Monthly Maket Mayhem – V for Victory!

Have we made a perfect V bottom this month?

Check out the movement on the Dow – From Jan 7th through Jan 22nd we had 7 of 11 Down sessions, culminating in that disastrous Tuesday morning when we hit 11,508 at the open before "recovering" to 11,971 as the Fed gave us an emergency .75 shot of the good stuff.  Since then, the market has been positive 6 of 8 sessions and we are right back to 12,743, just 105 points below making a perfect V over 2 weeks (and, to be fair, it took 11 days to fall and, so far, we've only been on the mend for 8 days).

Before I get a big head and talk about how fantastic our results were on our new virtual portfolios, let's remember that we initiated the $25KP after expirations on 1/22, the lowest low in 18 months, and we had been treading water in the $10KP, just trying not to lose money during the chaos as we looked for a chance to deploy our capital.  As I always say, virtual portfolio balancing is all about keeping yourself in position so that you are able to take advantage when an opportunity like this presents itself.

No matter how we got there (Yahoo!), congratulations are in order for $10,000 and $25,000 virtual portfolio players who, in just 2 short weeks have become $23,237 (up 132%) and $45,720 (up 82.9%) players respectively!  It is our goal as PSW to help our members ladder up and last year we were able to hit our double up targets for small virtual portfolio players in 3 out of 4 quarters but this is the first time we've done it in 2 weeks – what a way to start the year!

While the $10KP and $25KP may have benefited from some YHOO inflation, our Bargain Basement Virtual Portfolio did not.  That virtual portfolio is up just 8.3% in its first two weeks and is our worst performer, but mainly because our most conservative virtual portfolio is new and we started with $100K and are still about 1/2 cash.  On the whole, it's a very nice group of holdings if this rally continues.

Complex Spreads managed to gain 29% for the month, despite being Google and Apple heavy.  We wiped out so many callers in both stocks and rolled down so often it's hard to keep track but we ended up with Jan '09 GOOG $500s as our key holding and I can't believe I have to keep my fingers crossed for Google to hold $500!  Apple is down to the July $130s (we also have Apple in other virtual portfolios now) and our GS spread was a real lifesaver as they took off like a rocket after we took out the callers.

Our boring old Stocks Virtual Portfolio was anything but this month with a 25% gain thanks to our put selling strategy and great performances from MRB and ETFC, which is the only stock left now as we made our target 50% on the Apple puts we sold and bought those back ahead of the weekend (we don't like Mondays at the moment).

Going against the grain and uncovering our Long-Term Virtual Portfolio positions as we Stopped (out our callers), Dropped (to lower strike prices) and Rolled (to longer months) during the great panic of '08 gave us a first month return of 37.4% in what is supposed to be a very mellow virtual portfolio!  We are still only half-covered with 29 open calls and just 15 covered calls, with protection coming from a still-heavy portion of DIA puts in the STP .

The aforementioned Short-Term Virtual Portfolio can afford to eat those puts if we take off on Monday as our "high-risk" trades have taken us to just shy of a double in our first 30 days with the overall virtual portfolio up 97% and, best of all, more than half cash!  The STP finished the week in a far more conservative stance than the LTP with just 30% of it's cash value uncovered to the upside and that is because A) the STP carries the index puts that help protect the LTP and B) the length of the LTP plays already serve to cushion them from short-term market swings.

It is the protection function of our STP that led to such an amazing month as we had tons of index puts on the way and bought tons of index calls on the way up in case taking on all those callers turned out to be a mistake.  As we had a nice, steady rise – as opposed to the shockingly fast recovery that hurt us last quarter, things simply could not have gone any better!

To say we called this market on the button would be a bit of an understatement, at one point in the month I had to run a disclaimer stating: "I don't MAKE the markets do these things, I simply tell you what's going to happen."  I won't be able to say that for much longer as I've got my hedge fund starting in 2 months and, as Jim Cramer tells us, if you're not willing to manipulate the markets – you shouldn't even be in the game!  We'll see how far I have to stretch my ethics over the coming year and I'll do my best to keep you abreast of things as I take my trip down the river Styx.

Thank goodness we went into the holidays going to cash and resetting our virtual portfolios.  I had been nervous about the markets since Thanksgiving and unlike October, where we began buying on the downturn, I never bought the bounce up to 13,700 into Christmas and neutral just didn't seem safe enough so it seemed like a good time to go to cash.  As I said in the 2007 Wrap-Up: "It wasn’t a very good Santa Clause rally to end the year – we’re right back where we started from, just over the top of my 13,300 level but Wednesday’s move gave us the perfect chance to exit our positions as planned and we’re ready to face the new year with a leaner and meaner set of virtual portfolios."

On New Year's Eve I did the Index Round-Up '07 where I predicted this poor start as we observed all the "death-crosses" that were being formed in the major indices.  As I said about the Dow (then at 13,364): "It will only take the smallest bit of bad news to push us to retest the 2007 lows around 12,500 which is how I agree, yet disagree with Stuart Freeman (BusinessWeek’s market forecast winner of ‘07) as he sees the Dow bottoming in the summer in the low 12,000’s but I see it going lower now and topping in the summer, perhaps close to 15,000 but we both see the year ending around 14,500."  I don't know about you but I'm sure glad I read my posts every day! 

As I also said in that round-up: "Markets go up AND down and we certainly learned this year that we know how to make money in either direction so let’s just prepare ourselves by getting our virtual portfolios in shape and having our equipment ready so we can enjoy the wild ride that lies ahead.  PSW is a team effort and we’ve got a really fine group assembled who I am very confident will be able to capitalize on whatever opportunities lie ahead.  We’re not playing the markets because we wanted a quite paddle down the river – it’s rough going out there but oh man, what a rush it can be when we get to the other side a little older, a little wiser and hopefully a little richer than where we began."

From there we made a series of good decisions that led to spectacular returns, here are some highlights for the month:

• 1/2 (Dow opens 13,261):"I’ll be working on more predictions over the weekend but down, then up, then down a bit seems right for the year.  We’ll see what kind of start Wall Street can get the year off to but I will be slow coming off the sidelines until we get a chance to see how all this upcoming data is taken, we have quite a wall of worry to climb in ‘08 and I’m still kind of sore from last year…"
  • Wrap-Up: "The big catalyst for today’s drop was the ISM coming in at 47.7, much lower than the 50.8 in November and a clear sign of economic contraction."
• 1/3 (13,044): "We need to be light on our feet today and watch those levels.  10:30 is going to be more critical than usual but we’d love a nice run in the energy sector to short into as $100 oil is simply not sustainable as it’s already forcing the middle class to make sacrifices just to keep afloat."
  • Wrap-Up: During the day I called $100 oil the straw that would break the back of the economy and we got short as oil topped $100, even though we were also shorting the energy patch as our prediction was the global economy would sink and drag energy (all commodities) down with it. 

I find it very funny how the rumor mill always manages to go full force no matter what the facts are.  Here is a good example as we've heard 100 different theories about what OPEC would do at Friday's meeting BUT THEY TOLD US A MONTH EARLIER EXACTLY WHAT THEY WOULD DO: "OPEC pitched in today, announcing that they have NO plans to raise oil output at their Feb 1st meeting."   I suppose FACTS just don't make for good ratings on CNBC!

I also mentioned in the wrap-up how easy it would be for this country (given the proper leadership) to quickly shift its energy policy to save 10% of our consumption in just 2 year and another 20% in the next 5.  If cutting US consumption by 6Mb A DAY isn't a worthy goal, I really don't know what is but the last guy who ran on that program ended up losing the election in court so not even Obama is willing to piss off the oil companies in this election by saying something as radical as "stop wasting oil."

Iowa shocked the nation by choosing Huckabee and Obama, and change was indeed in the air.  It says a lot about Iowa's power to influence the nation as ALL the candidates now claim to be the candidates of change and Bush talked about change in his State of the Union address as well.  Gee, who'd have thought people weren't satisfied with the status quo?

• 1/4 (13,046): The picture on the right says it all as I began this down down 250-point day with the picture on the right, saying: "I think the Nasdaq is hovering in very dangerous territory at 2,600.  We talked about indices that have already formed a death cross on Monday but there’s no reason not to call them early when you see them and the 50 dma is making an ugly move over at the Nassdaq.  Not to go all stock market 101 on you but keep in mind that every day the index spends below the 50 dma PULLS the 50 dma lower and time spent below the 200 dma is especially painful as that is what can cause a death cross, where the 50 dma dips below the 200 dma, giving us a huge downtrend."
  • That was a day we got a terrible payroll report, just 18,000 jobs, that have since been revised up to 82,000 jobs but shhhhhhhhhhhhh – don't tell anyone how ridiculous this jobs number is as an economic indicator!  If they can't get the jobs number right WITHIN 355% – THEN STOP REPORTING IT!  It does far more harm than good for the government to roll out a random number, especially one that, for some reason, traders insist on taking so seriously.
• In the Weekly Wrap-Up, we were well on the way downhill and Tom2oc and I spent the weekend on Tom's Quarterly State of the Market Analysis, which was a real lifesaver for members as it turned the whole group fairly bearish ahead of the 1,000-point drop.  Even before it was finished I said: "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 again 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."

This is the chart that Tom drew out for the Nasdaq on SEPTEMBER 13th!  Once the uptrend completed itself Tom was just 2 points off with his 2,200 target so kudos to Tom, who, like me, has been warming up to the SOX this past week and that is going to be the key to a potential rotation into tech, setting us up for the great rally of 2008.

On Monday the 7th (Dow opens 12,801), I predicted a rangebound "bi-polar" week and that's what it was so we can just skip most of it.  I liked my 1/8 prediction that the Fed would act within 10 days as it was exactly the 10th business day when we finally got our cut.  I also predicted 1,348 as the turn point for the S&P, saying: "If we get a drop in the S&P led by those groups that arrests at that level, I will be very bullish about a recovery and AAPL will be getting a boatload of my cash."  I was right about ISRG and GS already as quick bouncers but my other two bargain targets, Apple and Google, remain to be seen!  By Wednesday we were back to cash (or, as I said at the time, better yet gold at $860) as we sold into the 2-day rally and it was literally all downhill from there for the next seven sessions as GS, the USA Today and Forbes picked that day to tell us we were in a recession.  As I said about that:

While I still feel this is a massive, coordinated effort to "foment" a panic ahead of action by the famous Plunge Protection Team, the fact is I’m not 80% sure of anything.  I’m not 70% sure and I’m barely 50% sure, but I think that’s as unsure as you can be so that means that unless I am investing in things that are going to, on average, return 50% to me with near certainty, then I am better off not playing until I become a little more certain of direction.

Thursday the 10th was an interesting day in which I detailed how we got so bearish despite it being a big up day in the markets.  AXP became our first "bottom fishing" pick due  even as we started shorting a lot of positions as the Dow jumped back to 12,853.  Holding 12,500 on Friday did get me into the weekend hopeful that we could hold that level as I said of that day's action (closing at 12,606): "Needless to say, we knew Friday was going to be a bummer but I got (surprise!) positive on the markets again and we got a little more aggressive into the weekend.  My attitude is we either make a stand here or we don’t, so it’s pretty much the last chance to be bullish before it goes completely out of fashion."

• 1/14 (12,613): We were off to a bad start as I was outbid for my flying car on Ebay but that didn't sour me on being bullish on Boeing that week as the stock came down to the mid-$70s.  The morning opened well but I warned: "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." 
  • Wrap-Up: "Well, we made it (12,750) with 28 points to spare but all that does is keep us from selling everything and running away screaming, we’re still a long way from putting on our horns again."  My closing advice: "It’s all about the US banking tomorrow, 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."
• 1/15 (12,778): "If you are not already covered to the downside, I don’t think I would recommend chasing the indexes down as I do expect (hope?) them to hold our floor. Once we get below that, we’re going to have to make some very hard choices but, thanks to a weak FXI yesterday, we put some key covers in place.  Unlike last week, 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."
  • Wrap-Up:  We can blame Intel for souring the markets but, like I said, any excuse would have done at the time.  I preferred to place the blame at the top: "While the terrorists may have failed to frighten our nation into chaos and retreat on 9/11, just 6 years later the Bush/Bernanke/Paulson team has managed to do just that to our financial markets with their massively inept handling of last week’s speeches that certainly left investors wanting more. Actually ANYTHING would have been an improvement over the empty platitudes we were given!  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."

In member chat that day we coined the phrase "Down is the new up" and it certainly was as the markets plunged over 1,000 points over 5 nasty sessions but I cautioned at the start of the downturn (even though we predicted it): "We may be making mountains out of mole-hills at this point. When you start hearing that we are falling to 2004 levels, wiping out 3 years of market growth, when you see stocks dropping the most in a single day since 9/11 you have to at least raise an eyebrow when everyone on television starts telling you to pack your bags and move to a cave."

We hoped 12,500 was going to hold on Wednesday but it didn't and I had warned that morning: "We have to move from "James Bond Investing" to "Kenny Rogers Investing" where "You got to know when to hold ‘em, know when to fold ‘em, know when to walk away and know when to run."  In that day's wrap-up I reminded members that: "Danger and change are the elements that make up the Chinese word for crisis, not opportunity, but a well managed virtual portfolio can avoid the dangers of the markets and we welcome the changes when they come and that will leave us ready to seize the opportunities that are presented to us."

Thursday the 17th (12,467) gave us a big pre-market rally as people expected Ben to come out with cuts at a planned speech but we picked up the DIA $126 puts as we had finally learned not to trust the government.  This was also the height of MBI/ABK concerns which led to real panic selling in the financials.  In the Thursday wrap-up, we were in a great mood for being on the right side of the drop but still, we prefer to be bulls and I closed saying: "There was nothing left to do for the rest of the day but buy more puts and try to laugh. It was kind of like watching a slow-motion train wreck as the markets went down, and down, and down, and down for the rest of the day. Now we have to sit here like idiots waiting for the government brain trust to find some way to bail us out, but we’re not going to be holding our breath, as I said at the top, we could be a long, long way from the bottom here."

Friday (12,159) we tested 11,954 but did get back to 12,000 and GE's "not so bad" report had me looking for a bottom as we tested the 12,000 mark.  I could not have been more on target with my morning advice to stay cautious into the weekend despite the strong pre-market: "There’s really no good news out there and we’ve had enough bad news so I think it’s best that we take a moment to meditate on the markets before they open. We are a LONG way from yesterday’s open so don’t get sucked into buying things unless you LOVE them so much you are willing to chase them down to 11,500. If we go up 1,000 instead of down 1,000 then great – just remember Asia did both this morning so BE CAREFUL!"

Now here is where we really lucked out for the month by following our rules: We got a very nice spike in the morning to 12,441 and we used that to cover our open positions.  The market fell back to 11,953 and we decided to buy out our callers with a fairly bullish posture into the long weekend, having gotten another 12,000 test and expecting it to hold.  On Monday we had a global market meltdown, which thankfully we missed and I said in my special Monday post: "We’re going to be either very lucky or very unlucky our markets are closed today, the timing of this is incredible – almost as if it were planned to shut out US investors as 2 years’ worth of gains disappeared over a weekend.  I wonder if Hank Paulson’s old firm will do well this quarter… "

Things were indeed dire on Monday but I rolled out my very simple plan on how to fix the economy and we figured if we sent it to enough Congresspeople it would get some people talking.  It didn't take very long before some of my housing points got some airtime, so thanks to all who spread the word although still no action on my energy initiative so we know who's still calling the shots in Washington!

Tuesday (12,092) was the big luckout for the month for us as the Dow opened down and spiked down so hard and fast that we had no choice but to follow our rules and Stop, Drop and Roll into the catastrophe.  My pre-market strategy was: "Our priorities as far as our long calls go is to roll them longer. Yes we’d like to reposition to a lower strike, but just as important, perhaps more so, is to buy ourselves more time and give the market a chance to show us a true bottom."  The strategy could not really have been more perfect for the day and, in the wrap-up I said: "Well that could hardly have gone better!  We got a huge spike down, EVEN THOUGH the Fed gave us a huge cut. That allowed us to exit puts, take out some callers, roll down our longer calls, add at low prices and then watch the Dow gain 400 points – who says this investing stuff is complicated?"

Wednesday (11,969) we spiked right back down to 11,969 at the open on Apple's "miss" and ECB President Trichet's comments that maybe throwing money at people wasn't a very good way to fight inflation.  This was a concept so shocking to US investors that they sold everything they had bought the day before but we were right there to buy it as I said that morning: "So all that being said, Warren and I are buying – not with abandon but we are dipping our toes in the water and hoping this morning is nothing more than a retest of yesterday’s lows and the Big Chart levels we expected to see this week."  As I later said in Wednesday's wrap-up: "Woo hoo – what a fantastic day!  We hit the nail on the head today, rolling down and buying out callers, bottom fishing some great plays and NAILING the turn in the market pretty much right on the button."

Seven sessions and 700 points later, the markets pretty much took care of themselves and we are closing out one spectacular month!  Congrats to all PSW members on a fantastic start to the year – we may not be completely out of the woods yet but at least we are starting to recognize some of the landmarks.

We had a busy week and closed out 152 positions with an 88% average gain.  A lot of the big money came from closing out some long-standing Google positions as we consolidated lower and longer as well as, of course, our index puts and calls, which just all seemed to go our way (other than our last trade on the Qs!).  It was a fantastic week capping off a fantastic month and if we had any sense we'd spend February on vacation – but what fun is that when we have this crazy market to play with?