Weekly Wrap-Up

It was a fairly miserable week in the markets with a very miserable ending so we’re not going to dwell too much on it.

On the whole, the market finished the week just 100 points below where it began and down 200 points from Jan 31st’s open at 12,438 (but that day we spiked down to 12,200).  We also broke below 12,200 on each day from 2/6 through 2/11 and again on the 20th and 22nd.  The only reason Friday’s drop was particularly stinging is we allowed ourselves to hope we were pulling out of the market funk after 600 points of gains in 4 sessions from last Friday through Wednesday.

Looking at a 3-month chart doesn’t make things seem quite as alarming and a 5-year chart makes you really wonder what all the fuss is about as we climbed from 7,500 to 14,000 and now we pulled back to 12,000, still up 60% in 5 years and merely having given back 2,000 of a 7,500-point gain (26%).  Charts are all about perspective and you can read them with a positive or negative spin depending on the media.

One week ago, I said a sell-off to 12,250 was overdone and here we are back at that point so Monday will be a critical test of the global panic button – How low can the dollar go and how much is this really going to affect the US markets and are US equities still the "least sucky" place to put money in ’08.  On Wednesday, the 13th, we traded down to 12,216 ahead of the St. Valentine’s Day Massacre and Monday we are virtually certain to retest that low!

I set the theme for the week on Monday with an update of my old "Inflation Nation" article with very little having changed from the time I first published it in 2006.  That was our theme for the week as runaway US inflation, led by $103 oil, played havoc with the markets and I’ve never been more sorry to be right on the button as I was this week as the market was ransacked by inflation fears.

On Monday we noted the WSJ showed economists had a very dreary economic outlook for the year yet the Business Council found that 96.4% of US CEO’s do NOT see a recession in ’08.  The question is – Are they insane or is Goldman Sachs, who have been pushing the doom and gloom view of the economy as if their entire future depends on it (and well it might, also according to the Journal).  On Monday, we were properly bullish as I warned against listening to the "bond pimps and other hyenas who are hoping to profit on an economic downturn."  I’m amazed at how many people are investing in bonds these days when the last thing you want to do in a weak-dollar, inflationary environment is tie up your cash in US dollars at a fixed interest rate.  That’s why Bill Gross was actually getting nervous on Friday and actually talked UP the economy for a change!

Monday WAS a good day (up 190), as was Tuesday (up 115) but Wednesday we put in a classic "spinning top" candle, which does tend to signify a change of direction.  We flirted with the 1,380 mark that Stock and Option Trades said would be a breakout test on Tuesday morning and that was also the day we got the PPI that caused me to say: "Inflation, inflation, inflation, inflation…  how will the market react to this?  Answer:  Probably not well."  That turned out to be quite the understatement!

I also pointed out Tuesday Morning that oil and other commodities weren’t all that expensive in terms of real currencies (pretty much any one but ours) and that it was going to up to Bernanke to save the dollar as he testified before Congress for the next two days.  Who’d have thought that Bernanke would turn up only (to paraphrase Shakespeare) "To bury the dollar, not to praise it."  Indeed the economic evil that elected officials do lives long after they leave office while the good is often reversed by the corrupt administrations that follow.  Our economic confidence suffered the death of Ceasar last week, assassinated from all sides by a pack of bears and hyenas all seeking to profit from the death of our economy.  In our Tuesday Wrap-Up I titled it "Europe Ascending" as the EU was indeed starting to look like a "less sucky" place to put money to work than the US.

Despite the 300+ point gain on Monday and Tuesday, I titled Wednesday morning "Worrisome Wednesday" saying that counting on Ben Bernanke to save the markets was a pretty  bad idea.  We had covered at Tuesday’s close and Wednesday’s up and down action caused us to re-cover, despite a very nice comeback from Apple that we hoped would negate Bernanke’s sour tone.

By 9:47 on Thursday we were already looking to put this week out of its misery.  My comment at the time was:  "Whole market dropping now, we lost 12,600 and if we don’t turn around today it’s going to be a tough weekend to hold."  We skated along that 12,600 mark (which Sage had already pointed out as critical earlier in the week) until 11, when we crashed right through it as Bernanke discussed small banks that may be failing, leading us to a two-day funk.

I tried to stay positive and at 11:44 I said: "2,325 has been supportive on the Nas as has 44 on the Qs, if they fail, we could get a nasty leg down."  Despite my own warning though, we took a few hopeful daytrades and it was daytrading that saved the week with some timely puts on XOM and CVX and EOG as it reversed, as well as some nice plays on QID, GOOG, the Qs and DIAs.  Its very hard to make money in this market so we do what we can… 

We were only lucky that we maintained a bearish posture on Thursday and added QID calls and another layer to our DIA mattress plays from Wednesday at 3:11, those plays saved us from a very bad Friday!  Due to the rapidly deteriorating stability of the market, we decided to shut down the Old $25,000 virtual portfolio at $44,485, up 78%, as well as the Bargain Basement Virtual Portfolio at $99,360 (down 0.6%) and put $100,000 into a new Day Trading Virtual Portfolio, which will not be all day trading per se but more of a very short-term opportunity virtual portfolio as these wild market swings give us plenty of opportunities for quick gains so it’s a good time to develop this skill.

Friday Morning we knew it was going to be awful first thing in the morning and our day can be summed up with the comment I made at 3:29: "What is you plan for a 300-poit down move on Monday? If you don’t have on, you may want to consider hedging a bit more!" 

We’ll see what new horrors Monday may bring but we are VERY happy to say goodbye to February, the most frustrating month we’ve had since starting PSW!  Good riddance to it I say but closing down 2 virtual portfolios to shift strategies is a VERY BIG DEAL and is an indication that I have become so concerned about the fundamentals that I’m no longer comfortable leaving cash in ANY position, even the ones we have covered.  I wish I had better news but, at this point, the market needs to give us a reason to believe in it again.

It was a miserable week and we were mainly stunned and just trying to protect what we had.  We closed just 36 positions with an average gain of 28% but an overall cash loss of 1% – that’s an indication of what kind of nightmare we’re having as we generally try to close out winners and winners were few and far between this week.  Our virtual portfolios were a mixed bag but the Short-Term Virtual Portfolio did very well as that’s where we place all the index puts that protect the other virtual portfolios and also where we do our day-trade type plays.

The Short-Term Virtual Portfolio finished the week up 12% and is 80% cash.  Since the virtual portfolio is up 137% for the year, the cash in the STP is more money than all the other virtual portfolios other than the LTP started the year with.  This is the advantage of running diversified strategies, while one thing may not be working, sometimes something else you do may be working very well.  In the case of the STP it was mainly the index puts as the Dow gave us win after win with it’s stunning and regular dips.  There are just 17 uncovered calls remaining and they are very well covered by our puts.  Our new Day Trade Virtual Portfolio is going to be following the hit and run style of the STP.

Our Long-Term Virtual Portfolio is, bless it, once again dead flat for the week, still up 40% for the year.  There are just 19 open calls and most of them are from positions that are half covered as we were less than enthusiastic going into the weekend.  The LTP has just 46% cash but, with the longer time-frame, we are ready to ride out some rough waters.

The $10,000 Virtual Portfolio is, sadly, now the $9,313 Virtual Portfolio, down 6.9% after 2 weeks.  This is actually a $65 improvement over last week!  We took puts on BA that will help a little but, on the whole, all hopes lie with the Rutterfly play (a butterfly on the Russell) as we are just 1/2 cash and I am loathe to put it to work in this choppy environment.

The New $25,000 Virtual Portfolio is also at 1/2 cash and down 5.4% over the past 2 weeks, up $480 from last week but still hurting and also with much hopes pinned on the Russell hitting our target.  We all need to thank Joseph for saving us on Friday by coming up with a nice cover for Boeing ahead of their loss of the contract deal that should pay off well on Monday (NOC up, BA down).

Complex Spreads took a very big hit, dropping 11% for the week, up just 27% for the year now.  With the virtual portfolio almost entirely made up of Google and Apple positions, we got off lucky!

Our humble Stock Virtual Portfolio actually gained 2% despite some real pain in the C and MSFT puts we sold.  We got out of our miners a little early but I’m glad to be at 2/3 cash in that virtual portfolio (up 32% for the year) and ready to take advantage of some of the bargains that are being served up.

As I mentioned above, we dumped the old $25KP and the Bargain Basement Virtual Portfolio in order to put cash into our Day Trading Virtual Portfolio and we’re going to have a workshop this week on how to work our positions in a terrible, choppy marked.  Let’s hope we find a floor on Monday!