Thursday Thump: Delusional Systems Kick Back In

Includes: DIA, QQQ, SPY
by: Philip Davis

It's what they and their hired psychiatrists call delusional systems. Needless to say, 'delusions' are always officially defined. We do not have to worry about questions of real or unreal. They only talk out of expediency. It's the system that matters. How the data arrange themselves inside it. Some are consistent, others fall apart. " - Thomas Pynchon

If we're worried about Europe again, it must be Thursday, right?

We did get some morbid GDP numbers out of Europe and - spoiler alert - their economy SUCKS! Why does it suck? Oh, I don't know - maybe because they practice a wacky little thing called AUSTERITY - which has been, over and over and over again, proven to be the absolute WORST thing to do when your economy is slowing.

Painful MedicineI know this is a very hard thing for conservatives to understand because it involves FACTS, but austerity does not work and has never, ever worked. In 2011 the IMF commissioned a very serious study that looked at 173 episodes of fiscal austerity enacted by "Advanced Economies" over the past 3 decades and found 0 incidents in which austerity was linked to expansion. So let's not get all shocked that Europe's GDP sucks - this was the GOP plan for America if Romney had been elected playing out across the Atlantic.

These are not opinions - these are facts. Europe is right where they are projected to be two years into an austerity program - losing tons of jobs and losing profits. Even US companies that do business in Europe are feeling the impact - but this is not news - not to us, anyway. We've been pointing this out since last summer and just last Thursday we were discussing which Nigel Farage clip best summed up the disaster that is Europe.

This one is relevant to today as Farage slams Francois Hollande for the economic decisions he's making in France and, lo and behold, today we get the disastrous French GDP data. In fact, I have mentioned for the past week that we were betting on a downturn based on the fact that the Euro has gotten too strong and the Dollar has gotten too weak - as summed up by Farage in this clip. This morning, in Member Chat, we took advantage of panic in Europe to short Oil Futures (/CL) again at $97.50 (same line we always use) and we caught a nice ride back to $96.80 with a stop back out at $97 and a lovely $500 per contract gain to start our day. Of course, yesterday I mentioned $98 as our shorting line in the morning and that was good for $1,000 per contract - why trade anything else?

SPY 5 MINUTE We'll be doing a Futures Trading Workshop at the Phistockworld Conference In Atlantic City this April - I hope to see a lot of you down there as I really think we should be discussing Futures trading more often. By the time you are reading this - the easy money for the day will have already been made and the panic selling will have subsided and, hopefully, our rally can resume. We were only looking for a 1% pullback this week and, in yesterday's chat at 2:52, I reminded our Members that there was no reason to be bearish as we weren't even close to our target pullbacks (set earlier in the week) of Dow 13,850, S&P 1,502, Nas 3,160, NYSE 8,840 and RUT 905.

As you can see from Dave Fry's SPY chart, that call marked a dead bottom but, to be frank, the trading volume is so thin that we may be the tail wagging the dog and it's our own bottom-fishing that brings up the market. Either that or I just have exquisite timing...

Our earnings play of the day was a couple of long and strong calls on CSCO but we also played the short-term move this way:

Cisco (NASDAQ:CSCO) - Better to have some conviction and say CSCO won't go below $21 and, if it does, you don't mind working it off and selling 5 Feb $21 puts for .54 ($270) and buy 5 May $20/19 bear put spreads for .29 ($145) for a net .25 ($125) credit straight up and your worst case is owning CSCO at a lower cost than it is now while anything up is at least a $125 instant winner plus whatever is left on the long spread.

Longer-term on CSCO, this may be the last time you see them this close to $20 - ever. The 2015 $20 puts can be sold for $2.75 and you can use that to buy the $22 calls for $2 for a net .75 credit so $19.25 is your worst case with an unlimited upside. You can be more conservative and sell the April $21 calls for .75 and now you have a $1.50 credit and all the time in the world to roll the calls if CSCO goes up fast but they've hit all 4 of their last earnings and last Jan was a 10% beat and this year they are only looking to go +.01 (.48) despite very steady 5%+ growth all year, which should be .49 or .50.

Both of these trades should be right on the money this morning (CSCO came in at .51 but guidance was conservative, so flat at $21 - which is fine with us) and we also did a fun short-term play on Apple (NASDAQ:AAPL), which I can't disclose yet as some of our members may still be filling it. Nonetheless, there are tons of great trading opportunities as we still have two more weeks of a lot of earnings reports and then a small break in March and we're right back at it with the early reporters coming in. This evening we hear from (among many); A, CBS, CRAY, GG, KYAK and WRI and tomorrow morning we get BAM, BKW, CPB, ENB, KRFT, PPC and UPL - no wonder we are able to find earnings plays almost every day!

Don't forget next week will be a short one but I see MDT, MAR, NBR, EV, MGM, TOL, SAM, HNZ (which just got a buyout offer from Berkshire), HRL, CEC and ANF as some of the highlights as we also get a lot of Housing Data, PPI, CPI, Fed Minutes, the Philly Fed and Leading Economic Indicators - not bad for a short week and just what we'll need to shake off the Euro Blues.

We're still expecting to see those 1% pullback lines tested this week. Tomorrow is expiration day, the Dollar is back over 80.50 and, hopefully, oil will sell off - if not now (because of the long weekend) then next week should be a good one. That's why we rolled back our short oil plays yesterday, rather than take them off the table. If nothing else, they make good hedges to our still-bullish overall portfolios.

Disclosure: I am long AAPL, SCO, GDX, TZA, CIM, GLD, BA, SQQQ, ALU, DBA, GLW, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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