Wrap-Up - Too Bearish or Just too Early?

Well, we've been here before.

Once again the market has staged a spectacular recovery on virtually no volume and mixed news. While we went into last weekend just a little bit bearish (about 55%), this Friday the market topped out about 150 points higher than last Friday, closer to the top of our range so we went much more bearish on Friday, perhaps too bearish considering this was the best Friday finish since Nov 6th and we haven't had a down Monday since October 26th.

Our plays this week turned very bearish to balance out the more bullish set we took in the first week of the month (see last week's Wrap-Up). Almost all of our bullish trade ideas have already made 20% and some are way over our goals as we were able to cash out a lot more winning bullish plays and press our bearish plays, turning the $100K Virtual Portfolio extremely bearish and twice as invested as last week. Big winners from the last wrap-up included:

DIA $104 puts sold at $2.25, now $.55 – up 75%
DIA $103 puts sold at $1.65, now .30 – up 81%
SONC Jan $10 puts sold for .85, now .55 – up 35%
DIA $104 puts sold at $2.55, now $55 – up 78%
BAX artificial buy/write (too complicated to summarize) – over goal already!
AMZN Dec $150 calls sold at $4, now .10 – up 98%
USO Dec $39 puts at .82, now $3.50 – up 326%
FXP Dec $8 puts sold for .70, up 64%
OIH Dec $120 calls sold at $3.25, now .27 – up 92%
AMZN Jan $140/135 bear put spread at $2, now $3.60 – up 80%
IWM $60 puts sold for $1.30, now .72 – up 44%
NSH June buy/write at $18/20.25, now $25.86 – ahead of goal
AMZN Dec $145 puts sold at $5 (average), now .25 – up 85%
AMZN Dec $150 calls sold at $3, now .10 – up 96%
TBT June $42/26 bull call spread at $1.80, now $2.60 – up 44%
TBT June $42 puts sold for $2.15, now $1.30 – up 40% (pair trade)
SRS Dec $8 puts sold for .42, now .17 – up 60%
FXP Jan $6 calls at $1.40, now $2.10 – up 50%
IYR Dec $46 calls sold for .85, now .20 – up 76%
USD Dec $30 calls sold for $1.80, still $1.80 – up 43%
DIA Dec $104 puts sold at $1.60, now .55 – up 65%

Of course we had a few trades from that week that went bad too as well as many that are still in progress. Our big misses were:

SRS at $8.50, now $8.14 – down 4%
X Dec $45 calls sold for $1.86, now $2.50 – up 34%
AGU Dec $60 calls sold at $1.85, now $3.40 – down 83%
VIX Dec $22.50/24 bull call spread at .45, now .25 – down 44%
UGL Dec $49/50 bull call spread at .45, now .20 – down 55%

So, what did we do right and what did we do wrong? Keep in mind we're ignoring the use of sensible stops when we do these reviews to simply track the performance of the pick. The key is having balance and we try to keep a variety of bullish and bearish trade ideas so we don't get blown out one side or the other. Shorting AMZN multiple times was our play of that week as we took advantage of a Cramer pump, something we did again this week, shorting RTH but no big payoff yet.

I wouldn't call SRS a loser but we only had a few so I listed them. It was one of our few stock plays and we do like them long-term so we wait patiently. X really took off on us despite (or maybe becuase of) the tarrif war with China and the collapse of other commodities. AGU was bad to us last week but much better behaved this week, where we shorted them again at $65. UGL was, of course, a counter to our very gold-bearish GLL plays, which worked out just fine.

This week, we onced again mixed it up nicely but had far fewer trades than the 80 of the previous two weeks, as we got less and less confident with what the market is doing and more and more interested in sticking with cash in this very silly market:

Monday Market Movement

We started this week off in confusion as I said, right at the top of Monday's post, that we could go either way from the middle of our range. As it turns out, we went both ways – down to or 10,250 target for the Dow (25% up from the July base) and back to the top of our range at 10,500 at Friday's peak. The other 25% watch levels I set up in Monday's post were S&P 1,100, Nas 2,187, NYSE 7,200 and Russell 600 were all broken on Wednesday and all but the NYSE have recovered on Friday. This Monday will be easy as we can just reuse all of last week's levels.

What we expected for the week is pretty much what happened, as I said at the close of Monday's morning post: "Volume should be light so anything can happen but we’ll be watching copper at the $3.20 line and oil at $75 to see if things are really breaking down from a demand perspective. As discussed in the Wrap-Up, we went into the weekend still loaded for bear but, if the levels do hold – we’re going to have to respect that and we’ll add some more upside plays, mainly to cover as we’re not flipping until we have clear break-outs." Obviously, not much has changed.

IYT Dec $73 puts at .80, now .45 – down 44%
ABX Jan $37.50 puts sold short at $1.15, now $1.45 – down 26%
PWR 2011 $12.50/Feb $17.50 (1/2 cover) at net $6, now $6.30 – up 5%
POT Dec $125/120 bear puts spread at $2.50, now $3.70 – up 48%
DIA $103 puts at .70, closed at .95 – up 36%
CEPH 2011 $60/Jan $60 (2/3 cover) at net $6.35, now $7.10 – up 12%
BAC 2011 $10/17.50 bull call spread at net $4.30, now $3.35 – up 22%

It was a flat day for the markets, the worst Monday we had had in some time but still green. We went into the close fairly neutral and missed some of the fun of the next day's drop but we had so many bearish positions already, it wasn't time to get too daring. Based on the stick-save into the close, we expected a boost in the futures but my 3:44 comment to Members was: "not expecting a major global meltdown tomorrow (but, then again, we never actually expect them do we?)."

Test Tuesday – Things Start To Go Wrong

100 people in Baghdad were killed in a car bombing and German Industrial Production numbers missed and fears of Dubai ran rampant while Moody's said both the US and the UK were in danger of losing their Aaa ratings on the same day Fitch dropped Greece to BBB+. All this Bernanke summarized in his speech at the Washington Economic Club as "formidable headwinds."

I predicted we'd open at 10,320 and we did but we bounced right of 10,250 so we couldn't get too bearish despite MCD reporting a 0.6% drop in sales in November and the ICSC Retail Sales Report shoing a 1.3% drop for the prior week.

SRS at $8, now $8.14 – up 2%
NYX 2012 $25/Mar $25 at net $3.30, still $3.30 – even
BA 2012 $50/65 bull call spread at $6, now $5.85 – down 3%
BA 2012 $40 puts sold for $5, now $5.20 – down 4% (pair trade)
DIA $103 puts sold at $1.30, now .30 – up 77%
ABX Jan $37.50s sold at $1.20, now $1.45, down 20%
DIA Dec $103 calls at $1.12, now $2.25 – up 100%
SRS Jan $8 puts sold at .62, now .57 – up 8%
TIVO artificial buy/write (too complicated to summarize) – on target
USU Apr buy/write at $2.75/3.38 – on track
UGL Jan $44/47 bull call spread at $1.40, now $1.20 – down 14%

Here's where we made our big mistake for the week. We expected a bounce off the 2.5% market drop to Dow 10,285, S&P 1,090, Nas 2,158, NYSE 7,095 and RUT 590 and at 2:30 I said to Members "I think this is the blow-off bottom of the W that takes us higher" and at 3:09 I said "It’s really just a percentage game. We’ve held these levels since early November and I’m not convinced that we have enough bad news to make today the day we break it. Today makes 4 out of 5 down days (and yesterday was hardly an up one) and that hasn’t happened since 10/30 (where we gapped up the next day) and before that 10/1 – also the bottom of a sell-off Between that, the 2.5% rule and the 25% lines, the odds are very much in Mr Stick’s favor – if not today then tomorrow." So we should have played it perfectly but we didn't.

Which Way Wednesday – Hedging for Disaster

While we did expect a bounce for the day it was starting to feel like it was time to start hedging for some real downside. I pointed out that last time we felt the need for disaster hedges (last October) our levels were: Dow 10,650, S&P 1,135, Nasdaq 2,000, NYSE 7,400 and Russell 700 and our hedges worked out very well then, this time we went for 4 new ones to start with:

DXD Apr $26/33 bull call spread at $2.40, now $2.50 – up 4%
FAZ July $20/35 bull call spread at $2.90, now $2.90 – even
SDS March $38/50 bull call spread at $2.10, now $1.75 – down 17%
SMN Apr $11 calls at $1, now $1.15 – up 15%

We identified SDS as the riskiest trade at the time but it also has the biggest pay-off at 6:1 if we hit it. Notice that the DXD and FAZ are both doing their job, holding onto their value despite an almost 300-point run off Wednesday's open. Oddly enough, setting up disaster protection like this is step one in preparing us to go a bit more bullish IF we finally break over our levels but, at the moment, we are watching this chart of investor sentiment as my theory is we are currenly in the spot marked "Denial," where it will take very little to change that 87% bullish sentiment to "Fear," which may be followed by "Desperation, Panic, Capitulation and Depression."

Others may insist we are only in the early stages of coming out of "Depression" since March and that the better than 60% gains in the past 9 months are the beginning of a rally, not the top of one. I figure if we are really only half-way to the top, then we won't miss too much by being a little cautious here, at what just MIGHT be a top. As I said in the morning post: "Keep in mind that this morning we are playing for our bounces but by no means bullish overall. Goldman’s market goose of the day is to announce that there will be no Fed hike until 2012 so all aboard the free money express. Of course, someone should tell GS that the money train left the station a long time ago and, unless the Fed is going to start paying us to borrow money, rates aren’t going any lower."

DIA Dec $103 calls at $1, stopped at $1.15 – up 15%
AGU Dec $65 calls sold at $1, now .65 – up 35%
ORCL artificial buy/write (too complicated to summarize) – on target
BAC/2012 $10/Jan $16 spread at $6.49, now $6.45 – down 1%
FTR artificial buy/write (too complicated to summarize) – on target
AGU Dec 65 calls sold at $1.70, now .65, up 62%

That was it for the day. We had a big stick save into the close which seemed fake and we didn't top our bounce levels so, although our official stance was to 1/2 cover into the close (just 55% bearish), I went more aggressive on the $100K Virtual Portfolio and left it very bearish, which was a shame becuase we got the gap up we expected Wednesday morning the next day…

Foreclosure Thursday – The Stealth Stimulus

This is what threw me for the week. Jobless claims were UP 17,000 to 474,000, completely defying the supposed -11,000 NFP number for November we heard last week. Jobless claims have not gone below 450,000 for an entire year yet we are supposed to believe that 2M people must be GETTING jobs to offset the declines. I've spoken to a lot of people and I've read the ADP reports and not one person has talked about all the new people that they are training at work but that doesn't stop the market from going up on nothing in particular.

Aside from that, we were once again back up on a huge futures spike, and the Dow would be up 200 points over Wednesday's lows by by 9:35. I said to members at 10:55: "So I’m looking over positions and I’m not so bearish as I want to cash in short puts I’ve sold so I guess I’m thinking we do hold around 10,200 through next week – just hopefully at the lower end of the 10,200 to 10,500 range. We may not get a proper breakdown until January unless there is a huge catalyst. Look how JPM negates oil, Soros negates UK and Greece in one press release and Pimco negates Dubai buy spending 0.001% of their funds on some bonds. With 83% bullish sentiment, any idiocy is treated like great news." I decided to go for it (very bearish) in the $100KP but, of course, the regular member picks were more sensibly mixed:

DIA Dec $103 puts at .50, now .30 – down 40%
AGU Dec $65 puts sold at $1.70, now .65 – up 62% (can't say I didn't mention them enough!)
FCX $75 puts at .90, gave up at .90 – even
VZ 2012 $30/40 bull call spread at $3.50, still $3.50 – even
C 2011 $5 calls at .48, now .50 – up 4%
RTH Jan $90 puts sold for $1, now .80 – down 20%
OIH Dec $115 calls sold at $2.05, now $1.60 – up 22%
RIMM artificial buy/write (too complicated to summarize) – on target
USO Dec $36 puts at $1.10, now .95 – down 16%
IWM Dec $59 calls at $1.40, now $1.55 – up 11%
FCX Dec $75 puts at .70, done at .90 – up 29%
TBT 2011 $45/55 bull call spread at $3.30, now $3.95 – up 21%
TBT June $44 puts sold at $2.10, now $1.95 – up 7% (pair trade)

So, not a terrible day but more downs than usual as we thought we'd get a turn down that didn't come. The 30-year note auction at 1pm went terribly, with rates flying up to 4.52%, a huge move from the previous week and interest was very light. Once upon a time, this by itself would have sent the market down 300 points but we barely dipped below 10,400 before going back up and then again we were saved from that line into the close.

Familiar Friday Morning – Deja Vu All Over Again!

We've certainly been here before – the relentless toppy market, looking like it may break out any moment and maybe one day it will but there just wasn't enough volume in the market thrust to give us confidence they can keep it up. As I said above, it's scary to short the market over the weekend but, faced with a poorly constructed rally, it seemed worth the chance.

Maybe it is possible to cobble together a breakout with nothing but pre-market pumps in the futures, stick saves in the afternoon and MSM hucksterism, celebraing every mediocre data-point as if it was as important as Marco Polo opening a new spice route or Posh Spice playing polo on a Segway (which isn't actually important but does make for fun word-play). So we layered on the bearish plays and hoped for sanity to return over the weekend but, if not, we'll be adding some bullish plays (we're certainly well covered to the downside now!).

RTH Jan $90 puts at .75, now .80 – up 7%
IYT Jan $71 puts at $1.35, now $1.20 – down 11%
ADCT artificial buy/write (too complicated to summarize) – on target
FDX Jan $85 calls at $5.50, now $5.25 – down 5%

We didn't hit our target on selling the DIA put put covers and that put us into a very bearish stance into the weekend. I'm more worried this weekend than last as we're more committed to the downside than we were before and the market is closer to a break-out than it was before. Bullish sentiment is at a frenzy but it's all going to be about the Retail numbers over the next couple of weeks, which is where we really think there's going to be a weak spot.

We'll be watching our levels, as usual, for the signal to switch of our brains and BUYBUYBUY on the breakout but we haven't gotten it yet in a month's worth of attempts so we'll just have to wait and see. On Tuesday we get PPI data along with the Empire Manufacturing Survey and Industrial Production. Wednesday we see Building Permits and Housing Starts along with the CPI Report and a Fed decision. Thursday gives us the usual Jobless Claims, Leading Economic Indicators and the Philly Fed Report so no shortage of data but how the market will react is anyone's guess these days.

Just 14 shopping days to Christmas!