Weekly Wrap-Up

So we finished the week up about 50 points on the Dow but the S&P was flat and the Nasdaq about the same.

It was a tough way to get there but we've been looking for consolidation with a rotation out of financials and energy and, to some extent, that's what we got but a stampede out of financials on fear of a collapse wasn't exactly the healthy rotation we were looking for.  The week started with an FBI investigation of CFC and 15 other lenders for securities fraud and Barrons came out against FRE last weekend (this weekend it's BSC of course) and Fitch downgraded 8 banks.  The fact that the XLF finished the week down just 2% is pretty amazing!

We made fantastic progress in our virtual portfolios as we were lucky enough to be in a buying mood on Monday, as we discussed in last week's wrap-up and on Monday morning I noted "can sentiment really get any worse?"  We decided to move into more Long-Term Virtual Portfolio style plays and what a great week for that it was as our LTP gained 10% on the week, very much in line with AAPL 2010 $100s at 44.12 we picked that morning (now $48.15).  I cannot emphasize enough how well the LTP strategy can protect you in uncertain times like this, as I explained in Monday's post, it's a great way to stay in the game while you wait for the market to turn.

Monday evening both Sage and I coincidentally wrote articles about the evils of commodity infation although, it wasn't really a coincidence as it should be the thing that bothers investors most about the economy.  Runaway commodity inflation is the one thing that undermines my bullish premise of global growth as NO economy is doing well enough to pay $150 a barrel for oil.

Tuesday the Fed finally stepped in (we had been waiting for this shoe to drop since last week) and we had a nice 400-poiint day but we decided not to get too excited about it without some follow-through.  We made a terrible play on SIGM which we rolled down to the Jan $25s at a 32% loss but sticking with BA the same day is starting to make up for it.  My Tuesday eveing advice was: " Let’s not go overboard here, we’re still going to keep our fingers on the sell button and take profits off the table.  If this is a real rally, we have 1,000 points to go so we won’t miss much by getting to cash once in a while."

That was our week right right there, maintaining a cautious attitude as we gained another 100 points on Wednesday morning is what gave us a terrific week.  AET was our second public LTP play that payed off big this week and our plan to dump out of our March calls was right on the money as we finally learned to act on the pattern of Wednesday giving us the week's high – the reasons may change but the chart remains essentially the same each week.

It was "Whiplash Wednesday" as the markets took a nasty turn but we hit it on the button and made some very nice day trades for some quick cash.  Thursday morning was the usual thump but, knowing Paulson was coming on and expecting a boost, we took out the callers and recovered on the run-up, giving us another nice boost!

You can make fantastic money trading a range-bound market like this, it's simply a question of fininding the right stocks to trade as they peak and trough and managing our positions.  We went to more day-trading to take advantage of this a few weeks ago and the LTP strategy let's you buy and sell callers, but with the buffer of having the long calls to cover you if they get away.

As I said on Thursday night, sometimes it's better to be lucky than good and I think everyone in the small virtual portfolios realizes how lucky we were with Thurdsay's turn of events that allowed us to escape from our key play on the Russell with a proffit.  There was no way we could have predicted Friday's news but having the good discipline to be happy to get even saved us from going back to square on on Friday morning, when the Bear (Stearns) hit the fan.

My comment from Thursday's Wrap-Up was: "While I still think we can expect further action from the Plunge Protection Team ahead of the weekend, I was concerned that Paulson’s morning conference caused 300 points of short covering and our failure to retake yesterday’s highs turned me a bit bearish as we faced the last 90 minutes of trading.'

We hoped for follow-through on Friday morning but, as I often say to members, hope is not a strategy but I was willing to put my foot down at 2:30 and lighten up on our covers, leaving us with a lot of open calls and some pretty large index puts as a general cover into the weekend.  My overriding logic is that if we have a bottom, then we'll be glad to let the positions run and, if we don't, then cash will once again be king.

It was, on the whole, a really good week and we closed 99 positions with a 51% average gain (as it was our goal to buy out callers we were 50% ahead on, this is no surprise) and we finished the week still back heavily in cash as this remains NOT a market you want to be leaving money in.  Cash gains were, as usual, dominated by our index puts but Google finally stepped off the sidelines and contributed for the first time in quite a while.

Index puts and good timing put our Short-Term Virtual Portfolio up 18% for the week and we are left with 20 uncovered longs, mainly losers along with 10 covered calls and 6 puts.  We are still over 80% cash and looking for a reason to put some money to work but that reason would have to be a "rally" that lasts more than 36 hours.

Activity in the STP was very low as I have shifted my attention to our new Day Trading Virtual Portfolio and and we've been very busy there in our second week, pulling in a spectacular 51% gain over 5 days coming pretty much entirely from our DIA puts, GOOG calls and Thursday's Russell calls, which gaiined 167% in 3 hours – not bad for a day's work!  Let's keep in mind that last week we were barely even so we took a lot of early exits but, now that we have more cash ($122,930) than the $100K we staked the virtual portfolio with, I'm willing to play a little looser than I was last week when we were in danger of going negative on a bad play. 

The Long-Term Virtual Portfolio is, of course, all about patience and we are back in good stead with a 10% gain on the week that brings us back to 51% for the year-to-date.  Much the same as last week, we took a chance and went fairly uncovered into the weekend (but with lot's of DIA puts in the STP to cover) with 29 open calls and just 13 covered calls (some of which are 1/2 covers of our open positions).  We did a full LTP review on Monday so it's a great opportunity for members to go back and review how the plan for the week went (of course, that was very early and there are still moves to trigger next week).

Our $10,000 Virtual Portfolio is almost back to $10,000 – $9,873 to be exact and I am thrilled as we are mainly (1 cover left) out of our Russell play and sitting with $5,423 in cash.  This virtual portfolio had a dreadful start and I am grateful we get a chance to make some new plays while leaving in some comfortable covered plays.

The $25,000 Virtual Portfolio was just a bit more flexible and our extra cash allowed us to take out all the Russell callers at the bottom and the comeback of CROX made our week as we headed back to $28,657, a spectacular 40% gain on the week (and it got worse before it got better!).  We have $15,332 in cash so we're pretty much ready for anything next week but with expiration day on Thursday, we are most likely going to sit tight and manage the 5 positions we have.

The Stocks Virtual Portfolio went nowhere but nowhere is good as we're up 32% for the year and 2/3 in cash.  We were hard pressed to find anything we really loved in this market and our plays on ABK and DAL were really just taking advantage of good front-month premiums more so than out of love of the stocks.

Complext Spreads were the start of the week with a solid 55% gain over last week although we took a big chance leaving Google uncovered into the weekend (Apple is 1/2 covered) but, then again, this is the high-risk Google and Apple virtual portfolio so we get what we play for.  Much of the cash gain came from crushing the hopes and dreams of our short-term GOOG callers as no good rally went unpunished and, after our nice $25 run on Tuesday, we were rewarded for being cautious with a $20 dip late Wednesday to Thursday and again from Thursday's close to Friday when we decided to "go fo it."

All in all, it was a very exciting week, it's a fantastic market to watch mainly from the sidelines but our plays are turning more profitable so the tempation is getting stronger to put a little more money to work, most likely after we get a good look at the holiday weekend.