Fiscally Tightened Friday: Dollar Up, Markets Down - So What?

by: Philip Davis


We told you it would end up flat and we told you about using SQQQ for a hedge as well as the XOM short play (opened at 89.60 yesterday) from yesterday's post so let's not get all "sky is falling" over this little dip, OK? As I said to Members in Chat this morning:

Dollar up 0.3% and Futures down 0.2% and it's funny to hear all the theories on TV about why the markets are lower. Japan is of course up but pundits are baffled by that too. I don't get it - are these people worried that they would be out of a job if they simply said "sequestration is a form of debt reduction, which strengthens the Dollar and relatively lowers the price of equities and commodities vs. the Dollar." I mean really, just say that and move on to another topic - would that be so hard?

UUP WEEKLY Now it's 8am and the Dollar is up half a point and the markets are down half a point and I just put out a note to our members to look for long plays on the Futures on silver (/SI) at $28, copper (/HG) at $3.48 and, of course, gasoline at $3.08 into the weekend (/RB) as well as good old gold (/YG) over the $1,570 line. This is all contingent on the Dollar staying under that 82.40 line and staying there and we are more comfortable under 82.35 but, to do that, the Euro needs to hold $1.30 and the Pound needs to hold $1.50 - both a bit shaky so far but both way oversold too.

As noted by Dave Fry, the Dollar will be right back to test the top of the range with another .14 gain at the open on UUP at about 22.50 and that's the danger zone for both commodities and equities but, overall, it's an over-reaction to a teeny-tiny little bit of tightening and it will all be washed out by another flood of free money from the Fed very quickly. Even Japan sees this and the Yen has already exhausted its decline, with a rejection off the 93 line this morning.

Oil is now touching $90.50 and that's another Futures long (/CL) that we can add to our list.

BBY isn't getting bought today but one of our top picks from last year is up 6.5% anyway pre-market as sales were up and margins were barely down (22.6% vs 23.1% y/y) and the cash is flowing to the bottom line once again ($965M in the quarter for a company only valued at $5.5Bn) for another company I was banging the table for at our PSW Las Vegas Conference in November, when they were down below $12 (now $17.50). Another top conference pick was HPQ, who popped $20 yesterday, also up from under $12 at our conference. Rooms at Harrah's are already all booked for our Atlantic City Conference in April, but we can open up another block if we get enough additional participants.

Speaking of Atlantic City, it was just this Tuesday that I reiterated my buy on CZR (Harrah's parent co) right in the morning post and they opened right at our $10.50 target and topped out at $12.50 the same day for a lovely 19% gain in just hours, but our short put trade is what we're really interested in, as that already made $450 out of a maximum $600 - more than enough to pay for our East Coasters to come play in AC for the weekend with the occasional break to discuss trading strategies.

We had a good discussion about trading strategies this morning, in Member Chat, along with our reasons for buying ISRG on yesterday's dip, which led to a good discussion on scaling into positions. We also looked at a TZA hedge (same as our old Income Portfolio TZA hedge with minor changes) and I think we're now up to about 10 positions in our new Income Portfolio - most of which make excellent offsets for a bearish hedge.

It was Wednesday's post this week where we set our strong and weak bounce levels and that was all we needed to know to stay bullish as we held all of our strongs so far: Dow 13,900, S&P 1,502.40, Nas 3,140, NYSE 8,805 and Russell 905 - all of which have been tested pre-market and all of which are likely to hold - especially if the Euro can keep it together at $1.30 and the Dollar doesn't punch over 82.50 - both of which are unlikely to happen today. That will leave us still pretty bullish into the weekend but still holding our hedges - just in case something hits the fan but our Commodity Futures Bets (8:58) are already paying off huge (silver $28.64, oil $91.10, gold $1,583, copper $3.50!), so you'll have to excuse me as I cut this short and go chat with our Members - this is too exciting to miss!

Disclosure: I am long AAPL, GDX, TZA, CIM, GLD, BA, ALU, DBA, GLW. 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 bullish mix of long and short positions - see previous posts for other trade ideas). Commodity positions are very short-term and not tradeable by the time you read this.