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Phil's Morning Alert to Members - A Cautious Hedge

|Includes: QID, QQQ, ProShares UltraShort S&P 500 ETF (SDS)
Phil - August 4th, 2010 at 9:48 am |

Good morning! 

Our levels remain:  Dow 10,700, S&P 1,155, Nas 2,300, NYSE 7,350 and Russell 666.

Yesterday we had that very depressing small business survey that killed the mood, today we have happy talk from Timmy and continued strong earnings so we’ll see if that can punch us over 1,900 on Nas futures, which is about 47 on the QQQQs and just under 2,300 on the Composite.  That’s gives us a very good bullish indicator, but it’s 666 on the RUT that has been the rally killer so it don’t mean a thing if we can’t make that line along with our Dow 10,700. 

Only surprisingly strong jobs numbers will do it and DON’T FORGET - this is all a weak dollar rally, that is the most instantly reversible rally of them all because a dollar bounce takes oil down and metals down and lowers the relative value of your stocks to the dollars you are exchanging them for - VERY fast drops if something happens that sends people into the dollar so be very careful out there. 

I still like our SDS play, of course but let’s add a QID trade - just in case the Nasdaq is rejected at 2,300.  The Aug $16/17 bull call spread is .40 and you can sell the Sept $15 puts for .35 so that’s net .05 on the $1 spread for a nice 1,900% upside in just over 2 weeks if the Nas falls.  QID is a 2x ETF so it would take a 5% gain in the Nas, to 2,415  to put the $15 puts in the money so as long as you will make money from long Nasdaq plays to offset - no worries

Also, a trade like this is rollable so let’s say you sell 10 of the Sept $15 puts for $350 and you buy 10 spreads for $400.  That puts you in for net $50 with a $1,000 upside on the spread (which is currently .50 or $500 in the money) and your worst case is you are assigned 1,000 shares of QID at $15 but, of course, you can roll it along (the Jan $13 puts are .50 and, if the Nas gains 10% by Jan - don’t you think you’ll be liking those QIDs at $13 anyway?

Disclosure: Positions as indicated but subject to change. We are long on the markets but hedging short-term.