That went pretty much as expected.
On the whole, it was just the one big drop on Wednesday morning that did us in and, if we just consider the drop from our 20% line at S&P 3,420 to our 15% line at 3,277.50, then it's just a 5% correction in a bull market and our weak bounce line is 20% of the 142.5 drop (we ignore the spikes), which is 28.50 but now we rond so call it 3,310 and 3,340 would be our strong bounce line – where we were rejected yesterday afternoon.
This morning we're back down to 3,280 as Apple (AAPL) earnngs disappointed along with, as we predicted – Starbucks (SBUX) but not too badly so, in yesterday's trade idea for our Earnings Portfolio, we're going to cash in our 10 Jan $70 puts for a small profit and the real money will be made on the expiration of the short calls below the $90 line -so those we can ride out for a bit. We never thought SBUX would hit $70 but the puts would have jumped nicely if SBUX took a big hit. It didn't so that part of the trade is over. Never forget why you got into a position.
Earnings reports and guidance from technology companies after the closing bell weighed heavily on markets overnight. Twitter (TWTR) plunged 15.3% in offhours trading after posting its slowest user growth in years and warning that uncertainty around the U.S. Election could compress ad spending. Apple (AAPL) shares dropped 4.2% ahead of the opening bell after quarterly iPhone sales fell from a year earlier. That, combined with a delay in the launch of the company’s new smartphone, led to iPhone revenue falling more than analysts had expected (but exactly as we had expected). Shares of Facebook (FB), Amazon (AMZN), Tesla (TSLA), Microsoft (MSFT) and Netflix (NFLX) are all down over 1% premarket – Google (GOOGL) is up $100 (7%) and is pretty much holding the market up by itself this morning.
“The big tech earnings were not that bad but markets did not respond positively, so that does suggest a deeper sense of negativity in the market,” said Seema Shah, chief strategist at Principal Global Investors. "While big tech has driven the U.S. stock market recovery this year, that means when we see any disappointments on particularly high-multiple stocks, then obviously the magnitude of the downgrade or the earnings-miss becomes far greater,” said UBS strategist Nick Nelson.
That's a very big problem for the Nasdaq (which is why it's our primary hedge) as we are down below the 50-day moving average at 11,532, so call it 11,500 and that's down 1,000 points (8%) from 12,500 in September and 11,250 is our 25% line so this is a very dangerous zone for the Nasdaq as there's no real support between here and 10,000 if 11,250 fails.
That means we can add the Nasdaq 3x Ultra Long (TQQQ) back to our Short-Term Portfolio as a hedge as we have limited downside to a short over the weekend with 11,500 being a hard line to recover and that's 2.5% up so a 7.5% gain in TQQQ, from $126 to $135 while a 10% drop in the Nasdaq to 10,125, would send TQQQ plunging 30%, to $88. We also have the advantage that TQQQ, like any ultra ETF, tends to decay over time.
We'd like to be protected over the holidays so let's buy the following hedge for our Short-Term Portfolio:
- Buy 50 TQQQ March $110 puts for $22.50 ($112,500)
- Sell 50 TQQQ March $90 puts for $15 ($75,000)
- Sell 5 GOOGL Jan $1,800 calls for $50 ($25,000)
We're paying net $37,500 for the $100,000 spread and we're lowering our cost by selling 5 of the GOOGL $1,800 calls for $50 as GOOGL is a $1Tn company and it's not likely to gain $200Bn more and we can always roll the short calls to higher strikes in longer months. The 2022 $2,500 calls are $50, for example. That brings the net cost of the spread down to $12,500 so we're buying $88,500 in protection. There is a $50,000 margin requirement on the short GOOGL calls so simply don't do them if you don't have tons of margin (we have plenty to spare in the LTP) and there's still $62,500 (166%) upside potential in the zero-margin bear put spread.
Speaking of looming disasters Exxon (XOM) warned it may take up to $30Bn in writedowns on natural gas fields after posting a historic loss despite sweeping budget and job cuts. Exxon is confronting one of its biggest crises since Saudi Arabia began nationalizing its oilfields in the 70s. The company lost $680M, or 0.15 per share, during the 3rd quarter, compared with the 0.25 loss forecast by leading Economorons. Shares are down 1.2% in pre-market trading after being up 4.4% yesterday but it's not cash-rich XOM I'm worried about but the rest of the sector if they report this kind of wipe-out.
Fortunately, energy stocks are no longer a major part of the S&P 500 as they've already taken major hits. XOM started the year close to $70 and is down 50% but it's hard to call them a bargain at $139Bn, despite the fact that they made $14Bn last year because they are likely to lose $1.5Bn this year PLUS the 2 years worth of earnings they are about to write off. A Biden Presidency would not be good for them either as XOM has done almost nothing to embrace and alt-energy future – they are going to die out like the dinosaur that used to be their symbol.
Total (TOT) is the way to go in the big oil space as they have also been beaten down from $50 to $30 (down 40%) but they are holding the line and have been the sector leader in alt-energy investments. We sold 5 TOT Nov $30 puts for $1,625 in our Future is Now Portfolio back in May and those are going to expire worthless as earnings have beat estimates and now we can add a bull call spread for next May (as long as they go, unfortunately) as a consolation prize if Trump wins but also because they earned 0.29 per $30 share for the Q, so holding up very well in a crisis.
- Buy 20 TOT May 30 calls for $3 ($6,000)
- Sell 20 TOT May $35 calls for $1.50 ($3,000)
- Sell 5 TOT May $30 puts for $4.20 ($2,200)
That's net $800 on the $10,000 spread so there's $9,200 (1,150%) upside potential if TOT is back over $35 in May but anything over $30.40 is going to be a winner and our worst case is owning 500 shares of TOT for $30 ($15,000) plus the $800 cash we spent works out to $31.60/share if we are totally wrong but, of course, we already made $1,625 from the short Nov puts so really net $28.35 is our worst overall case.
Aren't options fun?
Have a great weekend,
– Phil
