Seeking Alpha
Stock and Options Newsletter, Teaches Hedging Strategies, Smart Portfolio Management
Profile| Send Message|
( followers)
One thing I’ve learned about being bearish is that no one wants to hear how great your day was in a down market!

I suppose real bears have clubs where they all get together and toast the collapse of an index or two on a day like today, but I’m generally a bullish person so I’m never invited to those parties…

Bear Market

The last time we had a day this good was way back on February 27th, when the Dow fell 400 points in one day. It’s taken us two days to drop from Friday’s high of 13,690 to 13,450 - hardly a drop worth mentioning in the grand scheme of things and, if 13,400 holds, we will be ready to rumble again right after options expiration on the 20th.

Winning Ideas

Back on 2/27 we gained 28% in one day, and today our Short-Term Portfolio went from Friday’s 22% to 43% as our very dull policy of hedging just a little bit more with each gain finally paid off. I don’t say this to brag, but to hammer home the point to those of you who weren’t hedging so that MAYBE next time we have a nice rally we can all get on board with the
Diamonds Trust, Series 1 (NYSEARCA:DIA), PowerShares QQQ Trust, Series 1 (QQQQ) and oil puts as it’s days like this when they turn from your worst enemy into your best friend!

Kudos to ME for calling the top right on the head, and getting us out of our June longs (and many Julys), hedging the heck out of our leaps and even taking a bunch of Butterflies, Condors and Bear Calls! As I said on Tuesday morning:

Our markets are looking pretty good, of course, but you know we’re in trouble when I start playing Iron Condors and Bear Call spreads, like we’ve been doing on the member site this week. I have not been able to pull the trigger on many buys so far as I’m just not comfortable with the market action.

Mega Kudos to Happy Trading, who shared his concerns with the members at 3:37 on Saturday, saying: "Be very careful on Tuesday and Wednesday. Depending on the market conditions, I’d consider going cash starting as soon as Monday."

Kudos to Option Sage as well, who told us on Sunday that we’d better line up our contingency plans. As Sage said in his close: "Both Phil and I feel we need to be prepared for a market downturn (just in case!) and we want to make sure everyone is thinking in terms of contingencies for their portfolios."

Now those are Action Alerts! So excuse me for being very proud of the team, but I don’t think you’ll get a more accurate set of market forecasts anywhere. We don’t prevaricate, we don’t speak in riddles - we just tell you what’s going to happen ahead of time and that’s a very useful thing! That’s why my consulting company is called Delphi . . .

Let's try to figure out what the heck happened to the market . . . let’s review our key points for the week so far:

• Monday we had less than usual deal activity and an 8% drop in Shanghai, which concerned me in the morning and Factory Orders were a hurting .3%, down from 4.1% but that didn’t seem to bother the markets, especially with Japan putting in some very strong business spending numbers.
• Monday night I blamed rampaging oil for tanking the Transports and that trend continued as greedy, oily roaches wrecked the markets trying to squeeze an extra couple of dollars a barrel in excess profits.
• Tuesday we had weak Chain Store Sales (-.5%), In-Line Retail Sales (+2.1%), a decent ISM and Improved Consumer Confidence, but I didn’t like the very FAKE nature of the Shanghai’s afternoon "recovery". I hate to sound like a conspiracy theorist but that’s what conspirators count on when they rig the markets - that no one will want to say anything!
• Tuesday we were unsurprised by the drop but did not test my 13,500 target, causing me to say in the wrap-up: "While we held 13,550 for today, our failure to get back over 13,600 does not fill me with confidence!"
• This morning we could no longer blame China, as they held flat but our Productivity was down (1% vs. 1.7%) and our Labor Costs were way up (1.8% vs. .6%) and the ECB raised rates, sealing the deal on the Fed, who no longer have the option to lower theirs without running the presses, which will cause the same inflation they’ve been trying to avoid.

Now I’m a big fan of inflation, as it’s the only realistic way we can pay off the deficit. Inflation will raise your salary, increase the value of your home, lower your relative fuel costs, lower your relative mortgage, fund your retirement savings through interest bearing accounts…. The only people who really hate inflation are the people who lend you money. They get paid back in dollars that are worth less (worthless?) than the dollars they lend you. Isn’t it funny how bankers set the monetary policy in this country???

The system of banking [is] a blot left in all our Constitutions, which, if not covered, will end in their destruction… I sincerely believe that banking institutions are more dangerous than standing armies; and that the principle of spending money to be paid by posterity… is but swindling futurity on a large scale. - Thomas Jefferson

Given the circumstances, our indices did the best they could and I was encouraged by the fact that Google and Apple managed to hold up on the day. Naked leaps in our Long-Term Portfolio suffered little damage [American International Group (NYSE:AIG), Boston Scientific Corp. (NYSE:BSX), Caterpillar (NYSE:CAT), Circuit City Stores, Inc. (CC), Capital One Financial Corp. (NYSE:COF), Macy's Inc. (NYSE:M), Market Vectors Gold Miners ETF (NYSEARCA:GDX), General Electric Company (NYSE:GE), Mitsubishi UFJ Financial Group Inc (NYSE:MTU), The Progressive Corporation (NYSE:PGR), Starbucks Corp. (NASDAQ:SBUX), Service Corporation International (NYSE:SCI), TASER International (NASDAQ:TASR), MEMC Electronic Materials, Inc. (WFR)] and even our unprotected Free Picks (that come in the Free Newsletter) - that we discussed in the contest post over the weekend, held to a 106% portfolio gain since 4/30 (down 4%). Athough I like to think they were pretty good picks, they can’t all be winners, so we would have to conclude that long-term sentiment remains bullish and is reflected in the options markets.

Index

Current

Day's Move

Must Hold

Comfort Zone

Break Out

Next Goal

Dow

13,465

-129

12,468

12,600

13,000

13,500

Transports

2,879

-34

2,825

2,900

3,000

3,250

S&P

1,517

-13

1,430

1,460

1,500

1,550

NYSE

9,895

-106

9,218

9,465

9,600

10,000

Nasdaq

2,587

-24

2,454

2,500

2,600

2,750

SOX

481

-5

477

490

500

560

Russell

841

-7

803

820

850

900


US Markets

The Transports dropped into the DIScomfort zone, but held their rising 50 dma of 2,870, the Dow looks like it’s on the way to 13,200 and we layered our puts down to the July $135s on the DIA this afternoon, just in case. The S&P is also considering a visit to 1,500 and will be our leading indicator again, but there is nothing preventing the NYSE from heading 9,800 and even less stopping another 100-point drop from there. The Nasdaq added a red box warning, as predicted it was dragged there by the SOX, who may as well get it over with and retest 470 at this point. The Russell held 840 and will be canary number two tomorrow, but keep in mind that the SOX and the Transports are on this chart BECAUSE they LEAD their indexes!

We shorted the iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI) this afternoon as a drop in Asia tomorrow is a foregone conclusion. The question will be how will Europe bear up (they had an awful finish) and what mega-merger or Bernanke statement can save the market now? Early fireworks will be provided as hedge fund managers are accusing The Bear Stearns Companies Inc. (NYSE:BSC) of manipulating the market before they could by propping up the sub-prime market (as I had predicted they would at the time) and forcing them to cover their shorts. Well, LOL - I guess I’m not the only conspiracy theorist this week!

Another group of manipulators who were forced to cover was (as predicted by me and ZMan live on Market News First) the energy traders who found themselves holding the barrel (3.5M of them to be exact) as the cyclone faded as fast as holiday gasoline demand apparently did, leaving 19Mb ($1.2B) of offshore oil in storage facing a declining market and approximately $4M/week in rental fees. This should be a great lesson in macro-economics for the energy crowd - if the contango starts to fall!

Gold did NOT go up and the dollar did NOT go down, one of the most hopeful signs of the day, but it’s a very small peg to hang our hats on for tomorrow.

GoldDollar

Source: Options Trader: Wednesday Wrapup