Wild Weekly Wrap-Up

What a great week!

While it may have felt a little like a roller coaster again, the fact of the matter is we started Monday morning at 11,800, broke 12,000 and never fell below it, then broke 12,100 on Tuesday and never fell below that, then broke 12,400 on Wednesday morning and finished just under it for the week.  Sounds even better in summary than it actually felt doesn’t it?

We’re still having a wild ride with 1,200 points of up and down moves in just 4 days but at least we’re getting the hang of it and making the right calls, as I said on Thursday morning: "As options players, we are loving this as there are so many rangy stocks and indexes to play that used to take weeks to make 20% but now take hours to make 40%."  The fact that our entire Day Trade Virtual Portfolio is up 83% in just 3 weeks is evidence for that – while still very stressful, this market can be very rewarding when we get on the right side of things.

Even our small virtual portfolios, where we do not day trade and are very limited in the kind of moves we can make, have made tremendous gains the past two weeks.  The $10K Virtual Portfolio was down 30%, to $6,968 on the 9th, getting off to our second worst start ever for a new virtual portfolio but has now recovered to $11,183, a 60% gain in two weeks.  Our $25K Virtual Portfolio was down to $18,507 and has also gained 60%, now at $29,762.  Essentially both virtual portfolios are up the same because we went with the positions I felt had the best possible chance of making money in both small virtual portfolios but I will not take credit for being smart – we got unlucky, then we got lucky, it’s as simple as that.

The real trick will be trying to make the next 60% gain WITHOUT the 40% loss preceeding it, then we’ll be getting somewhere.  Now that we are getting the hang of this nutty market, it will be great to take a reset from a greater cash position and we will be mainly in cash if we don’t get some follow-through to this week’s rally on Monday.

The week really could not have gone much better for the strategy we’ve been playing for as we’ve been looking for a rotation out of financials and energy to push money back into tech.  With the XLF down 33% since October it’s mission accomplished there and we’re ready to play them back up but the XLE, which also makes up 20% of the S&P, is down just 10% over the same period and hopefully will have another 20% adjustment ahead of them as oil prices normalize.

We hopefully saw the blow-off bottom of the financials on Monday as BSC turned out to be "worth" 1/15th of it’s previous Friday close.  The fact that we didn’t crash the market on Monday gave us great hope and our Monday morning strategy was dead on: "We’ve done our best to conserve our capital all year for just such an occasion so we’re going to be in bargain hunting mode but think of this as the opening item of an auction, where we’re just going to watch the action and see if there are any real bidders, continuing to conserve our cash for the items we really want."

The key to our success was making the call NOT to overcover our calls but to instead stay flexible with index calls, as outlined in the K1 Project, that was Monday morning’s reading assignment and it was, as I thought, "panic, pure and simple" that was driving Monday’s sell off and gave us a perfect chance to take out our callers.

Sage was right on target Monday night, pointing out that BSC’s $3Bn loss of market cap was JPM’s $12.5Bn gain.  Talk about creating something for nothing!  It showed that while there was plenty of panic in the financial sector among the retail shareholders, the big money was already looking ahead to a recovery.  Imagine if JPM had bought BSC for $3Bn or even $1Bn, would they have GAINED from the transaction?  Getting BSC for free along with a $30Bn bonus from the Fed though, that’s a winner!

Monday was an easy day for us as all went according to plan as Paulson came in to save us at the day’s end, giving the markets some pre Fed-cut boost.  We were so in the groove by Monday night that I even said we may be up 500 points from the bottom (11.757) ahead of the Fed and we could cover into it and we were, in fact at 12,271 at 2pm the next day before we dropped almost 200 points on the initial disappointment.  That’s some pretty good targeting folks!

Tuesday morning we had fun watching Jim Cramer tell us how when he said BSC was solid at $60 he didn’t mean the stock, and I continued to remind people that $110 oil was a recovery deal breaker.  Amazingly, the .75 rate cut disappointed commodity traders as it isn’t enough to support this BS bubble and oil has fallen 7% since topping out ahead of the Fed.  I stayed on target predicting the .75 rate cut would wind us up at 12,400 and I was off by 8 points at the day’s end but I felt that was a slight overreacting and we decided to cover into the close as nothing had yet been done to address the fundamentals and oil hadn’t backed off yet and was likely to take the market with it if it did.

My statement about covering related to prudently putting on life vests when you are on the Titanic: "Now that doesn’t mean I am giving up on the markets, just that yesterday’s Fed action was little more than rearranging deck chairs on the Titanic while anyone not actually on the ship (foreign investors) can clearly see that we have struck and iceberg and are taking on water and no matter how many free pina coladas Bernanke hands out, all the 2nd class passengers are still going to die an icy, cold death."  

I won’t bore you with rehashing the whole thing but I laid out my logic on Tuesday night and it was dead on so it’s good to go back and read it in retrospect as all these great day trades and index puts and calls we buy are based on shifts in the economic currents we are observing.  I often compare short-term trading to whitewater rafting where you never "pick a direction" and stick with it, you have to always be watching the currents and the rocks as a lot of action can happen even though you are very likely to stay between the banks of the river!

Wednesday morning was very interesting as we were down in pre-markets, then opened way off but ultimately dropped 300 points during the day.  We made our second big oil put of the week with XOM $85 puts, which we very wisely dumped Thursday morning for a near double and I was still on a tear by sticking to my prediction (from the week before) that we would finish the week between 12,250 and 12,500.  We did finish the week at 12,371, 14 points off dead center.

Late Wednesday I decided the sell-off was, in fact, overdone and we took out our callers yet again – the third time in two weeks.  Wednesday was declared a wipe-out but we were in a great mood as it was a commodity led wipe out, which is exactly what we wanted to see.  Heyena attacks on MER accounted for the weakness in the financial sector and these are becoming very obvious to us, if not to the greater investing community so we bought with confidence into the sell-off.

Wednesday afternoon we expected that the PPT would close the week on an up note and there were several encouraging noises made on Thursday, including Barney Frank, who indicated that Congress may actually be ready to help the actual homeowners and that’s a very good thing.  By Thursday morning we were already downright optimistic (see top picture) and we wouldn’t even let FDX bring us down with their gloomy forecast, which I decided was based on them buying all the nonsense the media was telling them about the economy. Selling the DIA $121 puts at the open was a 100% winner, giving us a fabulous gain on every single main post pick of the week – not too shabby!

Our virtual portfolios were simply fabulous but I always like to warn that these gains are fleeting because we are not overly covered and could take a hit if the markets turn negative next week, especially if we get hit Monday.  We have plenty of index puts but I’d hate to see our positions retrace a nice week of recovery.  As it was expiration week, we closed a lot of callers at 100% profit and, overall, we ended up closing exactly 100 positions with an average gain of 102%.  Needless to say our virtual portfolios improved across the board:

• Short-Term Virtual Portfolio:  Up  38% on the week, up 202% for the year.  31 open positions.
• Day Trading Virtual Portfolio:  Up 24% for the week, up 83% in 3 total weeks, 5 open positions.
• Long-Term Virtual Portfolio:  Up 16% for the week, up 67% for the year, 42 open positions.
• $10,000 Virtual Portfolio:  Up 12% for the week, up 11% in 5 total weeks, 5 open positions.
• $25,000 Virtual Portfolio:  Up 4% for the week, up 19% in 5 total weeks, 8 open positions.
• Stocks Virtual Portfolio:  Up 8% for the week, up 40% for the year, 3 open positions.
• Complex Spreads:  Up 13% for the week, up 93% for the year, 3 open positions.

So, on the whole, we’ve got very few (for us) open short-term positions and we’ve been loading up on LTP plays as the market gave us a fire sale.  While the STP is still 70% cash, the LTP is 70% invested, reflecting very accurately our long and short-term confidence in the market.  Over the shorter time-frames, we are still looking to stay very much in cash and very flexible but we’re finally having fun again – and that’s what it’s all about!