Ho, ho, ho – the Dow is up 300 points this morning.
It's the same 1% we lost yesterday morning and only 200 points below Friday's close at 35,365 (so far). Does it count as a Santa Claus Rally if all we are doing is recovering lost ground? Santa's running a little late this year becase 15% of his elves caught Covid and there are supply chain issues and he had to raise wages so don't expect flashy toys this year – things are tough.
That's why, at PhilStockWorld, we learn how to make our own profits in any market conditions. We took advantage of yesterday's dip in our Live Member Chat room and added adult toy distributor, Best Buy (BBY) to our Long-Term portfolio by selling 5 BBY 2024 $70 puts for $10.25 ($5,125) thanks to a suggestion by Yodi, who noticed the sale at 12:42 which was, so far, the dead bottom.
At $95.77, BBY has a $23.35Bn market cap but even in 2020, they made $1.54Bn in profits, giving them a P/E of 15.16, which is fine for a retail store (and this was during a disaster). Last year they were back to $1.8Bn but BBY keeps a fiscal year that ends in October, so they are 3 months behind what traders are used to so Covid affected them heavily in their 2021 earnings as well. This year, which has just started for them, they expect to make $2.5Bn, which means they are trading at about 10x expected earnings – a very good deal.
We are able to turn that into an even better deal by selling the 2024 $70 puts for $10.25 – as that gives us a net $59.75 entry, which is another 37.6% below the current price. So our worst case is we buy 500 shares of BBY for net $57.75 and that's our break-even and anything above that is a profit – up to $5,125 – just for promising to buy 500 shares of BBY at a 37.6% discount. Aren't options fun?
Another way we make money during slow holiday trading is in the Futures market and yesterday, in our Morning Report (subsribe here so you don't miss out), I said:
Oil (/CL) is back down to $67.50, which can be played for a bounce into Wednesday's EIA Inventory Report (tight stops below). Oil demand is at 99Mb/d, which is 2Mb/d below the pre-pandemic levels and oil traders tend to watch very short-term charts and don't realize holiday travel plans are not that likely to be cancelled in the US – as we're still in that denial phase.
As you can see, we're up around $4,500 on two contracts this morning and that's enough to take a non-greedy exit as we test the $70 line (you can always get back in if we go over and use that for a stop on the new play but why risk it?). Congratulations to all who played along an, of course, you're welcome! The same goes for our usual Natural Gas (/NG) long trade that makes a dime at $3.85 so those are also off the table with a $1,000 per contract profit (again).
On the whole, our bounce chart is exactly the same this morning as it was yesterday though, at noon, the only green we had left was the weak bounce on the Dow – so a complete comback from yesterday's mornng dip but we're certainly not out of the woods yet with two red boxes on the Nasdaq (and we made a new low yesterday too, though not lasting enough to change the chart).
- Dow 36,000 to 34,200 has bounce lines of 34,560 (weak) and 34,920 (strong)
- S&P 4,700 to 4,465 has bounce lines of 4,512 (weak) and 4,559 (strong)
- Nasdaq 16,500 to 15,675 has bounce lines of 15,840 (weak) and 16,005 (strong)
- Russell 2,400 to 2,080 has bounce lines of 2,144 (weak) and 2,208 (strong)
Weakness in the Nasdaq directly relates to weakness in the S&P these days since just 5 stocks (MSFT, NVDA, AAPL, GOOGL and AAPL) are responsible for 50% of the S&P 500s gains since April and for 1/3 of the entire year's gains (300 of 900 points). “If those companies, for whatever reason, stop performing, there’s nothing to support the market,” said Peter Cecchini, director of research at hedge fund Axonic Capital. Expectations that stock prices will fall over the next six months jumped to 42% earlier this month, the most bearish reading in more than a year, according to a weekly sentiment survey conducted by the American Association of Individual Investors. New York Stock Exchange stocks closing above their 200-day moving averages, dropped as low as 41% earlier in December, a 17-month low.
There's little to be determined from this low-volume holiday trading so let's just sit back and relax and enjoy the show.
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"Here we are now, entertain us
I feel stupid and contagious
A denial, a denial, a denial, a denial, a denial
A denial, a denial, a denial, a denial" – Nirvana
