Well, what a huge waste of time this week was!
Remind me next holiday to just take the whole surrounding two weeks off. We had similar nonsense around Good Friday and do you remember that HUGE drop we had on Dec 31st that was completely erased on January 4th? It was very similar to the big sell-off we had on January 15th that was reversed on the Tuesday after Martin Luther King day (although that was the last good day we had for 2 weeks as the Dow droppped 750 points). Now I don’t want to connect that sell-off with Scott Brown’s win in Massachusetts and we didn’t go short just because the Dems lost their ability to make changes. We had gone short a week earlier as I called the markets "shell-shocked"; too battered by bad news to take appropriate action.
My new mantra is "I can’t change the system - I can only tell you what they are going to do and how to make money on it." This week that was really put to the test but no more so than Friday, when we got all the highs and the lows and all the drama in a single 6.5-hour session. As you can see from David Fry’s Chart, we took a huge dip on the Spain downgrade at about 12:40, followed by a stick save at 2 and then a massive dump back near the lows into the close. As I had noted in the morning post, we were already short but I pointed out to Members in Chat at 12:26:
CNBC trotting out the Steve Wynn story again? That was two weeks ago… Looks like we’re heading for a panic frenzy on CNBC again!
This is why we watch CNBC, even though it’s like waterboarding ourselves every day, we need to know what they are up to!
I put up a nice TZA hedge for Members which pays 500% on a 20% drop in the Russell as we had noted copper’s inability to hold our $3.15 target. The Spanish downgrade was just icing on the cake but also totally expected by us. I had just that morning put up a chart of the cascading cycle of failures and mentioned Spain was next. As we had been waiting for this shoe to drop for weeks, when we finally got word at 12:44, I posted for Members:
FITCH DOWNGRADES SPAIN!!! Down goes Spain, down goes SPAIN!!!
(We have time for fun video clips when we’re well prepared) That was quickly followed at 12:46 with:
I can’t believe what a slow bleed this is, this is TERRIBLE news folks, the EU is closed, they will wake up screaming and we will be closed. Cash, cover, blah blah…..
As we bounced at 1:17, I warned Members not to get sucked in, saying:
PRESERVE CAPITAL HERE FOLKS - IF THE MARKET DOESN’T GO DOWN, I’M SURE WE’LL FIND SOMETHING TO TRADE NEXT WEEK!
and, at 3:23, as we "rallied" back, I added the following day trade into the close:
DIA $98 puts at $1.20 (now $1.25) bottomed out at $1.08 today so plan on a DD at $1 (avg $1.10) and stopping at .90 looking to make a quick .20 if the Dow flips south so an equal risk/reward.
We nailed the entry and got our exit as the puts finished the day at $1.45 but even out with a 20-cent gain is a nice, quick 16% profit. That’s the kind of thing you can do when your portfolio is otherwise well-hedged with cash on the sides - you can take advantage of opportunities like this…
As a fundamentalist trader, we often buy when the momentum is AGAINST us. That’s when you get the good prices! Option contracts have support and resistance lines just like stocks, only they move much, much faster!
Notice that the contract that opened the day at the $1.08 I mentioned (click chart on the right to enlarge), got a lot of attention at $1.10 despite being 200 dow points out of the money. It rocketed to $1.65 (up 50%) on the intial Spanish move before quickly correcting back to $1.20, where we grabbed it for another quick pop.
We have rules for trading like this in our Strategy Section and our Members know we ALWAYS sell into the initial excitement. Mr. 300 contracts (30,000 options) at 10:15 was greedy and didn’t take 50% gains off the table and wound up being stopped out at about $1.45 - that’s leaving A LOT on the table and a very good example of why we have our rules!
It was a week for following rules and taking non-greedy exits. As I mentioned in last week’s Wrap-Up we had added some shorts into the weekend to protect the long plays we had picked up in the panic with yet another SDS play (which I detailed in Friday Morning’s post), this one a September spread aimed at making 700% if the market goes lower.
It is VERY important to understand that this is CRITICAL to our bullish plays. We can purhcase $100,000 worth of bullish plays that make 20-30% if the S&P goes up and we can protect those with $5,000 worth of bear spreads that will make $35,000 if the S&P goes down. That’s why we DON’T CARE if the market falls and that’s how we can bottom fish. EVEN AS we are still worried that we’re nowhere near the bottom - WE KNOW HOW TO HEDGE!
Hedging keeps us balanced and improves our trading, giving us the cash to add more longs when the market is down so please don’t get the impression (especially our new Members) that we’re ever 100% bullish. We take our covers FIRST and THEN we add our long plays. Buy insurance before you jump out the airplane - not after! Our hedges certainly kept us sane this week:
The Euro was still being considered a toxic asset (and may be again next week!) and I pointed out that our global situation was similar to where we were when I first warned of an economic meltdown in my March 2007 article: "Are We Heading for an Economic Tornado?" Few people realize the original Wizard of Oz was an allegory for the gold (Oz) standard and that the original slippers were silver, not ruby. The "silverites" wanted the more common metal to back our currency so it couldn’t be controlled by the elite Wall Street Bankers of the day (the Wizards).
Anyway, I won’t rehash it all here but it’s a nice weekend read, if I do say so myself. We went long on oil as it hit technical support against the Euro and we got a great move up this week, so much so that we took the money and ran before it all hit the fan on Friday. My outlook for the week was pretty straightforward:
We are in the same "wait and see" mode we were in on Friday but, as I said in the weekend post, we’re pretty bullish now and will be looking for downside covers if we can’t crack those key 1,100 and 10,200 technical levels on the S&P and the Dow. I sent out an Alert to Members this morning discussing position sizing and scaling in and the key point to make here is that we take our Disaster Hedges FIRST and THEN we buy stocks that are covered by those hedges. It’s still that kind of market. We hope to hold the lower end of our range and do some consolidation down here and we don’t really want to see a sudden jump back up as we’ll be right back to forming air pockets under our bullish positions but expecting this market to calm down without getting some kind of Xanex drip is probably unrealistic. Meanwhile, we continue to completely disregard Cramer’s advice and SELL premium while the VIX is high and we started with some hedges:
QID June $15 calls at $3.80, now $3.10
QID June $18 sold calls for $1.60, now .95 (was net $2.20, now net $2.15)
QID October $15 puts sold for $1.05, now .85 (was net $1.15, now net $1.30 - up 13%)
- TZA June $7 calls for $1.27, now .63
TZA June $8 calls for .96, now .42 (was net .31, now net .21)
TZA July $5 puts for .54, now .15 (was net credit .08, now net credit .27 - up 237%
QID is at $17.99 and TZA is at $6.86. For two weeks I’ve been on a crusade to educate my readers that you can take very small hedges like this which produce spectacular returns if the market does ANYTHING but go up. You don’t need to buy puts and spend money to protect yourself and you don’t have to bet against your own long positions and guarantee a loss. We just focus on the thing we want to protect against (in this case a major index sell-off) and sell premiums to people who want to bet the indexes will rise. That way, those suckers pay all the premium and we keep all the protection! This week was flat up slightly but both hedges made money. Why - because we SOLD premium instead of buying it…
Other trades that we are no longer working on (major plays we are scaling into are on our Members only Buy List) include:
USO July $29/32 bull call spread at $1.95, now $2.35 - up 20%
USO July $29 puts sold for .85, now .42 - up 50% (pair trade)
Oil futures at $67.50 and $70 (various entries this week), out at $75 - up $10 per penny per contract!
Apple (AAPL) October/June ratio backspread at net $720, now $815 - up 13%
Because we didn’t make our watch levels and dipped into the close, we took the afternoon sell-off very seriously and Andrew Wilkinson pointed out in the afternoon that a huge bear trade had been placed on the EEM and my comment to Members was:
Something is up, Andrew noted a big buy in Emerging Market shorts into the close. That’s more than $1M bet on something that one would hope is a black swan event but you don’t set up a trade like this if you don’t know something!
I had earlier on Monday afternoon noted the following news item, which made the connection that finally hit the general public on Friday:
The next big crisis? The Spanish banking system is so dishonest that it is really "a kind of anti-market," Jonathan Tepper says. Spanish banks could be sitting on €300B in mortgage-related losses, he asserts, but it is impossible to tell how bad things really are - or to fully assess the impact of the weekend’s bank seizure - since they have refused to properly price houses sitting on their books.
Needless to say, we were the least surprised people on the planet when the global markets gapped down to our 2.5% rule. I had already sent out a special Alert to Members at 7:01 reiterating our long on oil at $67.50 and reminding them that we SELL our puts into dips like that, not chase them down buying more. CNBC had such an awful collection of headlines that we HAD to go bullish. They were just trying too hard to panic the sheeple for our tastes.
My general strategy for the morning post was perfect for the day:
Despite the dips, we don’t panic and liquidate our portfolios on one-day drops. As I mentioned in the Weekend Wrap-Up, we have plays like our SDS spread that pays 7:1 if the market stays below 1,085… Now we have to decide if we jump out the window with the CNBC crowd or do we BUYBUYBUY on this dip…
We decided that the news we were selling off on was old and the reaction was overdone. As Europe held the 2.5% line and we held ours, we got more confident as the day wore on but we were pretty aggressive right out of the gate. My 9:47 Alert to Members already had bullish plays on oil futures, USO, SSO and FASand, literally 5 minutes later, I added a bullish trade idea on TNA. Those and other trades we have filled for ourselves already are:
Oil futures at $67.50, out at $75 - up $10 per penny per contract!
USO July $30/33 bull call spread at $1.40, now $2.20 - up 57%
USO June $30 puts sold for $1, now .20 - up 80% (pair trade)
SSO June $30 puts sold for $1.60, now .47 - up 70%
FAS June $17 puts sold for $1.45, now .38 - up 73%
TNA June $40/43 bull call spread at $2, still $2 - even
TNA June $27 puts sold for $1.70, now .30 - up 82%
Pretty spectacular right? These are the trades Cramer warned us NEVER to make. Why? Maybe because his hedge fund buddies like to corner the market on fomenting panics and then selling options to fearful suckers. I’ve been telling you about this scam and how to trade it all month and that’s why we like to be in cash (you need margin for these trades) in a volatile market. Even if you only allocate 5% of your portfolio to these trades, you don’t need to have too many successes to be up 3% in a week (156% a year annualized). Our fallback when these trades go against us is to flip them into long-term upside plays and, since we are already hedged for a 40% drop in the market - we don’t mind a little rough stuff!
Well that takes us all the way through the first 22 minutes of trading on Tuesday - see how much fun we have! The rest of the day’s plays are long trade ideas the members are still scaling into, but boy did they take off this week already!
We were totally bullish, selling DIA June $103 puts for $4.80 (now 1/2 out at $3.40, up 29%) into the close with my Dow target of 10,170, which I called at 3:36 and was hit on the next morning, pretty much on the nose. (Click chart to enlarge)
I had put together a new Buy List for Members, trying to keep on top of the now 50 trade ideas I had put up on the various dips of the past two weeks. Remeber, we went to cash at the top and are pretty anxious to be putting some cash to work. We are able to protect ourselves against a 40% drop thanks to the high VIX so there’s no reason for us not to dip our toes in the water. Nonetheless, the pre-markets were completing a run-up to my target in the morning and there was no good reason for the move. So I sent out yet another special morning alert at 5:05 am saying:
Before we start buying, let’s make sure we have a hedge or two! Prices will hopefully be cheaper on the entry but a very basic hedge we can use is TZA. Keep in mind that, like all insurance, we hope we lose the money!
Here’s the quickest trick for buying TZA. Buy the January $4 call for $4.10 and sell the January $12 call for $2.10 and you are in a $8 spread for $2 that’s $3.61 in the money already.
TZA was $5.30 at the low this year so, hopefully, unless the Russell makes new highs by January, you recover most of your insurance.
The nice thing about this is you can protect a $100,000 portfolio against an 18% drop by purchasing $6,000 of these spreads so your insurance cost is no more than 6% through the end of the year and your upside, in a disaster, is $18,000 and, with luck, you recover at least 1/2 of the insurance cost. Of course, the only way you don’t recover $3,000 (TZA at $5.50) is if the Russell goes back to it’s highs and, hopefully, that would be good for more than a $6,000 gain on your $100K portfolio.
Until we get back to our levels, there is no recovery, what we are getting so far this morning is the bounce we expect after a big drop - Dear Lloyd, lead us not into temptation….
Dow 10,200 to 10,650
S&P 1,100 to 1,155
Nasdaq 2,225 to 2,350
NYSE 7,000 to 7,250
Russell 620 to 660
I even put up the USO, SSO and FAS trades from Tuesday’s Member Chat in the Wednesday morning post and we had a chance to reload on all of them into the afternoon dip. Cramer’s photo asked the question "What bad advice have I not given yet?" but I think he’s batting 1,000 this week and I went into a very detailed explanation of why Cramer is wrong and why selling puts into a drop is one of the BEST ways to buy a stock or ETF you REALLY want to own. I also put up the Multi-Chart of the U.S. indexes and drew little blue lines for the bounce zones we expected by the end of the week, as you can see on Friday’s post, we came close but then were, not surprisingly, rejected from the descending, death-crossed 20 DMAs.
I reiterated the TZA January cover play in my morning alert to members but it was an easy call for the day as we got rejected off the bottom of our ranges and by 10:27 I was forced to comment:
Disappointed with "rally" off the data. Looking to take money and run if the S&P fails 1,090 or RUT fails 655 or Nas 2,250 or Dow 10,150 or NYSE 6,750…
We did grab Lloyd's (LYG) at $3.13 but they only made it to $3.40 before settling back to $3.29 so not worth mentioning other than to note that it’s the first banks since Citigroup (C) and Bank of America (BAC) to catch our interest since the drop. Short-term plays Members have filled include:
TZA June $6 calls at $1.40, out at $1.50 - up 7%
EUO July $23 puts at .40, still .40 - even
There were also 5 long-term bullish plays that made our Buy List that we scooped up as the market held up. We stopped out of those TZA calls a bit early as they hit $1.85 into the close but we were still looking to retest our levels so our stance was neutral (just in case) at 3:53, when I told Members
I still think they are setting us up for a gap over our levels.
When asked what I meant by that, my reply was what happened the next day:
I just didn’t see why we would sell off like that. It seems that someone wanted to paint an ugly picture, maybe they didn’t get a good fill on Tuesday morning? Maybe not gap up tomorrow, maybe another drop and THEN we take off but I’m thinking a fund that wants to make numbers on Friday would want to flush us today and buy the SPX overnight and pump us up for a big finish so they can get back to cash on Friday and book it.
Two day’s in a row, the sell-off of the previous day was erased in the futures. What can’t be accomplished when 4Bn shares are traded, is easily "fixed" when 400,000 shares are traded and the financial "news" networks dutifully report on it every day like it’s the most natural thing on earth. As we were rallying up into April, I made many, many comments about how most of our gains were coming in the futures and that this indicated a fundamental weakness in the real markets and would leave huge air pockets beneath our levels that could lead to sudden drops. If you didn’t believe me then - I hope you at least consider it now before the next wave of BS is thrown at us and you are lulled into a very false sense of financial security.
I once again reviewed the benefits of selling out of the money puts on stocks you want to own in a sell-off and I mentioned some of the stocks we were buying as well as Oxen Group’s spectacular call on Verifone (PAY), which gained ANOTHER 11% even if you waited until that morning to jump in. A straight play on Big Lots (BIG) did not fare as well. But you can see from my Family Dollar Stores (FDO) example how truly relaxing it is to own the hedged position we suggested (with a max bias of net $32.50) rather than just the stock. Despite all the twists and turns on the week, my morning outlook was still keeping pace as I said:
We already have our buys in so today is more about whether we re-hedge to the downside or not. We’ve gotten so many great entries below Dow 10,000 now, it’s going to be hard to buy more over 10,200 but let’s not get ahead of ourselves - we aren’t there yet!
We jumped on UNG out the gate with my 10:28 Alert to Members where I said:
Woo-hoo on Nat Gas - HUGE Hurricane forecast. 14-23 named storms predicted, 4-5 full-blown hurricanes. That’s going to boost oil and nat gas so UNG is still fun at $7.29, selling Jan $8 puts and calls for $2.50 for net $4.79/6.39. I also like the January $6/8 bull call spread for .95, selling $6 puts for .53 for net .42 on the $2 spread.
At 11:32 I warned:
These levels should not be such a hard slog, we were just here last Thursday and MUCH higher (10,700) earlier that week and way up at 10,900 two weeks ago. On the bright side, we are over 2.5% on the Nas, the NYSE (who has a long way to catch up) RUT and the SOX - we can’t really ask for more than that in a day. The Dow (2.2%) and the Transports (2%) and the S&P (2.48%) need to confirm the move up by popping and holding 2.5% and it would be very bad if we don’t as Exxon (XOM) and Chevron (CVX) are up 2.5% and 3% respectively, good for 32 Dow points alone. AAPL is up 2.8% and that adds .042% to the Nas by itself so, like yesterday, there is NO EXCUSE for NOT breaking 10,200 and 1,100 and not doing that is a sign of weakness.
Don’t forget, below those bottoms is nothing more than a weak bounce!
At 1:57 Hugh Hendry told us we weren’t panicking enough and we mixed in a couple of new bullish and bearish plays in the afternoon and I called a top in XLF at 2:50 in Member Chat and let the Members in prayer saying:
Come on everybody, say it with me: Dear Lloyd, lead us not into temptation. We are weak and we fall for these low-volume pops every time. Keep us on the path of the well-hedged and light our way with solid floors we can use as stops when thy will be done - Amen….
As we no longer trusted the day’s action, at 3:20 I warned Members:
Not holding 10,200 is not good!!!
At 3:23 I said:
I changed my mind - we’re up 5% from the lows in the futures (Dow 9,828, S&P 1,055, Nas 1,783 (now 1,853) and RUT 634 so I am thinking it’s more likely we get pullback of 1% here, either into the close or tomorrow morning. Good test of the 5% rule.
At 3:52 we pulled 1/2 of our mattress covers and after hours I reiterated an SDS cover for the morning, saying to Members:
I still say we are owed a pullback. The Dow is up 400 points from last night’s low so I expect a retest of 10,150 before they head higher. Maybe 1,095 on S&P and 650 on RUT. As to what drives the market - clearly a stick save - there was no news, nothing. They are painting a pretty picture so China and Europe can be happy going into their weekend.
The futures were flying (as we expected) to complete the 5% up move from the lows and there was nothing to do but joke about this ridiculously manipulated market so I gave the wise-guy run-down, pointed out that the fix is in and we didn’t expect the "rally" to hold. I detailed the rest of the day above so not much to tell here. We are waiting and seeing what next week brings and reserving judgment as we see what kind of ripples Spain may cause across the pond.
Friday we get the Non-Farm Payroll Report with, in theory, the most jobs added in a month (500,000) since early 2008. It's mainly due to the census but we’ll take what we can get at the moment! We also have Construction Spending, ISM, Auto Sales, Productivity and Factory Orders, mostly May data and that’s going to put the spin on the last month of Q2.
We’re happy to keep consolidating down here near the bottom of our range but there’s a fine line between that and a real breakdown. I’ll check in on Monday with an update as we watch the World markets - hopfully with some insight as to how we can profit from the week ahead.