Monday Market Movement: More Mario Momentum?

|
Includes: AAPL, AMZN, CHK, CMG, DIA, ISRG, MA, SHAW, SPY, TNA, V, XRT
by: Philip Davis

SPY DAILY

So, where's our stimulus?

Like good little Pavlovian dogs, we ran back into the markets last week when Mario Draghi rang the stimulus bill - increasing the $60Tn global markets by 5% - that's $3Tn of valuation added in 48 hours on the say-so of a former GS executive that has been put in charge of the European Central bank. What could possibly go wrong with this scenario?

If we can't trust the investment bankers who are taking over our government, who can we trust? So we'll assume that everything WILL be fixed this week and that the ECB, Fed, PBOC, BOE, BOJ and all the little Central Banksters will be pumping enough money into the system to justify a $3,000,000,000,000 increase in global equity prices - even though that means, at an average p/e of 15, that all this expected stimulus somehow drops an additional $200Bn to the bottom line of big business to justify the bump in valuation.

How many dollars, yen, euros and yuan do we have to give to corporations to turn into $200Bn? Well, if it's Amazon (NASDAQ:AMZN) - the answer is $15Tn because it takes $50Bn in sales for AMZN to make $600M so figure 75x in sales to make 1x in earnings. Why use AMZN? Well because AMZN is almost 5% of the Nasdaq and it was their amazing run last week, on what rational people would consider poor earnings, that reversed the downtrend initiated by Apple's (NASDAQ:AAPL) (who are 15% of the Nasdaq) miss.

AMZN WEEKLYI guess it's obvious why we're short AMZN (see Dave Fry's chart) but let's look at AAPL now, who are quite a bit more efficient at dropping dollars to the bottom line. Last year, AAPL took in $108Bn and made a profit of $26Bn - now THAT'S a good company. So let's pretend that all companies are as good as AAPL and nowhere near as bad as AMZN at converting sales to profits.

Now to get that additional $200Bn in corporate profits we only need about $800Bn in stimulus - assuming, of course, that money actually went to people who would spend it and not to Banksters who are still trying to back-fill multi-trillion dollar holes in their mark-to-fantasy balance sheets. $800Bn is a doable number so let's pretend it is enough to justify a 5% bump in the market and now we know what we'll be needing this week to hold Dow 13,000.

I suppose the question, for those of you playing along at home, is what do do with our TNA play? Our trade idea from Friday was the TNA Aug $49/54 bull call spread at $2.20, selling the Chesapeake (NYSE:CHK) Sept $17 puts for $1.28 for net .92 on the $5 spread. TNA shot up to $53.06 into Friday's close and the TNA spread is already $3 while the CHK puts fell to $1.08 for a net of $1.92, a 108% gain on cash for the day.

By the way, if you ever wonder why it is the top 1% doesn't complain about the Fed diluting our money with these ridiculous stimulus programs - it's because we can make simple trades like this that make 108% on cash in a single day once we're given the word (the same word I shared with you Friday morning) for what we call a "Free Money Day," when the Trade-Bots take the market higher and higher all day long and all we have to do is decide where to capitalize on it. We don't need a big conspiracy, just a nod and a wink from our boy Draghi and we know to deploy some of that cash we've been sitting on.

SPY 5 MINUTEAnd, wouldn't you know it, our cash had just topped out at 84 on the dollar so we even made a good profit on our sidelined cash while we waited for the signal. What fun. If you are a poor person who has to wait until the end of Friday to get a paycheck, which you then have to put into your bank and wait for it to clear so you can buy some stock on Monday - we have some lovely stocks to sell you this morning as we dive back to cash. Isn't capitalism great?!? It's so nice that everyone gets to participate like this.

Today, in fact, despite all the excitement over the promised stimulus, we'll be dipping our toes back into the Long Put List. As we noted last Monday, we're done with the Chipotle (NYSE:CMG) Sept $350 puts, which went from $5 on the 19th (when we initiated the list) to $55.50 at Friday's close (up 1,010%) as well as the Intuitive Surgical (NASDAQ:ISRG) Jan $350 puts, which are still $5, up from $1.70 for a 194% gain. But these are available again now that we've rallied:

  • AMZN Oct $205 puts at $4.20 (our $180 puts dropped from $2.75 to $1.85 and we rolled them up to the $205 puts)
  • DIA Dec $117 puts at $2.50, now $2.25 - down 10% (we prefer the $119 puts at $2.60 now)
  • MA Jan $290 puts at $2.85, still $2.85 - even
  • SPY Oct $120 puts at $1, now .85 - down 15% (we prefer the $123 puts, now $1.08)
  • V Jan $100 puts at $2, now $1.90 - down 5%
  • XRT Jan $53 puts at $2, still $2 - even

See how great the long put list is? We have 15 more like that for our members as well. The ISRG trade made $3.70 and the CMG trade made $50.50 while the "misses" barely bothered us - even in this massive rally and we have ages to make it back on the next dip or, in the case of MA and V - if we do get stimulus and our bearish premise is blown - we simply walk away and find something else to play.

The key is that, in the same time-frame we found very successful bullish trades and very successful bearish trades to take advantage of these wild market swings - and these are just the free trade ideas we put up in our morning posts - as is our tradition during earnings months. Sadly, July is coming to a close and so do the free picks until November, when we'll be having our Second Annual PSW Seminar in fabulous Las Vegas, which is members only this year but next year we may open it up to a bigger venue.

One of the things we teach our members to do at these seminars is to take advantage of the panic of others. Whether it's a stampede of bulls, like we're having now, or a stampede of bears - these are to profit from the madness of the markets. In fact, just today, our long-standing long on Shaw (NYSE:SHAW) is paying off as CBI looks to buy them out for $3Bn, or around $50 a share. When did we buy SHAW? Right after Fukushima, of course, when the stock dropped from $40 to $27 (and later $20) as fear gripped the industry. Here's me discussing it in an interview the week of the Japan crash last year.

So what will we do with our TNA play? We're happy to ride out the CHK short puts because we like the stock and the net $15.72 entry is certainly nothing we would worry about if it were put to us on that side so we can let those expire worthless and make another dollar (another 100%). But that leaves 200% of potential upside on the table and what we can do, if we aren't afraid of margin risk, is stop out the long calls (the TNA Aug $49 calls) at $5 (now $5.50) and only cover the short Aug $54 calls (now $3.30) only if the Russell makes it over 800, which will require that $800Bn in stimulus for it to stick. If all goes well and the short calls expire worthless - we can make $6 on a $5 spread - that's a neat trick.

Disclosure: I am short AMZN, DIA, XRT, USO, QQQ.

Additional disclosure: Positions as indicated but subject to change (still long on aggressive positions until momentum stops).