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How did I reach my breaking point on Friday?

Well, I haven’t been happy about the action for the whole month of March and this week was simply the last straw, where I feel the risk of being long now outweighs the likely rewards. Even all the bullish analysts in 12 of 13 of our beloved IBanks are "only" projecting the S&P to gain another 7.5% for the year. That’s not even 1% a month so excuse me if I decide it’s time to take a 7th inning stretch after we’re already up 70% of 77.5% projected over 2 years. As I said when reviewing our Buy List, where we are closing out 22 of 37 stocks - you just aren’t supposed to make an average of 28% with 64 winners on 66 picks in 6 weeks - it gets to a point where it’s just foolish not to cash out and take a rest.

Make sure you check out our latest round of Disaster Hedges as well; "5 Plays that Make 500% if the Market Falls" is a good way to keep your toes in the water! In last Weekend’s Wrap-Up I was "Still Trying to Get Bullish" and I was wrestling with killing the Buy List then. Doing the full review this week is what killed it for me because if I go over the fundamentals of 37 of my favorite stocks and can’t see more than 15 plays I’m enthusiastic about keeping, then it’s a good bet I’m not going to be too wild about the rest of the market either.

If I were a real bear, this would be great and I’d just be running around yelling SELL-SELL-SELL but I am, believe it or not, a generally bullish guy who prefers to play an up market. But I am also realistic enough not to fall so in love with my positions or bullish premise that I don’t know when it’s time to give things a rest. We haven’t had a proper pullback, we haven’t had good volume to the upside (Barron’s raised that concern this weekend), and we haven’t addressed many, many problems that are still out there.

Monday Morning - Moody’s Makes More Negative Noises

Moody’s got us off to a fun start on Monday morning, saying the US and UK are "substantially" closer to losing their AAA credit ratings as the cost of servicing their debt rose, a statement they softened later in the week, but now the IMF is making similar noises this weekend so the "secret" is out. China, it turns out, is also running big deficits but it has been cooking its books to maintain its own AAA rating. I mentioned TBT (as usual) on Monday and we did finally hit our $46.50 buy point on Thursday morning.

We were concerned China and Inida would take steps to curb growth and India did a surprise rate raise late Friday, while China spent the week more concerned about currency issues than growth. A lot of the upside we were seeing seemed based on Greece being resolved and, as we expected, nothing actually happened. Our trading, like the prior weeks, was more hit and run with a fairly good mix in both directions - just looking for quick profits for the most part:

  • BIDU April $580 puts at $21.50, now $29.70 - up 38%
  • SDS June $29/33 bull call spread at $1.90, now $1.75 - down 8%
  • EDZ April $46/52 bull call spread at $2, now $2.05 - up 2%
  • EDZ April $42 puts sold for $2, now $1.65 - up 17% (pair trade)
  • FAZ July $13/18 bull call spread at $1.60, now $1.38 - down 14%
  • FAZ July $13 puts sold for $1.60, now $1.50 - up 6% (pair trade)
  • BSX May $7 puts sold for .70, now .50 - up 40%
  • TBT complex spread - on target
  • NYX April $27 puts at .41, now $.20 - down 51%
  • C complex spread - on target
  • TNA March $56/54 bear put spread at $1.20, done at $2 - up 67%
  • DIA March 31st $108/106 bear put spread at $1.05, now .75 - down 28%

Tempting Tuesday - Waiting on the Fed

The dollar was being shot down in the futures on rumors (untrue) that the Greek crisis was about to be solved. It was a great excuse to sucker a new round of bagholders into commodity stocks on the day of the OPEC meeting, when about a dozen other untrue rumors were floated, as all the funds who have hundreds of millions of barrels of oil floating at sea begin to scramble to find ways to garner some interest in an oversupplied World market.

Housing starts and building permits were terrible and import prices were a very deflationary -0.3%, which led me to correctly predict the markets would go up since the markets are ridiculous and do the opposite of whatever is logical. As I said in Tuesday’s post:

Today is a glorious day to celebrate the complete lack of any improvement whatsoever in our economy.

  • USO April $38 puts at .74 avg, now .76 - up 3%
  • GLL April $9 calls at .75, now .95 - up 27%
  • USO March $39 calls sold for .75, expired .20 - up 73%
  • TASR January buy/write at $4.13/5.83 - on target
  • HOV complex spread - on target
  • FAS July $86/92 bull call spread at $3, now $3.30 - up 10%
  • FAS July $52 puts sold for $1.95, now $1.83 - up 6% (pair trade)
  • FAS July $80/86 bull call spread at $3.30, now $3.65 - up 10%
  • FAS complex spread - on target
  • Oil futures short at $82, out at $81.50 - up $10 per penny per contract
  • VIX $17 calls at .70, out at .50 - down 28%
  • TBT complex spread - on target
  • Oil futures short at $81.50, out at $81.55 - down $10 per penny per contract
  • AMR April $9 puts sold for .45, now .63 - down 40%
  • ETFC complex spread - on target
  • VNO April $75 calls sold for $2.20, now $2.50 - down 14%
  • VNO April $75 puts at $2.50, now $2.10 - down 16%
  • JPM June $40 puts sold for $1.40, now $1.23 - up 12%
  • IYR $50 calls sold for .40, expired .16 - up 60%
  • IYR $50 puts bought for .44, expired worthless - down 100%
  • INTC complex spread - on target

We got the Fed statement at 2:15 on Tuesday and my comment to members was:

Last time they said about the closing of loan programs: 'The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.' That was at the end of the 2nd to last paragraph and removing that is a way of saying - 'That’s it, you are on your own now.' I’m surprised that’s not giving us a sell-off but maybe this is a head-fake but let’s not take any chances and stay bullish over 10,650.

Wednesday - World Wide Rally Worries Bears

This is where I threw up my hands… The pre markets were flying with all the global markets celebrating the Fed’s drunken spending spree. I ran a chart series showing how our major indexes were reaching completely ridiculous levels and Cramer’s 5th anniversary show was just too much to bear. I was spinning on my way to calling an official top. My closing comment in the morning post summed it all up:

Of course, all this news sent the Asian markets up about 2% this morning and Europe is up half a point ahead of the US open so we can only conclude that things must be great becasue the markets are going up. I’m starting to lean towards what I wish I did in July of 2007 - cashing out and taking a vacation! In the very least we are going to keep lots of cash on the side but we will be able to make more bullish bets next week as we now have a nice set of levels to signal a breakdown.

  • TTH August buy/write at $20.14/22.57 - on target
  • FAZ July $13 puts sold for $1.60, now $1.50 - down 6%
  • SDS June $29/33 bull call spread at $1.60, now $1.75 - up 9%
  • EDZ April $46/52 bull call spread at $1.30, now $2.05 - up 57%
  • EDZ April $38 puts sold for $1.10, now .65 - up 40% (pair trade)
  • FAZ July $13/18 bull call spread at $1.26, now $1.38 - up 10%
  • FAZ July $13 puts sold for $1.60, now $1.50 - up 6% (pair trade)
  • MET complex spread - on target
  • RIMM complex spread - on target
  • Oil futures short at $83, out at $82.50 - up $10 per penny per contract
  • SCO April $12/14 bull call spread at .70, now .90 - up 28%
  • SCO April $12 puts sold for .60, now .45 - up 25% (pair trade)
  • PFE 2012 buy/write at $12.45/13.73 - on target
  • PFE artificial buy/write - on target

Notice that we’re not ashamed to go back to the well as we repeated the disaster hedges from Monday as the market topped out on Wednesday, giving us better entries in round 2. EDZ in particular went from barely winning to a huge win by taking advantage of China’s 2% move up that morning. Scaling in entries gives you the flexibility to take advantage of the situation when the market moves against you (and you don’t believe in the moves!). Also note that EDZ is not so much a disaster hedge as a bet because of the short time-frame and should be treated accordingly!

Free Money Thursday - 130 S&P New Highs Can’t Be Wrong!

I had just updated our $100KP with only a single adjustment and that adjustment was to get more aggressive with our losing FAZ covers, so tongue was firmly in cheek with the above title. I noted how the Russell, in particular, had been behaving strangely but that all the indexes just seemed to be at the point of being blatantly manipulated. Re-reading that post it’s pretty clear that I was just a step away from calling for a cash out.

  • SDS April $31/33 bull call spread at .65, now .74 - up 14%
  • SDS April $30 puts sold for .44, now .36 - up 18% (pair trade)
  • EDZ July $40/49 bull call spread at $3, now $3.40 - up 13%
  • EDZ July $36 puts sold for $3, now $2.70 - up 10% (pair trade)
  • EDZ complex spread - on target
  • TNA March $55 puts sold for .60, out at .25 - up 58%
  • TZA July buy/write at $4.95/5.98 - on target

Notice how we flipped to almost all bearish plays after attempting to play both sides in the earlier part of the week. The TNA was an attempt to get bullish but, like all our unhedged bullish plays, they were called dead on Friday’s silly open. I put up the Buy List, this time called "Bye Bye Buy List" Thursday night at 6:45 but it's something I’d been working on for 2 weeks - checking out companies, looking at the sectors, trying to get a handle on the trends and even doing some TA - all of which led me to conclude that it was time to take a break.

Options and My Patience Expire Today

The spike up on Friday morning on no particular news was the last straw for me. I discussed having reviewed the Buy List and coming to the conclusion that we had simply come too far too fast and I no longer felt comfortable with bullish positions and, with April earnings coming up shortly along with the Easter holiday, it just seemed like an opportune time to take a little break from worrying about positions and do a little spring cleaning of our portfolios.

Cash is king and, as I said in the morning:

Our plan is to take opportunistic trades between now and April earnings - we’re still expecting a pullback and I’d be very motivated to go back into our old friends if they go back on sale but most of those picks were made for a defensive market posture that won’t be necessary if we break over our levels from here, and they certainly weren’t worth riding back down after hitting 75% of our goal in 25% of the year!

  • C complex spread - on target
  • SPWRA June $17.50 puts sold for $1.35, now $1.40 - down 4%
  • EDZ July $43/49 bull call spread at $2, now $2.15 - up 7%
  • EDZ April $40 puts sold for $1.10, now $1 - up 10% (pair trade)

So now we can relax and see how the markets handle health care reform this week along with India’s rate hike and China’s whatever it will be next week and Greece’s same old, same old. We have plenty of dry powder to take advantage of opportunities and we have plenty of bearish covers that are covering nothing so, if anything, we’ll be looking for bullish momentum trades or bargain hunting like we did with C and SPWRA on Friday.

Source: Wild Weekly Wrap Up: Cash Out Edition