TGIF for sure!
This week cannot possibly end soon enough as it's been a real downer with the Dow dropping 10% in 4 days. With an 850-point drop over 4 days we'll be looking for a 170-point bounce back to 7,720 as our first test of the morning. I did an extensive Big Chart Review in last night's post and we'll keep an eye on those critical levels as well, especially in the European markets, which close at 11:30 and will very likely foretell our close as the DAX is trading 2 points above and the CAC is trading 2 points below the 50% line.
On the downside for the Dow, we have our October, 1997 low of 7,528 as a must hold or it may be time to throw in the towel. As it is we had to flip-flop yesterday in our intra-day chat as we played the bounce very well by going long early in the morning but we had to re-cover as we broke back down below 7,900. As usual, it was a fantastic market for day trading as we had great calls on GOOG calls($5.85 – $10), UYG ($4.20 – $4.69), QLD calls ($1.25-$2.25) ahead of my 1 pm call of a rally failure (as we failed to top 8,200) and on the way down, we picked up DIA Jan $80 puts that flew from $8.95 to $10.38 and those we covered with Nov $78 puts, which finished the day at $3.45 and should be able to be bought back for less than $1 this morning. The last day trade I called was the GS $50 puts at $1.33 at 3:37 and those hit our $2 target before the close so it was a perfect day but the action was so fast and so whipsaw that it was frustrating nonetheless.
When trying to keep the virtual portfolios in balance, it's important to get to know and concentrate on a single play you can make to give you balance. My preference is the DIAs as they have very liquid strikes at every $1 increment and the Dow tends to move in fairly predictable ranges so we are able to quickly cover and uncover as we get our levels. It is far better to make this one trade and use it as ballast rather than scrambling to cover and uncover a whole virtual portfolio – especially when the market swings yesterday took us dwon 200, up 250, down 200, up 300, down 300, up 150 and down 550 on the swings. I said earlier in the week that a good day trader can do nothing but trade those DIAs all day long and make a fortune.
Energy investors lost a fortune all in one day yesterday as the OIH fell 12.5% and the XLE dropped 10% as oil fell 5%, finishing the day below $50. As we were going down at 3pm yesterday I noted to members that this drop was finally different as there was actually some selective buying going on. Additionally, the LIBOR has come down to below 1% on the overnights, the 2-year note is 2%, wholesale gasoline is $1 (so someone is making a bundle on the mark-ups!) and gold is $750 again. These are all signs of improvement! The Dow components that were being bought while the index fell 500 points were BA, CAT, GM, HPQ, IBM, INTC, KO, MMM, T, VZ and WMT – all members of our buy list.
Also on our list from the Dow are AA and PFE, who did not have good days and are very attractive for a hedged entry at these levels. We've given up on C as we're still stuck with them at $9 and I still like them but – ouch! Actually it's not so terrible if you are scaling in as our hedged entries have the stock put to us for about $8.50 and doubling down at $5 gives us an average entry of $6.75 against which we can sell the Dec $5 puts and calls for $2.75 to reduce our net to $4 if called away and $4.50 if put to us. This is, on the whole, a pretty good adjustment for a stock that dropped 50% since we made the original play! If a position gets to a point where you no longer want another round put to you, you need to set stops of course or simply buy some offsetting puts like the Jan $10 puts, which have just .50 in premium at $5.72 and will save you from a big dip.
When a stock is as beaten down as C and you feel like taking a chance on them, you can do all sorts of interesting hedges like buying the stock for (using yesterday's close) $4.71 and also buying 2010 $10 puts for $6.72 which means you will get no less than $10 for your stock if you exercise. That puts you in for $11.43 with a maximum risk of $1.43 and no limit to the upside. You can even offset this by selling Jan 2011 $12.50 calls for $2, which limits your upside but drops your basis below your guarantee and, if C does goe bankrupt, it will wipe out the 2011s and you'll still get your $10. If C comes through with their dividend, which is technically 10% at this price, it's a nice little play!
Asia was ready to play today with the Hang Seng opening down 800 points and finsihing the day up 360 points. The Nikkei had a similar session, opening at 7,400 (down 300) and finishing at 7,900 after testing 8,000 just before the bell. There was no particular good news in Asia, simply bargain hunting into the weekend after a truly terrible week. Of course the Shanghai, which had been bought all week, sold off a bit but just 0.76% so a good week for them despite some very scary unemployment numbers in China, who can quickly have more people without jobs than America has people WITH jobs if things get worse. "The current employment situation is still grim," Human Resources Minister Yin told a news conference in Beijing. "Our judgment is that in the first quarter of next year there will be even greater difficulties." Bankruptcies and temporary shutdowns of factories have cost many rural migrant workers their jobs, he said. Pictured on the right is a university job fair in China…
The good news for Chinese workers is, at least they are getting paid! That is not necessarily the case in Russia, where government data show that wage arrears jumped in October to over four billion rubles ($145 million), their highest level in a year, and that firms owe back pay to 300,000 people. Economists say the real figures are likely to be higher, though far below those seen in the 1990s, when tens of millions of people were affected. Then, workers went without salaries for months on end, sparking nationwide protests. A Moscow-based advertising executive said she hadn't been paid her salary of 40,000 rubles a month since September. "I keep going to work because I don't want to lose all the money I've earned," she said. "I'm hoping I might get paid before the New Year."
Europe is flat ahead of the US open and may take their cues from us but we're watching the CAC and DAX closely as they dance around the 50% line on our Big Chart. Financials and commodities are leading off the bottom in Europe but the trend is not very strong. Amazingly, we have had no word from our so-called leaders, who teamed up to kill the markets yesterday as Paulson spent almost an hour saying nothing and Congress spent just 15 minutes telling GM et al that they need an actual plan before they are going to get $25Bn to spend. Amazingly, this reasonable request by the House was taken very badly by the auto industry – probably because they have no plan and are not likely to come up with one.
Our plan for the day is to watch our levels, perhaps add some DIA puts on the bounce and/or take out the puts we sold to cover and re-cover IF we break 7,800 where we would go back to watching the same levels as yesterday. Just another tricky day in the markets and thank goodness for the weekend – we can really use the rest!
