I wonder what everyone is so worried about all of a sudden?
Well, take your pick I guess, you can use the cartoon above as a dartboard to pick something to worry about each day. I predicted this post-Fed crash on Monday but it came a little faster and harder than I thought (I had declared Monday to be Jan 13th, 2000 – 5 days before the crash) but, looking at the banking sector's performance, it seems our problems may be deeper and more horrible than I thought.
I had a dozen calls and mails and 40 IM's yesterday from traders saying "What's happening?" as they were too busy dumping things to bother to find out why they were doing it. By the end of the day I was just snapping back with the reply "Reality."
Our members had no such trouble dealing with reality as we were well prepared, not just for a drop, but for a drop that centered on the energy and financial complex, where we've spent weeks discussing how the Fed is simply not helping by placating Cramer and his hedge fund buddies while selling US consumers down the river on an over-inflated commodity raft.
We did our Virtual Portfolio Reviews on Tuesday to get ready for the Fed and I'm very glad I published the $10KP on the public site because we get a ton of questions as to how hard is it to follow our strategies and here we have 8 open positions designed for a $10,000 virtual portfolio that gained $7,464 in the 48 hours since it was published and anyone in America could have picked it up and played along. That's not a bad performance considering the market went up 150 points Wednesday and then down 362 points yesterday but both the $10KP and the $25KP are designed to be hedged against catastrophic moves.
As of the close, the $10KP (up 212%) is actually outperforming the $25KP (up 177%) but that is going to change drastically tomorrow as the $25KP has 10 LVS Jan $135 puts and LVS was much worse than we thought! Congrats to all the $25KP players on that one and everyone else who kept the faith as we relentlessly shorted this position on the way up.
Of course, aside from picking the right stocks to play, it helps a lot to get the movements right and I discussed yesterday how we cleverly shorted into Wednesday's very irrational exuberance. Well, not so cleverly really – as I said in my article "How to Spot a Market Correction a Mile Away," everything I needed to know about how to play this market I learned by watching Rodney Dangerfield in Caddyshack! While that strategy has served us well pre-Fed, I'm no longer content to go against the grain until we see some real evidence of a bottom.
While it was tempting to try to guess a bottom we played it safe today as I cautioned members at 10:34: "General note – do not confuse minor retracements for rallies. Any stock that falls 2.5% should go back to -2%, any stock that falls 5% should go back to -4%, bounces back to those levels mean nothing. That goes for a Dow that falls 200 points and bounces to -160 in general. There are literally just 381 advancers, we could literally list them here in a few paragraphs!" The Dow was just coming back from 13,673 and was at 13,718 when I made my comment and topped out at 13,758, down 171 points from the open. OK, I was off by 11 but I don't keep the abacus handy during trading hours so these are just quick estimates…
I won't go into all the crazy mattress plays we ran yesterday but we made a TON of money off yesterday's DIA puts as that drop was more than we dared hope for (otherwise we would have taken more!) but I had to beat the bulls back with a stick as just 20 minutes later, with the Dow barely bouncing off the 13,700 line, and everyone asking what we should buy, I had to say: "I just got done saying I expect us to bounce to 13,780 on pure math so I’m taking some plays for that purpose alone but all you do now grabbing “deals” on a bounce is pay a high premium with possibly no follow through. I know it’s very tempting but, if we’re coming back, there’s another 160 points of gains to add after we cross 13,780 so I’m just asking you to be 20% patient."
As I've mentioned before, it's been beaten into us for 2 years to buy on the dips and that will be a very hard habit to break if the market turns truly bearish. Until we see some real strength OR weakness, it is going to be far safer to go with the flow, rather than trying to get ahead of the turns. If we get a real change of sentiment, all news can become bad news quickly! It took me until 11:36 to call the market dead yesterday when I said: "We’re not holding it!" (hey, they can't all be essays!) and we got some bad car sales reports around lunch time but at 12:41 I observed: "I see things going up (mostly OIH and Semis) but nothing is moving the market… GOOG stuttering, if they go they will take the Dow below 13,700. OIH run seems silly too."
We had played the OIH $190 calls at 10:42 but we got out of them as I noted at 1:23: "Wow CNBC is pumping oil like crazy! They are talking $200 oil and leveraging a regular defense department war game as “evidence” of the pending crisis. That just makes me want to short oil more as it smacks of desperation. SU Dec $110 puts are $6.60 XXX COP Dec $80 puts are $2, those could be interesting too with nat gas falling. XXX" Just 25 minutes later our primary signal broke down (well, actually I decided it was breaking down, it didn't actually fall for another hour): "GOOG going red – 13,500 here we come!"
I was, of course, wrong, the Dow bottomed out at 13,550 but there's always tomorrow! At least we got our puts in before the final 100 point drop of the day and we did rehedge a bit to the upside at the close, but my heart wasn't in it and we kept our BIDU puts open, expecting the usual knee-jerk reaction in Asia as they follow our markets down, especially considering it will be Friday for them tonight and I can't imagine them getting all bullish into the weekend after watching this disaster!
Are we doomed? Economically – absolutely! But will the markets react that way before a recession slaps them in the face? That's hard to say. Obviously our government is doing everything in their power to boost the markets but the fact that it's the COMMODITY markets they help first has left us on a very shaky foundation and the bubble grows ever larger and there simply isn't enough air left in the Federal lungs to grow this thing any larger. Let's watch for the true commodities like copper, nickel and steel to fall first, then oil but not gold as all this financial instability will send Asian investors flying to their favorite metal.
