This was the worst week ever in the markets – EVER!
That's saying a lot isn't it? We had 9/11, we had 2 World Wars, Korea and Vietnam and the Cold War. We had Watergate, the Iran Hostage Crisis, the Great Depression we even had Bird Flu (remember when that was our big concern?) yet none of those events caused as much market damage as our current crisis and we may, in fact, only be at the early stages of it if the latest action (or inaction) of the G7 does not quickly restore confidence in the system.
Notice that the us indices did outperform their global cousins, both for the week and for the year so far with Emerging Market Stocks down a horrendous 53.6% for the year and Global and European stocks are not far behind. The Dow is resting right on that 40% line for the past year and the Russell is still leading us by being down "just" 37.9% in 12 moths.
Last October 10th, the Dow was at 14,078, the actual closing high and Friday we closed at 8,451 after touching as low as 7,882. It's interesting to read my morning post of last October 10th as I was, at the time, bearish on the market, comparing the whole thing to a house of cards AND the Titanic in the same post. Unfortunately, like many, I allowed myself to think 11,500 made a good bottom, that was 30% ago! Yes, US equities have been the "least sucky" place to put your money in 2008 but who knew how much everything would actually suck? We are actually in the worst-case scenario and a save right now would be the miracle – the easier and more likely path is a downward spiral from here.
Last weekend we had a "Rotten Weekly Wrap-Up" and I pointed out: "One frightening statistic is that 29% of the financial sector is still above the 50-day moving average, compared to just 11% of the S&P, while NONE of the Dow components can make that claim" and this week the XLF fell from 18.78 on Friday's close to 12.87 on Friday's open, completing that 29% drop for the rest of the sector. As I said at the close of last week's wrap: "Friday was a huge disappointment and if this bailout bill fails to turn sentiment, we have got BIG trouble!" Trouble was not only BIG but BAD and UGLY too, the worst trouble the markets have ever seen.
We knew things were going to bad on Monday morning and I led off discussing the DXD (which went from $70 to $110 for the week) and FXP (which went from $115 to $160) as cover plays. They were ones we already had as trade ideas on Friday, back when the FXP $110s were $7.50 and the DXD $63s were just $5. As I said Monday morning: "It’s good to have plays like this ready, in cases of emergency as it’s faster to cover with one big short position than scrambling to cover a dozen more bullish plays."
As I said the week before, it's the upside plays that are speculative in this market and that continues to be true, now for our third week in a row. My sentiment turned very negative on Wednesday, the 1st, when I wrote the morning post titled "Hedging for Disaster" and, whether you are a bull or a bear, the strategy is very valid in a market as volatile as this where the Dow made over 3,000 points of up and down moves on Friday alone! I predicted oil companies would drag us down this week but who knew the XLE would plunge 25% in 5 days? I was going over the worst case on Monday, picking the IBM Nov $95 puts, which flew from $5.50 to $14 during the week and XOM Jan $70 puts, which went in the money from under $4 on Monday and my target $3.50 on Tuesday all the way to $17 at Friday's high. The CVX March $70 puts also took off like a rocket from $6 on Monday and Tuesday also to $17 at the week's end.
I'm pointing this out to hammer home what I've been discussing in these hedging articles – keeping yourself 30% invested in the contrary direction with this volatility can save your virtual portfolio when the market goes the other way. In a flatter market, betting against yourself with options is trickier but, when you can go up or down 5% in a single day, that 30% can turn into 100% and whatever you have left on the "wrong" side of the trade turns into a bonus. Our upside speculative play that morning was the WFC Apr $30 calls at $8 against the Oct $34 calls at $2.50. As WFC fell from $33.64 to $28.31 this week, the Apr $30s dropped to $5.65 and the Oct $34s fell to .40. While it is certainly not a win, plays like these sure beat playing the stock with a covered call as the stock lost far more than $2.50! We are keeping in mind always what I said at the end of Monday's post: "We’re hoping for signs of hope but it’s the upside plays that remain speculative. The Fed is pouring money into the markets to no avail and sentiment is very bad."
After 2 weeks of bearish plays we HAVE to look for something to play to the upside. Now the WFC Apr $30s, if you had taken that play on Monday, can be rolled down to the $26s for $2.10. That would increase your basis back to $7.50 ($8-$2.50+$2) in the $7.70 position but those $26 calls were $11.50 on Monday and you can now roll the .40 Oct $34 calls to the $3 Nov $30 calls. That brings your basis back to $4.50 with a $5 position advantage over the caller (plus 6 months of time). If you are maintaining your upside plays like this and you have 30% of your virtual portfolio in downside plays that are running up 50% to 100%, then you are probably in good shape.
The hard part is timing the reversals and that's why we've developed an interest in the ultra-longs at this point – for the same reasons we were keen on the ultar-shorts a couple of weeks ago. If the market snaps back 1/2 as hard as it snapped down, then ultra-longs will make up for a whole lot of losses on your more bearish plays. During chat on Monday I ran down a list of stocks that seemed ridiculously underpriced but I also said: "These are amazing, but how can you buy anything with the market like this?" Fully expecting a rate cut on Monday night I said: "Not that a cut will be a long-term solution but at least it should be a rally we can sell calls into and pick up some more puts at a discount." That turned out to be a great game plan for Tuesday morning, when the Dow quickly ran up to 10,105 but finished the day at 9,447.
I liked ABX up on Monday night and called a good bottom on platinum. ABX took off like a rocket from $30 to $35 but then fell back to earth and is $30 again (and I like them again!) while platinum went from Monday's close at $948 to $1043 on Friday. Unfortunately, I didn't know any good platinum companies to play… Monday was also the day Cramer told everyone to get out of the market and it was, as I predicted, a self-fulfilling prophecy.
We WANTED to believe Cramer was wrong on Tuesday morning but thank goodness for Monday night's Big Chart review and our decision to play the levels and not our feelings because those 40% levels we were watching told the story for the week. Charles Ryan of Deutsche Bank hit the nail on the head Tuesday morning when he said: "In the current environment, its not clear that a package will work anywhere in the world. No matter what the fundamentals, [investors] are afraid that tomorrow everything will be cheaper than it is today." I had no happy picks on Tuesday as I had said "..investors will not be happy with anything but a massive rate cut" but I did like the USO Apr $78 puts, which went from $14 to $18.40 (so far) and it's important to note that even if you sold the Oct $71 puts against them for $3 as a hedge, those now are $6 but can be rolled down to Nov $66 puts, which are $6.10. This is why we love spreads on ETF's with $1 increments!
There was, of course, much to be frightened of Tuesday morning and my closing comment that day was: "I’m getting concerned about the retailers as this credit crunch may ruin Christmas." Very sadly, that one seemed right on the money as the retail reports were beyond awful!
Tuesday I went to the Value Investing Congress and came back in a very foul mood and my conclusion was: "Stocks have "value" as long as investors believe that the economic conditions are temporary but, especially for the non-dividend payers, they are simply not worth the paper they are written on to someone who needs to eat." After watching the rest of the weeks action, I would have to amend that statement to include "or funds that need to liquidate" as that probably was and may continue to be one of the main drivers of this sell-off.
Wednesday morning we got our rate cut and had upside plays at the ready but we never crossed that Dow 9,800 line I was looking for as a trigger. Again, staying unemotional with levels is key in this market… GLD came down $70 from Tuesday's open but the GLD 2010 $110s, as expected, actually held their value, which is too bad as it would be a good time to buy more ahead of the government announcing the next $2Tn in expenditures. My morning conclusion was: "I think we are seeing panic but there’s no telling when that panic will subside. If we can’t put in a bottom today and recover to hold back over 9,800, we may be a long way from any sort of proper bottom and those downside plays will be great moneymakers but I can’t imagine what solace that will be in a world where the markets are that devastated."
Wednesday night I continued to preach the gospel of levels as we made a lot of great intra-day plays during member chat by simply watching the 9,500 line on the Dow for our turns. Closing below it left us bearish for the day and I ran a rare second Big Chart of the week as we started to look down as I said: "Do not make the mistake of thinking the global markets are so disconnected that we can fight the pull if those indexes continue to fall. We need the Hang Seng and the Nikkei to get back over 50% before we can even consider feeling better about finding a bottom and we ABSOLUTELY need the S&P, the NYSE and the Nasdaq to hold their 40% lines, which are just a few points away."
Looking back on this now, just a few days later, it's really sobering to see just how gloomy our outlook turned in just 10 days. It's hard to stay bearish in the face of a market crash but I reminded members that afternoon as we looked at more short and ultra-short plays: "We may get it all back in the morning but it’s the catastrophic losses we are protecting against. If things perk up, then great, we take a small loss on the covers and enjoy the ride, that’s what insurance is – you don’t curse your life insurance every day you wake up alive do you?" Very sadly, we didn't get anything back – we weren't even halfway to our week's lows!
Thursday morning I called the rate cut "another disappointment" and I said: "Sadly, it’s our downside levels we are watching now as last night’s Big Chart Review shows the S&P (946), the NYSE (6,232) and the Nasdaq (1,717) all dangerously close to the 40% off line for the year." Once again I looked at a couple of bullish plays on the XLF but we failed to hold our levels to make a trigger point as I said there: "We have our critical levels for the day: Dow 9,400, S&P 1,000, NYSE 6,400 – If we can’t hold those, there’s no reason at all to be bullish but, as I said, if we dip back to 9,200 and hold that, then picking up a few of these bullish plays on the cheap could work out well if we bounce back up but setting realistic stops is key because if we do break below 9,000, then Cramer’s 8,000 prediction looms large and, ahead of the weekend, I can’t imagine investors getting all brave on Friday if we fail our levels today."
By Friday morning we were already begging for market mercy but I finally put my foot down and laid out several plays to get into if we could hold $30 on the QQQQs, 900 on the S&P and 8,400 on the Dow. During the session the Dow fell as low as 8.000 but held it and finished at 8,451 while the S&P touched 840 at the open and climbed back to 899.22 at the close (not good enough) while the QQQQs ran a multiple test of 29.5 but finished the day at 31.32 – our most promising index!
Despite the scary-looking day, I called an audible at 1:51, saying to members: "There goes 8,000. If we get back over it, then the long plays can be triggered as that’s what happened this morning with the quick reverse but if we don’t take back 8,200 it’s time to run away screaming." At 1:58 I went with the bold call saying "DDM is Dow ultra-long and it’s below the option charts! Jan $39s at $3.95 (HXDAM) are pretty good as DXD was at $55 two weeks ago." Those DDM's took off like a rocket, with the underlying ETF going from $29.40 to $36 on the spike up (22%) and settling out at $34 on the button (15%) – not bad for 2 hour's movement… The picks were flying fast and furious in the 2pm hour but at 3:31, with the Dow at 8,665, I had to warn: "If you don’t have any other cover then you should, we could open down 500 on Monday (again)."
By 3:35, the Dow was at 8,869 and I suggested DOG, which is an ultra-short on the Dow but they only went from $84 to $88 on the 350-pont pullback, so I'm a little less than thrilled with that one unless they adjust up on Monday. My conclusion at 3:56 in member chat was: "This is actually a very spotty rally, not that impressive. I would keep some downside hedges for the weekend – just in case but, while I can believe our leaders are dumb enough to blow it and come up empty, I don’t think the rest of the G7 will let that happen" but, after hearing Paulson's comments on Friday night and reading what little concrete actually came our of the meeting, I'm more nervous than ever.
Hopefully they are saving some big announcement for Monday but that seems silly even as I'm writing it as we are just desperately hoping for the leadership that has been sorely lacking for years and this crisis is simply not going to solve itself. These are terrible times and the oulook is grim, we need to hedge to the upside but the last five days can only go in the book as the Dow's worst week – so far, as it's going to take a lot more than rhetoric to turn these markets around!
