Weekly Wrap-Up

The only way this month could be going better is if we were doing this well in a bull market.

I hate to be a bear but that's sure where the money has been this month and we were very lucky to have gotten out ahead of it.  As crazy as it seems, there is more "fast" money to be made on the downside than the upside, which is why I advocate always having a 30% contrary positions in your folder – as long as you pick weak stocks, it shouldn't hurt you so badly in a rally but it sure saves your virtual portfolio when things turn south on you!

I don't want to bore people with how spectacularly we're doing, members can pick up the virtual portfolio and see for themselves and I am aware that it's downright depressing for people who aren't doing well to read about how others are having a party so I'll just stick to the basics for this wrap-up.

I turned very bearish on Friday morning as the "fake" rally finally got to me and I had to just put my foot down and go short into the weekend.  We were short on oil, short on financials and short on the Dow and the Nasdaq, about the most bearish I have been since we started the new site.  There's nothing wrong with a nice sell-off, like we had late last month, those are nice and healthy once in a while.  The problem is having a sell-off like that (700 Dow points) and not bouncing back.

Both David Fry and I were very suspicious that the "rally" of last week was the work of the Fed and the "Plunge Protection Team" and bore no relation to an actual recovery in the making.  We got a good jobs number but we decided to ignore it and Tom Brown told us everything was fine in subprime land and we decided to have him committed…  My main plan on Friday was: "I could be totally wrong here, especially with a strong jobs report indicating a resurgence in the US economy but I’m going to put it on the line and short oil into the weekend so I’m just praying for them to rally that sector today so we can jump in and SELLSELLSELL!" 

It's times like this I wish I did play the futures because here's what USO did from my 3/9 rant!  Don't cry for us though, we did manage to place a dozen bets on BP, COP, VLO, XLE and XOM that all worked out fairly well!  The one that didn't work was CHK, who are well above the group and we'll be keeping a close eye on them for next week's action.

In last weekend's wrap-up I called the whole upswing a "Dead Cat Bounce" despite the "spectacular" 75-point recovery the market staged on Friday.  Tom2oc also saw the signs and declared it a "falling rally, something that occurs following a muscular decline that has broken the back of an important uptrend. It tries to restore the important uptrend, but typically fails. One of the signs of the coming failure is typically shrinking volume on the rise."   That was a great call but the call of the week award has to go to Zman who, on Monday morning said: "As the refining industry snafus sort themselves out and OPEC prepares to meet in Vienna oil is starting to retreat. I’m looking for a pullback to $57.50."   Crude finished the week at $57.11, down $3 for the week (the 5% rule!).  More on oil later…

Options Sage added to the mix by giving us a sound strategy, which we employed with gusto this week, to mitigate losses on calls that went sour on us.  In fact, in our total closed positions, we were net sellers of contracts to the tune of $127,000 so far this month, closing that group so far with virtually no payouts – nice work if you can get it.   The reason we were able to employ this strategy effectively is because LAST MONTH, I began adding an unprecedented amount of length to our positions as I was feeling the drop coming "in my bones."  It made for a few underperforming weeks but it was well worth it to avoid the losses that ravaged the markets in March.

Also on the weekend, Dr. Brett and I had ongoing concerns about the money flow, another factor I saw chewing away at what little market support there was.  I concluded "So let’s be careful in this "rebound" and make sure the real money is coming back into the markets, rather than sneaking out the back door.  We’ll look for this week’s inflows to match last week’s, which should be a sign that it’s really safe to jump back in the water but before I start to declare our market glass half-full, I want to hit our 33% levels in ALL indices and see a lot more of a rebound from our outflow leaders!"

Now even though I bought the mug you know I hate to be a pessimist soI opened Monday morning determined to find some positives in the market.  We decided to "be looking for positive moves from JNJ, MSFT, PG, UTX and WMT as they were our weakest Dow components last week."  That was a good set to watch because it kept us from making foolish buys as the group, as a whole, fell right to the 5% rule for the week.  Coincidence?

Although Monday seemed like a good day with another 63 points of gains but we didn't hit my recovery levels so I said: "Where we are now (assuming we are recovering) is most likely in the first leg of a recovery after a drop, likely to retest our lows at least once before we can really turn things around." 

I called Tuesday "Testy Tuesday Morning" and said that the sub-prime mess would most assuredly matter unless GS could convince us otherwise.  Well, GS did their best but even their spectacular earnings couldn't calm down investors and that was the beginning of the end for this week.  That morning I predicted "Energy traders will be gnawing their own legs off today to avoid confirming a downtrend in oil prices." and they did, but also to no avail.  We went back to the mattress with put plays on IWG, IWM and DIA, all made on the public site as they are nice and liquid so I hope they helped a few people (they sure helped us!).

Tuesday ended badly for the bulls and, as I said in the wrap-up "Oil’s chart COULD have turned uglier – but they ran out of time! "  Wednesday we went with a physics lesson and I pointed out that it was perfectly normal for us to swing back close to market neutrality as we follow an elliptical trading range – all we have to do is avoid having our virtual portfolios burst into flames as we enter the atmosphere…

We did take a wild bounce off Wednesday's lows and you would think that would have made me happy but it was way too fake.  As I said ".. while I’m sure some of us were pretty disappointed we didn’t get a crash (because we had A LOT of put plays), it sure is fun to see the market come back like that, even if it is only for a day or two."

Still we got stopped out of a lot of nice puts that day, half out of most of our oil plays and that's what stops are for, to prevent us from riding things out longer than we should.  Oil had a huge drawdown that did not impress Zman or myself as Zman predicted a reversal in natural gas to drag down the broader energy market.  We both expected OPEC to do nothing and were not disappointed there either.

On Thursday morning I urged patience as it still didn't strike me as the kind of "recovery" you would want to buy into.  That morning I said "I love buying stocks as much as the next guy but I prefer to buy stocks that ARE going up, rather than stocks that LOOK like they are going up (it’s a fine distinction)."  That comment was followed by two days of action where wave after wave of buyers kept dipping their toes into the market, only to have them swiftly bitten off.  Put buyers fared little better as the choppiness hurt both sides but, luckily, we had gotten our puts early and we changed from buyers to sellers as we took advantage of Friday morning's "rally" to sell a ton of calls.

We had an open chat session during the day on Seeking Alpha as our server was down, worth looking at if you're not a regular member.  On Thursday night I warned that the famous "ex-food and energy" reading of the PPI and CPI were ludicrous and that the very foul stench of stagflation was in the air.  This weekend the word is starting to pop up a lot in the press and I predict an upcoming  "super spike" of the word in the Google trends index.  Notice who is most worried about stagflation:  New York, San Francisco (Banks and VC's), Washington (policy makers) and Chicago (traders).  My job is just to keep you in the loop on these things…

So Thursday night the money flow still wasn't feeling right and the NYMEX barrel count was still WAY too high to be real so it seemed pretty obvious that things would go poorly on Friday, despite the Bush administration's move to squash funding for geothermal energy "because it works and we're only interested in solutions that don't work yet."   I've got plenty to say about oil, manipulation, the SPR and the current energy policy but I'll leave it for a full article as a lot of interesting muck is being raked up now that some Senate Investigating Committees are actually starting to investigate things rather than rubber-stamp or even deify every bit of nonsense that's been going on in Washington this decade.  There's a reason Halliburton is moving their upper management to a country with no extradition – and it's not JUST to avoid paying taxes…

We finished the week with a real bang as Uncle Ben's money shower wasn't fooling me or David Fry, who pointed out that $57Bn had been pumped into the markets by the Fed on Wednesday and Thursday.  I went so far as to call shenanigans on the CPI number, saying "If our government is willing to do that (throw $57Bn at the market), do we really think they are above fudging a few numbers to prop up the market as well?"

We decided that for the markets to really bounce then the dollar would need to bounce but, when it's raining from the sky like that, it does tend to lose its value and neither one managed to turn in a positive day in the end.

The real sign that we were in big trouble came from Wen Jaibao's press conference where he was forced to spend more time reassuring people that he was going to be supporting the dollar (what else was he going to say?) than he did talking about, oh say – CHINA!  When the hopes and dreams of the financial world are pinned on whether a $2.5T economy is going to commit to propping up a $13T economy that is coming unglued at the scenes – it might be time to diversify that dollar virtual portfolio after all.

In Friday's day trades we picked up triples on XOM, VLO and QQQQ – all very liquid, 10-cent positions – the kind we like to play on expiration day, making us plenty of beer money for an old fashioned Irish holiday weekend.

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It was, on the whole, a spectacular week to be bearish and I'm sorry to have to make money this way but there really weren't too may other options available….

We closed out 46 positions with a 54% average gain on 24 average days held but, like last week, that's very misleading as we mostly sold positions and they max out at 100% returns, which actually bring us down in some cases.  Our return on cash was $157,000 with a net outlay of -$36,000 as we sold far more positions than we opened and the expiration date was very, very kind to us.

All of our losses were total losses of old, non-working positions we had given up on and expired worthless.  Of the 8 turkeys, DIA, GOOG and GS were the bad ends of successful bear call spreads:

20 of our 38 winning positions were contracts we sold as it was a much better week to play the house than to bet on housing!  Even worse (or better I guess), 20 of our top 28 winning positions were contracts we sold with our biggest straight contact winners all puts except for our beloved APPL $90s, that we sold the last leg of on Tuesday:

Our 70 remaining open short-term positions are still weighted towards calls but we are now well protected with our index puts,  Most of our calls are light positions and the 44% average gain is illusional as it includes massive gains from our SHLD, TIE and PD plays where we have sold so many calls against as to reduce the basis below $1.  Eliminating these brings us to an expected 6% average return, nothing to write home about but very nice considering we just pulled $150,000 worth of winners off the table.

Our Long-Term Virtual Portfolio has gotten younger (47 average days open) as we have taken a few off the table and just sold a new round of covers.  The average gain is 70%, also very good since we have a lot of new plays at 0 and the much more important return on cash is 80%.  I will point out that the LTP is 90% calls and we still had a winning week and I will keep pointing this out until I get you guys to start adopting this discipline!

Our 12 stock picks held up OK, with an 8% average gain on 61 average days held.  I've got a SIRI play lined up for Monday (see yesterday's comments) and I do promise to pick more stocks (although I was bang on with our quick trades of LEND and NEWC but those were just fun trades).

So, all in all, a very good week but let's hope we don't have to do it again as I hate to play the downside of the markets.

Have a good weekend,

– Phil