Every rally is getting sold into, much the way every sell-off was bought into last year. Is this a major change in sentiment as the "smart money" takes every opportunity to get out of the market, or is this the "dumb money" being stampeded to the exits - once again at the bottom of the cycle?
Fear is certainly permeating the air and, as I have to keep saying to make our position clear, we are generally aiming for 75% cash with 23% positions that are hedged by at least 20% and 2% in Disaster Hedges that pay 5:1, so we are "bullish" but it’s bullish and guarding against a 30% drop - which is more bullish than we were in May, when we were guarding against a 40% drop on our buys. Anyway, it’s VERY important to keep that in mind as we are picking up very long-term positions and we actually HOPE the market does go lower so we can buy more at low prices because it will be HARD to commit our cash to any rally that doesn’t get us over the April highs and we may have a LONG time to wait for that one.
So, we are having fun with short-term trades and doing our bottom fishing and, as I mentioned yesterday, we are now taking some upside hedges that can give us 10:1 pay-offs if the market breaks UP on us. That way, if we have 23% in positions that make 20% and even just 1% in positions that make 10%, at least we pick up about 15% if the market gets away from us. If we were more bullish, we’d make a bigger commitment, but heck, we STILL are not at our weak bounce levels yet - so caution is the way to go.
We need a catalyst to get us going. Just like the myth of infinite Chinese growth was the catalyst that got the markets through last year, we need to sell the story of a US recovery overseas to now get those investors back in the water or we’ll be left swimming all alone with the sharks…
I was happy with the Beige Book yesterday and we thought the sell-off in the afternoon was BS, so our last trade idea of the day was to grab the QQQQ July $45 calls for $1.08 and those will get us our 20% this morning - but we’ll take them right off the table if we can’t pop $45 on the Qs and hold it. That’s what you have to do when you have a lot of cash on the side - just stick and move, stick and move - taking the quick profits and then PATIENTLY waiting for the next opportunity. I always tell Members to watch "The Man Who Planted Trees," as it’s a great allegory for long-term investing, which is all about patience and persistence - qualities that are hard to come by in today’s fast-paced market.
There’s an old saying that goes: "Patience is waiting. Not passively waiting. That is laziness. But to keep going when the going is hard and slow – that is patience." Teaching options strategies is easy - teaching people how to patiently wait for the right opportunity to deploy them is the real challenge! We went to cash early (see yesterday’s post) at the top and had to wait for a clear signal to go short and now we are PATIENTLY waiting for a CLEAR signal to go long. Right now, the going is certainly hard and slow but this is the low-end consolidation that we didn’t have before the last rally and it’s just what we need in order to fuel up for a real move up to new highs once we see some real signs of a recovery.
We lost another 450,000 jobs last week, that’s NOT a sign of recovery, nor is our -$40.3Bn trade deficit (despite a huge drop in oil prices) with exports falling 0.7%, outpacing the decline in imports of 0.4%. The ECB left rates at 1% this morning and Trichet raised the 2010 GDP outlook for the Union to the 0.7%-1.3% range from 0.4%-1.2% BUT he lowered guidance for 2011 from 0.5-2.5% to 0.2-2.2%. The low end of that outlook is downright scary and we’re all going to have to learn to be VERY patient if this is how the next decade is starting off.
We’re not out of the woods yet. A "liquidity seizure" stemming from Europe’s debt crisis could drag the global economy back into recession, warns Nomura’s Paul Schulte, and at this point, "debt restructuring in Europe looks inevitable” but Jim Rogers says he is (and I love this) "as confused as anybody else" but the level of bearishness on the currency "usually that indicates a rally… Once a technical rally starts, who knows where it can go from that." We are short on EUO at $26, betting the Euro holds that $1.20 line and it’s an easy mark to make your exit on the ultra-ETF, so a fun way to bet on a bounce…
Being long on the Euro means we expect the markets to bounce as the dollar devalues relative to stocks and probably commodities as well. It will be interesting to see how oil does - it shouldn’t be over $75 but a rising Euro could give it a kick and that will rally the energy sector (we have many long bets there now) and we’ll be keeping our eye on copper, which we took long at $2.81 last week and is now $2.86 and we’d like to see $3. Freeport McMoRan (FCX) ($60.75) is our stock play there but, as I mentioned - we don’t ever pay retail for stocks!
EU markets continue to move higher today, completing a 2.5% move up over 2 days, which is what I expected from our markets - we were very disappointed by yesterday afternoon’s sell-off. Fundamentals are nice but, short-term, you can’t fight the tape, so we will be keeping a close eye on our levels. We need Apple (AAPL) to pop so the Nasdaq can take off - without them it’s going to be hard to get a rally going.
The Nikkei gained 1.1% and the BSE gained 1.5% but the Shanghai gave back 1/3 of yesterday’s gains (0.8%) and the Hang Seng flatlined at an unimpressive 19,633. None of that really matters though. It’s up to us to show a little strength today and it’s up to the EU not to screw it up by panicking again. If we can get through today with a nice move, we may actually be able to go into the weekend a little bullish for the first time in ages.