we were watching. By 2:53 we were buying again with a buy/write on BTU and a great play on FAS that made a quick 50% into the close. RBS hedged at $5.93/6.72 was our last play of the day and they rocketed upi tp $9.82 on Friday (we're capped out at $7.50). We flipped bearish into the "stick save" close, of course.
That caution was rewarded on Thursday as the market gave up a quick 100 points in the first hour of trading on the usual jobs losses but the Philly Fed surprised to the upside and that was all it took to set off a rally, breaking the pattern we had been following all week (mirroring the prior week). I had set levels in the morning post and, although we were bearish, I cautioned Members in a 10:02 Alert: "If we hold them, then you have to respect the rally." We picked the QQQQs at 33 as a key indicator of a breakout and we crossed that at 2:20 but AAPL gave us the leading indicator we were looking for as they crossed $120 at 12:35 and never looked back. It was confusing as the Philly Fed was very different than what we had just read in the Beige Book but that's why I cautioned Members: "Let's just watch our levels and try not to outhink things." Thinking can be very dangerous in this market!
At 10:54, during the course of writing the comment I went from bearish to more bullish, leading with "I think we're in an overall downtrend" but finishing, 5 items later, with: "If however, only the Dow fails and the others hold, we should take a turn up in the Dow seriously as it's a silly index and really doesn't count as much as the others so if it comes back without the others failing, then this was a false sell-off. So 7,980 is a big deal as that's where the Dow needs to bounce before it pulls the other two below the line…" Six minutes later, the Dow dipped right below that mark but held our levels and we were off to the races once again.
Our long, sad march to roll up our BIDU puts continued that morning as we crossed into the $190 puts at net $14.90, DIA $80 puts were a good quickie at the open but GOOG $370 puts stopped us out with a quick 10% loss. After being burned on our shorts, by 11:42 I had really shifted my attitude and I said to members: "I think it’s very possible this is a pre-rally shake-out. I think the shorts were piling on and there are tons of puts taken against the market (VIX was very stubbornly high while the market topped out) and that this is just a good way to get rid of callers today and sell some more puts before ripping the market back up. Don’t forget it’s the weekly candles that count and we only need to close up 1 point for the week to keep the V looking good. Volume this morning is nothing so you can’t read much into this action so far and we got that bounce right on the mark at 7,980 so, as I said, you have to respect the rally." At the time we made a plan to flip more bullish by fully covering our Sept DIA puts with May $81 puts if we crossed our breakouts.
We still went in and out of quickie DIA plays as they were fun way's to make a quick dime and we added a CBS buy/write at $3.77/4.39 and those are looking very safe now as CBS jumped to $6.70 the next day and we only need $5 to max out our gains. Another nice thing about making little quickie plays on DIA is it lets us know when things change and, at 12:54, we declared the DIA Apr $80 put play to be well and truly dead as it looked pretty obvious the next move would be higher. Just ahead of the breakout we did another GE play, hedging in at $9/10, BAC at $7.25/8.13 and C at $1.70/2.85, selling FAZ puts for additional protection. All working great so far…
I laid out the logic for a long-term S&P hedge during trading that afternoon but that has been greatly elaborated on in the comment section of this post already. That afternoon had it all as the Transports and SOX led us higher and we caught a sell-off in the bond market that let us know money was coming off the sidelines, signaling a real rally in the making but we did, once again, go 55% bearish (1/2 covered on the DIA puts) into the close – just in case! With just 10 minutes to go I had a trade idea for a GOOG earnings play that I detailed in Friday's post so I won't bother here, that was a huge winner the next day as we hit our target and played both ends perfectly.
After the bell on Thursday, I put up hedge plays for DRYS and ELN for the next day. DRYS went straight up and ELN went straight down but we'll take them both. Also that evening, once we had a chance to calmly reflect, I had a chance to catch up on some reading and reached the conclusion, at 11:13 pm, that we were back to being irrationally exuberant and, despite our moratorium on thinking, that set the tone for trading on Friday morning. We liked GE's earnings but not so much C's and neither did the NYTimes this weekend, calling the $1.6Bn profit "fuzzy math."
Still we were doggedly optimistic and I said in the morning post: "We still haven’t made our high-hopes target of 8,200 for the week and we hope to hold 8,200 into the close but there’s nothing I can imagine happening in the next 7 hours that will make us go less than 55% bearish into the weekend" and that pretty much sums up the day. Once again the levels saved us from being too bearish as they held up as I had said in the post: "If it’s a real rally, we’re going to hold Dow 8,100, Nasdaq 1,650, S&P 855, NYSE 5,400 and Russell 465 – anything less than this on 2 of the 5 levels will put us 60% bearish." Nonetheless, at 3:43 I said to Members: "DIA – 1/2 cover into the close it is then. I wanted to go more bearish but the levels won’t let me!"
As it was a crazy expiration day we had tons of fun with day trades, too many to detail here and nothing to be learned from them as it's a once-a-month event on expiration day but we milked those GOOG puts like champs as we shorted them right out of the gate and then several more times that day and cashed in our long calls at the open because we "ALWAYS sell into the initial excitement."
We still took new hedged entries on ELN, SPWR and DNDN and went for another round of MA puts as they spiked up at 2:49, which was almost exactly the high of the day. Overall, it was a great week, we hardly missed a play and we kept a hedged selection so we're still ready for anything next week. We have no major data but tons of earnings and this marks the nend of the 6-week up leg of the V we needed for symmetry but now what? I'm very concerned about the new EPA decision to classify rising carbon-dioxide emissions as a hazard to human health (finally) as it can be a catalyst to cause a massive sell-off in carbon-producing industrials.
There will be hundreds of earnings reports next week and we're itching to trade them but still mainly with hedges as we're not so confident as to say who lives and who dies before the lions are released and the battle is waged. Still – let the games begin!
