Sell FSLR (buy back short puts)

Sell FSLR via buying back short Aug 230 puts

FSLR is now down after the earnings report, despite blowout numbers, and a supportive chart formation. Stock is down 15 points since I sold the puts (was 295 now 280), but because the expected volatility dropped, the put declined in value and I can get out with a break even profit. "When in doubt, get out."

Positions: long BUD, IBM

Buy FSLR (sell puts)

Buy FSLR via selling Aug 230 puts

FSLR higher on earnings, chart is also supportive. Recent lows are 240.

Positions: long BUD, IBM, FSLR

Buy IBM (sell puts)

Buy IBM via selling the Aug 115 puts

IBM had good earnings two weeks ago, and has been consolidating. The puts are 12 points out of the money, with a modest premium that reflects the low chance of IBM going below the strike before expiration.

I am not loading the boat by any means, with this low premium, high probability trade.

Positions: long BUD, IBM

Pring: Four reasons to be optimistic

Over at Peter Brimelow's Marketwatch column, Martin Pring is quoted with (link)
"Four Key Reasons to be Optimistic Today"

1. Low Consumer Confidence = Profits Ahead

2. Bull Markets Always Follow Bear Markets

3. Lower Oil Prices Ahead

4. Record Cash Levels on Sidelines

>>

For the intermediate term trader/investor, I agree that there are many reasons to be bullish. For the short term, the knives keeps falling and would be heroes continue to be sliced up. I am not so brave at the moment. A retest of the recent lows may be an interesting time. There is a chance it could be an acceleration to the downside if a lot traders have a stop loss at the low.

Position: long BUD

The other shoe

Today is what some might call the other shoe dropping. There isn't that much news, but the bottom drops out of the stock market. At the moment, I am unsure of what is coming next, and for now will stand aside. I'll keep looking for trades, but I have to say, it is a confusing market.

Positions: long BUD

Sell AAPL calls

Sell AAPL Jul 185 calls for virtually a total loss (-95%)

Earnings are good, but guidance is disappointing, and the company says that Steve Jobs' health is a private matter. AAPL opens about 10% lower. I dump my calls for almost a total loss. This is the biggest dollar loser of they year for me. There are no guarantees buying ahead of earnings. I took my shot, going for the home run and struck out. Still, I am "glad" I bought calls rather than my usual of selling puts. When a stock gaps down, being short puts is scary and can wipe out a good portion of one's account.

Positions: long BUD

Buy AAPL calls

Buy AAPL Jul 185 calls

That's not a typo folks, I bought calls. Readers know this is unusual for me, that 80% to 90% of my trades have been selling options, usually after earnings, not in front of them. Using a baseball analogy, this a home-run swing for a person who is more typically a singles hitter. Positive factors include big misses by some other tech stocks, and AAPL has been beat down to a chart support level. Rumors about the health of Steve Jobs helped sink the stock this morning. I am buying in the middle range here, not at the lows.

Apple options are pricing in about a 10% move on earnings tonight. This means straddle sellers break even on 10% up or down, straddle buyers need more than a 10% move to make money. (A straddle is buying both a put and and a call.)

Positions: long BUD, AAPL

3-1-2 for July expiration

As a trader who mostly sells options, it makes sense to track progress from expiration to expiration (always the 3rd Friday of each month). For the trading month up to July expiration, I have five winners, one loser. The headline is 3-1-2 because two of the winners are what I term "break even winners" where the broker makes more than I do. Losers of the same ilk are "break even losers."

The one loser was X (U. S. Steel) and it would have been a winner had I held until expiration, instead of cutting my loss. The five winners are short RIMM, long SPY, EEM, IWM, SPY again. The trades this week with the tailwind of the big rally helped move me above break even for the period.

Overall, this month can be described as treading water with a tiny gain. Still, considering that most of my trades were longs (short puts), and the market had another down month, it is something. Better to be cautious and eek out a tiny gain, than that guy that I wrote about in "Another Sad Story." He "graduated" from an option seminar that taught the strategy of buying straddles (both puts and calls hoping for a big, big move either way) ahead of earning reports. That guy lost 100% of his account in a few months worth of trading. Options are not for everyone and like I said, my trading style would not work for some others.

long BUD is my only remaining position

Cheers.

Sell IWM, Sell EEM (buy back puts)

Sell IWM via covering my short Aug 63 puts

Stocks have had a nice 2+ day run, and a pullback, perhaps even a pullback all the way back to the lows wouldn't shock me. V-shaped bottoms are not common, and even when they occur they can be very tough to trade. There aren't many "safe" entry or exit points on most V-bottoms. "When in doubt, get out."

Sell EEM via covering my short Jul 125 puts
As I type up the IWM entry, EEM continues to slide. Even though the odds of it coming into the money are about those of a lightning strike, I am closing out my position for a break even profit. Even since I entered the trade, it has been nagging me. The remaining premium seems worth a bit of peace of mind for the rest of the day, because I am not in front of the computer all day.

RIMM, SPY expiring today
that may leave me with long BUD as my only position

The "beat" goes on, well, until GOOG

VixandMore (link) has this

>>
with 11% of the S&P 500 companies reporting, Bespoke has calculated the current quarter's EPS beat rate to be 72%. There are a lot of earnings reports still to come, but if it holds, the 72% beat rate will be the second highest in the past decade.
>>

Then GOOG drops a bombshell and is down 11% after hours. The other caveat is that a good many companies are beating estimates for this quarter and then guiding lower for the rest of the year. One explanation might be that the stimulus checks are about done, and a lot of them got spent for the quarter just ended.

I believe that earnings are the primary mover of stocks over the long term. It will interesting to see how the overall stock market responds to the GOOG news. A modest dip would be the normal reaction. Calendar trends point to 7/24 as a decent buy in for stocks, and about a one week holding period. Again, seasonal factors are one of the least reliable indicators. Still, I like to bet with as many indicators in my favor as possible.

Buy EEM (sell puts)

Buy EEM via selling Jul 125 puts

Just a sliver of premium to be had, but it is one way to slightly increase my bullish exposure for tomorrow.

Positions: long BUD, EEM, IWM, SPY
Short: RIMM
July expiration EEM, RIMM, SPY
August BUD, IWM

Buy IWM (sell puts)

Buy IWM via selling Aug 63 puts

I double up on bullish index bets. These puts are closer to the money than I usually buy. I am betting this rally has some oomph. As always, time will tell, and if it goes against me, I will cut my losses.

Positions: long IWM, SPY, BUD
Short: RIMM

Buy SPY (sell puts)

Buy SPY via selling Jul 118 puts

Like I wrote yesterday, I think this rally attempt may hold, and making a small bet on the long side. Expiration is Friday, so even two more of these 1% down days won't take it to my strike price. [Yoda voice] Cautious I am.

Positions: long BUD, SPY, short RIMM

Another banana

Another failed rally, though the market closed well off it lows. Yet another day when a relatively big decline (-1.4% on SPY) seems like a good day because it closes well above the lows.

As I wrote a couple of days ago, sometimes it takes two failed rallies for bulls to throw in the towel and the third rally is the one that finds some footing. I don't like to trade fast markets, and today was another fast moving market. We'll see how the next rally attempt unfolds and I may try to play it, though as always it will likely be a small hedged bet.

Gold has seen a good run, though I remain reluctant to try and trade it.

Positions: long BUD (short August puts)
short RIMM (short July calls)

Buy BUD (sell puts)

Buy BUD via selling the Aug 65 puts
Bud agrees to a takeover bid from InBev. There is always a chance that the takeover falls through, and some traders may be locking in some gains by buying some puts against long stock. The odds favor a stable share price, moving steadily up to 70. Deal expected to close by the end of 2008.

Positions: short RIMM, long BUD

Sell SPY (buy back short puts)

Buy back short SPY Jul 116 puts

I don't like the way the market is trading, or the way I am trading. So I am taking my breakeven profit (when profit is less than the commissions) and taking this trade off the table. Many traders trade smaller and smaller when they are in a bad streak.

Position: short RIMM hedged

Cover short X (buy back calls) ouch!

Cover short X position by buying back my short Jul 200 calls

X sky rockets 20 points off its recent low this morning. I am caught with my proverbial pants down. I vascillate on taking the loss and it only gets worse as the day does on.

I need to write on a white board "I will not chase high premiums... I will not chase premiums..." So many times I get burned badly when I do. Taking the loss, is a major ouch in percentage terms, but a tiny hit in dollar terms. Even with this morning's big move, there is still a high probability that X will not go over 200. However, continuing to hold the position means an outside chance for a game changing loss. As my profile states, living to trade another day is priority one for traders, no matter how convinced he/she might be about the trade eventually turning around. Stubborn traders are often short lived traders, or they are hindsight traders that trade on paper instead of with real money. It is an easy game to buy at the low and sell at the high trading on paper, and reporting trades in hindsight. Not so easy in real life, real time.

Someone remind me (maybe it will be me) of this lesson, the next time I am tempted by a high premium, or what seems like a "mispriced" option.

Positions: long SPY, short RIMM

Short X (sell calls)

Short X (US Steel) via selling the July 200 calls.

Calls are mispriced for a moment, perhaps a retail customer putting on a spread, wanting to buy the call. I pick off the modest premium before someone else does. First time I can remember reporting a trade like this on the blog, so it isn't my style to look for mispricing.

X is in a waterfall decline, which can be a high risk formation. However, my calls are 50 points out of the money and above the old high of 195, with nine days until expiration.

Positions: long SPY, short RIMM, X

Another picnic basket

The bear gets another picnic basket, with a 100 DJIA rally turning into a rout, then some modest buying into the close. It is almost a relief to be down 1% on the SPY.

Carl Futia has a bear sighting, this one at the Chicago Tribune newspaper (link to blog, July 7th entry if you are reading this later).

Da Bear

A growling bear is featured online at Barrons (pic link, main link).

We (the collective stock market we) have been waiting for you. As I wrote a couple of weeks ago, the appearance of the bear on the cover of Barrons can be taken as a buy signal. I remember Barrons featuring a high tech bull decked out in 3-D glasses near the top of the go-go boom in Internet stocks.

Like all sentiment indicators, this isn't one to bet the ranch on. The last time I wrote about sentiment, it was in terms of option premiums, and the market went straight down. It is a time to keep my eyes open. There are likely some good opportunities out there.

Positions: long SPY, short RIMM, both hedged

Buy SPY (sell puts)

Buy SPY via selling the Jul 116 puts (ten points out)

The opening rally fails, and I get in at about break even for the index. We are at chart support. I think there is a 50/50 chance that support holds. However, for these puts to come into the money, the first half of July will have to be another record setting down month like June 2008 was. Odds of that are not so high. A minor decline, with some rallies along the way is what I see as the most likely outcome. The short puts will do fine in that scenario.

Elsewhere, steel and coal stocks saw a sharp decline yesterday. The percentage play might be to short them on the first rally. A couple of stocks did see an opening pop, but I wasn't nimble enough to get in. Spreads on options can be wide on most of these stocks, so that discourages me.

Positions: long SPY, short RIMM

Oversold and oversold-er

The stock market is oversold. Yet, it keeps going down. I am reminded of the Stochastics trading systems. The percentage of winners can be decent, depending on the parameters and risk management. However, the losers can often be whoppers, and the buy signal keeps going stronger as the trend continues in one direction.

For novices, stochastics are a popular technical indicator used to identify over bought and over sold conditions. Traders using stochastics often use it to trade counter-trend and try to call the turns. When I was a stock market novice, stochastics seemed like a great way to trade, now I rarely look at it. Why? It doesn't fit my personality, or my trading style. As always, your mileage may vary (YMMV), and there are many traders that do very well that use stochastics as one of their top indicators.

At the moment, I don't see anything that looks like bottoming behavior in the stock market. Sometimes the best thing to do is nothing. It seems high risk to go short or long at the moment. When the market is oversold, a big rally happens sooner or later. However, timing that move is difficult. Anecdotally, often times two rally attempts will fail before a rally takes hold. My opinion is that we haven't had even one decent rally in this latest decline. Put premiums on SPY remain very high as compared to their equivalent calls, so it is difficult for me to want to buy put options.

Positions: short RIMM hedged

Another sad story

On Sunday, a friend told me the story of another friend who lost all their money trading stock options. The loser was someone that hooked up with one of the ubiquitous option seminars. This particular seminar taught the strategy of buying option straddles (both a put and a call) ahead of earnings reports. Anyone that knows much about options, knows this can be a high risk strategy.

It is sad, however, I wasn't surprised at the outcome. I don't know if anyone tracks the graduates of these seminars, but I expect the percentage of winners to be lower than the percentage of winning traders that consistently buy options ahead of earnings reports. A few will win, and some that win will do spectacularly well. The odds are another matter.

Options can be used in a conservative, measured approach to reduce risk. Options can also be used to engage in high risk, all-or-nothing type of trades, hoping for a home run. Position size is a big deal when trading options, and many a novice gets way in over their head. Some like the person I heard about lose everything, their entire nest egg in a few months of trading. Be careful out there.

Charts: USO, DIA and more

Oil is driving the markets. In the past, I have written about oil being the dog and gold being the tail. Now it seems all world markets are keying off what oil does. It is an amazing circumstance.

Here are links to some charts:
USO, DIA, SPY, IWM, EEM, GLD


USO (oil exchange traded fund) is in a strong trending market. Predicting a top is risky business and there are no signs of that. USO hasn't really gone parabolic, just slowly, steadily churning higher.

Speaking of parabolic, the GLD chart has that kind of potential. Gold has underperformed oil, if gold had kept up it would be more like $1400 now instead of $900.

DIA (Dow Jones Industrial Average) has broken the March lows. This is psychologically bad because many novice investors track the DJIA not the broader indexes. SPY (SP500) is close to a retest, just two or three points above the March lows. Like I said, I think there is a 50/50 chance the March lows will be broken. IWM (Russell 2000). IWM is showing relative strength vs. the bigger cap indices. EEM (emerging markets ETF) chart is similar to the IWM chart, holding above support.

Charts are charts, and aren't a guarantee of anything. The most troubling chart for the stock market is USO because the price of oil seems to be driving the stock market lower and there are no technical signs of a top in USO. Obviously when something has seen a decent run, there are often sharp corrections along the way. It is lower risk to wait for support and resistance to be established and trade off them, than to be the hero and call "top" or "bottom."

Major market meltdown, GLD up big

What a surprise this is to me, what with the option premiums so high for the move that occurred today, SPY down big, GLD up big. Good thing I didn't bet big on that snippet of analysis that I posted a couple of days ago.

Some margin calls can be expected with a move like this, so further selling may occur in the weakest stocks. Traders short gold or oil may also face margin calls and be forced to cover. This is one reason not to try and call the bottom in stocks or top in oil. The other reason is what I have always written, that calling top or bottom can be entertaining, but usually isn't profitable. Very few traders have that magic touch of calling market turns, and I am not one of those few. I prefer to trade after the dust has settled or the news is out, and support and resistance has been established.

With the downside momentum, support for SPY at the March lows (~125 support vs. 128.3 close today) looks weak. The way things look now, I would not be a long term buyer at that price.

Positions: short RIMM hedged

Short RIMM (sell calls)

Short RIMM via selling the Jul 155 calls

RIMM gaps down on earnings and outlook. The gap and prior high is resistance.

Sentiment and option pricing

On Friday I mentioned that puts are priced higher than equivalent calls on SPY. For example, today the SPY closed at 131.45.
Sep 120 put is bid 2.18, the Sep 110 bid 0.85
Sep 143 call is bid 1.21, the Sep 153 call 0.12

So the put 11 points out of the money costs almost twice as much as the call. The put twenty-one points out is six times as much as the call that far out. Six times! What does that mean? It means that option buyers and sellers are pricing in the probability of a big drop in stock by September, with minimal chance of a big rise.

Options on GLD show the opposite expectation. With GLD closing at 86.86
Sep 76 put is bid 0.65, the Sep 70 put is bid 0.20
Sep 97 call is bid 1.60, the Sep 103 call is bid 0.90

So option players on gold are much more willing to bet on a big rise than a big drop, the opposite of the pricing on SPY options.

The option premiums are a sentiment indicator, and odds favor the option buyers being wrong. Sometimes they beat the odds as no indicator is perfect. Given a choice, I would prefer to bet against a big decline in stocks, and/or a big jump in gold. When options premiums are so out of balance it favors those making bets on extreme moves being wrong again.

In normal times, premiums are about equal, with calls slightly more expensive than equivalent puts. Let's look at a third underlying: Research in Motion. RIMM has earnings out on Wednesday and the stock closed at 143.06

Jul 125 put bid is 2.74, Jul 115 put is 1.21
Jul 160 call bid is 3.30, Jul 170 call is 1.71

This shows slightly more people betting on a RIMM stock price rise than a drop. However, the premiums are not multiples of each other like the premiums on SPY and GLD, so there is no clear read on which way the option players are leaning.

Option pricing can indicate underlying sentiment. Sentiment tends to be more useful at market turns than in a trending market. My preference would be to bet against the option speculators, so that would translate into me being bullish on SPY and bearish on GLD. As always, what I write is not a recommendation to buy or sell, or investment advice. As always there are what I perceive to be low risk entry points, and high risk times to enter into a trade.

5 out of 6 for June expiration

My option chickens all come in--all my short options expire worthless, so I get to keep my premiums. The one loser this month was Deere, and that would have been okay too, had I held until expiration.

The stock market has an ugly, ugly day. I am looking for more downside action before the end of the month. SPY seems drawn like a magnet to retest the March lows around 125 (current close 131.6), with what I see as a 50/50 chance that support will not hold this time. So the play is to buy puts, no? Maybe not, because the market is oversold, and out of the money put premiums are about triple the equivalent call premiums. This doesn't look like an easy play. I would prefer to bet against the put buyers that are bidding the options up so high, because they are usually wrong.

My options that just expired included index puts on SPY and IWM. The market didn't decline fast enough for those put buyers to make money. It wasn't even close. Despite a very bad stock market, I wasn't ever close to closing out those short puts. Time decay is the friend of the option seller.

Two (now three) doom and gloom articles

Two articles from Marketwatch, the first is Todd Harrison with "Recipe for a market meltdown" (link) and the second about stock fund managers moving to cash "Managers are the most negative in a decade" (link2).

I found a third forecast from the Royal Bank of Scotland (link3). This one makes the other two sound like the song "Happy Days."
>>
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
>>

Yikes!

For long term contrarian investors these are positive sign posts. For traders, caution remains the order of the day, as long as the primary trend is down.

Positions all options expiring Friday 6/20
hedged longs EWZ, IWM, SPY
hedged shorts SHLD, TSL

130/30 trading fund JFT

The 130/30 strategy involves looking for the weakest 30% of stocks, shorting them, and taking that money to invest in the other 70%. A fund that does this is 130% long, 30% short. This strategy is used by some hedge funds (Marketwatch article). For the little guy that want this kind of play, JFT is a new exchange traded fund. The caveat is that it is low volume, so spreads may be high and the expense ratio is 0.95% per year.

Elsewhere, the stock market fizzles again today. The stock market almanac indicates weakness for the rest of June, and July tends to be a poor month for bulls as well.

Nusbaum: China close to a buy

Roger Nusbaum the ETF guy writes about China (link):

>>
The Shanghai Composite has gone on another run down and closed today at 2868 down 53% from the peak last fall and down 45% YTD.

I've disclosed being out for a while now with the intention of going back in and I think the time for me to go back in is quite soon.
>>

Mark Hulbert at Marketwatch writes about bond timers (link), and how timer sentiment is flashing a buy signal for bonds.

Sell DE (buy back short puts)

Sell DE via buying back short Jun 72.5 puts

Floods in the Midwest may mean bad news for Deere tractor sales. Even though my puts are still well out of the money, I am taking my loss while it is are still small. Another down day like today and the loss starts to loom larger.

It's been a yucky market to be sure. It is disappointing to see the entire 150 point rally given back.

Positions:
Long EWZ, IWM, SPY
Short TSL, SHLD

Buy DE (sell puts)

Buy DE via selling the Jun 72.5 puts

Deere has a $7 billion stock buy back fund, so the odds of a steep drop are extremely low, even lower than the theoretical 2.6% odds given by the ThinkorSwim analyzer. (ThinkorSwim is my broker and has their own trading software that includes a probability analyzer.)

Positions, all hedged, all June expiration
Long DE, EWZ, IWM, SPY
Short SHLD, TSL

Buy SPY (sell puts)

Buy SPY via selling the Jun 127 puts
Stock market weak after Bernanke talks about inflation. Foreign stocks, especially China tumble on fiscal tightening.

Positions all hedged, all out of the money, expiration Friday is nine days out
long EWZ, IWM, SPY
short SHLD, TSL

Futia on Magazine covers

Carl Futia mentions magazine covers in his blog (link) June 9th entry if you are reading this later.

Magazine covers can be a good sentiment indicator. The two covers are about oil, so it may be more bearish on oil, than bullish on stocks. When the stock market bear shows up on the cover, that is a stronger stock market indicator.

A dozen stocks: 50/200 dma

I review some charts looking for stocks above the 200 day moving average, and dipping to or one day below the 50 dma. Here are a dozen tickers that I found worth a closer look:
NKE CMI CHRW PCLN ITU SCHW
AZO APA CNI XLB FXM RIO

Keep in mind, that this is relative small list of stocks that I am looking at, so there would be many more symbols if running a similar screen on all listed stocks.

For my favored strategy of selling puts out of the money, the best: APA CMI PCLN

For long termers looking to buy XLB is the materials sector ETF (top ten stock holdings for XLB).

As always, this is not advice, or a recommendation to buy or sell. Cheers.

Easy come, easy go

Yikes! I didn't see today's drop coming. The employment report and tension between Israel and Iran make for a perfect storm for the bears. Oil leaps $11 to $139 per barrel. GLD follows.

As always, what next is the most important question to ask. If the stock market gaps down on Monday's open, that may be a time to add to longs. The Fed has its hands ties as far as more interest rate cuts. The Fed is partly responsible for the weak dollar and the surge in oil and commodities.

I tell myself to stay calm, that there will be opportunities in the carnage, cut losses and live to trade another day.

Long EWZ, IWM
Short SHLD, TSL

Short TSL (sell calls)

Sell TSL Jun 55 calls
TSL down on earnings and outlook.

Positions all hedged
Long EWZ, IWM
Short SHLD, TSL

Buy EWZ (sell puts)

Buy EWZ via selling the Jun 80 puts

Positions: long IWM, EWZ, short SHLD all hedged

one, two, three strikes?

Two down days this week so far. I am looking for a third to add long positions. If that third day doesn't
materialize, Friday may be the day.

GLD options started trading today. Happens to coincide with a bad day for oil and gold. I'm sure that some gold newsletters are going to write about their interpretation of events.

Positions: long IWM, short SHLD

Short SHLD (sell calls)

Short SHLD via selling the Jun 100 calls
SHLD Sears/Kmart lower on poor earnings and sales.

Positions: long IWM, short SHLD

Jaffe: Fully Invested Life

Chuck Jaffe at Marketwatch writes about his father-in-law's financial path in life (article).

>>
... people worry about getting the absolute most from their money, about getting optimal results from each and every purchase and transaction.
...
The moral of his financial story is a simple one: Financial goals are about more than just money. Factor in the time, worry, personal values, hopes, dreams, and anything else tied to money, then take a path that allows you to reach your goals, not just by the number but in keeping with your personal attitude.
>>

When young people ask me about investments, I ask how much time, effort do they want to spend? How much do they enjoy the process of picking stocks or funds? For many the answer is that they don't have much interest, and don't want to spend much time. For them, the best path may be what some call "lazy portfolios," using ETFs and/or index mutual funds.

Kohler: "Trade small, don't be a hero"

Option Addict Jeff Kohler is re-running what he calls his greatest hits (exit-ideas article).

>>
Trade small, don't be a hero. Plan on doing whatever is necessary to be here to trade again tomorrow. If you are on a bad streak, step away! If it seems that you are always on a bad streak, maybe it's not the market.... maybe it's not the stock... maybe it's your system!
>>

I have written many times about the risk/reward of being the hero and calling top or bottom. There are a lot more dead heroes often losing everything, than those who are successful calling major market turns.

Positions: long IWM hedged

Dividend ETFs and Bond ETFs

Here is a raw list of dividend ETFs (link)

Here is a list of all ETFs sorted by annual expense ratio (link)

Sorting through the data on the two lists and the following seem the most interesting to me:
DVY, PIP, SDY, VIG, VWY

For another opinion with more of a focus on current yield, I found this Gary Gordon article.Gordon's top three are: DEM, DWX, DVY

For Bond ETFs my short list includes:
TLT because it has options
BND Vanguard bond index with low expenses
SHY low volatility.

As always for the average person (vs. the gunslinging trader), dollar cost averaging into age appropriate investments is often the best road.

Position: long IWM hedged

Buy IWM (sell puts)

Buy IWM Russell 2000 ETF via selling the Jun 65 puts. Some fear finally showing up after a week of mostly down days, with the VIX perking up. These options are seven points out of the money, so it will take a smash down of 10% for them to be exercised against me. I am dipping my big toe back in the water after having all my positions expire last week.

Long IWM hedged

Oil: one bull, one bear

Two views on oil from MarketWatch, the bearish article (link), the bullish article (link).

The bullish short term target is $140, only $6 away, so it isn't that bullish. The bear says that he is typically early. Of course, it is dicey trying to play oil at this point (or any stock or commodity that has seen a huge bull move).

One scenario I can see is a spike top on big news. That might tempt me to try and go short, though my history trading energy stocks is poor, so I tend to shy away from this sector. Usually the XLE makes a secondary top after spot crude has topped, but counting on that history to repeat isn't something I would like to tempt, considering the move up.

Mild sell off, AMZN, GLD

The stock market had a nice run up, so today's sell off seems mild and contained. Of the 30 Dow stocks, the only two that were up were the oils, XOM and CVX.

AMZN was upgraded on Monday. There are about three days worth of shorts in the stock, so on the third day from Monday (Thursday), I might look to buy puts, or sell calls.

Gold has had a very good week, though oil continues to show more relative strength. Historically, oil and gold have a strong correlation.

No current trading positions

GLD options coming soon

Barrons (link) reports that options on GLD might start trading as soon as May 30, 2008.

>>
After about four years of waiting, wanting, and whining, options on GLD could be listed as early as May 30, according to the Chicago Board Options Exchange.

Chickens and chicken feed

I am counting my chickens today, as my short options expire. Small profits to be sure, but any profits are good in the current market environment.

AXP, EWZ, HON, PCLN puts all expire, and I get to keep all the premiums

I've been cautious, a stock market "chicken" so to speak, so it seems appropriate to label these profits "chicken feed." Enjoy the weekend. Cheers.

Positions: none

Famous quotes and trading styles

Motley Fool has an article (link) on eight famous quotes that can be applied to investing. This is my favorite of the bunch:

>>
"If you hold a cat by the tail, you learn things you cannot learn any other way."

-- Mark Twain

And if you own a stock that tanks beyond recovery, you'll learn something that no collection of financial horror stories will teach you...
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I tell people that the emotional part of trading is the hardest part. For this reason, I rarely make sweeping predictions, and don't spend time on paper trading contests. Few people have ice in their veins and remain calm and logical when they are losing money. Few remain logical and thorough after a series of big winners. Again, a baseball analogy of not getting too high or too low is appropriate.

I also tell people that there are a thousand different ways to make money in the stock market. The trick is finding one that works for your personality. My trading style with its small gains, and potentially big losses would drive some mad. However, over my many years, I have found that these are the kind of trades that have historically worked out best for me. When I swing for the home runs, and when I want to hold for the long term instead of cutting losses, those are the times I usually lose, often losing big.

Complacent VIX, Motley Fool Buffett picks

At Adam Warner (blog link) writes about Jason Goepfert's findings:
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I checked for any other time since 1990 that the VIX hit a six-month low, while the S&P 500, on which the VIX is based, was still at least 1% below its own three-month high. That would show us times when traders were assuming a low-volatility environment despite prices that might not justify that assumption.

Returns in in the S&P 500 going forward were substandard (and negative) going out as far as two month's. From one to ten days out, the S&P was positive less than 45% of the time, and showed an average return that that varied between -0.1% and -0.8%. Not a huge negative edge, but certainly less than random.
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Over at Motley Fool, they have an interesting stock screen trying to find so-called Buffett stocks (article). I like PBR Petro Brasil best from that list.

Positions: AXP, EWZ, HON, PCLN, all hedged longs
out-the-money short puts expiring 5/16/08

Buffett and derivatives

Berkshire Hathaway disclosed paper losses on some of their long term SP index puts.

Here is a blog entry at Financial Crookery about that position (link) see May 8 entry. It is a bit deep in jargon, so option newbies might find it difficult reading.

Positions: long AXP, EWZ, HON, PCLN
all are out of the money short puts expiring next Friday 5/16

Buy PCLN (sell puts)

Buy PCLN Priceline via selling the May 125 puts
stock breaks out on earnings report. Strike price of puts is at chart base.
Sell May 125 PCLN puts

Cycle top May 8?

From Marketwatch (link)
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Bennet Sedacca of Minyanville notes that a combination of annual, decennial and presidential cycles yields a potential "top date" for the S&P on May 8. Those were, so you know, the same cycles that suggested a low on March 15th.
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As I have opined before, calendar cycles are one of the weakest influences on the stock market. That said, if the yearly calendar pattern has its way, the market will hold its own into May option expiration (5/16/08).

Crunch time in the stock market today, lots of stock got hit including my three (AXP, EWZ, HON).

Buy EWZ (sell puts)

Buy EWZ (Brazil ETF) by selling the May 85 puts

These are currently about nine points out of the money, so it is like putting in a bid at a sharp pullback. I am surprised at the overall stock market strength, considering the price of oil continuing up.

Sell BRKB Berkshire Hathaway

Sell BRKB for small profit, earnings below estimates. Over the long term, I believe that earnings more than anything else (eg: technicals, balance sheet, sales) drive the stock price.

Positions: hedged longs AXP, HON

Bear Market Rally?

Random Roger is convinced (blog, look at May 2, 2008 entry):
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Feel good rallies are a normal part of the bear market landscape. This is either a run of the mill feel good rally or I am wrong and this whole financial crisis/housing price deflation/bond market distortion will turn out to be nowhere near as important as many people thought.

What do you think is more likely?

I am convinced this is a bear market rally, there is no convincing me otherwise. That does not guarantee I will be right of course
>>

Positions: long BRKB, hedged longs: HON, AXP

Brazil Brasil

Breakout on EWZ. Unfortunately, the two day move up is 9%, so it is chasing if buying at the market. Still, the longer term looks compelling, based on the chart.

Yield curve deja vu (bullish signal)

Over at Vix and More (link) Bill Luby says the current yield curve looks like 2003. Back then, the set up brought a big bull market for stocks. As always, history rarely repeats exactly the same way, but it can be useful to find historical time frame comparisons. Yield curve has so many factors in it.

Gold vs. copper, GDX vs FCX

Gold continues down. GDX near important long term support at 40 (2-year chart). FCX which mines a variety of metals including copper has outperformed (chart). Another advantage of FCX is tighter spreads on the options. They are different, with FCX looking like the stronger play at the moment, but neither looks compelling at the moment.

Lately, support levels sometimes have meant little to nothing in terms of slowing or stopping downside momentum. Yous pays your money, yous takes your chances.

Positions: Long BRK.B, hedged long HON, AXP

Buy AXP (sell puts)

Buy AXP by selling the 42.5 puts
Stock is moving up through resistance on earnings, support at 45 and below

Positions: hedged long AXP, HON. Long BRK.B

Morons? (Cramer)

Adam Warner blogs about Cramer saying that call sellers on GOOG were morons (link)
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You should recognize that pretty much every outsized gain, ones where the stocks go up on small, niggling positives is about short-selling. The Google (GOOG) 480, 490, 500, 510 strikes? Tons of call-sellers, taking advantage of premiums too juicy to resist. Morons: limited upside, unlimited downside.

Breaking news: Naked call selling has unlimited upside risk. Never sell anything.

There is some validity to the notion that call shorts on expiration get trapped and are forced to chase a stock higher into the next call short. And so on.

But to call them morons is utterly.......moronic. GOOG did not just report earnings out of the blue. The date was known, the volatility was pumped, and selling options ahead of an earnings report is net-net not a bad strategy. There is an expected gain element to it, something beyond his black and white nonsense.
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My take: if someone bets the ranch by selling options, puts or calls, before earnings or even after, the insult might be appropriate. However, keep in mind that the volatility is in the price of the options before the report. Sometimes the option buyers win, but certainly not always. It is easy to see in hindsight what the correct play was. Ahead of the report, not so easy. If the call sellers are morons, then the call buyers must be the opposite, since they are taking the other side of the bet. We'll see if the option buyers or sellers win with tonight's AAPL report, and who the moron's will be tomorrow.

The logical conclusion that one might come to is that buying calls before a big earnings announcement is a smart move? Hardly, the road to riches over the long term, though as in the case of GOOG, there are occasional home runs. A 35 point move was in the price, and the stock got an 80 point move. How often does it happen that way? If it happens often enough the price of the options keeps going up, until again selling the options becomes the better play. Options have a way of balancing things out that way. Those that continue to make big bets and wrong bets go down with the ship, and leave the game.

Stock market is frustrating me at the moment. Gold is even more frustrating for the gold bulls, what with oil continuing to make new highs and gold lagging worse and worse.

Sell INTC (buy back short puts)

Sell INTC buy back short May 21 puts
I am getting out with a small profit, following my rule: "never let a profit turn into a loss." Even if it looks like the stock may hold on this unpleasant day for most stock bulls.

Positions: long HON hedged, BRK.B unhedged

Sell CAL (cover short puts)

Sell CAL buy back May 17.5 puts
CAL in free fall this morning. I getting out with a 100% loss, of course that is only a point or two on the common stock. UAL news is bad, SP downgrade on Friday, fuel prices continue to edge higher. I am taking my lumps. Crunch.

In 2025 (China) and super cycles

Interesting reading from Barron's (article)

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PricewaterhouseCoopers forecasts that China will be the largest economy, having surpassed the U.S. in 2025. By 2050, Chinese gross domestic product will be 29% larger than that of the U.S.
...
the fastest growing economy of the next four decades is forecast to be Vietnam, PwC says, with GDP growing 9.8% per annum, measured in dollars and 6.8% as measured using purchasing power parity.
...
Mexico's bonds, rated triple-B or the equivalent, have seen their yields decline below what the bonds of triple-A-rated General Electric pay. That bears repeating: Triple-B Mexico bonds yield less than triple-A GE debt.

Mexico's benchmark dollar-pay bonds due 2015 yield 4.65%. A triple-A GECC bond due 2012 yields 4.65% while a GECC issue due 2017 yields 5.33%.

>>

Like I said interesting reading.

In a separate article there is discussion of 60 year-super cycles that suggests a top in bonds, with much higher interest rates on the way, sooner rather than later, and a top in commodities in about one year give or take.
article

Buy HON and CAL (sell puts)

Buy HON via selling the May 55 puts
HON higher on earnings, solid support at 55 to 57

Buy CAL via selling the May 17.5 puts
Fare hike is good news, earnings just out were not a disaster. Strike price on puts is at the lows so there is chart support.

Positions:
Long CAL, INTC, HON, MON hedged (with MON expiring today)
Long BRK.B

Earnings giveth and taketh

GOOG makes for the third big name tech related stock with booming earnings, INTC, IBM, and now GOOG. Some other stocks didn't have such good news such as NOK and PFE. Some stocks fell on what looked to be decent reports such as EBAY, and some rallied on what on the surface looked to be bad earnings such as MER.

As always, my opinion is that earnings are the main engine for stock performance, more important than most other factors.

I got crunched today in BRK.B and am none too happy. I am tempted to double up the position--we'll see. MON short puts are expiring tomorrow, stock is up 15% since I wrote the options. I am also short the May 21 puts on INTC. I was tempted to buy some IBM, but missed the best time window. I reminded myself that it is easy to get overconfident and have the market crunch me like a cat playing with a mouse.

Buy Berkshire Hathaway BRK.B

Buy Berkshire Hathaway
BRK.B is about 1.5% off its 2008 lows, while SPY is about 4% off the March lows. The anecdotal side is that some BRK.B holders may have sold recently to pay taxes.

Positions:
long INTC hedged
long MON expiring this Friday 4/18
long BRK.B

Buy INTC (sell puts)

Buy INTC by selling the May 21 puts
INTC higher on earnings and outlook

Gold booming up this morning. Interesting.

Farrell: Investors are irrational

On Marketwatch, Paul B. Farrell writes (link)

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No matter how much new information, facts, data, tips, slogans, theories and systems are pumped into your brain by these well-intentioned "investor education" programs, irrationality always trumps rational thinking. Seriously, think about the wealth of new online resources and technologies since the 1990s "information revolution." Has it helped? No. In fact, just the opposite: The investor's brain has regressed, becoming less intelligent and vastly more irrational. You simply cannot make an irrational brain "less irrational" by filling up it up with more information!

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Cynical to be sure. The cliche is that a fool and his/her money are soon parted. The corollary is that you can't save every fool in the world.

Elsewhere earnings continue to move the markets. Big fish INTC had an overall positive report, despite missing estimates, and that will likely drive a whole herd of stocks higher, just as GE's miss drove the entire market lower. Like I wrote, the earnings sword cuts both ways.

Adam Warner at his blog writes
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GE lays an egg, the market gets nervous that it's not just financial that will take earnings hits and everyone wants puts in CAT and HON and I imagine Whirlpool and a host of others too. Clearly there is money flow into puts, but is that really smart money, with the implication that you want to follow it?
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Is that "smart money" or are they sheep?

Gold continues to underperform oil, continuing to send mixed messages.

Billy don't be a hero

I resist the temptation to buy IWM (actually sell puts as usual) near closing time. The market looks to me like it is prime for a decent rally from here. The topic is the title of an old song: Billy don't be a hero, don't be a fool with your life. How many times have I written that calling bottom and rushing in to buy is a difficult game, and often means more risk than reward.

With hindsight glasses, I should have stayed short SMH, short VLO, and even long NKE. Overall with this skittish market, it is better to be a live chicken with a few pecks of profit than a brave and dead tiger that stood his/her ground.

Long MON hedged

Cover short SMH (buy back short calls)

Cover short SMH, buying back the short SMH Apr 31 calls for a tiny profit, but a profit.
I am nervous about this market. The earnings sword cuts both ways. Today's bad report from bellwether GE can be easily followed by good reports from other companies. One factor in my decision is that Vix and More (link) reports a lot of puts being traded, so a big stock market decline would be unlikely and a fierce rally would not be unusual.

Short SMH (sell calls)

Short SMH the semiconductor ETF via selling the Apr 31 calls

Semis up on upgrades and Bank America analyst comments. Chart shows resistance at 31, that and the good news upgrades, looks to be a good window to short the stock.

Elsewhere, Mark Hulbert notes the unusual bearishness of gold newsletters (link). Another feather for the bullish case.

Long MON hedged, Short SMH hedged

Gold:cup half empty or half full?

The half full side is the decent rally given the news back drop of IMF gold sales. The half empty side is that crude oil makes a new high and gold is still 10% off its high. Gold and oil have had a strong correlation. I am undecided, so the appropiate cliche is: "when in doubt, get out."

Elsewhere, I was tempted to buy BA on Tuesday, but got cold feet in front of the news. The delay on the 787 Dreamliner was already in the stock, and the news that current year estimates would hold sent the stock up. Volatility drained out of the options after the announcement.

Positions: long MON hedged

Lazy Portfolios

Paul Farrell at MarketWatch writes about so-called Lazy Portfolios (article)
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Follow these guidelines:

1. Asset allocation outperforms stock picking
2. Compounding builds long-term asset values
3. No-load index funds beat actively managed funds
4. Buy and hold, adding new money from savings
5. Market timing and active trading is a loser's game
6. Trust yourself, you're the expert, do-it-yourself
   

The simplest one listed in the article is the 2nd grade starter:
60% Vanguard Total Stock Market Index
30% Vanguard Total International Stock Index
10% Vanguard Total Bond Index

As always for the average person, one of the best ways to go is diversifying into age appropiate investments, and dollar cost averaging. It may not be exciting, but it is effective.

Sell WM buy back puts

Sell WM buy back short Apr 9 puts
News isn't so great. Getting out with a break even profit.

Positions: long MON hedged

Buy WM, sell puts

Buy WM via selling the Apr 9 puts
Stock higher on news. Support at 10, and more at 9. Close below 10 is mental stop.

Bill Gross: "T-Bonds overvalued"

Bill Gross, chief investment officer of Pacific Investment Management Company, or PIMCO on bonds:

"I think Treasuries are the most overvalued asset in the world, bar none" (Reuters article)

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Coming from him, that is something that makes me sit up and take notice because bonds are his primary business. Barrons also has a bearish column on bonds (link). Given all this bearishness, bonds are likely to push higher in the short term.

Meanwhile, Friday's stock market action is encouraging. If the stock market was going to tank, it had every opportunity to do so, with the weak employment report, and decent rally this week for longs to go home for the weekend flat with a profit. Some sectors are still weak, including big banks, and airlines. With the terrible news in airlines this week, it is a time to be looking at them. Though, as always, calling bottom is rarely a profitable game.

As for gold, it had a relief rally after the big plunge. Seems that the coupling to oil, remains very strong. I still think lower lows are likely for gold, though, the secular bull still has a long time to go. This means short term lower, long term much higher. I still don't like the risk/reward for traders--readers know I am not a gunslinger who likes making the big bets.

Positions: long MON hedged

Buy MON (sell puts)

Buy MON (sell Apr 95 puts)

Earnings good, guidance conservative. Mental stop on a close below 100.

Boom goes the dynamite

Wow, I didn't expect the huge stock rally today, or the huge decline in precious metals.

Both situations were building up pressure. April is the best month for stocks since 1950. There may be some selling during the middle of the month to pay income taxes.

I was tempted to get on board the bull bandwagon, but reminded myself of the many whipsaws that have come after recent booming up days. All 30 Dow stocks were up. There will be lower risk times to get in.

Flat with no trading positions.

Hold on to your nuts :)

I heard a stock market pundit use this phrase, something like:

It is time to hold on to your nuts, like squirrels getting ready for winter, not a time to be aggressive.

For 2008, I have been making a fair number of trades, usually getting out with tiny profits at the first whiff of trouble. So far I am at break even for the year, only the broker is making money while I tread water. Yes, some folks are making money, however, far more are losing. It is a market that is very easy to trade in hindsight, not so easy in real time, with wide intraday swings, and more whipsaws than sustained moves.

I remind myself to stick to my knitting, meaning the kind of trades I do best on, instead of seeking the exotic, and high risk home run swings. I am back to flat with no trading positions.

Cover VLO (buy back short calls)

Cover VLO buy back short Apr 55 calls
A break even profit. I am not understanding the reason for the rally. "When in doubt get out," especially in this up and down market.

Band predicts Dow 16000 by 2009

Richard Band is quoted as predicting Dow 16000 over at Marketwatch (article).

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Technical factors appear to have led Band to make such a bold prediction, which amounts to a 33% return for the overall market over the next 12 months.
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Most newsletter timers are bearish, actually net short according to Hulbert. As for myself, I think lower lows are the most likely course. Interesting.

Short VLO (sell calls)

Short VLO sell Apr 55 calls
News from Iraq gives this refining stock a pop. I am fading the move. A close above 52 would be cause for worry.

Sell NKE (buy back short puts)

I close out the NKE Apr 60 puts. Overall market is sliding. I am skittish enough to head for the exit, instead of waiting for the action to sort itself out. This puts me back to flat (no trading positions).

Meanwhile, GLD and GDX have retraced part of last week's steep decline. I still think that odds favor lower lows in the precious metals and won't try chase this rally. Too many newbies in the metals market, and almost none of them are scared. Of course, odds are never a guarantee.

Another leg down for stocks, and metals

Stock buyers seem too sanguine for the low to be in. The market has been beat down, and certain sectors such as banks, and housing have been rallying. The rally likely has more to go, however, I do not think the ultimate lows for this bear move are in. As always be careful.

Same deal with precious metals. Silver buyers have bought up all the physical they can get their hands on, with many online dealers sold out, or having much higher minimums. When buyers are so eager to buy on the first dip, odds favor a second leg down, a lower low. That said, the three day smash may cause a bounce. Looking at the GDX one year chart, it has seen numerous three day smashes, and most of the time there are lower lows down the road. So it may be time to look to get in, but watch for a better opportunity and don't chase any rallies.

For those that celebrate Good Friday, and even those that don't, a peaceful day to you.

Hedged Long NKE

Buy NKE (sell puts)

Buy NKE, by selling the April 60 puts
Stock is higher on earnings. Chart is supportive.

NKE is my only trading position

Green after St. Patricks Day

Wall Street celebrated the day after St. Patrick's Day with a monster rally and green plus signs every where. Financials led the way with LEH reporting good earnings before the open. Gold was one of the few losers on the day. The 3/4 point rate cut was less than the widely rumored full point cut and the dollar rallied and gold fell.

As I have been writing for a whole week, the Fed rate cut has been baked into the cake. Past Fed moves have been kind to gold, not so much today as gold got clobbered. The stock rally was more on the health of some brokerage stocks. Rumors circulated about MER, but even that could not do more than an hour of damage on this rally day.

It is painful to miss these big rallies. It is more painful to be short. For 2008, I am holding my own, despite all my trades being on the long side in the face of a steep market decline. I have been cautious, cut losses, and been lucky enough to avoid the disaster stocks such as BSC, HUM and others. My one losing trade, so far in 2008, ironically, was GDX, which had a miserable day today.

As always, what next? Hard for me to believe the coast is clear for the stock market, though with Good Friday coming up on this short trading week, lets see if the market can make it to the holiday without another crisis. Late March, early April, sometimes has investors selling to pay their tax bills.

Growth vs. value - three lessons

From John Prestbo at Marketwatch (link)
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First, never rely completely on past patterns prevailing in the present or future. Lots of busy, distracted and lazy investors will do just that, which creates opportunity for those who take the time to observe market trends carefully.

Second, develop a keen appreciation of the interconnected nature of the market. Large and small, growth and value, industry-group and sector -- they all are entwined; anything affecting one will affect the others. Banks took it on the chin in the subprime mess, and look what that's done to large-cap value as a strategy.

...

Third, when the market starts climbing again, don't assume the most-clobbered style will rebound the fastest. In the year following the market bottom on Oct. 9, 2002, the DJ Wilshire Growth Index did soar a stunning 39.87%. But that was only slightly better than the 38.61% gain for the DJ Wilshire Value Index. And value outperformed growth over the ensuing three years.

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BSC to be bought for $2

Wow, what a turn of events. BSC shareholders get the big banana, all time high of 160 to 57 Thursday to 30 on Friday to 2! Yikes!

As of this writing SP futures, Japanese bonds, gold are all higher. I can't understand how the BSC take under can be good news for stocks, bonds and gold, so I expect this to sort itself this week. I dodged a bullet, because I saw those huge premiums on BSC options on Friday and was so tempted. Many times in my past, chasing those big premiums as an option writer has led to disaster.

My instinct is to sit out this dance and wait for more clarity. To quote Clint Eastwood, "a man has to know his limitations." Fast moving volatile markets are a dangerous place for relatively slow moving position traders such as myself. The baseball analogy would be to wait for my pitch instead of swinging wildly at the nasty slider being thrown at the moment. I may look to take on some positions, but they will be small with a decent margin of error.

Panic, smoke and fire

Bill Luby at VixandMore (link):

>>
the ratio [VIX vs. 10 year T-note yield] is currently at levels seen only during extreme crisis or panic market environments.

>>

BSC options players (OptionAddict) were sniffing at the bad news and bid up the premiums way up before the news today. With the news, the premiums went to the moon, so high that I was tempted to sell some of the options, but reminded myself of the out sized risks of high premiums. The smoke is now full five-alarm fire, with the possible buyout or take under of BSC as the most likely outcome.

So with the high fear factor, is it time to load the boat on the long side? Especially, if we get a gap down open on Monday, I'll look to take a shot at the long side. The Fed meeting might bring a full point rate cut, and/or more measures like the $200 billion short term loan problem. Watching this, it feels like the Fed is trying to build a sand castle on the edge of a rising high tide. Each massive effort only lasts as long as the intervals between the bad news.

Yes, at some point the tide will turn and the bad or terrible surprises will end and the market will rally for real. As I have written many times, calling bottom is rarely a profitable game (same with calling top). It sure is exciting and fun, but it is difficult and high risk. I prefer something easier with the odds in my favor.

Sell IWM (buy puts)

Buy back short puts on IWM for modest profit, so am back to being flat (out of market). ThinkorSwim Analyzer (my brokers software) shows 5% of closing before 63, then as the market slides, odds increase to 9% by the time I exit and more like 20% at the lows of the day. I take my modest profit following my rule: Never let a profit turn into a loss. Stock futures indicated a huge bump up before the open, but it didn't materialize and faded to a loss before the first half hour on BSC news.

/edited for typos: originally posted 9:49 PDT

Gold $1000

Spot gold didn't quite make $1000 on the bid, but futures and the ask did, before settling back. The Fed has been kind of gold during the recent months. Let us see if that streak continues next week, with Fed futures traders betting on a 75 basis point cut. Long term, I continue to believe that there is plenty of fuel left in the gold rocket. Short term, a lot of fish have been hooked, with more and more newbies jumping in and buying when they didn't want any gold at $700, or $400 or lower.

With oil spiking up, airlines have been spiking down.

Positions: Long IWM hedged

Ben saves the Bulls

Fed chairman Ben Bernanke saves the bulls with a $200 billion liquidity pump to bail out weak financial institutions. By allowing them to use bad loans as collateral, one wonders what happens at the end of 28 days. It is a bit over my head.

What next? That is always the most relevant question. Schaeffer's (link) reports that Fed Fund futures are factoring in a 75 basis point rate cut at the Fed meeting next week. 75!? Wow.

Long IWM

Another banana

The market feeds the bulls another banana today, as the decline continues. I am getting hammered after dipping my toe in the water on the long side. IWM nearing my mental stop of a close below 64 (64.50 Monday). I was tempted to double up on Friday, and again today. Usually this isn't a good sign, so I resisted the impulse.

I remain mostly in cash with my toe in the frigid market waters, long IWM via short puts

GDX has a strong down reaction day, down 3.8%, even though the gold futures hold up fairly well, with GLD down only 0.23%

Random Roger has some thoughts about indicators and bear markets (link) see March 10, 2008 entry.
>>
Reading things like put call ratios starts to get tricky if you believe this is a bear market. This is a point in the cycle where it is easy to get fooled. The market is down almost 20%, I'm sure if you looked you could find an indicator or two to tell you the market is oversold
...
Compelling as they may be, if it is a bear market all of these things will be wrong. Bear markets last longer than five months and on average go down more than 20%, closer to 3o% actually.
>>

Another 12% down would bring it into "average" bear market range. What if this is the "big" one? The way most pundits can tell is using their hindsight glasses.

Carl Futia on Speculation

In the archives I found this interesting column by Carl Futia (article) from 2005.
>>
Sad to say, intelligence has little to do with success in speculation ...

What is really needed for successful speculation is not intelligence but what speculators call an "edge". An edge is a piece of knowledge or a reliable instinct which predicts the direction of market prices and that is not shared by too many other speculators.

You can't get an edge by reading the finance or technical analysis books you bought on Amazon or at Barnes and Noble. The information they contain is fine as far as it goes, but the trouble is that it is information that everone else has too! It can't give you an edge on other speculators. For the same reason you can't get an edge by attending a seminar that promises to reveal market secrets which will lead you to wealth.
>>

Sometimes friends or acquaintances tell me they have signed up for or already taken a seminar or class or bought some whiz bang software. For the reasons stated so clearly above, it rarely works. What I tell everyone is that there are a 1000 ways to make money, a 1000 different approaches to the markets. Find the one, two or five that work for you and fit your personality. Something that works for me, may not work for the next person because of their temperament and inclinations. Mechanical systems need to be adaptive, because there are now so many formula spinners testing their trading systems night and day.

It is the weekend so I will ramble on a bit. Investing is different from speculating. For the average person, diversifying into age appropriate asset classes, and dollar cost averaging will out do most would be speculators. Same when getting out, get out a little bit at a time. Making big bets is entertaining and exciting, but few folks continually take big risks and win enough to offset the losses. Readers know that my style is to cut losses, and hedge to limit risks. Again, with spring training upon us, the analogy is a singles hitter in baseball vs. the home run hitter that strikes out a lot. Both styles can be successful, a lot depends on personality and execution.

Buy IWM fund (sell puts)

Buy IWM, sell Mar 63 puts

IWM didn't make a new low on the gap lower. I am buying closer to the highs than the lows for the day. Mental stop is on a close below 64.

Bottom or bananas?

Today stock market bulls got the banana. Is this event the big banana (a steep decline) or a bottom with a retest of the lows?

Fear as measured by the volatility index is perking up but not screaming yet (VIX chart). Newsletter sentiment has turned quite bearish so a tradeable bottom is getting closer (Marketwatch sentiment article).

Traditional chart reading says if IWM breaks below 64 (chart) the next downside target is the width of the recent range or eight points, giving a target of 56. Today's close just above 66. Another possible scenario is taking out the stop below the tick low of 64.19, and then a trading rally. If the market gaps to the downside at the open tomorrow, that might be a sign of capitulation and a good entry point for longs.

When in doubt get out, and that is where I have been and continue to be--out.

Retesting the low

I've mentioned several times that a retest of the recent lows might be a good time to buy. Today some traders were watching the SP500 closely as it neared the recent lows. The SPY is a proxy and doesn't show the retest as clearly (six-month-chart).

The way it happened makes me suspect. Another rumor about a much anticipated bailout of ABK. A similar rumor about ten days ago, launched a furious rally of four days and about 5%. This rally could fizzle before 24-hours with a much more modest gain off the low. The market doesn't look so good to me. Early March is a strong seasonal period. A good bit of IRA money flows in at this time, along with early tax return money. Those that have to write a check, tend to do it closer to deadline and may account for some of the traditional seasonal weakness in stocks in late March.

Precious metals had a hard down day. Certainly not a time to panic either way, after the gains that have occurred. A lot of fish seem to be biting on this move up. When enough little fish are in, the big fish will close the trap and take their money by shaking them out with some sharp and violent price drops.

I am looking at a lot of stocks, but remain flat for now.

Silver $20

Wow, the parabolic move in silver continues. A double off the base takes silver to $26/$28. That would be where I would look to take trading profits, if I had a bunch of it. I don't have bunches and bunches, but do have a decent amount for the long term.

Still some skepticism on this move as a lot of silver coins are going for less than spot. When retail demand is high, the newbies will pay over spot because they want to get it. It probably is no more than an anecdotal indicator, but it is easy enough to watch.

Stock market recovers off its lows. Some of the buying might be beginning of the month inflows. I am not convinced that the bottom is in.

Trading positions: none