"If our government pursues Asian-style Central Banking policies they will subject our markets to Asian-style market swings" – Me, August 23rd, 2007
Well we sure are swinging now aren't we? Up 1,000 on Monday, down 1,600 by 11 am Thursday and back up 1,000 by Friday at 1:30 before giving back another 500 points into the close. Overall, the Dow finished up just under 5% for the week and an optimist would say that's one of the best weeks in the market ever – right before you slap him silly with your 401K statement!
My concern in last week's wrap-up was that 29% of the financial sector was still above the 50 dma, versus almost none of the rest of the S&P, and the financials did finish this week flat but at least the 50 dmas are dropping to meet them… In general, treating the upside plays as speculative this week was a great plan as the day-trading posture was rewarded as we bounced reliably between the levels we set at the highs and the lows that were dominated by the 8,800 line (10% off 8,000 and a bit more than 5% above the 10/10 close at 8,450.).
Last week I set our goal for this week to hold 30 on the QQQQs (touched 29.62, closed at 32.30), 900 on the S&P (touched 867, closed at 940) and 8,400 on the Dow (touched 8,262, finished 8,852). I closed last week's wrap-up saying "Hopefully they are saving some big announcement for Monday" and that's exactly what we got but, as expected, it was not quite enough to turn the markets around. On Monday morning I calculated that we should expect at least a 2.5% pop in the markets following announcements of $2Tn being put in play by central banks so our gains for the week still do not reflect an improvement in attitude so much as a function of a simple capital infusion.
Of course I was pretty skeptical of the rally we were expecting that morning, saying: "So wow! That is some big effort being made to prop up the financials. When they fly in a team of doctors from all over the world and put the patient in a world-class facility with all the best equipment and vow to do "whatever it takes" to save him – is that a good time to sell him life insurance? …Think of this weekend’s action more like a shot of adrenaline for the financials – they may be able to jump up briefly, but it’s an emergency measure and needs to be seen as such."
Fortunately, we've been monitoring the pattern of Manic Monday's followed by Depressive Tuesday's all year long and we've settled into a nice set of top and bottom plays to ride out these wild market swings. My comment Monday morning was: "As usual on Manic Mondays, we take our gains with a grain of salt." I also made note of the 40% levels to watch in the EU markets, only one of which held for the week at DAX (4.891, now 4,781), CAC (3,701, now 3,337) and FTSE (4,052, now 4,063). In our home markets the 40% levels we wanted were equally unsuccessful with Dow 8,400 (now 8,852), S&P 950 (now 940), NYSE 6,300 (now 5,948), Nasdaq 1,725 (now 1,711), Russell 515 (now 526), SOX 329 (miles off at 239) and Transports 1,868 (touched on Tuesday but sadly back to 1,724 to close the week).
My trade ideas for Monday morning were MSFT 2010 $17.50s, which jumped from$7.25 Monday morning to $9.20 at Friday's last sale, TM, which went nowhere and the Apr $50s never hit the target and a CVX Dec $45/$55 spread, which jumped from $6.60 to $7.65 even if they were entered as a straight spread, rather than taking the $45s first and selling the $55s into the Monday rally, which would have made it a huge play. The same goes for the full play on MSFT, where I said that "very liquid front-month contracts to sell into the initial rally at good premiums." Both MSFT and CVX made spectacular moves on Monday, as did TM – with very nice entry points on slow starts. Those kinds of plays are ideal for initiating income-producing spreads, the trick is to pick big-cap stocks that are slow movers with very liquid front-month contracts to sell as they pull back off rallies. I also picked the EWJ ETF, which opened Monday at $8.70 but was already at $9.80 on Tuesday morning so I called for a quick cash-out or cover there.
As I mentioned Tuesday morning, it was a "monkey with a dart-board" kind of rally and anything went up on Monday, the real trick was trying to pick stocks that were still going to be positive on Friday! I was very down on the bailout plan as it stood on Tuesday morning and we did not get the secondary action I had said on Monday would be critical to sustain the rally. We looked at SLW in the morning post and they promptly dropped this week low enough to test even a $4.10 spread entry. I still like SLW down at $4.50, a 3-year low. The levels we looked to hold in order to remain bullish on Tuesday morning were generally close with no cigar, and were Dow 9,775 (we touched 9,794), S&P 1,035 (touched 1,044), NYSE 6,555 (touched 6,650), Nasdaq 1,900 (touched 1,896) and Russell 600 (touched 584). The failure of the Nasdaq and the Russell put us in a selling mood right at the bell and the DXD Jan $70s we looked at in the morning post performed as expected, opening at just $10 and running up to $32.40 on Thursday's dip. Even at the end of Tuesday, I reveiwed them in the wrap-up, those DXDs were "just" up to $15.95 – plenty of room left to grow for the next two days!
What I said at the end of Tuesday's morning post was very good advice at the time: "Not reaching 10,000 this week will be a bad thing and you ARE going to want some good protection into the weekend so initiating something here that you can sell premium against ahead of Friday’s expiration is not a bad way to begin covering the downside – just in case the basement is still flooding!" Holding 9,000 on Tuesday encouraged us to do a little well-covered bottom fishing (still with upside plays the speculative ones) and the 20% discounts we were aiming to give ourselves selling covers barely held up for the week. It was not, of course, unexpected – as I said at the end of Tuesday's wrap-up: "We’ll be watching our levels closely tomorrow but we’re back to looking down and hedging up until we get back over our 40% lines. Maybe the government pulls another trick to pump up the market in the morning but, if not – we’ll be back to looking at more put opportunities as we head for a retest of the 50% line." Letting our levels be our guide and taking the emotion out of the trades has been our saving grace the past few weeks – as much as we want to see a silver lining, sometimes the gray clouds just mean rain.
Wednesday morning looked ugly from the outset and the day's action did not disappoint us but we kept plucking away looking for things to buy on the way down. At the end of that post I said: "We are laser-focused on the 40% levels; Dow 8,413, S&P 946, NYSE 6,232, Nasdaq 1,717 and Russell 514 – without those, there is no point in being positive on the markets and I’ll do a full Big Chart review tonight. It’s still nasty out there and the upside continues to be our speculative plays but what fun speculation it is at these levels and we will continue to bottom fish on plays like CX, which give us a wide margin for error." That CX play was to put us in for a net $6.50 using the pre-earnings premium and the stock has held $7.50 so far, a nice 1-month profit if it holds long enough to be called away.
We ended up falling 733 points on Wednesday, falling off a particular cliff after Bernanke's noon comments that caused me to say: "Holy cow, how many times can he say crisis in 60 seconds?!?" We broke the 7.5% rule and that virtually guaranteed a follow-through 2.5% drop on Thursday morning but the Big Chart review gave us the levels to watch that allowed us to turn bullish almost on the button of Thursday morning's turn.
The Thursday morning plays we looked at were all bullish. Selling the AAPL Nov $85 puts for $10 (now $6.12), a GOOG $20 earnings spread that's already $27.20 and the QLDs, which fell $1 below our $30.50 target and ran up to $34.20 after touching $37 on Friday but that didn't stop the Nov $32s from finishing up 34% from our entry price. We got the Google earnings we were looking for with those plays but Friday morning's post had me back to "Hedging for Disaster" as it just seemed like there was not going to be enough gas to get us to a comfort zone into the weekend.
It's a very good post (along with the original post on the subject) that, along with Buffett's bottom call in the NY Times that morning, gives an outline for our bottom fishing strategy we nailed the move on Friday to a T during member chat because, as I siad in the morning, we were looking for Nasdaq leadership that had to be confirmed by NYSE 6,232, which was almost touched to the penny but failed at 1:40. That allowed us to go from selling the naked GOOG $370s at $7.30 at 9:34 (expired worthless) to my level comment of 12:58: "We are getting Nas leadership followed by NYSE so all good so far. Russell is dog of the day but let’s see if the NYSE can take out 2.5% at 6,120 but expecting a normal bounce back to 6,090 if rejected. 2.5% rule on the S&P is 970 and Dow around 9,250. On the Nas it’s 1,755 so rejections back a touch off that are fine but not too far if we’re going to break up." You can follow my prediction along on the NYSE and see how we performed between those targets over the next 2 hours, which gave us very good signals.
By 1:42 I was nervous enough to pick a bold play on the SDS March $90s and Nov $80s at what turned out to be the absolute low for the day on that ETF. By 2:15 the downside was confirmed enough for me to say: "Looks like we are running out of gas. Anything can happen into the close but you don’t want to be caught uncovered if we head down fast. VIX came way down, down 10% from earlier so it seems very satisfied with the move now." Sadly, we dropped 500 points into the close in a terrible finish, marking the end of one of the "best single-week gains ever."
It's still very scary out there and while Barron's says "things aren't as bad as they seem" (which Barry Ritholtz quickly made fun of), our friend Dr. Brett makes a case for the S&P returning to book value – quite a bit lower than where we are now. I'm still going with my analogy of last weekend that the government is simply using paper towels (over $2Tn worth of them this month!) to clean up a leaking economy without doing anything to address the actual cause of the leak and that may end VERY badly for all of us. I'm amazed that gold has traded down and we jumped on it again on Friday as the NY Times points out this weekend that the government has now committed "almost $1.5Tn in loans and investments… guaranteed another $3.6Tn in investments and bank deposits and provided another $620Bn in currency swaps" – not the kind of money you like to see spent when you want to keep inflation in check.
We'll continue to watch our levels for guidance next week but I think the decline in commodity prices is a very good thing while at the same time the CDS situation is improving rapidly. Unfortunately, neither of these things is going to give us the instant relief investors are crying for in the markets but that does present us with lots of good opportunities to continue to bargain shop, maintaining our disaster hedges just in case Prudent Investor's $596 Trillion crisis prediction turns out to be even 1% correct (Toni feels it net's out to a still-shocking $14.5Tn of net default risk – still very bad!).
