Weekly Wrap-Up

"January is one of the peculiarly dangerous months to speculate in stocks. Other dangerous months are July, October, September, April, November, May, March, June, December, August and February."  – Mark Twain

That was simply a terrible way to start the year wasn't it?

I'm very glad to have made a cash call ahead of the holidays and I was very pleased on Friday to see a generally relaxed member section with over 500 comments and very little panic.  The general mood at PSW is we are circling like vultures (although I prefer to think of it as scouting for prey like eagles!) and repeating our favorite mantra:  "It is NOT my job to save the markets."

Sure we did some light buying and we took a few puts as well but mainly it was a wait and see kind of day as the market exceeded my 13,000 downside line exactly the same way it did so ahead of Thanksgiving.  Unfortunately, a repeat of that pattern can take us as low as 12,300 if we can't hold 12,800 next week (and I mean for the week, not any particular day's move).

In Tuesday's Index Round-Up I said: "We are sitting exactly on the 200 dma at 13,350 with the 50 dma about to form a "Death Cross" and it will only take the smallest bit of bad news to push us to retest the 2007 lows around 12,500" but even I was stunned at how quickly we dropped  63% of the way there this week.  I am working with the great Tom2oc to provide a market forecast this weekend but I can tell you now that the technical outlook is pretty grim and I'm honestly low on fundamental reasons to ignore the worst-case outlook.

Effectively, also as I said in the round-up, we need a capitulation in the energy market to put a floor under the transports or there will be no saving the market in the near term. OPEC cannot afford to wait until their Feb meeting to calm the markets because it will probably be too late by then.  I turn to OPEC for leadership as our own has clearly failed us, as evidenced by the nothing Bush said afer his meeting with Paulson and "The President's Working Group on Financial Markets." 

Also on Tuesday I said "The S&P already made their death cross on Christmas eve and, if we don’t pull  back over 1,500 soon, then we are probably heading for a retest of 1,400 before we can make any further headway." and of the NYSE, I said: "any tick below the 200 dma at 9,769 should be taken most seriously as a bad sign for the markets in general."  Wow, I get the understatement of the year award on the first day! 

I sincerely hope this incredibly prescient advice made you a lot of money because I myself could certainly have been more bearish.  On Wednesday morning I said I would be staying at the sidelines but I wish I had shorted more aggressively.  We made the right call right out of the box and the market finised at 13,043, just 1 point above the target I had set earlier in the day. 

We took a chance and uncovered some calls at the close on Wednesday and that wasn't a terrible plan as we did get a 90-point bounce on Thursday, where nice earnings from MON and a strong ADP jobs report gave us a lift in the morning but I said at the beginning of the day: "I can’t see our markets celebrating $100 oil today so a "rally" may be short-lived with the inventory coming at 10:30."

In member chat my opening statement at 9:41 was: "Here’s our 80-point bounce off 13,000, now the obvious barrier at 13,100 then 13,160 makes a positive signal but it’s S&P 1,460 that will be key. Russell should be doing way better than 750 as the ADP data showed lots of small-cap job growth so that’s bothering me right now plus, we still have $100 oil to contend with." followed 5 minutes later with: "MRVL 52 week low joined by MNST, BBBY (ahead of earnings), AMAT, SBUX, MRVL, M, YRCW, JAVA, KLAC… this is not looking good despite the positive Dow print so let’s re-cover if the S&P doesn’t break 1,450 very soon."

We tried to hold on but by 12:44, even as the Dow was just off the day's high at 13,116, I said: "Damn, things are turning ugly again. Going in on DIA $130 puts at $1.55, hopefully for no reason but I’m thinking we’re breaking down."  By 1:06 it was really all over and I said: "Now I’m glad I took the DIA puts – covering everything up as there’s no sense in being greedy."  The Dow finished the day at 13,056, 4 points below my 9:41 target and you would think I would have done great but I was foolish and didn't follow my own advice, leaving too many things open near the close.

When technical indicators break down, going with your feelings is a lot less smart than usual!  Even I have to be reminded of that sometimes – the hard way!  In the wrap-up on Thursday I said $100 oil was the last straw for the economy but that: "We can change this country and, with the right kind of leadership we can accomplish great things quickly."  as the people of Iowa had just sent a strong message in their caucus that finally, we're not gonna take it anymore.  

Friday morning the only change we got was how fast the markets fell as we zoomed down to a 256-point drop for the day.  We knew it was coming right out of the gate as the Non-Farm Payrolls came in almost the opposite of the ADP report so somebody's lying and it's probably the government but what are you gonna do?   

We should have a massive technical reveiw of the markets up tomorrow as I've spend the weekend working with my pal Tom2oc and we are going to have some great technical analysis up on the member section so I won't get into it now but "Uh-Oh" still pretty much stands!

It was uh-oh for our virtual portfolios as well on Friday as we simply did not have enough downside protection except in the STP where I keep the index puts.  All the virtual portfolios were reset last week so I'll just run down the basics but it's very sad as we were doing so well as of Thursday:

• The Short-Term Virtual Portfolio had a great first week, gaining 9.2% in our first week, finishing at $1,092,255.  As I said, this is where the index puts lived and they served us very well in this severe drop, even though we were fairly light on them overall.
• The Long-Term Virtual Portfolio eeked out a 1% gain taking on $10,265 on top of it's $1M beginning.
• Our Stock Virtual Portfolio has just one stock, MRB and they took a sharp dip on Friday, sending us from up 6.7% to down .4% before we could even stop out.  I saw no reason for this and gold held strong so I'm holding them but not adding.
• Complex Spreads got hammered as the "coverage" on Google was not enough to prevent us from taking a loss as Google plunged 4% in one day.  Our Apple Apr $210s held up fairly well and are still uncovered and we will have to roll them down and sell against them on Monday if the market doesn't improve.  Overall, we finished off down 1.4% for the week at $493,150.
• The AMGN Jan $52.50s held their nickel value in the Happy 100 Virtual Portfolio, which still stands up $640 at $100,640 after 3 months.  This virtual portfolio will be replaced by a special virtual portfolio for our new basic membership site on the 18th.
• The $10,000 Prfolio dropped $1,000 on Friday and finished the week at $11,193.  It's been a very tough time to start a virtual portfolio with a limited budget and I'm very concerned about what to do with this one if the market keeps going down.
• Our $25,000 Virtual Portfolio also took a big hit on Friday and finished down $11,300 on the week at $147,507.  At least with this virtual portfolio we have the cash ($81,000) to turn bearish with the market if we have to…

On the bright side, we wiped out a lot of callers and made some great gains in the positions we closed.  73 closed transactions yielded a great 123% average gain but those gains only managed to offset position losses in our virtual portfolios, giving us the net gains reflected above.  Had we not sold so many calls, we would have had a truly miserable week indeed.

All in all, it was a very tough time to be in the markets.  I am hopeful we can hold these levels but I won't be making the mistake agains of being overly optimistic if we don't retake our technical levels.  That's why we ran this massive TA project over the weekend, it will be good to have a lot of charts to refer to as we head into these very choppy waters.