Weekly Train Wreck

We had an exciting week last week until the last day, when I had to post a picture on Friday morning entitled "Descent into Hell."

"Stop the Week, We Want to Get Off" I said on Friday and we've been calling for cash since early December so I won't get into the "I told you so" thing…  Those of you who left money in the markets could use something more constructive than that!

To that end, in addition to starting a new $25,000 Virtual Portfolio for members, I'm going to initiate a $100,000 Bargain Basement Virtual Portfolio on the new Basic Membership site that will begin hunting for stocks that we consider irresistible at these prices.  As we approached 12,000 on the Dow yesterday, I found myself leaving many positions open, hoping for at least an interim bounce.  After all, even the Titanic (pictured) had an end that rose up while the rest of the ship sank!

As I predicted last Friday: "This is the depression stage in our 5 stages of grief and it’s healthy.  We’re well covered, well in cash and ready for action.  Of course if 12,500 doesn’t hold it may be time to panic a bit but there is nothing today that is fundamentally different than there was 30 days ago, when the markets were 1,000 points higher.  They were wrong at 13,800 and they’ll be wrong at 12,500 – I maintain my target range of 13,000 to 13,300 for the Q1 consolidation but it’s going to be a wild, wild ride!"

We held out some slim hope that our wise leaders would come up with a plan to avert a crisis but, now that I look back on the actual events – what kind of schmucks were we?  These are the same people who wrecked the economy in the first place by spending money like drunken sailors, fighting the most pointless AND most expensive war in history (we passed WWII spending last year), depleted the treasury and unlocked the box of Social Security and drained that too and have set us on a path to a deficit that will be 100% higher than when they took office.  That's right, in the last 6 years we have amassed more debt that this country had in the first 225 years of operation – and we started out with a big war debt!

It was Alexander Hamilton who was first charged as Treasury Secretary with getting our nation's debt under control and I find it very interesting that he was killed by Arron Burr, our nation's first trigger-happy Vice President!  I thought of this as I saw Cheney standing there with Bush and a very nervous looking Hank Paulson.  Hamilton once said: "Why has government been instituted at all? Because the passions of man will not conform to the dictates of reason and justice without constraint."  This is why the markets crashed this week, the unveiling of the government's "plan" turns out to be no plan at all, just another money drop meant to appease the masses but offering no solution to the actual problem.  As Hamilton also warned: "Those who stand for nothing fall for anything."

It was obvious from last week's market action and the early action this week that expectations for Bush were very, very low but the President succeeded in missing them by a mile with one of the poorest speeches since… well since his last speech, which was also horrible!  During Bush's last statement, I said to members "I'm loading up on gold (not the stocks, the actual stuff) as he speaks" and yesterday, the market simply just gave up and died while the man talked (11:32-11:41).

But anyway, as I said above, it's over – the captain has steered the ship into an iceberg and the fact that the band continues to play on doesn't really give us much comfort as the icy water laps at our heels.  I do have a solution for this mess and I'll publish it in a later post.

Meanwhile, back to our review: As I mentioned in the weekly wrap-up, the first drop was fine as we were well covered and we went into the weekend covered at far lower strikes as we rolled our long calls down.  This week's drop was a tad severe (600 points) but we followed the same strategy only this time, with less coverage, hoping for a nice bounce back to 12,500 in next week's abbreviated action.  If we don't get that, it's time for cash (or gold) anyway.

Monday was manic as usual as we climbed 200 points from Friday's close but I was outbid for my flying car and IBM couldn't hang onto their early morning gains, both of which events put a damper on the fun early on.  I warned in the morning "Don’t take this rally too seriously today, it’s literally 12,750 or bust so we roll up the index puts and keep our eyes open for who remains weak in this rally."  Well, it was easy pickin's as everybody looked weak but we relied on our index puts for the bulk of our protection and oh boy, did they pay off!

We closed Monday at 12,778, not quite enough for us to throw caution to the wind and we hung our hopes on Citibank earnings and Macworld, neither of which provided the boost that we needed.  This was expected by us Monday night as I said on the day's close: "Despite whatever feel good noises we get from Mr. Jobs, it’s just not going to offset write-downs in the tens of billions so let’s watch our levels and, for US markets, let the NYSE be our guide. If they can’t hold 9,400 then we may have a long wait before we see another green box in the US markets."  The NYSE left us very little doubt as it gapped right below 9.400 on Tuesday morning and showed no interest in a comeback.

Kudos to Stock and Option Trades, who gave us a great interim report on Monday night, as they were spot on with observations, including calling the violent move in CRDN the next day.  These are the kind of opportunities we need to identify in a poor market – sharp traders will always find a way to make money!

We tried to do some bottom fishing on Tuesday BUT THERE WAS NO BOTTOM TO BE FOUND and we had a couple of hugely profitable free picks on SU $110 puts (finished the week down $12 from Tuesday's open, up 300%) and the $100 puts (up 2,000%) as well as the OII $70 puts, which finished the week up 1,500% so I'm not even going to waste my breath telling you the benefits of subscribing next week when we start our Basic Membership site (these posts will no longer be free but there will be more picks and other features).

I said Tuesday morning: "I won’t be so keen to roll down here as I’m not anxious to commit more capital until we put in a solid floor" and the day stank from the open (NYSE failing on us) with INTC putting a nail in the coffin with a disappointing report that really wasn't so bad, but it gave the bears a chance to go hog wild and drive the markets lower after hours.

My comment on the situation on Tuesday night was: "For whatever reason, this administration has fostered a crisis of confidence in the markets and Intel is just our martyr of the moment – the mob wants blood and any blood will do."

I called the only bounce of the week on Wednesday morning while Bill McLaren gave us the chart of the week with an S&P downtrend THAT WAS NEVER VIOLATED as we crashed below his "obvious" support line after bouncing off it in Wednesday's trading.  Our failure to break over 1,400 left us bearish during the "rally."  That morning Kenny Rogers warned us: "You got to know when to hold ‘em, know when to fold ‘em, know when to walk away and know when to run" and it sure was time to beat feet by the end of that session.  We did a little bottom fishing with CROX, which worked great but also with LVS, who blew my perfect record for the week by dropping 5 more dollars but we rolled to the June $75s, where we are sitting naked with a 32% loss at $11.60 so far. 

Thursday I said it looked "kind of iffy" and that was quite the understatement as it really hit the fan with the ABK news and the Traxx index gave us a good indication of how dire the situation was looking for the financial community.  Our Thursday morning free pick of the DIA Feb $126 puts opened at $3.50 and finished the week at $6.20 (up 77%) – these plays only work if you make 'em folks!  Thursday we had Bernanke's pathetic Congressional testimony which pushed the Dow as close to the 11,000's as it's been since last March, where we made a brief low at 11,926.

Friday was, of course, no improvement, even though GE gave us a pretty good view of the global economy.  Things were looking up until the President threw one of history's greatest air balls with probably the worst possible solution to our current crisis.  This too was expected as I said that morning: "There is nothing I hate more than sitting around waiting for George Bush to solve all my problems."

Thanks in large part to our various index puts, our virtual portfolios held up pretty well but the open positions are a veritable blood bath of red with average losses of well over 20% in the Short-Term Virtual Portfolio.  The virtual portfolio itself gained 15% on the week thanks mainly to our focus puts on FXI (down $20) and RTP (down $60) as well as our DIA puts and QID calls.  Had it not been for those, things would indeed have been very ugly and I'm not enjoying my weekend with 37 uncovered calls in the virtual portfolio.  Like I said before, if this doesn't work, it's time for cash!

Despite bumping off almost all of our callers worthless, the Long-Term Virtual Portfolio lost 2% on the week and we finished with a very scary 33 naked calls.  It seemed like a good idea when I did the review but, like I said, I'm not sleeping well this weekend!  As I pointed out to members, we have already reduced the virtual portfolios by 75% to start the year and they are 1/2 cash so the risk is limited but that's still no reason to lose money so we will be very wary next week if there is continued weakness. 

Our Stocks Virtual Portfolio took a huge hit, going from up 4% to down 2% in a week as, unfortunately, I decided to enter C by selling puts.  While I doubled down on the 2010 $25s, owning the actual stock has simply gotten scary!

The star of the week was our $10,000 Virtual Portfolio, which gained a stunning 18% on the week, finishing at $13,807 with over $1,000 of that gain coming yesterday as our RIMM and AMGN callers both expired out of the money.  All four of our positions are uncovered for now so let's not get too attached to these gains but we definitely have to go to cash on this virtual portfolio if things don't pick up next week.

Cash is the fate of our Q4 $25,000 Virtual Portfolio, which we say goodbye to with $152,348.36, down $1,662 for the week and we have 12 open positions that will be transferred to the STP as we start a fresh Q1 $25,000 Virtual Portfolio on Tuesday.

Complex Spreads went nowhere with a $780 loss for the week, still up 10% for the year and we now have naked AAPL Apr $160s and GOOG '09 $610s as our major holdings in rolls that were entirely paid for by our callers so a big thank you to them for what hopefully will be a couple of very exciting positions.

Overall we closed 146 positions for the week with an average gain of 65%, 108 of which were callers who we either bought out or expired worthless.  That is, unfortunately, all the good news as what remains in the virtual portfolio will generate quite a loss if we are forced to liquidate – something we hope to avoid but must be prepared to do as we are too bullish for a very large drop.  While I'm very, very pleased with how well our virtual portfolios held up this week, it's because we planned for a drop to 12,500 and 12,100 is not too bad but we need to watch our shorter-term positions very closely next week during tech earnings, which are likely to make or break the market.