More Monday Morning Foolishness: Playing A Rigged Game

 |  Includes: BAC, CCJ, CHK, FTR, HMY, HOV, JPM, MT, OIH, SPY, TLT, X
by: Philip Davis

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Think Mcfly, THINK!

Forget the rhetoric, forget what Cramer says - or any of the other idiots on what used to be accurately called "the idiot box." Just look at this one, simple chart (thanks Doug Short) and tell me - why on earth would the Fed step in and take emergency action when the market is at a multi-year high?

Have they EVER done this before? EVER? Has ANY Central Bank EVER taken emergency liquidity measures when their stock market was at or near their all-time highs? And look at the interest rates (the red line) - there's nowhere to go folks - not unless the Fed is going to start PAYING US to borrow money. In which case - sign me up for $10Bn ...

This is the point that was made this week on the cover of Stock World Weekly, and my comments in "The Week Ahead" section were:

How the Hell can we expect the Fed (or the ECB) to "step in" to "save" the market when the S&P is up 110% off its 2009 lows (666) and only 10% below it's all-time high of 1,561.

Is it the Fed's mandate to create unsustainable bubbles to force a misallocation of financial resources into stocks and, even worse for our country, out of bonds? Already this week we saw TLT drop from $132 to $123 (6.8%) and not one, not two - but 3 anemic bond auctions in a row. What happens if the US can no longer fund its own $16Tn deficit? Is this what the Fed's new function is - protecting the investing class at all costs?

SPY WEEKLY Our conclusion was that, in this very low-volume environment, we can't take these breakouts seriously - especially with the dollar down 2% since July 25th - that means our indexes should be 2% HIGHER than they were on the 25th, just to stay even. We were at 1,340 on the S&P before the dollar collapsed on Draghi's "we will fix everything" comments and now we are at 1,405 - up 4.8%.

If we deduct 2% to adjust for the dollar (and the market does tend to track the dollar 2:1 anyway), then we can say 1,405 is more like 1,377 and to REALLY say our 1,400 line is broken - we'll need to see 2% over that at 1,428. THEN we'll call it a rally.

As you can see from Dave Fry's SPY chart, the volume has been PATHETIC. In fact, last week was the lowest non-holiday volume in the past 10 years - INCLUDING 9/11 - and we were closed for three days that week. Look at Thanksgiving - DOUBLE the volume of last week with two days closed (one half day). Christmas, Easter, 4th of July and Last Week - those are our stock market holidays now.

So let us do what TA people don't and adjust for the 2% drop in the Dollar since July 25th and we'll raise our breakout lines from 13,200 on the Dow to 13,464, 1,400 on the S&P to 1,428, 3,000 on the APPLDaq to 3,060 (and the new IPhone looks like a go for Sept 12th), 8,000 on the NYSE to 8,160 and 800 on the Russell to 816. None of this should be too much to ask for, the highs for the year were (mostly mid-March): 13,338, 1,422, 3,134, 8,327 and 847 - so we're not even asking for new highs, except on the S&P.

UUP WEEKLY The Dollar was down at 80.74 in mid-March, now 82.50 (up 2.1%) but, it also fell to 78.50 (-4.8%) at the end of April and, wouldn't you know it - back at the time I also warned people that it was a false rally propped up by a weakening dollar and stimulus rumors while the internals were collapsing on low volume (but still stronger than this BS). The S&P fell from 1,415 at the beginning of May to 1,291 on the 18th, so down 8.7% in 3 weeks and then down another 25 points (2%) into the end of the month, leading us to begin bottom-fishing with our "Twice in a Lifetime List" on May 15th, with our full list going out to Members in the morning alert of May 17th.

I posted notes on some bullish plays we still like for our members in last Thursday morning's alert but we're done with these already as we move on to fresh horses:

  • BAC 2014 $7 puts sold for $1.75, now $1.24 - up 29%
  • CCJ 2014 $17 puts sold for $3.30, now $2.20 - up 33%
  • CHK 2014 $13 puts sold for $5, now 2.15 - up 57%
  • FTR 2014 $3.50 puts sold for $1.30, now .55 - up 57%
  • HMY 2014 $8 puts sold for $1.40, now $1 - up 28%
  • HOV 2014 $2 puts sold for $1, now .60 - up 40%
  • MT 2014 $15 puts sold for $5, now $3.50 - up 30%
  • JPM 2014 $30 puts sold for $5, now $3.25 - up 35%
  • OIH 2014 $30 puts sold for $4, now $2.40 - up 40%
  • X 2014 $20 puts sold for $5.10, now $3.80 - up 25%

As these were short sales of puts on stocks we REALLY wanted to own at the net strike in 2014, after three months (out of 20) since May, we only expect to be up 15%, so all of these are way ahead of schedule so we cash them in and look for similar plays on stocks that haven't moved yet, like HPQ and, of course, if any of the above get cheap again - we'll be interested again but, at the moment, we're still skeptical enough to want to cash out our winning bull trades and get back to "Cashy and Cautious" - concentrating more on our Long Put List, which has already yielded some nice winners - and those entries only get better and better as the market gets pumped back to the highs.

It's not a complicated concept - we get more long at the bottom and more short at the top. If that's flip-flopping then call us flip-floppers but, as you can see from that weekly SPY chart above - that's a pretty reliable channel with a very obvious break-out line and we'll be HAPPY to switch off our brains and BUYBUYBUY with the rest of the sheeple - AFTER we get something more than stimulus rumors and AFTER we have a proper breakout of our levels.

Until then, let's be very careful out there.

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

Additional disclosure: Positions as indicated but subject to change.