Well that was a lot of work to lose 400 points for the week!
On the brighter side we're up 500 points since October 10th and it's starting to look a little bit like some healthy consolidation forming a bottom around 8,500. 8,500 is close enough to 40% off 14,000 for us to use the rounded numbers for a top and bottom and, as we form a new base, I'll be adjusting our upside expectations accodingly but it's pretty clear that we'll be testing the 9,000 line next week and Robin Hood's Dow chart gives us a pretty clear indication of the very hard road to recovery that lies ahead of us.
We had a fantastic week with many great trades as we were right on top of the market moves all week. In last weekend's wrap up I said: "We have the election to distract us on Tuesday and that is also keeping a lid on the financial news as most papers are concentrating on the election so it may go unnoticed on Monday that no additional funding is pouring into the markets. We have a lot of data hitting the wire… after which the market mood may change quite a bit." Well, that was pretty much exactly what happened, with the markets driving up 300 into the election and then dropping 1,000 points the next two days as investors refocused on earnings and data – isn't it nice to know what's going to happen a week ahead of time?
I was actually off by 100 points in calling for 9,500 to be the top on Monday morning as we coasted along the 9,600 on Tuesday but it did become the break point on Wednesday. We noted that p/e's could actually go quite a bit lower in a full-blown recession and we remain concerned that this is a "junkie economy," one that needs a fresh fix of capital on a regular basis to get going and which quickly goes into withdrawals and crashes until it gets the next Federal fix.
Monday evening I noted that the VIX movement justified our change of strategy to purchasing actual stocks and selling the puts and calls against them to lower the basis as we are loath to pay the wild premiums that are currently attached to option contracts. We picked up a lot of good plays during member chat on Monday but we ended the day "bullish but skeptical," as we focused on the NYSE 6,232 line, which gave us clear buy and sell signals over the next 2 sessions. After Monday's strong finish and looking at the Tuesday futures I reminded members that an Obama victory was already priced into the market and the upcoming data was going to suck, closing that post saying: "Europe and Asia are thrilled with the idea of a massive change in US policy and that should provide even more incentive for foreign investors to shift capital to the US and our futures are already reflecting that. Still, the economic realities are frightening and there’s a nearly 3-month wait from election day to inauguration day so there will be no quick fix – even if a quick fix were possible."
Tuesday morning was all about the election and, in our Polical Post of the Week on Monday, I had switched from market predicting to election predicting and called 360 votes for Obama. With Indiana yet to be called, Obama now has 365 votes so I'm pretty pleased with that one. In addition to calling the election on Tuesday morning, I also called for picking up the QLDs below $30, a level they made it back to on Thurday and that remains my second favorite upside play on the dips (UYG being my first). I also picked an entry on SMH by selling the Dec $19 puts for $1.05 and so far, so wrong on those as they kicked up to $1.50 but I do still like the entry price of $18 on that lagging ETF.
Despite the pre-election excitement on Tuesday I urged caution, repeating: "Let’s keep that in mind – no matter who wins today, there are no quick fixes. We moved to 50/50 bullish last week and we have no reason to get more bullish until we take back and hold our NYSE levels and, of course, we need to see those 40% lines hold across the board." While we made many of our levels on Tuesday, we did not make them all and we quickly gave them up on Wednesday – but not before we had a great opportunity to cover and pick up some short plays!
Wednesday morning I was in a very good post-election mood but that didn't stop me from calling the TWM (ultra-short Russell) which ran from $93.25 to $110 the next day or the USO puts as we expected the inventories to be a disappointment. I also raised the concern that McCain supporters, many of whom were in that top 1% investor-class, may be pulling their market bets back and it wouldn't take too many of them selling to bring us back down. I noted the large amount of downside guidance revisions as another reason to be cautious and, of course, the Jobs numbers were terrible. It remained very much a day-trader's paradise as the violent market swings gave us dozens of opportunities for quick plays and we took full advantage this week.
Thursday morning was our much-anticipated rate cuts from the ECB and the BOE, with the BOE going the extra mile and cutting 1.5%, which caused me to be more worried than relieved! I pointed out that the Plunge Protection Team may have been behind the pre-election rally but we had faith that the voting majority would step in and begin to form a bottom so we put on our waders and went bottom fishing during member chat. As I said in the morning post: "We may have a long, drawn-out bottom but we can generate a good income stream by choosing well-hedged positions in dividend-paying stocks as well as selling option contracts against our long-term holdings. Until we get more of a recovery, that will be our plan – we’re not bullish so much as bottomish."
Thursday's market action left me much more bullish as we liked the look of the rotation that was going on and there was clear panic selling (Republican's unwinding pro-McCain bets) that even led me to go positive on XOM and Oil as the bottomed out. In Thursday evening's wrap-up I said it was time to trade places and take advantage of the sellers, something we had already begun doing in member chat that afternoon. I also highlighted a spread trade on DRYS which gave us a cost basis of $12.99 and that one had given us the most trouble so far as DRYS dropped to $13.79 already BUT I STILL LIKE THE PLAY! Now you can buy DRYS for $13.79 and sell the Dec $12.50 calls for $3.85 and sell the Dec $12.50 puts for $2.62 and that nets $7.32, called away for $12.50 (58% gain) or having the stock put to you at an average of $9.91, a 20% discount off today's price. DRYS is trading as if no one is ever going to ship commodities from one country to another again – this is just silly!
There were lots of silly things to pick up last week. On Thursday evening's post alone I noted the positive plays we had bolded during member chat in just one day on QLD, UYG, GOOG, LVS, DRYS, CAL, ABX, XOM, USO, JPM, UWM, LDK and CMI. Most stock picking services would be happy to do in a quarter what those trades did for us the next day but we had no reason to shift posture on Friday and expect further gains as we move towards a retest of our 40% levels and we have our new "must hold" levels to watch on the Big Chart as well.
We were happy to be done with the week on Friday morning and I noted it was all about the Qs for the day and they managed to keep us positive during the day's trading but we did add some downside spreads into the rally during member chat as we expected the market to rally but wanted to have some long puts in place, just in case it stops but we did follow our plan of going into the weekend fairly neutral as we featured 6 positive plays during Friday's member chat against our DIA spread and a short day-trade on BIDU. All the upside plays were covered spread except for FXI, which I liked naked at $24.90 because I think, as I said at the time of the trade (10:42): "China has suffered enough and is not a commodity exporter so I think buying their market 30% away from zero is a pretty good deal." In addition to the straight buy, I liked the 2011 $20 leaps at $9.30. As I pointed out, the Dec $30s could already be sold for $1 with 24 more sales left to go – not a bad way to invest on a Chinese recovery!
So it was an excellent week of bottom fishing and now it will depend on how much loving we get from Central Banks this weekend to see what kind of boost we get to start the new week with. We had a great opportunity to get more gold last week as the dollar topped out again at 86.50 and gold retested the $725 mark. GLD Jan $80s are still just $8.10 and you can sell Dec $90s for .60 (or, better yet, wait for them to go over $1), which is a great way to protect yourself from inflation eating into your cash positions for the next 12 months. I know it's out of vogue to believe in inflation this month but I'm sticking to that forecast as the global money drop proceeds apace.
