Which Way Wednesday – Probably Both Ways, Again

ilene's picture

Which Way Wednesday – Probably Both Ways, Again

By Phil of Phil’s Stock World

image008 Which Way Wednesday – Probably Both Ways, Again

What was that mess yesterday?

As you can see from David Fry’s SPY chart, we went up and finished down, but the volume was a bit lower to the upside than the sell-off into the close. MSFT and INTC led us to the downside – no surprise really as we discussed both this weekend as Dow components to avoid in the current cycle.

There was no significant economic data, just the usual nonsense about Greece and, of course, the drumbeat of fear regarding the US fiscal cliff that the MSM is banging 24/7.  ”What’s up with that fiscal cliff” is now how 90% of my conversations begin with anyone who knows what I do for a living.

I now find that it’s easier to say “Oh, we’re all totally doomed” than to explain why we’re not because when, for example, I say this to one of my Mother’s friends – they nod wisely and agree with me while, if I try to explain why they shouldn’t worry so much – they get all confused and then say to my Mom – “I thought he was supposed to understand the stock market.”

Guess I should have tried this with my children. Rather than sitting up for 15 minutes every night explaining why there are not monsters under their bed and why they didn’t need to worry, I could have just agreed with them and said “Yep, big hungry ones!”  Maybe they’d never sleep again but at least I’d sound knowledgeable about monsters and the imminent dangers they posed to sleeping children.

Stocks are now at 3-month lows and it’s been a month since we strung together two up days in a row (Oct 15-17) with the S&P falling from 1,470 on Oct 5 to yesterday’s low of 1,371 for a 99-point drop in 25 trading sessions (6.8%) – losing an average of 4 S&P points a day with 1,360 being our Must Hold line on the Big Chart. The S&P and the NYSE are both, so far, holding their lines (NYSE is 8,000) and they are our broadest indexes but we’re pretty close to having to layer our disaster hedges as we cross those -7.5% lines.

The S&P was at 1,440 when we put up our latest round of disaster hedges on the 20th of October. Before that, we had just been using TZA as our primary hedge – all the way from $13.50 – now  $17.38 and up 28.7% without even leveraging it with options.  The new play on TZA was the April $14/22 bull call spread at $2, selling the April $13 puts for $1.35 for net $0.65 on the $8 spread and that combo is already net $1.84 and up 183% so we can take those profits and establish a news spread with the April $17/24 bull call spread at $1.40, selling the $14 puts for $1.05 for net $0.35 and then we have taken $1.44 off the table, locked in a 121% profit and we’re left with a free $7 spread that’s currently $0.40 in the money.

If you want to be more aggressive, you can add the new spread and stop out the old spread with a 100% profit but we still feel this is a pretty good bottom and it is time to take some profits off the table on our profitable spreads.

I still like HPQ at this price and the Jan $14 puts, now $1.43, can be rolled out to the 2015 $10 puts at $1.85 to net into HPQ at $8.71 and, of course, if you don’t REALLY want to own HPQ for net $8.71 – why on earth would you have sold the $14 puts in the first place?

Our 4th disaster hedge was the EDZ Jan $12/16 bull call spread at $.60, selling the Jan $9 puts for $0.35 for a net $0.25 entry and, although EDZ has only moved from $11.52 to $11.98, the spread is already $0.60 as we took those puts nicely out of the money and they are down to $0.15 already. Up 140% is not bad on a less than 4% move in the underlying. That’s because we followed the theme of our PSW Conference and we SOLD premium to suckers who think they can predict the moves in the market – we didn’t really predict anything other than $16 seemed too high and $9 seemed too low for a 3-month move in EDZ off $11.52!

And, finally, we had our V spread, which a pessimist would say is not working but an optimist would say is still giving us a great entry point.  V was at $140 and is now $142.12 but the Nov $135/130 bear put spread died with a 50% loss on earnings (.42) and the AXP April $45 puts sold for .66 are not helping so far as they are up at .83 so our total loss on the net .23 spread is, so far, .60 but, if the AXP short puts do finally expire worthless, there’s still a chance to make .24 – over 100% even on a trade that went badly against us.

I still like V for a short play if we fail to hold our levels as it’s hard to imagine the economy falling apart without the CC companies taking a hit. We were aggressive with V into earnings and their earnings were good and their early earnings reporting means we can play the Jan $145/135 bear put spread for $4 and I still prefer owning AXP long-term and you can sell the 2014 $40 puts, which are $14.50 (26.6%) out of the money for $3.40 for net .60 on the $10 spread that’s $2.88 in the money to start.

As always – keep in mind these are insurance plays that we hope we’ll LOSE – as they are there to protect our bullish portfolios.  When you use hedges that make 100-200% in such a short amount of time on such a minor (6.8%) drop in the indices – you don’t need to put much money into the hedge to offset potential losses.  As a rule of thumb, we look to mitigate about 1/2 the damage that we believe a 10% or higher drop could do to our portfolio.

All of our disaster hedges had, and still have, the potential for at least 500% gains but, when you make 100-200% this quickly – it’s a good time to take some bearish profits off the table and re-position into something that won’t give it all back up if we finally do turn the other way.

October Retail Sales are spooking the market this morning as they are down 0.3% but that’s with the hurricane shutting down the East Coast in the last week of the month. Similarly, the October PPI fell 0.2% and even core PPI was down 0.2% and that’s recessionary if it’s a trend but, more likely, it’s just a blip. Finished Goods are actually up 2.3% for the year with Intermediate Goods down 0.1%. See also: Real Retail Sales Figures Were Better Than Headline Numbers Showed

We remain overall bullish until and unless we fail to hold our Must Hold lines on the S&P and the NYSE – it only takes one major index to draw a line in the sand to encourage the rest. Also, Dow transports are still at 5,054 – why are we holding 5,000 if things are so terrible? Maybe they’re not?


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Sandy15's picture

Fed suckered short sellers to jump on pump ups on low volume.  Now they sucker longs by pumping then crashing the market.  They know all they've done is not going to work.  Government is getting rid of 4 star generals, gutting our military through sequestration, weaking our economy more and more.......  time to crash the market to impliment their new world order.

Grand Supercycle's picture

WILE E. COYOTE crash update:

As mentioned, equity outlook is increasingly bearish now the election is over.

Current bearish price action comprises the first installment of the very overdue Wile E. Coyote sell off.

The previous SPX meltup - devoid of healthy retracements - has caused the coming crash.

One can only stretch the bungee cord so far before it reacts...

SPX / DOW / NASDAQ daily chart downtrend continues.
SPX H+S pattern on daily chart continues.
SPX likely H+S on weekly chart continues.
AUDUSD daily chart rising wedge confirmed (ie bearish)
Wildcard ~ possible EURUSD rally if bullish news is announced.


Look Out Below.

jballz's picture

You have no idea how far down the rabbit hole goes. The government has been increasing the amount of fluoride in the drinking water by percentages each year. Do you know why? It was a build up for this election. Without the mind control properties of fluoride, Obama would have lost in a landslide. The New World Order has been in place since the 1800's, and has been run by the major financial institutes (starting with the Bank for International Settlements) ever since in preparation for the 2008 and 2012. And, if you think you can drink bottled water go get away from the mind control properties of fluoride, think again. Studies have shown that the certain mind control radons have been interjected in bottled water at levels abstract to the same protogens of tap water

GMadScientist's picture

Hyperbolic Hydraulic Colic Frolic!


Fred C Dobbs's picture

A Tyler will have to post the truth about sodium fluoride someday.  

WhiteNight123129's picture

Simple Phil

Premise 1. There is too much debt to GDP

Premise 2: Someone s debt = someone else asset

Premise 3: Equities are just a residual claim junior to debt, it is true at the company level or macro level (1929- 2009)

Conclusion : there are too many financial assets to GDP.

Two ways to resolve: bankruptcies (wack the financial assets and debt 1929-1933), or printing 1933 and 2009.

Equities which are NOT joined at the hip with circulation (i.e. NOT soft commodities equities) can not possibly be cheap when the ratio of financial assets (debt) to circulation is that high. The Gold-Dow ratio just reflects those swings between real assets and financial assets.

ebworthen's picture

QE4 coming come January.

Fiscal cliff will be solved with pushing the problems into the future, just like they have for the past 20+ years.

The "markets" may go up, but they don't mean shit; any more than they did in 2007.  Wall Street and Washington want your assets and what they haven't grabbed yet they will grab in the future.

Go ahead, invest, and they will tax the piss out of your gains; and when you try and get it out when you need it.  IRA and 401K balances to be turned into annuities controlled by the IRS.

ZeroFreedom's picture

I took Phils advise but just went long TZA Direxion Russel 2000 Bearish 3x ETF, so up about 6% and still long on just a small position so his call was correct on the TZA as a short term trade.

willwork4food's picture

I admire your optimism. Regretably, my Scottrade account says I own them $2.31 which I have no freaking idea why and really don't care.

Money is too tight right now in these parts of the woods.

vmromk's picture

Weren't you the poster which stated that AAPL was a buy at $550 ?

Just think of the buy it will be $100 lower.


Paper is dead. Save your asses, now. 

Pick up some l'argent in solid form. Or, ammo. Bitchez.

Wall Street will be on fire soon enough.

Too much phoney tulip bulb paper floating around, along with combustible Bennie Bux. 

ilene's picture

Yes, Phil liked it at around $550. Great buy under $100!

Winston Churchill's picture

Strong support at $55 for Crapple..

Not a buy till then.Same goes for everything else.

90% discount or I no buyee.

jeff montanye's picture

you may be right but the '29-'32 and '65-'82 moves were more like 80%, adjusted for inflation/deflation.

i'm thinking the 2700 '87 dow high may be support.  but wait!  i didn't correct for inflation!  back to you.

(it is, after all, the grand supercycle top -- twelve year head and shoulders pattern.)

DeadFred's picture

Ilene, I usually respect Phil's views a lot but this time check if he's been snorting something.

wonderatitall's picture

the storm hit october 31.....what world do you live in...buy buy buy..obama got plenty o money ....


Tenshin Headache's picture

annnd it's gone! (1360)

jeff montanye's picture

i was wondering when someone would mention that.  

disabledvet's picture

"cry havoc and let loose the dogs of war." I fail to see the "which way." and of course to be paid out in those gains you'd have to come clean on your losses. I really don't think trading this market has been profitable for anyone actually. Are you arguing the election was good news then? By all means if you are...by all means please do. Everywhere I look I see "Government" now. And of course it was Wall Street that needed bailing out, yes yes? So seriously....what DO you recommend? Seems to me...tho I hate it..."all the pieces are falling in place." Or is it getting in line?

ilene's picture

disabledvet, I'm not a trader and think this is a really difficult market to trade. Some people enjoy and manage to be successful - in this case, Phil was bullish, but hedging with strategies that would be successful if the market dropped - so his short positions/hedges did well, his longs wouldn't have. In my opinion, for non-traders, buying when the market is low, finding good companies, and buying "value" makes the most sense. The market is confusing people now, from what I've read/heard. 

earnyermoney's picture

Yeah, Bernanke's heroine is not working anymore.

Ask Phil if he's seen his buddy Jon Corzine.