We're just waiting on the Fed today, as are the rest of the markets.
Yesterday's volume was the lowest since Sept 11th but not as low as Monday, which was our lowest volume since the end of June, just before we had a 5% correction. June 26th and 29th were our last two consecutive ultra-low volume days but June 30th was much bigger (a down 100 day), July 1st was up again on low volume and then July 2nd was another big down day and we bottomed out on July 10th. That was the time that the media was telling us we were forming a "classic" head and shoulders pattern and were doomed to revisit the March lows. It was also the last time we enthusiastically bought stocks.
At the time of that weekly review (7/11), we had CAL at $10 (now $16.82), CBS at $5.97 (now $12.58), COST at $43.45 (now $58.58), CVX – who we just shorted – at $58.20 (now $72.60), DIS at $22.41 (now $28.38), EXM at $6.05 (now $7.32), RT at $7.12 (now $8.85), SNDK at $14.47 (now $22.91), SPY at $87.96 (now $107.27), SPWRA at $22.35 (now $32.63), SUN at $22.09 (now $27.75), V at $59.86 (now $74.41), VLO at $15.57 (now $20.50), WFR at $16.61 (now 19.09), X at $30.77 (now $50.45), XLF at $11.10 (now $15.35), XOM at $65.12 (now $69.85) and ZION at $11 (now $19). Of course our members had much better entries as we had been targeting our entries on all of those but anyone reading our weekend review on July 11th could have played along at home from those prices (we even spiked down at Monday's open) and when I say we are now bearish – it is that we are bearishly protecting these ridiculous profits – the kind of profits you usually don't get after 3 years, not 3 months!
Overall, the broader market is up 20% over that time so it can be argued that a monkey with a dart board could have made good picks at that time but, if you read that week's notes – you'll notice that this monkey was screaming for people to buy and was going against what pretty much EVERY other analyst was saying and I was confident enough to lay out my picks, my strategy and my fundamental arguments for everyone to see. It would have really sucked if I was wrong, but I wasn't wrong at all…
I am telling you this in the hopes that you take me seriously when I tell you that the same logic and reasoning and observations that led me to believe that the market was oversold at 8,100 (which was the bottom of a 5% rule range we had been tracking since last fall) is just as overbought at 9,800 – which does happen to be 20% off the bottom and is SCREAMING for a 5% correction.
IF we get my 5% correction (back to 9,277) and IF we find solid support at that line, I will be willing to raise the mid-point of our 5% trading range from 8,650 (which I hope we don't see again) to 9,100 or possibly even 9,300 (up another 0.25%), which would put 9,765 at the top of the range. These are rough numbers because I would have to rechart the entire market and it's a real pain in the ass so I am loathe to do it but that's no reason to stay bearish and I've been promising members I would capitulate if we hold our 33% marks (Dow 9,394, S&P 1,056, Nasdaq 1,917, NYSE 6,959 and Russell 574) and that doesn't seem too much to ask the markets this week does it?
As you may have gathered from reading my more recent posts, we've been trying to stay balanced in our picks the past week. Yesterday we took a strangle on the Dow ahead of the Fed with the Sept 30th $98 puts at .90 and the $99 calls at .60 – looking for a 200 point move up or down, we don't really care which but down would make us feel a little better. We got the hell out of our AIG calls at they ran up 100% and that left us naked short and that's working out great so not everything is going up non-stop. We added EDZ, which was a very contrary play to the emerging market mania that's being promoted in the MSM but, of course, it's hedged so we're not looking for a home run on that one. As I mentioned above, we flipped short on CVX ahead of today's energy report and we already have a winner with my 11:10 call to short FSLR who were kind enough to run down from there all day.
We also went back to the well on SRS at $9, selling the naked Nov $8 puts for .80 for a $7.20 net entry (aren't options great?) as well as a Jan $6/8 bull call spread for $1, which pays 100% as long as SRS doesn't drop 10% – not too much to ask for… MPEL was a bullish play at lunch (thanks Mr. M!), RSX was bearish (screw you UBS, GS and JPM!) but hedged as we are actually scared of those guys and we went bearish on BXP at $70, which is just silly! That was it for our trading day, a bit more bear than bull so we'll see if things pan out. My theory is there is nothing the Fed can say that can justify this run.
There are just a couple of things still bothering me in the economy:
- The FDIC is scrambling for money to cover the next wave of bank defaults (if they have no money, your FDIC deposit insurance is meaningless!).
- There are 1.2M homes more than 90 days past due and 4M homes on track for foreclosure in the next few years.
- Even wealthy homeowners are now "strategically defaulting" on their loans.
- TOL is having a sale to try to spur buying interest with an AVERAGE of $84,000 in incentives.
- Rating agencies continue to overstate asset values by a wide margin.
- Geithner says the system must be reformed, which is right but wait until we see the REAL books!
- The Shanghai composite is still falling.
- The Baltic Dry Index is still falling, heading right for my long-predicted test at 2,250.
- Oil is still ridiculous at $72, costing Americans $4.5Bn a week more than it did in Q1 and $2Bn a week more than Q2. After refining costs and mark-ups, it's about $9Bn a week, which is $468Bn a year which is like taking back 3 times the Bush stimulus checks that boosted the economy last year.
- ETFs are stockpiling gold, with a 55% increase in assets this year, causing a massive speculative bubble in gold.
- Credit remains EXTREMELY tight.
I think Paul Vigna did a good job summarizing my feelings by labeling this a "Pinocchio Recovery:"
Now, I see a recovery that looks like Pinocchio: it wants to be a real little boy, but it’s really just a wooden toy that moves only when somebody pulls its strings. But everywhere, we hear people talking up the recovery as if the economy is sprinting into a new bull market. I keep seeing all those strings pulling the economy, and wonder if and when they can be cut.
If this market is Pinocchio I guess that makes me Jiminy Cricket as I try to keep things in perspective but it took Pinocchio being turned into a donkey and getting swallowed by a whale before he learned to listen to that annoying voice of caution. As Jiminy Cricket tells Pinocchio, "the world is full of temptations – they're the wrong things that seem right at the time. Even though the right things may seem wrong sometimes and sometimes the the wrong things may be right at the time or visa versa."
That pretty much sums up the current market – full of temptations and mixed signals and I can only follow my conscience when giving advice and right now my advice is caution. It may not be fun, it may not be exciting, but it may stop you from being swallowed by a whale and feeling like a jackass!
Speaking of jackasses, we'll see what the Fed has to say at 2pm. Our last two Fed meetings ended June 3rd – which was a top we fell from on the 15th and August 12th – which was a top we fell from the next day. We do have the G20, which is this week's Blue Fairy that investors are pinning their market wishes on but I'm skeptical that a wave of anyone's magic wand is going to work right now, and certainly not as fast as the current market is pricing in.
When investing, always let your conscience be your guide!
