Whipsaw Wednesday: The Rally Resumes

by: Philip Davis

RUT WEEKLYThat was a nice, healthy LITTLE correction - wasn't it?

Dave Fry's Russell chart does a nice job of illustrating the range we are in and it's pretty much in-line with our Big Chart support level for the RUT, right on the 940 line as the current floor and, as we discussed last week - 950 is the significant cross we are waiting for to finally signal that it's time to flip to our next set of levels, where 950 is the -5% line on the way to our +10% goal at 1,000.

As I noted last Friday, we're camping into the end of the quarter so we're not expecting a huge move until the end of the month (gotta save something for the rest of the year) but it's also not very likely that "THEY" let the market fall before "THEY" get a chance to print up brochures to show you what a fantastic quarter "THEY" had so "THEY" can convince you to put your money into the casino (so they can get theirs out!).

I should mention that we're done shorting oil as I mentioned on Friday that we liked USO short and SCO long - both good for 3% moves on the ETFs (and a lot more than that on the options, of course). It's a new contract now and we actually liked the Futures (/CL) long off the $92.50 line into inventory this morning (10:30) and I'd love to see a spike up to $95 that we could short into again (as the fundamentals on oil are still unfavorable) but I'm not even sure they can break $94 without at least a 2Mb draw this morning - we'll have to call an audible in member chat on that one.

DIA WEEKLYWe have an easy line to watch on the Dollar, as it tests 83 (over bad, under good) and we're going to be retesting a lot of good levels on our Big Chart so it will be easy to know when to get bullish. We flipped a little bearish yesterday at 11:39 in Member Chat, when I called for adding some DIA June $141 puts at $2.60 to 3 of our virtual portfolios and we caught a very nice run to $3.10 (up 19%) about 2 hours later as we caught the dip on the nose but we kept the puts open as we're not sure we're done going down yet - and June is still 90 days away...

Also because we've been adding longs on these little "dips" and, frankly, we need the hedge - as we've been pretty bullish during the run-up. Those DIA puts are the only bearish hedge we have in our new Income Portfolio - so it would kind of suck if we had a flash crash and didn't have time to add other covers.

Somebody was worried about something yesterday as the VIX shot up over 15 for the first time since the beginning of March and, before that, it hadn't been over 15 since December - now THAT's COMPLACENCY! We settled down at 14.39 at the end of the day and TLT flirted with $118 (another sign of market anxiety), where it hasn't been since early March either.

$VIXWe love a higher VIX, of course, as it gives us better prices when we sell options. We got such good prices, we even sold some Apple (NASDAQ:AAPL) calls to lock in our gains but we also took advantage of the panic in Lululemon (NASDAQ:LULU) to sell some April $62.50 puts during the panic yesterday - as the company was revealed to have accidentally made their black yoga pants too sheer and would be recalling them and making a new batch.

If you are thinking "so what?" - then congratulations - you are on the road to becoming a fundamental investor. For the most part it's dull - we basically wait for the sheeple to run out of a hyped-up story like this and then we bet that they'll come running back in once the media is done crying "WOLF" but, unlike the villagers in the classic children's tale - the sheeple never learn. That's why we call them, the Beautiful Sheeple and give them a theme song.

It's not your fault that you're always wrong
The weak ones are there to justify the strong
Capitalism has made it this way,
Old-fashioned fascism will take it away - Marilyn Manson

I do my best to try to wake people out of their stupor and a lot of our members say that joining PSW is like swallowing that red pill in The Matrix - we just pull back the curtain and show you the men who are working the machines.

As you can see from the comments on my post on Income Inequality in Seeking Alpha yesterday, a lot of people are unwilling to look behind that curtain while, in PSW Member Chat, there was barely a mention, as the markets were more interesting for us yesterday than politics - and we're well aware of the levers that are being pulled - which allows us to place our bets accordingly.

The China lever has been pressed down since early Feb and Goldman Sachs and others have used that particular wolf to stampede the masses out of commodities but we've been buying up gold and FCX (copper) as it sold off as well as Cliffs Natural Resources (NYSE:CLF), which GS just yesterday downgraded, saying iron ore "may average $139 a metric ton" this year because of slowing steel production in, you guessed it - CHINA!

GS put Rio Tinto (NYSE:RIO) on the dreaded "conviction sell" list and dropped BHP Billiton (NYSE:BHP) to "neutral," causing both of those stocks to take huge hits but what are people running from? Surely you must be aware that China has been acting to CURB runaway demand for housing because they are worried about inflation. In case the GS analysts are reading this - inflation is that thing where prices go up - not down. Not only does China have to artificially attempt to staunch growth but, in the US, it's picking up drastically. Other countries (other than Europe) are either growing or putting in stimulus measures to promote growth, not reduce it.

Meanwhile, GS is talking about an AVERAGE of $139 per metric ton vs $144 previously estimated but CLF ($20.33) is in Cleveland, Ohio, and is one of the primary US suppliers of iron ore. The US is where demand is RISING, not falling. Yes, global prices are generally fungible, but that doesn't mean the local boys don't have an advantage with less shipping, turn time, etc.

X ($19.50) is another one we like playing for a turn on the same premise and the Jan $18 puts can be sold for $2.25, which gives you a net $15.75 entry on a company that does less than 10% of its business outside of the US. X reports on April 29th and we're not expecting anything too exciting this year but next year I imagine they should be comfortably on the way to making more than $2 a share and that's a buy at $20 in my book, and certainly more than $18!

Back to China, though. So how long can a rapidly growing economy pretend it isn't? About as long as a rapidly pregnant woman can keep putting on the same pair of jeans, right? Every day it gets a little harder until, finally, China has to admit it needs a bigger pair - or maybe some inflation-friendly stretchy pants.

FXI should be a fun play as they test the 200 DMA at $36.36 and if we give them 2 months to recover, we can buy 20 of the May $35.50/36.50 bull call spreads for .60 ($1,200) and sell 5 CHL (now $52.50) Jan $47.50 puts for $2.20 ($1,100) and that puts you in $2,000 worth of spreads for net $100 and all FXI (now $36.34) has to do is hold $36.50 through May and the worst-case on the other side is that you end up getting assigned 500 shares of CHL at net $47.52, which is 9.5% below the current price.

Frankly, we'll be more interested in opportunities in CHL, X, FCX ($32.98), DBA ($26), etc. as we've already caught GLD, GDX, ABX, HMY and NAK this month and we need fresh horses for the next leg of the race in the "Let's Take all the Money from GS's Sheeple Sweepstakes."

Last time I put up a free trade idea like that in the morning post was back on Feb 26. At the time it was the very simple sale of 15 CZR March $10 puts for .40 - generating $600 in cash and, of course, those short puts expired worthless on Friday (March expiration day) and we keep the $600 and enjoy a free weekend in Atlantic City.

As long as we're having a good time - that's what's important, right?

Disclosure: I am long AAPL, GDX, TZA, GLD, ALU, DBA, GLW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to change (fairly bullish mix of long and short positions - see previous posts for other trade ideas). Commodity positions are very short-term and not tradeable by the time you read this.