Weekend Wrap-Up

Are we climbing the proverbial wall of worry?

Perhaps it is just, as I had teased our resident bear Matt back on April 16th, "The Squeezing of the Shorts."  600 Dow points later, I got my own shorts squeezed, both Wednesday and Friday with Wednesday's plays ultimately working out and Friday's not so much so far as we went to mainly cash but day-traded what we felt were overbought conditions.  The wall of worry I see, it the amazingly negative sentiment that permeates the blogosphere as those who have not learned to switch off their brains are getting trampled by those more in touch with their animal (bull, of course) instincts.

Market Club's Adam Hewison does a good job reflecting this conundrum in yesterday's S&P chart review, as he discusses the difference between the technical and fundamental view of the S&P.  Even the technical guys are perplexed, as evidenced by Corey's (Afraid to Trade) Elliot Wave Analysis, which has 3 different interpretations of the same S&P chart.  Even the MSM is conflicted with the front page of today's WSJ spinning "Jobless Rate Rises to 8.9% BUT Pace of Losses Ease" and "Banks WON Concessions on Tests."  Won is such a nice word but it's very funny that essentially the same article on the AP wire carried the headline: "Accounting Tricks Boost Bank Profits."

This is why, for the first time in a long time, I called for cash.  We had a very nice run and NO ONE has any idea what will happen next week but what we do know is the bears are getting slaughtered!  Logic screams that we are due for a correction but logic has had no place in these markets for quite some time, certainly not since we skipped that whole consolidation thing after the one minor (300 point) correction on April 20th as we zoomed back from 7,800 to just shy of 8,600 in 3 wild weeks.

Yes 8,650 was our target for the end of May but there was an expectation that there would be a pretty good correction BEFORE we got into our 5% range of 8,200 to 9,100.  We paused at 8,200 for just 3 days (around 4/30) before jamming right up to what is effectively our midpoint.  Will we continue to jam up to 9,100 next week without even bothering to come back to retest 8,200? 

The way things are going it's possible but we do need to be mindful of the 5% rule.  We did get an adequate pullback from 8,000 at the end of April to establish 7,500 as a firm floor and we could possibly argue that, given the establishment of 7,500, that the run from there to 8,131 (8%) on the 17th (the day I after teased Matt) the pullback to 7,875 (5% over 7,500) that followed also established a firm floor.  Now we are up close to 8.8% over that last level with 8,650 making a neat 10% gain off the last 5% line with our goal in site.  Hitting your goals early is not always a good thing – just ask the guy who crashed a multi-Billion Dollar probe into Mars a few year ago!  Coming off 7,875 I expect a retest of 8,268 (5%) at some point, we zoomed through it Monday without looking back and we'll see if we are that lucky next week.  Still, we could keep going higher – I just don't know.  That's why I like cash at the moment, it's flexible!

We were happy in last weekend's wrap-up to be hitting our targets but it was coming on very low volume and that kept us suspicious.  The very positive S&P results were a good thing and we made it through yet another week without any major disappointments.  In member chat over the weekend I pointed out to the bears that we may never have a pullback in the financials saying: "You must accept the possibility that the people who sold XLF from $10 to $6 were IDIOTS and we may just be fresh out…"   XLF added another 25% for the week but now we've begun to question which side the idiots are on as people seem to have gone just a bit overboard celebrating the Financials "recovery."

Monday morning the futures were flying as China showed the world how to deal with the flu (just lock up all the Mexicans).  Although I was generally incredulous of the move, I did warn that: "We are just as likely to test 9,100 as we are 7,600" but I was unable to take my own advice and "just ride the waves" as the fundamentals were just not there at all even though in Monday's 10:25 Member Alert I did point out correctly: "If you don't start seeing rejections at key levels you may not see them at all." 

We took some qucik stop outs trying to pick a top early in the morning, getting stopped out of DIA puts and having to roll FSLR puts up and up (as planned) but it wasn't the easy win we thought it would be.  Of course you don't have to beat us with a stick too many times before we see the lights and we went with DIA $85 calls at $1.23 as a 2x cover to the puts in the next Alert (11:05).  We flipped in and out of too many dia positions to recount this week though as we tried to have some balance to the wild ups and downs.  We did a FAZ spread that went very badly (in for net $2.20, now .90, down 60%) but we have since rolled it as financial cover.  A bullish FXP vertical spread worked until it didn't and another spread was voided as the Hang Seng held 16,000 but we went back into longer FXP calls later in the week.  GOOG $390 puts also stopped us out – a real shame as we got a great dip the next morrning.

We were taking the puts on against our plan to begin cashing out our longs (we were 60% bullish as of the morning covers) as I just felt we were toppy and I did apologize for the conflicting signals in our 12:13 Alert.  It was my inability to follow my own advice and turn off my brain that kept me mostly on the sidelines for the next 150-point move. FAS puts stopped us right out and selling FAZ $7.50 puts at 2:09 buried those of us who stuck with the play.  As I said in that post: "I’m still leaning down but nothing is leaning with me yet."

Yes the only "gravity lesson" we should have taken from the cartoon is the fact that things can go over a cliff and just stay there as if fundamentals don't matter at all.  In our Big Chart Review on Tuesday Morning we decided to focus on our 40% levels (Dow 8,412, S&P 945, Nas 1,716, NYSE 6,232 and Russell 513) and that was our guide for the rest of the week.  As I said in that post: "…we are still waiting for the S&P (2.5% more) and the NYSE (7.5% more) to confirm" and you can see on this chart that we got exactly the outperformance I expected out of those two indexs.  VERY bullish and I missed it as I got too wrapped up in the fundamentals (bad brain!).

Our first plays of the day on Tuesday were all bearish, OIH $90 puts for .95 that quickly shot up to$1.25, FAZ $7.50 puts sold at $1.75 are now $3.05 and had to be rolled along to July $6 puts at $2.50 so, effectively we sold those at net $1.10.  Our next escape plan (aside from covering with FAS puts sold) is to split the puts into a credit strangle as the July $4 puts and calls are also $2.50 at the moment.  FSLR May $170 puts disappointed us again and we gave up on them.  Still too bearish we went with a 1/2 cover on our UNG leaps from the $100K Virtual Portfolio as they jumped 20% again since (bad, bad brain!).  I put a few companies on overbought watch but we gave up on new trades, resigning ourselves to just seeing how far the rally would run.

I updated the $100KP Tuesday evening after more brain usage and decided to pull the plug on many of our bullish plays.  It may have been a little early but it did put us into great position to grab the bank plays I laid out on Friday morning's special post.  Wednesday morning we expected a choppy ride and we got it and I did feel very good about our goal of cashing out longs that day as well as rolling up our shorts, anticipating a sell-off on Thursday but it wasn't as clever as it seems since we were mainly salvaging the put plays we missed on Tuesday.

The banks stress test results were leaked and that screwed up all my week's assumptions as we were expecting a sell-off into the test and relief after the results.  Instead we got the relief first followed by a very mild sell-off and then more relief (for now).  We knew the ADP report would give us a big boost but my first Alert (9:32) after the market opened was: "I still like my short ideas from yesterday: CAT looking scary too, BIDU, GOOG, GS, HOV, LVS ($11.25!), POT, AMZN, RIMM (oh wait, I forgot they invented a phone!), TM, UYG (testing $4), WFR (and I love them) and XLF ($11.70 – almost as good as LVS)."  Other than UYG and XLF, that list was 100% successful when we cashed out our shorts the next day.

Once again we had winning short plays on DIA and OIH puts and at 9:52.  Tight stops (9:52) actually kept us from losing more than a nickel on the XLF shorts.  We stayed 1/2 covered on our long DIA puts and they took a beating and shorting USO stopped us out the next morning.   We took a hedged entry on FXP at $12.45/13.72 but, as I you can tell, mainly we were just pressing bets from earlier in the week as we were mainly trying to get to cash.   A long SKF buy/write was taken at $23.35/29.17 and we'll see how that plays out.  We were getting worried at 12:15 as I said: "This is very frustrating as I was very close to stopping 1/2 out even on the bear side but just missed my triggers.  Now back to hoping we sell off."

I had mentioned the hidden inflation in Tuesday morning's post and at 12:31 on Wednesday I cited dollar weakness as causing the trouble and, as you can see from this chart, the dollar was in the early stage of a major melt-down on Wednesday which goes a long way to explaining the market's irrational move up.  The 1.5% rise in stocks we saw into Friday's close was really nothing more than the 1.5% drop in the value of the dollars we buy stocks with. 

After a very rough start we caught a huge break as VNO went up to a ridiculous $54 at 3pm and we sold the naked June $55s for $4.15 which dropped below $2 the next day.  After hours we hit some winning trade ideas on FAZ and DDM and in Thursday morning we took advantage of the spike saying: "Our main plan is to cash out our long plays and hope we make something on the short side but we’ll have to let that go as we move to cash for the weekend."

My image for Thursday morning (left) summed up our expectations for the day and we were not disappointed as the Dow opened at 8,565 and dropped almost 200 points on the day.  It was a very dull day as we made no new trades – our bullish plays were cashed as planned and we pressed the remaining puts as planned and all we could do was watch until my 1:47 Alert titled "Not Being Greedy With May Shorts" in which I said: "At this point, with our put plays all back in black – we need to start stopping out if they get the market back over 8,400 (our goal was to get to cash and this is a gift)."  I set a downside target of 8,360, which we hit on the button at 3:35. 

My comment for a position into Thursday's close was "CASH overnight unless you are a psychic" as we wanted to have dry powder ready for the stress tests.  After looking them over and deciding we could afford to move bullish on the financials, I made a special post for members called "Stress-Free Investing In Stress-Tested Banks" with targets for putting more of our $100K Virtual Portfolio money to work. 

Friday morning, the banks took off so fast that some of the trades got away from us but we did catch a few.  With our hedged entries, it's the net that matters so the stock can be up or down a bit but, as long as the value of the calls and puts we sell keeps up, we can still get our entries.   We wanted to be flexible and I was glad we cashed out on Friday was we got, what I considered a very silly gap up to 8,550 in the morning and our morning strategy was to use the opportunity to press and roll our June puts as I decided it was finally time to put our brains back to good use.

Because we were mainly in cash with nothing left to protect, this is about as bearish as we've been in quite some time.  Oil was ridiculous over $58 a barrel against the fundamentals of a poor outlook from both TM and HMC.  I mean, come on people – we know that F, GM and Chrysler are in big trouble and if that doesn't help TM and HMC then aren't we probably still in a recession?  And why are car companies having trouble?   Because people are cutting back on driving for one thing.  So, how is it, with oil inventories at 20-year highs and OPEC sitting on 6Mb a day of spare production capacity, that we are now paying more for oil than in the economic boom Q4 '06 and Q1 '07 and up 20% in 3 weeks?  The dollar, while dropping, is still at the same level as it was then (84). 

Our first put of the day was DIA puts right at 9:46.  My trade idea in the morning alert was: "The easiest day trade is the DIA $82 puts .40 I really like them and happy to buy more at .30 as a gamble that the Dow drops 100 between now and Monday.  Europe is very strong and we may go up for a while, hopefully I’ll see the turn coming but I think we can stay up until they close so maybe a push back to yesterday’s highs at 8,560 and that’s the place to start taking a short stand."  We didn't quite make 8,600 but the game plan went very well.  We followed that right up with QID June $36 calls but they didn't hit our buy target, too greedy at $2.50.

FAZ was hurting a lot of us as it fell to $4.50 and we targeted selling the June $6 puts at $1.80 (now $2.20) and the July $4 calls at $1.75, now $1.48 so we'll have to wait and see if we do get that bank pullback.  I had said in our banking post that I saw more banks I wanted to short than buy and that should, EVENTUALLY, give us some pullback in that sector.  FSLR gave us a very quick 100%, 45-minute gain in that same Alert and we followed up by going in and out of DIA $84 puts, which ended up as the $85 puts for + .40  which we went into the weekend with at net $1.33 per the rolling plan from the morning.  XOM was another put candidate and we took the $70 puts for $1 and a second round at .85 and we were very close to stopping out in the afternoon and are holding these on faith.

FXPs, which I had been liking all week, got even cheaper and the June $12.50s at $3.80 were too hard to resist.  COP $46 puts at .85 dropped to .56 and we spent .45 more to roll up to the $47 puts, now .99 (down 24%) so Warren Buffet's gain was our pain on that one so far.  With the Dow up at 8,532 was undaunted at 12:26 and said to members: "I’m pretty much adding to everything up here (the above put plays)."  The only positive play of the day was a hedged entry on DRYS at $4.90/6.20 as they dipped down in the afternoon as we do like them long-term.  While we were incredulous of the move up and especially about the complacency shown by investors into the weekend, we kept our positions light – just in case we have another gap higher on Monday but 8,650 is a line we're willing to bet against crossing without a good pullback.  If we're wrong – then 9,100 will be a line we're willing to bet against crossing….

So not our best week as we went bearish too early but the 3rd month of the 3,000-point rally finally got to me and I just couldn't ignore the relentless pull of gravity on the markets as they refuse to be tested.  Just like the Fianacials, you can put off the tests and you can change the parameters of the test and you can even cheat when you take the test but YOU WILL BE TESTED.  Why should the broader markets be any different?