Gosh I thought I was going to have an easy week as it was only 4 days and we were mainly in cash but oil finally broke down on us and we had a week of hot an heavy trading!
That's the beauty of cash – it's easy to put it to work quickly when things go your way…
The general market sure didn't go anyone's way this week with a whimpering performance for the week. Ironically, it was evidence of a strong economy and continued job growth that worried investors as it put the Fed back in the game as many investors were betting on a softening sometime in the spring. Luckily I've been saying for months that is never going to happen and we've been investing accordingly…
Motorola single handedly killed a Nasdaq rally that began and ended Thursday but, as I said all day yesterday – selling 66M phones in one quarter is not a sign to get out of tech!
We can't fool ourselves though, these are trying times for the markets and we need to take advances with a grain of salt before we start committing serious capital again. The reason we had such a great 2006 is because we took it off the table in May and didn't really play the upside again until July (see Year in Review).
So patience is a virtue we all need to practice in 2007 – we waited 3 months to make 100, 200 and 300% gains on our oil plays but wasn't it worth the wait? At the moment, I would still prefer a much bigger pullback to shake out the nay sayers and to test our 200 dmas for support, not the pesky 50 dmas that most of our indices are playing kissy with. BUT, what I prefer is what every old fart stock analyst prefers – the same thing I'm used to!
We all like to see our little patterns repeat themselves so we can nod our heads (and shoulders) and point to a "flat top" forming or point to the "ascending triangle" and discuss declining RSI at cocktail parties (ok, you've got me there, no one invites TA guys to cocktail parties!). It is very disturbing for an analyst to look at a chart and say "I've never seen that before," so we all try to stuff the big, square pegs into the usual round holes and pretend this is the same thing that happened in 19XX when THIS and THAT event caused THESE and THOSE things to occur – and boy do we sound smart saying that!
I myself sounded like a freakin' genius back in the summer when I told you (on August 25th) that "the market was just looking for an excuse to rally" and the key phrase that would unlock Dow 13,000 (I was aiming low at the time) was going to be "soft landing." I even said: "To do this right, we really need to kill the commodity bubble but perhaps it will have to "soft land" as well. That would be a really neat trick, one I hadn't previously considered, that oil can drift back below $60 against rising demand that will make us and OPEC happy." Well we know that OPEC got greedy and blew it and now they're going to pay but that doesn't mean the rest of the market is going to suffer.
$50 oil is good, not bad! Had I tried to tell you that falling commodity prices would hurt the markets in 2004 you would have locked me away with Henry Blodget in the crazed analyst zoo (where they are building the James J. Cramer pavilion as we speak!) but now everyone is treating a collapse in overblown commodity pricing and the stocks that price gouge profit off them as something besides T Boone Pickens' personal nightmare.
The problem is, that in two short years, with $2.5T pouring into commodity stocks and another $1T pouring into the commodities themselves (NOT including the $10,000,000,000,000 that flowed into housing since early 2004) analysts think that the commodities HAVE BECOME the market!
That's nonsense – it's party time!
As long as you're not a commodity speculator then these, are indeed, the best of times. How can you have low inflation AND strong economic growth? By slashing material costs! It's a simple, basic economic fact that hasn't happened in so long we've actually convinced ourselves it doesn't exist…
I was bullish about the global economy in August and I'm bullish about the global economy now. While I do anticipate a pullback, I don't think it will be severe (as long as you don't consider 11,500 severe!) I also anticipate the same mega-rally I correctly charted out on August 30th to continue to form up.
Like I said though (and I can say this now because I have a record of knowing what I'm doing) that is all BULLSH*T! It is deeply embedded human nature (thanks Dad) for us to seek out and "recognize" familiar patterns in order to make sense of the chaos that festers all around us, but that also tends to make us try to pigeonhole everything we see into categories. Our President says profiling is a good thing and we should embrace it but our new House speaker says our President is an idiot and only the Republican Military-Industrial complex is evil. Well, she got the votes – who am I to argue?
So, as with any analyst who interprets the markets, I like to see something happening that happened before as it reinforces my belief that I know what is going to happen next BUT I think the changes in the global economy are so profound at this point (see previous articles) that it is leaving most analysts and economists in the dust as it simply isn't what we were taught at school.
I'm pretty sure that NO ONE, not one person, who followed the Nikkei last year, predicted it would break through 12,000 (after 2 years of trying), pop up to 13,500, drop back to 13,000 and rise all the way to 16,500 – all within 5 months!
They ran all the way up to 17,500 in April of 2006 and then, finally, had an "I told you so" bear pullback to 14,000 by the end of May (feeling nauseous yet?) before recovering back to 17,000 last month. Now that's volatility!
So now you know why we took the DIA June $124 spread… If our own VIX finally awakens from it's long slumber, it can be a hot time in the old Dow for 2007!
We're going to keep our eyes open and maintain a skeptical edge but let's not let the parade of geniuses on CNBC (or Bloomberg or the Journal) chase us in and out of positions just because they can't believe a market can gain 5,000 points in 6 months (the Nikkei just did!) or lose 3,000 points in 3 months (the Nikkei just did!).
This newsletter averaged 40% per selection in 2006 and the Dow gained a measly 2,000 points for the entire year! Imagine the fun we can have on the way to Dow 17,500!
Of course we'd have almost as much fun if the Dow dropped 5,000 points as we like to hedge but it's much more fun making money in an up market when everyone's having a good time.
For a 3-day week that started out with this statement: "I have a lot of picks lined up but this is not the time to hit them, there are far too many unknowns jumping into an unusually short week like this and playing catch-up with the global markets." we sure did make a lot of trades! Well…. I am nothing if not flexible!
We OPENED 40 new positions in 3 days, mainly in comments in a wild week of trading! Not at all what we intended going into the week. We only managed to close 29 positions but they were up an average of 107% with only 2 losers, including my ill-fated in-and-out Google test trade.
Our other loser was BBY and we were lucky to escape on this morning's bounce for .25 but I left the March calls on the table as I still have faith in this one. They got good news Friday morning and probably would have done very well if the broader market hadn't sold off. As we said last month when everyone was panicking and we were doubling down, the analysts simply don't understand a retail business model – as incredibly pathetic as that is!
11 of our positions were better than double, always a recipe for success and they were, of course, mostly oil plays:
- COP $70 puts finished at $1.85 (up 147%).
- HPQ $40s were taken half off for $2.25 (up 125%).
- JOYG $45 puts were well timed and finished at $1.40 (up 229%).
- RDS.A $70 puts were taken twice and sold twice for an average of $2.17 (up 235%).
- RIMM Mar $130 puts were closed at $8.60 (up 213%) but we jumped back in yesterday at $4.90 (net after selling the Jan $130s for $1.80).
- SUN $65 puts were rolled out (we have the $62.50 puts too) for $4.40 (up 110%).
- XLE $58 puts were taken out two days apart for the same price, $2.80 (up 383%).
- XLE $61 puts made a nice roll and returned $4.20 (up 155%).
The best of the rest was, amazingly YHOO $27.50s that shot up to .75 (up 96%) yesterday and we took that money and RAN!!! That was a dead looking trade from 12/13 that we took 2 DDs on for .20 on 12/29 and I would have been thrilled to get even! We still, of course have the much more exciting Jan '08 $25s that we can finally start selling calls against again…
The full spreadsheet will be up on the member's site later today.
Our short-term virtual portfolio has 78 open positions that are up a whopping average of 74% with an average hold time of 15 days. This is due in most past to a spectacular bunch of open oil puts and a very well-timed Apple spread.
We are down to just 5 lonely regular stock trades that are up 14% over 71 days and I honestly don't know how people can stand to trade these things! I know I said I'd find some more to trade this year, we had 20 open at one point last year but I'm just not feeling it – the market is way too choppy for me to tie up virtual portfolio money in whole positions.
Our 27 long-term positions are up 99% already after just 41 average days open – that's a very good start as we don't expect to get traction on these for a couple of months. There's only 4 puts which bothers me a bit so I'll have to work on that over the weekend.
I will detail these for the members' site as we should all be on the same page (otherwise what the heck did I clear out the other virtual portfolio for?). 😉
Props and welcome to new member Juliet who brought up AGIX in comments Friday morning at 10:30! I told here how much I HATE little biotech companies but said this one was a fun "craps roll" (small bet) at the current level and, just 4 hours later, the darn thing was up 20%! That works out to an annualized return of several Trillion – likely to be the best new member pick of the year already!
Zman and I are looking to buy the MRO Feb $85 puts for $3.
We need to be careful with the oil trades coming into expiration. As I said yesterday when I warned to close out all Januarys (I missed a couple): "There will very likely be some astounding options shenanigans with oil in the next 2 weeks. I’m talking mind-blowing stuff so we need to be very careful. "
It will be very interesting as the pump for expiration will run headlong into the NYMEX contract close so we can expect some real whipsaw action next week – both peril and opportunity are afoot!
Have a great weekend!
– Phil
