Which Way Wednesday – Fed Minutes Might Help

Wheee what a ride!

I don't think we could have had a better day as the move up allowed us to place our bear plays (we went naked on our DIA $98 puts right at the top at 10 am) and the only fear we had was the morning data but by 10:10 I sent out an Alert to Members reviewing the bullish-looking data but then concluding: "Still this should give us a big boost with volume still light at 30M at 10am.  Unless we break 9,600 with some authority, this should just be another shorting opportunity."  We were still concerned about good Auto Sales numbers boosting us back up but they were actually a series of disappointments all day long.

As David Fry points out in his morning post: "Most trading systems don’t have a “feel” component and mine doesn’t either. The only logical thing which we’ve commented on repeatedly as have others is light volume and how the news hasn’t jived with reality. And, recently, investors have been selling good news versus buying bad news as before."  This is why PSW always stresses the fundamentals in stock trading.  The market can trade against them for quite some time but, eventually, the true value will set you free (and often can make you a very nice profit!).  I've had a very tough month in August pointing out the the news hasn't "jived with reality" and suddenly we have gone from feeling overly conservative to being the only well-positioned people around – in cash, with plenty of winning puts and ready for another round of bottom fishing with the VIX right back at 30, which gives us exactly what we need to run our favorite plays.

We still have tons of cash in our $100,000 Virtual Portfolio and I'll be initiating some buy/writes this week.  I already proposed one for TTWO after last night's earnings but now it looks like I'm not the only one who thought they looked pretty good and we're not going to chase – there are, once again, plenty of fish in the sea!  The last time we ran a Buy List was the week of July 6th and if you want to see what an actual list that goes 18 for 18 with an average upside of over 25% looks like, you can check that week's wrap-up, which has a lot of good commentary for how we recognize a bottom.  We will, of course, be looking for some of our old friends who come back to those levels – we already pulled the trigger on DIS in Monday's post and RT looks good again and we picked up SPWRA yesterday, WFR is getting close but the others still have a ways to fall before we would consider them bargains again.

The best thing about our bottom fishing right now is that we already have a wildly profitable set of covers from last Monday's post, where we loaded up with long-term bearish plays on XLF, DXD and SDS, which, in addition to our usual DIA puts, are currently protecting almost nothing as we cashed out all our non-hedged longs.  So we NEED to add some long positions to protect out very bearish virtual portfolio.  It hurts us not to buy anything and that's why we're happy to begin scaling into companies like SPWRA, who we know we would be very happy to buy more of if they do get 20% cheaper.  TTWO fits that bill at $10 but not at $10.50 and RT is back in our sweet spot at $7 and I'll be choosing sell strikes for members once we see where things open up.

So this is pretty much our favorite time of year – whenever the market has a yard sale and we just so happen to be walking around with cash!  As I often tell members, you can't buy low and sell high if you don't sell when things are high and wait until they are low to buy again.  It may seem obvious and it's pretty much what Warren Buffett has been telling people for over 5 decades but, surprisingly, there are very few who follow this path as the media (and most investing web sites) stress constant investing and trend following, ignoring the comparatively tedious work of identifying true values and developing long-term trading plans to profit from that knowledge.  

Patience is our number one lesson at PSW and we force our members to watch "The Man Who Planted Trees" as a standard assignment for new members.  Once you learn patience, the next lesson is balance and, as the great Mr. Miyagi said "Better learn balance. Balance is key. Balance good, karate good. Everything good. Balance bad, better pack up, go home. Understand?"  Substitute "trading" for "karate" and you get the gist of it… 

Balance is still way off in our economy as the ADP report shows a bigger than expected by "expert analysts" (but not by us) job loss of 298,000 jobs for August vs. 250,000 forecast by people who can't possibly be reading the same papers we do.  Productivity on the other hand was better than we, and other experts expected at 6.6% (vs. 6.4%) but that was Q2 and my prediction is we hit a wall there and Q3 will disappoint as I've been seeing evidence that companies over-fired in a panic in Q1 and those super-productive Q2 workers are burning out as you can only whip a frightened worker into so many hours of unpaid overtime before they either revolt (remember the VLO workers lawsuit?) or simply start to break down and get sick and unproductive no matter how much you yell at them and threaten to fire them in a poor economy. 

We already got bad news as mortgage applications fell in August and, following through on a trend we have been following – August Retail Sales are literally off a cliff.  Mastercard Advisors' SpendingPulse data to be released today found that sales of clothing at specialty stores, across all payment types, fell 6.6% in August compared with a year earlier.  Retail Metrics estimates teen retailers were the worst performers last month, with a 7.8% decline from a year ago.  We still have July Factory Orders coming at 10am and those are anticipated to be a strong 1.7% due to the clunkers program but that masks other, underlying issues (as it was meant to).  The 10:30 crude inventories better show a good draw in order to keep oil from breaking that critical $67.50 mark.  A net draw of 4Mb+ is needed to overcome the pressure being placed on gold as the CTFC cracks down on commodity ETFs, a move that may force the unwinding of up to 1/2 of all NYMEX open contracts into a dead market and, with those retail numbers, who's going to believe that there is strong fuel demand no matter what the survey shows? 

Another dead market is the one for the dollar, which fell below 93 Yen this morning and Japan did not like that one bit and the Nikkei fell right to the 2.5% rule, down 249 points, even with the "chopstick save" that added 60 points into the close.  The Hang Seng fell 350 points (1.8%) finishing near the day's lows but the Shanghai held it together just over the 200 dma as China allowed refiners to hike fuel prices and spurred a rally in that sector.

Overall, things are so bad in the global economy that even opium farmers in Afghanistan are suffering as global demand slumps to the lowest prices in more than a decade (what's the ETF for that?).   "The bottom is starting to fall out of the Afghan opium market," according to the latest UN report, which says that Afghanistan's opium cultivation this year has fallen 22% from 2008, the second straight annual decline.  A persistent global glut has discouraged production and forced down prices paid to farmers, though output continues to outstrip global demand. The U.N. drug office's executive director, Antonio Maria Costa, said in a statement that the stockpiling of excess opium was likely keeping prices from crashing.  Gee, substitute "oil" for "opium" and this all sounds very familiar.  There is no lead to subsitute parasitic warlord drug pusher for energy company CEO, Webster says those two phrases are interchangable…

Europe is down another point ahead of the US open and the big news to me is Spain's unemployment rate jumped 2.5% in August to 18.5% but you wouldn't know it from the US Media, who haven't mentioned it all morning, nor can you find it in the Wall Street Journal, which is a shame because so many people used to use it to get NEWS about the makets but I'm not going to get into this again today as it's really the same nonsense I pointed out yesterday only with a fresh coat of paint to cover up more bad news with happy nonsense.

Again, I am not down on the economy (not doom and gloom anyway).  I simply think we were overbought and due for a correction but only if you HONESTLY look at the facts can you finally discover true value and if the government and the media and the despicable manipulators who run amock in our markets are allowed to continually mask the truth – then it will simply take longer for the markets to do their job and find the proper levels.  On the whole, we love the volatility and the nonsense as it gives us tons of trading opportunities but it's the societal damage I can't be happy with and those long-term costs are not offset by our short-term profits. 

We would all be better off facing and dealing with reality, only then can we move forward.