What a fun week!
The market performed like a trained puppy for us, going right up and down in our range between 8,200 and 8,650 – which we are now fairly certain is our new mid-point, which means we'll be looking for a test to the upside over the next three weeks that is equal to the test to the downside of the past 3 weeks, so we'll be looking as high as 9,800 on a good run – I guess we'd be able to call that a "Santa Clause Rally" but really, anything less than that will actually be fairly bearish. We topped out at 9,625 on Nov 4th and last closed above that level on Oct 6th – on the way down.
Our last good run off 8,200 came on October 28th (into the 11/4 election), when we had one huge day (Tues) followed up by another week of gains leading to the top on Nov 4th. The catalyst that week was the election and a lot of CB rate cuts and we can expect more money drops into the end of the year as World Governments scramble to save Christmas.
I was in a very Scroogey mood on Monday, where I predicted a market maelstrom, following through with my bearish call to cover up the Friday before as we felt the markets great week was simply full of ill-gotten gains. As I pointed out in referring to the image of the ships circling a whirlpool in the ocean – you can see how people on one side of the ship can look down into the hole and see nothing but oblivion while people on the outside of the ship can look out and see calm waters ahead. That's how the markets are trading with neither the bulls nor the bears able to see the others' point of view. Monday's action did not disappoint us as we plunged headlong into the abyss with a 600-point drop for the day. The rest of the week was spent just trying to get back to the last Friday's open…
Nonetheless even Monday morning I was calling for more bottom fishing and Monday evening I put out a list of 36 "Stocks to Buy at the Bottom" as I was encouraged by the technical neatness of the 50% retrace we had that day off the run from 7,550 on 11/20 to 8,850 on the 28th and back to 8,150 at Monday's close. Well, not exactly neat as neat would have been 8,200 on the button but it did look like panic at the end of the day and we aren't big on panicking. In fact, I said in the Monday night post: "This market is being driven by fear, not logic. I heard there was a poll in which 40% of New Yorkers are worried they will lose their job and 80% have cut spending accordingly. At the height of the Great Depression, 25% of the people were out of work so it is very, very, VERY, likely that 1/2 the people who are worried about their jobs actually have nothing to worry about – even if the economy gets much, much worse."
I had a whole pro-market pep talk in that post and several more in members comments during the week. My core philosophy at the momment is summed up by the statement: "If the world doesn’t implode, if we are not back to living in caves by the second decade of the 21st century – then we’d better own a few stocks don’t you think?" Of course picking 36 winners was like shooting fish in a barrel for the remainder of the week. Even BA – our only loser, was down just 35 cents from our target entry and, since we're hedging for 20% downside losses and make 30-40% just for holding the stock even off our hedged entries – 35 cents is just fine with us!
I mentioned to members on Monday: "The trick to making a good hedged entry is to try to pick an entry on the upswing and buy the common and sell the calls. When the upside momentum slows, then it’s time to sell the puts. You can also initiate the play in a down market by selling the naked puts on the way down, buying the stock as the momentum slows and waiting for a bounce to sell the calls. You need to set very tight targets to do this, you don’t want to turn these plays into gambles but you can improve your positions nicely by timing it with our level tests." The market was very, VERY cooperative on Tuesday and really all week, giving us many opportunities to make great and then ride the waves as we tested our up and downside levels.
Speaking of levels, since the market is up 5% for the week we expect at least a 2.5% follow-through to the upside. Off our 8,635 finish on Friday, that would bring us right to 8,850 so we'll be watching that line with great interest. We did go into the weekend with an even bias, just in case but we picked up new ultr-long plays on the QID puts and the DDM calls to get more bang for the buck on the plus side in case we do get our follow-through faster than we thought.
2 days of auto hearings were a major drag on the markets, especially as no bailout was resolved by the week's end but Friday ended with a general consensus that something would be done to take bankruptcy off the table, at least for the moment and that by itself was a huge relief for the markets. We were already bullish on Tuesday morning, picking UYG again at $4.40 (now $6.11) and XLF at $10.55 (now $12.81) but the XLFs were hedged and limited to a 19% profit on the 19th.
In Tuesday morning's post I also mentioned the QID $69 puts, which zoomed from $2.30 well past our $3 target, finishing the week at $4.15 while the UWMs went from $15.30 to $17.40. BIDU was our dog of the week, with the Jan $120s down from $18 to $12 but we liked that one enough to spend $5 more to roll them down to the $110s for $4 more, now $116. Our FCX play from Tuesday morning fell below our $17.50 target and this is one play in which I do think it's worthwhile taking out the Jan $17.50 caller, who fell from $6 to $2.50 as the panic out of commodities was way overdone last week (have I mentioned how much I like gold lately?). During member chat on Tuesday, after some discussion, I raised our mid-point target on the Dow from 8,500 to 8,650 – effectively making us 150 points more bullish overall.
In addition to a very detailed description of our hedged strategy for RIMM, the Wed morning post has a hedged entry for UWM (2 days in a row I liked them) that ultimately covers the index to almost 40% down and, as I said at the time: "If things are really going to be so bad that we think the Russell will drop another 50%, what’s the point of trading anything to the upside?" My closing comment for Wednesday morning was: "So it’s going to be one of those days. We have every reason in the world to break down below our levels and, if we don’t, we’ll have to consider it a positive. Let’s see if oil can hold $47 but copper may continue to fall all the way to $100 as they face the same spare production issues that are killing the speculative market for oil. Remember, it’s not about the Beige Book per se this afternoon but the market’s reaction to it. If we hold our levels and see some buyers, we can get a lot more confident in our bottom call."
I mentioned in the Thursday morning post how we hit our levels perfectly and nailed the Beige Book moves almost to the penny during member chat in what I said was "still the predictable roller coaster." We finished Wednesday dubious of the closing rally and very bad retail sales figures offset some very big EU rate cuts. The only stock I liked on Thursday morning was AAPL, which had closed at $96 on Wednesday and I predicted it would go back around $88, which we didn't quite get back to that afternoon ($89 was the low) but selling the $95 calls for $6 was a hell of a good idea in the morning as they dropped to less than half by the close. If you wonder why I am so bullish on AAPL, look at this store opening in Munich – with a very cool panoramic view.
Friday we got TERRIBLE unemployment numbers but we were happy that the sell-off was being led by the energy sector and we held on for our level test at 8,200. Despite the terrible news, I reviewed the macro situation in the morning post and I said: "We’ll see if we hold our lower levels this morning, XOM and CVX are still very heavy shoes to drop on the Dow and BA is now rumored to be postponing 787 deliveries by six months so there is plenty of fuel to take us below 8,200 and holding it will actually be impressive." I concluded that we would have to play the dip by ear but by 10:53 I was already saying: "8,150 held (hold means came back quickly – doesn’t have to exactly hold). We are right around 2.5% across the board and Transports broke 5% so very bearish if we don’t retake those. Good time to layer the mattress plays by adding lower index puts and then putting 20% of the profit stops on the in-the-money puts you have."
The mattress strategy is to take a 1/2 position at a lower, cheaper strike and set tight stops on your in-the-money callers to lock in profits. The Dow was at 8,169 at the time but, once we got past Bush speaking without the markets making new lows, at 12:01, with the Dow at 8,252, I made a firm bottom call and picked the DDM $31s at $1.50 (finished at $2.65) and a rare naked sell of the QID $85s at $6.20 (finished at $2.88) as I laid out the logic that that sale was very unlikely to be too painful. Shortly after that we went for TM at $56 as well as the 2010 $45s at $19.30, which I love as a leap spread to hang onto. GLD 2010 $80s were back to a ridiculously low $10.80.
I noted money pulling out of the bond market at 1:27 was a bullish sign that we could get some legs to the rally and at 1:59 I predicted: "Now we get the perfunctory rejection at 8,400. Coming off 8,150 that’s 250 points so holding 8,350 is very bullish for a break over 8,400." That is pretty much exactly what happened – note the contention around the 8,350 line that finally broke up at 2:30. In fact, at 2:36, I pointed out to members: "Notice other than the spike down we held 8,350 – that makes it more likely we pop through 8,400 in the next 10 mins." After that, unfortunately, the market went up so fast I was skeptical of the move so we didn't stay 60:40 bullish at the close as I wanted to see better sector rotation than we got in that rally but still, what a wild ending to a wild week.
Make no mistake, we are still on the roller coaster and still very much in the grip of gravity whenever we are not being pushed higher by outside stimulation but there is a lot of stimulation already out there and much more on the way. A half hour before the close on Friday, I made a case for the rally being real, saying:
"Take the entire financial system and scrap it. Take all the debt in the world and all the money in the world and wipe it out. Tell everyone tough luck the world is bankrupt and we’re going to have to start from scratch. OK – so step 1, you have 6.6Bn people who need to eat so people farm and people make tractors and my Levi factory starts up again and someone gets a truck and drives the corn to the store and the jeans to the farm etc. If you did a cold reboot of the entire global economy – unless there is a nuclear war or some other disaster that actually prevents people from living their lives – you have a global GDP of $25Tn or $4,000 per person. Our current GDP is $50Tn and I find it very hard to believe that there is anything you can do to get it below $35Tn, even in a full-blown depression. A Nigerain farmer doesn’t give a damn whether Citibank will default on its CDOs, he wants GE to clean his water and he wants a pair of Nikes and a few tools and maybe a tractor from DE – there is nothing that a meltdown in the financial system can do to change that.
"Investors in this country are in a media fear bubble that has no basis in reality. You hear all kinds of crap from pundits who are so wrapped up in the makrets that they can’t see the forest through the trees. Wall Street is simply not that important. The world will survive even if Roubini and Whitney are 100% right (but they’re not). I have said before that this is probably the last time in your life you will be given a chance to buy companies at these prices and we have been given chance after chance after chance to buy at 8,200 but if you are holding out for 6,000, you are very likely to be very disappointed."
Tune in for more excitement next week, we keep setting agressive upside goals because we are so far down we can't afford to be satisfied with anything less. The markets are still very dangerous and we continue to proceed with caution but, as I said to members on Monday night: "If the doomsayers are correct, the Dow will fall to 5,000 or less and our puts will more than triple so a 30% or better hedge to the downside keeps us out of the poorhouse. Even if the market goes nowhere, as long as we can collect 10% a month or better selling calls and puts, our virtual portfolios can post a small gain for the year."
