What a great week!
I am so happy we stuck to our guns after that very disappointing Monday session. Fortunately, after the awful finish the market had to last week, I went into last weekend's Economic Overview with the full intention of making a bear case for the market going lower and ended up realizing – I couldn't find one. As I said at the conclusion of that post: "So plenty of doom and gloom around but, after two days of reading, I have to say that I still think we have suffered enough. The fact that there is money out there to pay Wall Street executives 23 times what it costs to feed the nation of Zimbabwe for a year or half of California’s budget shortfall indicates that what we have here is more of a mis-allocation of funds, rather than an actual lack of funds. For good or inflationary ill, the Fed has a virtually infinite supply of ammunition to fight this downturn and they are determined to use it."
While the markets continued to drift lower on Monday, it was only the follow-through we expected from the previous week's action as they finished at the bottom of the 5% rule so there was no shock, actually relief, when we drifted down to test -2.5% during Monday's session. As I said Monday morning: "We have been playing it bearish since last Tuesday so we’re fine overall and we had NO reason to change our stance into the weekend as we expected plenty of doom and gloom in the weekend news to sour the mood of investors today but let’s take a look at the week ahead and see if we can find a path to navigate out of this mess. Hopefully we can find a good reason to do a little bottom fishing off our buy list (hedged, of course) and sell a few puts into the morning dip." How was that for a winning strategy?
I mentioned that the rest of the world was getting on with their bailouts and what was holding our market back was the ridiculous posturing of the Minority Party (ironically depicted here as 4 old white men) as they "vowed opposition to the stimulus plan," something that they are still doing this weekend as almost-President, John McCain, claimed "the overwhelming majority of Republican Senators are opposed to this legislation." McCain's junior Senator from Arizona and party whip, John Kyl was on Fox news saying: "If you throw in the interest, it's over a trillion. It's about $1.3 trillion." Which is interesting since the interest on the $6Tn Bush Debt alone is only to $270Bn a year, yet Kyl has calculated $500Bn will be the interest on $800Bn – perhaps he just needs to get himself a new loan officer… Of course, you can say nonsense like this on Fox news, as no one on that station would ever do something so crass as check a fact.
Despite the doom and gloom of Monday's open, I did predict 8,000 would hold but also was expecting us to flatline for 8 days. The change in tone out of Washington gave us a boost on Thursday, changing my tone more bullish as well but, be aware there still will not be a bill on Obama's desk Monday or even possibly all of next week. I also predicted that an "awful bank" program would be set up, a plan that would make the "bad bank" plan look stingy and it looks like we're going to get that too! My play of the day on Friday morning was a covered buy write that pays 15% if XLF finishes over $7.50, something that's looking pretty good as XLF gained over 10% to $9.80 this week.
In addition to the 38 stocks on our Buy List, all 12 of Monday's featured trade ideas were bullish and all 12 were winners of course (like shooting fish in a barrel this week). As I often say to members, you don't get a good price if you wait for the stock to go up – it may seem obvious but the difference in waiting can be stunning. My 2:55 comment was typical of this philosophy when I said: "They have got to be kidding with ABX, down 10% from Friday’s open! You can knock another 20% off selling the March $32.50 puts for $2.25 for a net $30.25 entry, that’s about the 50 dma and should hold at least for a bounce no matter what." We don't just randomly buy whatever is down but when a stock we follow and like goes on sale, we are not shy about making a bottom and our simple hedging strategies give us a very comfortable cushion. Giving ourselves the additional discount provided by our hedges also gives us more comfort pulling the trigger in the first place, very important in these uncertain markets.
Tuesday morning I noted that the S&P was in a breakout triangle. I mentioned the QLDs and UWMs as our "index ultra-longs of choice" and they both added 10% this week from Tuesday's open, which is always nice. I made my pitch for the stimulus money to be focused on rewarding innovation, things that create jobs and give long-term benefits to the economy – pretty much exactly what is being stripped out by compromises as they offer "no immediate benefits." The key trend of the week was the same as the week before as I noted the Baltic Dry Index continued to be on the march, this was extemely good for the DRYS plays we picked up in Monday's panic. I was pretty sure we were experiencing healthy rotation off the bottom, something we've been waiting for for quite some time as we keep looking for a rally that is NOT led by the energy sector.
Tuesday at 11:13 I felt good enough about the bottom holding that I listed 25 of our Buy List plays I thought would be good for an entry at that point. 21 are already ahead and, since they are hedged entries, all are actually on target so far – not bad for a morning's work! We had some day trades on SKF (as usual) but picking FAS at $8.40 was bullish and CAL, JPM were also added as big winners as the streak continues for the month on featured trade ideas.
Wednesday's post was titled "Will We Hold It Wednesday" and I mentioned "I turned cautious at the close and suggested 1/2 covers were probably the best way to go after such a nice run which only, in reality, took us back to our old, reliable 8,066 target on the Dow… we’re really expecting a flatline around 8,000 until then with 8,217 acting like a hard top to the range. I’m a lot more concerned about 8,000 holding than where we end above it." Problems in Spain and Russia were concerning me as well as the week's earnings and we were concerned about a CSCO miss that evening. I said we'd be happy to hold 8,000 for the day and we finished back at 7.950 but I was happy enough at 2:19 to call a turn with the SKF puts, with that ultra-ETF around $150 and at 2:29 to call a too early entry on BAC at $4.75 (leaps) and then WMT at $46.50 and FAS yet again at $8.40. Those were the only bullish plays of the day as things did not look THAT good but, again, the idea is bargain hunting.
As I said in Thursday's morning post: "Fortunately we had gone bearish – but that doesn’t mean we WANTED to break back down, just that we were ready for it." I'll have to thank Cramer for turning me more bullish as he had a special rant Wednesday night telling pople that the SKFs made it impossible for the Financials to gain ground, which meant to me it was time to buy more financials as Jim chased his sheep out of them. As I also said that morning about SKF: "…our primary day-trade strategy on the ultras is to short the calls at the top of a good run!" Note what a fun trade that turned out to be from Wednesday to Friday.
Buffett also helped the Bull case along with a $2.6Bn investment in Swiss Re and I picked BRK.B as a momentum buy over $3,000 with a stop at that line, something we're still waiting to see but I ammended that to a buy at $2,876 on Thursday afternoon, looking for $124 at $3,000 if it can't break through. The Baltic Dry Index continued to fly and I said "somebody, somewhere must be buying something" and our top suspect was China, where our FXI plays gave us a fantastic week. We didn't even test my low targets on any of the indexes except the Dow in the morning but, even before the open my plan was: "We will be bargain hunting today as we expect Monday’s lows to hold."
ANF was a good plan from the morning post that we executed 17 minutes into the market open but I went full out bull at 10:04 with a pick on the DIA $81s at $1.20 (now $3.45) and the DDM (ultra-long Dow) $25s at $1.70 (now $3.70). Of course we shorted the SKFs again, hitting it just off the exact top at 10:11. Of course there were few plays made that day as we had already picked so many things at the bottom and this was simply a good time to sit back and watch and we were nervously looking for a top and we floated in right around the 8,066 line we'd been looking for since Tuesday morning's post.
Friday morning I decided the whole thing was the Republicans' fault in my "L Word" post and I decided the evidence was that the markets were getting ready to move on, even without their approval. On the same track, I had a very interesting conversation on Friday with some NY money people who were of the opinion that the reason there are so many rich liberals now is that, unlike the conservatives who acted like the 1992 election was the end of the Earth, they saw it as a GOOD time to get into the markets and into "new tech" companies that were, at the time, being derided by the conservative MSM as poor investments doomed to failure. So the net effect of listening to self-reenforcing trash talking against the Clinton administration and all their policies was to keep conservative cash on the sidelines, fearful of the doomed policies that would surely lead the country to ruin, while "Liberals" liberally invested in the future and made stunning amounts of money in the .com boom.
I don't care if you are liberal or conservative but do consider how much your political outlook clouds your investment decisions. Right now there is BIG, BIG money being bet against the financials under the assumption that there is nothing that the Obama administration can do to fix this mess. That may be so but which group of investors is more likely to buy into a recovery at the early stages? Which group will go out and buy clean energy companies etc.? It's one thing to vote your pocketbook but if the vote doesn't turn out your way, is that a reason to keep betting on the losing horse after the race is over? It seems as if that is indeed human nature and it's something we all need to transcend as we try to become better investors.
So I was on fire Friday morning and I laid out our investing FACTS, including again the Baltic Dry as well as noting the massive inflow of cash into the Municipal Bond market, the most bullish indicator we'd seen yet that money is moving off the sidelines (close to $1Tn this week!). Once again we hit the "easy" button on Friday, where all of the bullish trade ideas I featured for members were winners. The market was going so well in the morning that I even decided a hedged entry on USO was worthwhile as we got in at $22.50/25 and don't mind holding oil long-term around $37 if put to us. VNO was our second trade of the day and exploded off our entry and the Dow finished 16 points over the 8,264 mark I set at 10:55 as my expected top.
At 12:45 I was a bit early calling for DIA coverage and I reiterated a top call at 1:51 saying: "Things feel a little tired here, no change from what I saw a half hour ago but we may hold this level as there are a lot more people worried about being burned up than down." That caused me to select a bull put spread on SKF (bearish on financials) as well as some GOOG puts as they neared $375 (too high, too fast) and even BGZ (3x large-cap bear fund) into the close as it was not so much about being bearish as covering all our winners for the week, just in case we open into some disappointment on Monday.
So we are cautious but hopeful going into next week but I've already warned members that I'm very concerned about Thurdsay and we'll be looking to see how the Dow moves between 8,217 and 8,650 between now and then with little tolerance for a breakdown. Either way it's going to be a very exciting week and a perfect lead-in to our Webinar next Sunday where we will discuss 5 trading strategies and 5 trade ideas for this very choppy market. This will be the first time I team up live with Option Sage and the gang at Market Tamer for a webinar so I'm looking forward to it – I hope you are too.
