Phil Davis submits: Wow, what a way to end a quarter! Even with all my worrying and hedging we still finished the week with a 59% return on our 58 closed positions, which were held for an average of 11 days. While it's a far cry from last week's 117% -- I did say that we should quit at the top as there was no way we were going to repeat it. Of course I said that the week before when we made "only" 50% so what do I know?
Despite my best efforts we still have 35 open positions, but they represent a lot of rolls from positions that topped out and opposite sides of spreads that closed well. By themselves, they are a sad lot of open positions with no profit as a group after 10 average days.
Think of them as more of a watch list than positions I recommend.
This is why we moved to cash. As I said Monday, the market was looking toppy and that was my theme for the week –- although the Dow did it's best to make me look silly for four days, I think I may have gained some converts by the week's end!
My primary signal that the market was turning was our generally optimistic portfolio's performance dropping from a 90% return in week 2 of September to 27% in week 3. We did manage to close out 58 positions at 59% for this week but those are gone and just represent numbers on the balance sheet now. As I said, the remaining positions, which are at 0%, could be taken off the table by a smart guy and call it a quarter!
First a quick comment on today's action (or lack thereof). I will save my economic diatribes for other posts:
The Dow had all the air let out of it early in the day but it closed the week at 11,679 -- that's pretty amazing! We opened Monday at 11,519 and went up 4 straight days, only hitting resistance at the all-time high of 11,722.
I'm what you would call in the markets a "recent historian" meaning I like to go back a week or two and try to figure out what changed, rather than just accepting the day's BS at face value. Way back on Tuesday the 19th we had a brief test of 11,500 and I said "wanted a pullback to start yesterday so it we could find a base but you bulls just keep on buying!"
We did, in fact retest 11,500 on Thursday, Friday and Monday, all after the Fed declared another pause on the 20th. We had Oracle's super numbers on the 19th, and a coup in Thailand on the 20th the day the TRANQ started bothering me by not breaking 2,500. They have now triple-topped at that mark and the fate of the market rides, appropriately, on their shoulders next week.
Action on the 20th was so good that my Wednesday night comment was "Every time I try to get out -- they pull me back in!" -- so much so that we decided (wisely) to ride out Thursday and Friday's dips to see if 11,500 would make a new floor. As I said last Thursday night about the NYSE "Painful as it may be to sit through, we are simply in a healthy consolidation under 8,400."
As I reviewed the week I notice that last Tuesday CNBC had made some morning comments on crude as it tested a technical level at $64: "CNBC's Dylan Ratigan (6:45am) says 20-30% of the price of crude is speculative, Joe Kernin just insinuated that hedge funds have been manipulating the oil markets" I said if this was CNBC's new editorial policy we could expect some fireworks but that was the last time anything like this was mentioned and, as we discussed all week, they are back to their usual endless string of oil pumpers so I would really like to know what happened there last week!
That Wednesday we took a non-greedy cash-out on our oil plays which turned out to be perfect timing, although we did take some new positions this week, on the ridiculous (we hope) run-up back to $64.
A very scary, weak Philly Fed Index drove oil to $60 last Friday and I said we had to ignore it as the last the index went negative was April 2003, which sparked a huge rally! We decided all the "negatives" were actually positives and went into the weekend cautiously optimistic.
So what happened to me this week?
I would have to say that the Amaranth crisis bothered me -- or, more so, the market's total lack of rational caution in the face of this disaster. A single fund lost more that $5B, 65% of its assets in 18 days, and people are treating it like it's an isolated event, like they were the only people on that side of gas and no one was on the wrong side of oil.
Had there been a pullback, a 1-200 point drop back to 11,500, I think I would have remained bullish but this week's action just seems like the exuberance may be a little irrational with a 5% bounce in oil prices (despite record inventory builds). Then there were the massive amounts of plays that we couldn't close because they kept going up -- very unnatural.
What constitutes unnatural?
Well, oil for one thing. The energy sector makes up 15% of the market cap of the S&P vs. just 7% in 2004, the "rebound" in that sector accounted for all of the S&P's gains for the week and many stocks have been bought up based on technical signals that I am not inclined to trust.
Didn't the market fall apart in May as oil went over $70 and copper went over $350 and gold went over $600? Have we since perfected cold fusion or have people just forgotten the fundamentals for a month?
Last time gold broke over $600 was May 8th and the Dow was at 11,670, on it's way to an all time high (we thought). Just 7 days later gold was still going up and the Dow dropped to 11,400 and down to 11,100 just a week later.
You'll just have to excuse me for exercising a little bit of caution as we play this game for the second time. As a happy TiVo owner, I can't tell you how many times you can replay a scene and it comes out the same way every time! Amazing...
So forgive me for moving to cash but that is my current call 85% of it -- and the only reason we're not at 100% is the early month 100% returns have left us with a lot of profit rolls and opposite side of spreads that just aren't worth cashing out.
We had no new picks Monday or Tuesday, just 4 on Wednesday, 3 on Thursday and 8 on Friday but 5 of them were oil puts and Genentech Inc. (Private:DNA) was a spread.
If the market collapses next week this will come to be know as the Phil Pessimism Index and will become a leading economic indicator!
I hope I'm wrong -- I hate a down market, but let's see what happens next week, keeping an open mind either way.
Research In Motion Ltd. (RIMM) was a poster child for our Always Sell into the Initial Excitement rule. The Oct $90s, for example opened at $13.10 (up $11.10, 555%) and rose with the stock to $15 but finished the day back at $13.40. This was a very strong performance on the whole, but 20% of the profits disappeared after the 10:15 high, why risk it?
A more interesting call is the $110, which opened at $1.15 (up $1.10, 2,200%), ran up to $1.80 and finished the day back at $1.25! How's that for holding something too long? If nothing else, take the emotion out of these calls by setting a trailing stop at 20% of the profits (ie. your stop on the $1.10 should have been any .22 pullback which would have stopped you out at $1.60 at 10:30.)
Always ask yourself, "Would I buy this option at this price right now?" If the answer is no, it might be time to sell!
This Week's Picks:
It was time to sell just 10 of our picks today but, as I said, I've reduced all positions to just 20% or less of what I held earlier in the week. This way I can still play, but not have too much riding on a very tricky market!
- Capital One Financial Corp. (NYSE:COF) $80s pulled back to $2.25 and triggered the .20T stop for a 246% profit. That action scared me out of the Dec $80s so they are off the table too at $390 (up 90%), as it makes no sense to risk a double.
- E.I. DuPont de Nemours (NYSE:DD) $42.50s fell so fast we had to take $1.10 (up 120%) and I'm glad we did!
- My older Genzyme Corp. (GENZ) $70s just ended up being a dead trade at $1 (down 17%) and I'm canceling the buy on the put. We've moved on to Genentech Inc. (DNA).
- Google Inc. (NASDAQ:GOOG) Oct $420s had to come off the table at $8.60 (up 19%), as we need as much cash as we can to offset those hurting put positions!
- McDonald's Corp. (NYSE:MCD) $40s stopped out at .90 (up 13%).
- Sony Corp. (NYSE:SNE) $40 puts opened very low and triggered us out at .65 (up 30%) but I might rebuy next week if back to .50.
- TODCO (THE) rose with the oil sector and the Dec $35s came off the table at $3.90 (up 39%).
- Toyota Motor Corp. (NYSE:TM) $110s had a big pullback and I was in no mood to gut it out and let go of them at $3 (up 20%).
- United Parcel Service (NYSE:UPS) $75s were a big disappointment at $2.20 (up 10%) as were all the transports.
Even tightening up to 10% (of profits) stops couldn't shake out 12 of our straight stock calls (see spreadsheet) but we did finally say goodbye to the following:
- Goodrich Corp. (NYSE:GR) pulled back to $40.95 so we let it go with a 7% profit.
- Cambridge Display Technology Inc. (NASDAQ:OLED) just went too high too fast and we let them go on the drop back to $6.89 up 38% on the Aug 18 buy and up 45% on the Sept 18 buy (who says it doesn't pay to wait). This does not change my plan to buy them again on Oct 18th.
- Consolation Prize Member Restoration Hardware Inc. (RSTO) has done it again! The 10-cent trailing stop let us out at $8.70 for a 24% gain in just 2 weeks. That's 3 times for these guys!
- Palm Inc. (PALM) went up too fast to chase and was a no-trade.
- IMAX Corp. (NYSE:IMAX) had a rough day but the Mar $7.50s gained a nickel to finish at .35, as did the Mar $5s if you sold them for $1, but that is no concern until March.
That's it for me for the weekend and, unfortunately, until Monday Night!
Be very careful out there with open positions!
The latest EIA report says we are past the peak in oil and nat gas prices until 2012 and I hope they're right but you couldn't tell it from last week's action...
Read all of Phil Davis's articles on Seeking Alpha.