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INDU WEEKLY 500 points in 3 days (Dave Fry charts) - that's pretty impressive!

Even more impressive was the fact that we held our levels yesterday (see Morning Post and Morning Alert to Members for more detailed analysis), despite the rapidly rising Dollar - now testing the 81 mark, which usually bodes ill for equities (it's killing gold, now $1,638 at 8 am). The Dollar really started flying on the release of the Fed Minutes (see yesterday's comments in Member Chat) which spooked SPECULATORS (not investors) as it was apparent not all the Governors were on board with QInfinity.

I had pointed out in yesterday's post that we had Fed speak from 3 Governors today and we had discussed earlier in the week that they had to be spinning something and now it's clear that what they're spinning is the minutes. Plosser (hawk) and Yellen (dove) will both speak at the American Economic Association Meeting in San Diego this afternoon and Bullard (slight hawk) will speak after hours at some other thing in San Diego.

We may get a hawkish overall slant as Treasury has to pawn off over $100Bn worth of notes next week, some of which expire in 2023 and 2043 at sub-3% rates that any rational economist can tell you will be only a slightly better investment than just planting the money in the back yard and praying for a money tree to grow from it over that same period of time.

We got our money supply data from the Fed last night and M2 is up to $10.3Tn from $8.7Tn at the start of 2011 and I'm no math wiz but that's 18.4% more money and wouldn't that, then, devalue all money by 18.4%? That means giving you 6% interest on your money over the same 2 years puts you 12.4% behind, right? That does make sense because the Dollar Index is down from 89 in mid-2010 to 80 now and that works out to 10.1% but we just had a 1.5% bounce in the Dollar on the Fed minutes or we would, in fact, be looking at the same 12% drop. And we're not even counting the $3Tn that is tucked away on the Fed's balance sheet - WOW!

(click to enlarge)Why is inflation not out of control? Because the VELOCITY of money has crashed from its normal 1.2 to 0.7 - that's down 40% - as this mountain of money does finally begin to move through our economy, the velocity of money will begin to normalize and you'd better have some really good inflation hedges in place when that happens or getting screwed for 6% a year on T-Bills will be the least of your problems.

Speaking of T-Bills, TLT plunged from 123.64 on Monday to 117 this morning, that's down a bit over 5% for the week, indicating you can't fool all of the people all of the time but, as I was saying, the Fed is already prepared to sprinkle a little fear back in the markets to keep people running to the safety of bonds - because only people who are either very, very stupid or very, very, scared are tying up their money for 10-30 years at 3% - that is simply madness. Actually, we had a nice discussion of stupidity and Democracy this morning in Member Chat -worth a look.

TLT WEEKLY Of course a 5% drop in TLT is nothing compared to the 37% drop in the VIX this week (see yesterday's chart). What do you do when the index that measures volatility is itself ridiculously volatile? As option traders - we absolutely love it - just as much as we love inflation because it lets us leverage our bets to ridiculous levels. In fact, just yesterday we were discussing what to do with the F calls we have in our Income Portfolio, which is now up a virtual 10%+ in just 6 months. Ford (NYSE:F) is our best position, with the Jan 2014 $10 calls having moved from $1.40 to $3.65 - up 160% since our July 3rd entry - that will keep you ahead of inflation!

We also sold the $10 puts for a whopping $1.92 (F was only at $9.15 back in July) and that aggressive combo gave us a .52 credit on 30 contracts (3,000 options), which put $1,560 in our pocket to start and now we can cash those calls for another $10,950 for a $12,510 total gain against the $1,560 credit and that's up 800% on cash (assuming the short puts expire worthless). Inflation, when it comes, will only serve to further enhance long bets like this so we'll be looking for those kinds of opportunities this year in our long-term portfolios.

We'll be reviewing our Income Portfolio this weekend in a special report to Members - always a good thing to do as the year rolls over. Alcatel Lucent (NYSE:ALU), for example, was an early one we picked up back in July (16th) and we bought 10,000 shares of the stock for $1.12 and sold the Jan 2014 $1 puts and calls for .85 to give us a net .27 entry with the obligation to buy 10,000 more shares at $1 if ALU finishes below $1 so our worst case would have been owning 2,000 shares of ALU at net .635 - just net .15 more than we would have spent to buy 10,000 shares straight up without the hedge. Already ALU is at $1.56 and the short puts are .15 and the short calls are .70 - so about the same as they were before but, if we cash in now, we can pull .86 off the table - just short of our $1 maximum if we wait a year and up 470% in less than six months from our net .15 entry. Once again: Inflation? What, us worry?

(click to enlarge)I'll go over all 25 of our long-term, Income Portfolio positions this weekend and some, like ALU, have matured and don't have much left to give us while others, like F, still have a long way to go but maybe we'll pull a little off the table now and shift to a more aggressive spread with some of our profits while pocketing the rest to move onto some fresh positions - especially with earnings season just around the corner.

Herbalife (NYSE:HLF) is a short-term trade I've been mentioning in the main posts for the past few weeks - we're done with those now as they are back to $37 (from $25) and the option plays made ridiculous amounts of money. Sunpower (NASDAQ:SPWR) also went flying yesterday and just last week, on the 26th, we played the 2015 $5/7 bull call spread for .50 and sold the $3 puts for .60 for a .10 credit with a net $2.90 entry as our worst-case if they went down. The stock was $5.50 at the time and shot up yesterday to $9 and already $5/7 spread is $1.50 and the short puts are .60 so net .90 and up 800% if we kill them now but it's net $2.10 if we wait so those we'll probably hold onto - as we can still make another 1,300% over 2 years - some things are worth the wait.

(click to enlarge)We love the volatility. 2013 promises to be an excellent year for it as we are just two months away from the Debt Ceiling Crisis - which will be just as overblown and annoying as the Fiscal Cliff was (and that one still isn't really over), with just as many opportunities to take advantage of the sheeple panicking out of their positions as the media bangs their fear drums. Ah, good times...

We got our Non-Farm Payroll report this morning with 155,000 jobs added plus a nice upward revision to November to 161,000 from 146,000. This is despite the Government CUTTING 13,000 jobs in December and 89,000 in Q4 - too bad more of them weren't Congressmen.

We'll get Factory Orders and ISM at 10 and then nat gas at 10:30 and oil inventories at 11 - which we are hoping to short off of but we already had a big dip to $91.50 this morning on a weak API Report (see Member Chat) but we're back to $92.65 already and hopefully we can short again around $93 and ride them back down below $92 for nice gains.

Hopefully we continue to consolidate between our 4 and 5% lines into the weekend - that will be an overall bullish signal for next week.

Source: Friday: Dow Up 500 Points To Start The Year - Should We Quit While We're Ahead?

Additional disclosure: Positions as indicated but subject to change (fairly bullish mix of long and short positions - see previous posts for other trade ideas).