Well we only lost 450 points fro the week.
The way we seem to drop more than that in a single afternoon with great regularity makes this seem not so bad but it's still 5% on the Dow, which is 43% off it's highs of last year. There was really nothing in Friday's action to get excited about – it was expiration day and one great way to get rid of your stock is to sell a ton of calls and then jack up the stock on expiration day so you get the whole lot called away at your price and let the poor call holder deal with the pain of selling it down the road.
So we need a lot more than a good afternoon to confirm a recovery and we'll be watching the same levels we've been watching all week to let us know if this market is going to be naughty or nice for Christmas. On Monday we were determined not to get excited by anything less than 9,200 and we got nowhere near that as we put in new lows instead. I asked in Monday morning's post if 8,500 is the new 12,500, where we can expect 1,500-point swings up and down around that range, as we did around 12,500 since we broke that level in December of 2006. It does seem as though we've pulled back the market curtain and found there is indeed nothing of substance there…
I pointed out Monday that we were only holding 8,000 based on the anticipation that the government was going to do "something" to "fix" the economy and this week was nothing more than an erosion of that confidence as we got no encouragement at all from the current administration. It made for some very ugly trading and it was horrifying to see that stocks we entered around Dow 8,200 with a 20% margin of safety were being stress tested so early in the cycle. Monday's dip was caused by the revelation that Paulson would stop doling out TARP money, leaving a little in the checkbook for the next administration.
While I predicted that the strong dollar could drive oil back to $50 on Tuesday morning, I was still expecting there to be some sort of rotation into other sectors that would stop energy from taking down the markets but, sadly, we got none of that! What we really didn't expect was to see C fall from $9 at Tuesday's open to $3.50 at Friday's low, dragging the rest of the financial sector down with it in a vote of not even a little bit of confidence in (what was) the nation's largest bank.
On Tuesday we got the PPT-inspired rally I predicted in a very crazy session but on Wednesday morning I pointed out that we never made our levels and we continued to stay guarded with our upside plays heavily hedged. Other than C, DRYS was our worst pick of the week as that stock also fell from $9 on Tuesday to $3.50 on Friday. Both C and DRYS are in the category of stocks we are willing to hold onto for years but, as the great Dr. Smith once said: "Oh the pain!"
It's still very much a day-trader's market, even when you intended to make a longer-term play. The XOM Dec $70 puts from the Wed morning post went from our $3.10 entry all the way to $6.75 on Thursday and are now back to $3.38, where I like them again for next week! This kind of volatility can drive anyone nuts – XOM is a $385Bn company that gained and lost over 10% ($40Bn) in value twice this week. Consider what the effect of this is on average people who watch the value of their 401K's fly up and down like that on a daily basis (and, of course, for the past 6 months, there have been many more downs than ups). We had tons of great day trades this week but less trade ideas than usual as the uncertainty hit critical levels on a bottom test we're still not sure is over…
As I said on Thursday morning, as we finally had hit our 8,000 target on Wednesday: "Let's keep in mind though that this is a bottom test and there is a big difference between a test and an actual bottom." Despite the pessimism, my second morning call of the week was to pick up the FXI's at $21.50, which I considered a fair bottom and that was pretty much the exact low of the day for a perfect entry and already FXI is back at $24.46 with just $22 needed to hit a 33% gain on the hedged entry. This is the only way to play this market – either we cover ourselves well enough to ride out some wild swings or we play hit and run because it can all reverse an hour later.
My Thursday morning prediction that the energy sector could capitulate and take us down to 7,000 took just hours to come true as the XLE plunged 10%, leading the Dow lower all afternoon. Thursday was another day were level watching saved us as we never retook 8,200 and we were able to stay right on top of the crazy up and down moves during our intra-day trading. I detailed that action in Thursday evening's Big Chart Review so I won't go over it again here but let's keep in mind that we are still watching those 50% lines to give us a clue into next week, which will be extra-strange due to the holiday.
Friday morning we were anxious for the week to end and we did end it with quite a bang but it remains to be seen how real our 500 points in 50 minute finish was. I was very encouraged that AA and PFE, both of whom I said I liked for hedged entries in the morning post, had huge days with AA picking up 23% on Friday alone. With stocks like these – who needs to trade options for excitement?
Even our disastrous C play was salvagable thanks to the VIX hanging around 80 and giving us some fabulout rolls. I detailed a strategy for that in Friday's post and there is a ton of good discussion in member chat this week regarding virtual portfolio balancing and repositioning. We did get the break back over 7,800 I was looking for but the way we got it back was a bit disturbing so it will take a lot more follow-through now for us to trust it but I see no reason we shouldn't get back to at least test 8,200 next week on light holiday volume.
Obama will name his cabinet on Monday and, in this "anyone but Bush" world, that in itself could be a market booster! Monday will also bring us existing home sales and retail sales hit us Tuesday along with the Q3 GDP, the Case-Shiller Home Price Index, Consumer Confidence and the Richmond Fed. If we survive that, Wednesday packs in Mortgage Applications, Durable Goods, Personal Income and Spending, Jobless Claims, Chicago PMI, New Home Sales and Consumer Confidence. Also interesting and possibly market-moving on Monday is an SEC meeting to discuss short selling.
We still have earnings next week from CPB, HPQ, DHI, BGP, AEO, JCG, TIF, DE and PBY among others but all eyes will be on C as we see if they can make it through the week without going below $3 a share. A GS report shows hedge funds cut stock holdings by 2/3 this year and hedge funds now own just 3.5% of US equities – down from over 10% last year. All in all, close to 700 hedge funds may close completely this year and 75 funds have liquidated or halted redemptions already. However we do end up coming out of this downturn, it will NOT be business as usual on the other side…
One good thing about all this is you never need to listen to old people tell you how rough it was in the old days. We are a mere 3% away from putting in the worst year EVER for the S&P 500 – yes, EVER! Pretty much ALL 500 stocks have declined this year so keep in mind – it's nothing personal – the markets aren't out to get you, they simply got everybody and, just like your grandparents survived the Great Depression with some really cool stories about an interesting life of real struggle in a harsh world that we could hardly relate to – so will we.
Whether it takes one year or 5 for the markets to turn around, turn around they will and our job is simply to stay in the game so we can be there when opportunity knocks. Meanwhile, we stay well hedged and ready to take advantage of the small trends we do see. Disney, IBM and HPQ were founded during the Great Depression, the jet engine was invented in 1937 and made commercial jet flight possible (and you can buy United stock now cheaper than it was then!), television arrived around that time.
The Dow Jones of 1928 included American Can, American Smelting, American Sugar (popular name!), General Railway Signal, Nash Motors, Potsum Incorporated, Victor Talking Machine and Wright Aeronautical but it also included Chrysler, GE, GM, Mack Truck, Sears, Standard Oil (XOM), Union Carbide and X. Some things will change and some things will stay the same but a diversified Dow virtual portfolio from 1932 of $100,000 would have still made you a millionaire in 1962 – perhaps they won't all survive, but it's also a little overdone when we trade like none of them will.
