Tempting Tuesday – Things Begin to Look Up Again
Suddenly we're heading back over our 50 dma lines and we've wiped out most of that drop below our Must Hold lines (above). In the bigger picture, we're back to consolidating for what could be a big finish to the year.
Much of the outcome is up to the Fed tomorrow and expectations are high for a big boost in QE to make up for the termination of Operation Twist. Anything less than an additional $45Bn a month pledged in tomorrow's statement will be disappointing and might reverse equities yet again. It's a little early to go gung-ho bullish – just in case the Fed disappoints.
We have no need to chase as were buying at the bottom – like HOV, which was our bullish featured pick in the morning post on November 16, when the stock was at $4.30 (now $5.38 – up 25%). Like the trade ideas I've been posting this week, a lower entry could have been made by buying the 2014 $4/7 bull call spread at .75 and selling the $4 put for $1.40 for a net .65 credit. A month later, the bull call spread is $1.10 (up .35) and the short put is .80 (put is down .60 - but we shorted it, so we're up .60 on the put).
These are sensible ways to play stocks in a choppy market. We give ourselves 15-25% hedges to the downside – built into the spread – and we leverage our upside considerably so a 25% gain in the stock returns 146% on our investment.
Once after the Fed tomorrow, we could be set up for a move back to 13,600 if Bernanke can manage to instill a bit of investor confidence going into the close of the year.
There are still plenty of opportunities out there. Just yesterday we still had plays on IMAX and AAPL in the morning post and, in Member Chat, we added bullish trade ideas on NOV and GDX early in the morning – in anticipation of another bullish day. GDX took off but NOV is lying flat. Our trade idea on NOV was an artificial buy/write, selling the 2015 $55 put for $7.40 and buying the $60/82.50 bull call spread for $10, which is net $2.60 on the $22.50 spread that's currently $8.44 in the money.
Of course, we have other strategies that let us generate a cash income while we wait for this position to mature and we discussed that yesterday. Early this morning we discussed yet another bull call spread on AAPL, which has a 122% upside over 24 months with no margin requirements – these are the kind of opportunities we can take advantage of, even in this very choppy market. ("The max profit on a bull call spread comes by waiting for it to expire in the money. In between, you are either on or off track but it's a targeted bet in both time and position so you always need to be realistic about where you are and where you expect to be. With AAPL, for example, you can buy the 2015 $450/550 bull call spread for $45 so you have 122% upside if AAPL is over $550 in Jan 2015. Since you expect to realize a $55 gain over the next 25 months, you are "on track" if you are making $2 a month and off track if you are not.")
Asia was generally flat but Europe is up 1% this morning, mainly on news of German Investor Sentiment (ZEW Survey) jumping to 6.9 in December, a big reversal from -5.7 in November. This is the fist time the index has been positive since May and, as we discussed on Friday – the German markets have been kicking our asses all year and we'd rather see them do well while we try to catch up than to see them pulled down to our level, which is less than 1/2 of their gains for the year.
So plenty of room to run if investors get in the mood, and that mood will depend on the Fed tomorrow and whatever Fiscal Cliff pronouncements we get out of Washington this week. Small Business Optimism is dreadful at 87.5, now heading back to 2010 lows. It isn't just the hurricane or the fiscal cliff – optimism has been declining all year but the break below 90 is very serious and is something we do need to keep an eye on next month.
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