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Wheee, what a ride!

We only had one trade idea for Members all day Monday and that was the DIA $103 calls for .52 from the 9:46 Alert. It is extremely rare that we only have one trade in a day but there really wasn’t anything for us to do as we had been BUYBUYBUYing all last week so there was nothing to do but watch. The calls finished yesterday at $1.12 for a nice 115% gain in 24 hours but we took the money and ran at 10:04 on a spike up to $1.25 because it’s too close to expirations to mess around. They actually topped out at $1.55 near the close but - better safe than sorry. Anyway, we replaced them with IWM calls later in the day and those doubled up and we were out at the close - again, it just doesn’t pay to be greedy. (Click to enlarge)

It’s fun to day trade options on expiration weeks because the premiums go way down and we get fantastic leverage. Our longer-term trades turned mixed for the first time in two weeks (we had been 100% bullish) and we went from one to a dozen trade ideas a day as we used DXD for an overall hedge and took bullish positions on Apple (AAPL) (2), Google (GOOG) (2), Intel (INTC), AT&T (T), TZA (which is really a bearish position) and bearish positions on DIA (2) and Mastercard (MA). Of course, ALL of our bullish plays were hedged already so the mix was a real indication of how exhausted the rally was starting to look.

Too much, too fast was the watchword for Tuesday as we were already up 5% for the week so we expected a gap fill back to the open (didn’t come yet) before we get serious about taking out our levels (Dow 10,290, S&P 1,102, Nas 2,257, NYSE 6,930 and RUT 651). We expected good news from INTC (we did a bullish ratio spread aimed at $22) and now we’ll see if it’s good enough to get the Nas up to 2,257 but it was the NYSE that worried us yesterday as they were close but no cigar at our 6,930 target.

Gap filling would be nice and normal and would take us back to test Dow 10,200, S&P 1,075, Nas 2,200, NYSE 6,800 and Russell 620. If we can show a little support there and consolidate for the next run, we’ll be in pretty good shape to continue this run but FIRST we have to test them WITHOUT everyone freaking out and getting us back into the negative spin cycle.

To some extent, it will be up to the actual data and we have lots of it coming this week (see yesterday’s post for details). We NEED to get out of this nasty downtrending channel so let’s hope we don’t get too much of a pullback but it is possible for us to pull a bullish consolidation back to that 1.049 line and, now that we’re into options expiration week, we can’t really trust anything that happens for the next few days anyway.

Last options expiration was June 18th and the Dow finished at 10,450 and the S&P was 1,117 so, after a really wild ride, we’re coming up just a tad short of wiping out all calls and puts but there are three days left. We’ll see if they can hit the marks on the nose by Friday and burn the maximum number of people (although pretty much everyone who fell into the bear trap last month is pretty much burned already) but, as I said, "too far, too fast this week already" so we’re just a bit cautious. The bond market has burned all of its bears in the longerst rally since March while US Corporate Credit Risk is at 6-week lows and even the default rate on Junk Bonds are at their lowest level since March of 2009 as huge increases in corporate profits drop the Q2 default ratio to 0.47 - the best performance since Q4 2007 - don’t you think that bodes well for earnings?

I’m also worried because the MSM has suddenly flipped bullish with Jim Cramer flip-flopping so fast he reminds me of a kid learning to do 360s in a parking lot. The WSJ ran an article titled "Why the Doomsayers Are Wrong," apparently missing the irony that 90% of their coverage was devoted to doomsaying in May and June. Irony also seems to escape CNBC, whose web site now says "Markets Look Good Over Short-Term," "Feel Like Market Will Keep Going Up: Art Cashin" and, of course "Cramer: "We’ve Seen the Lows for the Year." Only the NY Times seems worried with "Crisis Awaits World’s Banks as Trillions Come Due."

As I was saying to Members yesterday, nothing fundamental has changed in the past 5 days - it’s all about the spin. The markets flip from bullish to bearish on a weekly basis, which reminds me of the audience rushing in and out of the theater every time Bugs Bunny throws the switch (at 5:00 on this video). Put Lloyd Blankfien’s head on Bugs Bunny and replace the trampled Elmer Fudd with the average investor and you get a pretty good picture of what’s going on in the markets. Keep in mind that I am neither bullish nor bearish, I think we are range-bound and we get either too high or too low in a range and all this bandwagon jumping angers me because I see so many people getting burned as the media effectively tells them to buy high and sell low.

So, not too much point in discussing fundamentals because fundamentals have little to do with what’s going on in this market over the short-term. You really couldn’t get a more positive report than the one we had from Intel yesterday, which the company says was the "best quarter in the company’s 42-year history," and the numbers don’t lie: EPS, sales and margins all crushed estimates, and Q3 guidance was raised far above expectations. In a normal world, that should spark a massive tech rally but we already had a massive rally of 6% in 4 days so, at this point, it may take a bit more than just INTC to kick us over the top.

The Nikkei finally woke up this morning and slapped on a 2.7% gain but it's still down at 9,795 and far behind the Dow, which it usually paces more closely. Chinese markets were up about 0.7% and the BSE rested flat today, still under 18,000. Europe has been heading down since the open, giving up half a point and that flattened out the US futures after a 1% pop last night right after Intel’s earnings. There’s not much international news today but a day of rest would be good after a week of rally anyway.

We got a 2.9% drop in Mortgage Applications last week and this summer is looking very anemic in the Housing Sector. June Import Prices were a deflationary -1.3% (-0.4% expected) and Retail Sales were off 0.5%, which is better than May’s -1.2% and, Ex-Auto, it was down just 0.1% so not too bad, really. We’ll just have to wait and see what the markets decide to do with this information but it’s the Fed Minutes at 2pm that are likely to make or break this rally so tune in for the afternoon fireworks!

Based on INTC’s report, I’d be looking at Dell (DELL), IBM (IBM), HP (HPQ), Apple (AAPL), Cisco (CSCO), Synnex (SNX) and Sony (SNE) as probable good earnings plays - we’ll be looking at them in Member Chat today. We’re off to a very good start as our first earnings play of the season, on INTC, is right on the money at $22 and that’s a great way to get started on our very profitable earnings spreads, which make every quarter feel like Christmas.

Great article in The Times as Amsterdam Physicist, Eric Verlinde demonstrates that gravity is nothing more than an illusion. This is the kind of thing that hopefully our own top scientists will be able to uncover once pot is legalized in America as well!

Try to stay grounded today…

Source: Which Way Wednesday: Topping or Popping?